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ACCA Paper F2 Management accounting

Course slides

Slide 6

The nature and purpose of cost and management accounting

Cost classification, behaviour and purpose Business mathematics and computer spreadsheets Cost accounting techniques Budgeting and standard costing Short-term decision-making techniques

Format of the Exam

Format of the Exam 1 mark question 10 questions Paper based exam: All multiple choice with a choice of 2 or 3 answers. Predominantly wordy questions.

Marks 10

2 mark questions

40 questions
Paper based exam: All multiple choice with a choice of 4 answers including words and calculations.


Slide 7


The BPP Learning Media classroom slides

What do these slides cover?
A selection of key areas of the syllabus

Using the slides

Use the slides as a point of reference Add detail by talking around the slides (eg using material from the corresponding Study Text chapter) Consider adding slides yourself to suit your course Recommend students attempt appropriate questions from the Practice & Revision Kit

Slide 8

Chapter 1

Study Text Chapter 1

Information for management


Assist management in running their business to achieve an overall objective

What is the overall objective of a business?

Slide 10

Data and information

Data is the RAW MATERIAL Information is the PROCESSED DATA

Slide 11

Planning, control and decision making

Planning Long term strategies Short term targets Control Performance of the organisation Review corporate plan Decision making autonomy of managers

Slide 12

Key roles of a management accountant

How to put a cost on our products and services

What to produce/how should we finance it etc

Assessment of business requirements/budgeting

Assessing inefficiencies

Performance Evaluation
Comparison to targets

Slide 13

Chapter 2

Study Text Chapter 2

Cost classification

Arrange costs into logical groups
By function e.g. production, admin, finance By nature e.g. labour, materials, stationery

Grouping by function:
Pool of costs

Production costs

Non production costs

Slide 15

Grouping by nature:
Pool of costs




Slide 16

Cost classification

Production costs X
Direct Prodn cost Indirect Prodn cost Admin costs Selling & Distribution

Non-production costs TOTAL COST/EXPENSES


Slide 17

Cost classification
Direct Production costs Direct materials Direct labour Direct expenses Indirect Production costs Indirect materials Indirect labour Indirect expenses Total Production costs Non-production costs Administration costs Selling and distribution costs TOTAL COSTS
Slide 18


A typical cost card for a cost unit

Direct Production costs

Direct materials (5kg @ $3/kg) Direct labour (3hrs @ $6/hr)


15.00 18.00

Indirect Production costs

Variable overheads Fixed overheads FULL PRODUCT COST 2.00 3.00 38.00

Slide 19

Cost object

Cost unit
Divisional structures
Cost centre Profit centre Revenue centre Investment centre

Slide 20

Chapter 3

Study Text Chapter 3

Cost behaviour

Accountants Linear Assumption

Accountants version Economists version
Total cost ($) Variable cost (VC) Y = a + bX

Fixed cost (FC)


Total cost = Fixed cost + (VC/unit x Output)

Slide 22

Hi-Low Method
Four step approach 1. Find the highest and the lowest output and the total costs at these levels of output. 2. Find the difference in output units and total cost. 3. Calculate the variable cost per unit (VC/unit). 4. Calculate the fixed cost by substitution.

Slide 23

Chapter 4

Study Text Chapter 4

Correlation and regression; expected values

Costs vs output - scattergraph

dependent variable

y = a + bx

output (x) independent variable

Slide 25

Linear regression
Finds the mathematical line of best fit y = a + bx

b = n xy - x y
n x2 - ( x)2 a= y-b x n n

Slide 26

Correlation coefficient
r= n xy - x y

([n (x2) - ( x)2][n (y2) - ( y)2])

-1 < r < +1 r = +1 r = -1 r=0
Slide 27

- perfect positive correlation - perfect negative correlation

- no correlation

Coefficient of determination
The amount of variation in y which appears to be explained by variation in x Does NOT prove cause and effect Coefficient of determination = r2

Slide 28

Expected Values
Long term weighted average of possible outcomes: Expected Value (EV) = np
If +ve EV = accept If -ve EV = reject

Slide 29

Chapter 5

Study Text Chapter 5


Electronic piece of paper

Divided into rows and columns

Data is input into cells i.e. A5, D8

Data can either be numbers, text or symbols

Output is derived by applying a formula to data cells e.g. addition A5 + D8

Slide 31

Uses of spreadsheets
Preparation of management accounts

Cash flow analysis, budgeting and forecasting

Account reconciliation

Revenue and cost analysis

Comparisons and variance analysis

Sorting and categorisation of data

Slide 32

Formulae with conditions

We can build a range of options into our data
= IF (logical_test, value_if_true, value_if_false) Example

= IF (A5>500,Hurray!,More Sales Please!)

Slide 33

Presentation of spreadsheets
Split into sections; Inputs, Calculations and Results
Use titles and column and row headings State data source and purpose of spreadsheet

Apply consistent format i.e. 2 decimal places

Use colours, borders and shadings to highlight and differentiate
Slide 34

Chapter 6

Study Text Chapter 6

Material costs

Order, receipt and issue of raw materials

Purchase requisition

Purchase order

Goods received note

Slide 36

Accounting for materials

Materials inventory account

(1) Material purchased X

(2) Issues to production X

c/d closing inventory balance



Slide 37

Monitoring inventory levels

To maintain accurate records of inventory
Visual methods of inventory control

Theoretical methods of inventory control

Re-order level Minimum level Maximum level
Learn for the exam

Slide 38

Costs associated with stock

Purchase costs


Order costs C x D/Q

Holding costs H x Q/2


Slide 39

Economic order quantity

Number of units to order to minimise costs


2CoD Ch

Given in Exam

Slide 40

Available above a certain order quantity
Is it worth ordering above the EOQ to get the discount? Steps:
Calculate EOQ Recalculate EOQ if it falls within a discount band Calculate total costs at EOQ Calculate total costs at the lower boundary of each discount band
Slide 41

Economic batch quantity

Used when stock replenished gradually
internally or; from supplier

Similar to EOQ but factors in replenishment rate Total EBQ never held in stock as stock is being replenished during the period

Slide 42

Economic batch quantity

EBQ 2CoD D Ch 1 R

Given in Exam

Total holding costs in period

Q D 1 Ch 2 R

Total set up costs in period

D Co Q

Slide 43

Chapter 7

Study Text Chapter 7

Labour costs

Method of remuneration
Time-based systems

Piecework systems

Bonus/incentive schemes
Slide 45

Measuring labour activity


Standard hours of production

Efficiency x capacity = production volume

Slide 46

Accounting for labour costs

Direct or Indirect labour learn the rules Ledger accounting
Dr Wages account Gross wages Cr Bank / PAYE / NIC accounts Dr WIP account Cr Wages account Dr Production o/h Cr Wages account Direct wages Direct wages Indirect wages Indirect wages

Slide 47

Labour turnover
The rate at which employees leave the company
Reasons may be controllable or uncontrollable by the company

Slide 48

Chapter 8

Study Text Chapter 8

Overheads and absorption costing

Cost card
Aim to find the full cost of one unit $/unit
Direct materials 4kg @ $2/kg Direct labour 3 hrs @ $7/hr Prime cost Overheads X X X X 3 Steps Allocate

Full Product cost

Slide 50

Absorption costing method

Total Production Costs Direct Costs

Indirect Costs (overheads)


1.Allocate & Apportion

Production 1

Production 2 Production 2
3. Absorb


Production 1

Slide 51

Overheads step 1
Total Production Costs Direct Costs

Indirect Costs (overheads)


1.Allocate & Apportion

Production 1

Production 2


Slide 52

Overheads step 2
Total Production Costs Direct Costs

Indirect Costs (overheads)


1.Allocate & Apportion

Production 1

Production 2 Production 2


Production 1

Slide 53

To reapportion service cost centre overheads to production cost centres there are 2 methods Direct Method Reciprocal Method

Inter-service department work is ignored

Slide 54

All inter-service department work is recognised

Overheads step 3
Total Production Costs Direct Costs

Indirect Costs (overheads)


1.Allocate & Apportion

Production 1

Production 2 Production 2
3. Absorb


Production 1

Slide 55

3. Absorb
The final step is to charge these overheads to cost units. This is called absorption.
OAR (overhead absorption rate) =

Activity level

Production overhead

What activity level should you use?

Slide 56

3. Absorption bases
(a) Per unit (b) Per labour hr (c) Per machine hr (d) % Direct Labour cost OAR/unit OAR/lab hr

OAR/mach hr
OAR/$ labour

(e) % Direct material cost

(f) % Prime cost
Slide 57

OAR/$ mats
OAR/$ prime cost

Pre-determined OARs
Businesses estimate (or pre-determine) their OAR at the start of the year OAR = Production Overhead __________________

Activity level
BECOMES.. Pre-determined OAR = Budgeted overhead _________________ Budgeted activity level

Slide 58

Businesses want to record overheads regularly during the year Overhead = Actual Activity x Absorbed (eg labour hrs) Pre-determined OAR

Slide 59

At the end of the year actual overheads will be known Overhead Absorbed Actual Overhead

Difference = under or over absorption

Slide 60

Reasons for under/over absorption

Why do we get an under or over absorption?
Pre-determined = OAR Budgeted activity level Budgeted overhead _________________

Budgeted overhead
Actual overhead Expenditure variance
Slide 61

Budgeted activity Actual activity Volume variance

Non production overheads

For internal reporting non-production overheads can also be allocated to units
One approach may be:
Non-Production Overhead


X 100

Production overhead

Slide 62

Chapter 9

Study Text Chapter 9

Marginal and absorption costing

Cost card marginal costing

$/unit Direct materials X

Direct labour
Variable overhead Marginal cost Fixed overheads

Used to value stock under Marginal costing Used to value stock under Absorption costing

Full product cost

Slide 64

Contribution = selling price less ALL variable costs

Selling price Less: Variable production costs Variable non-production costs


$ X X X

(X) X

Slide 65

Marginal costing profit statement

Sales Cost of sales
Opening Stock (@ Marginal cost) Production costs: Variable costs (mats, lab, var.overhead) Closing Stock (@ Marginal cost) Variable non production costs Contribution X X (X) _____

$ X

(X) (X) ____ X

Less: Fixed costs Net Profit

Slide 66

(X) ____ X

Absorption costing profit statement

Sales Cost of sales Opening Stock (@ Full cost) Production costs: Variable costs (mats, lab, var.overhead) Fixed overheads absorbed

$ X X


Closing Stock (@ Full cost) (X) Overhead = Actual Activity X OAR Adjustment for under/(over) absorption X/(X) Absorbed _____ (X) ____
Gross Profit X Non production costs (sales, distribution, admin) ____ X Net Profit X
Slide 67

Reconciliation proforma
Year 1 $ Absorption costing profit Add: Fixed overhead in opening stock Less: Fixed overhead in Closing stock Year 2 $

= Marginal costing profit

Slide 68

Reconciling profits
Difference in profit = Change in stock X OAR/unit

But which profit is higher AC profit Or MC Profit? Production Closing stock AC Profit
Slide 69

> = < > = < > = <

Sales Opening stock MC Profit

Chapter 10

Study Text Chapter 10

Process Costing

Introductory example a party

a barrel holds 100 pints of beer and costs $100 How much should we charge per pint to cover our costs?

$100 = $1/pint 100 pints

Slide 71

Will you get the full 100 pints from your barrel?? We only actually expect to get 95 pints

Normal loss = 5 pints

So what should we charge now per pint?

$100 = $1.05/pint 95 pints

Slide 72

Normal loss eg barrel dregs!

What could we do with our loss? A local gardener likes the dregs for his plants hell pay 20p per pint, we could use this to reduce our costs. So what should we charge now per pint?

- scrap value $100 - (20 x 5 pints) = $1.04/pint 95 pints

Slide 73

So how have we found the cost of a pint to charge our party goers? Cost per unit = ________________________________ Input costs - Scrap value of normal loss

Input units - Normal loss units

Learn this formula!

Slide 74

What about unexpected losses?? At the end of the party we realise that we didnt get the 95 pints we expected we only got 85.

Abnormal loss = 10 pints

Its too late to charge more, we have already charged $1.04 per pint. its just our loss well have to cover the $1.04 for each pint we didnt sell
Slide 75

Finally.good news
What if losses werent as much as we expected? At the end of the party we realise that instead of the 95 pints we were expecting we actually got 98 pints from the barrel.

Abnormal gain = 3 pints

We expected to scrap them for 20 we actually sold them for $1.04
Slide 76

Normal Loss
Normal loss = expected loss
Good output

Process 1

Normal loss

Slide 77

Abnormal loss or gain

Abnormal loss = unexpected loss
Abnormal gain = unexpected gain
Good output Inputs

Process 1

Normal loss

Abnormal loss / gain

Slide 78

Recap Process costing


Units calculation
Input units = Good output + NL +/(-) AL/(AG)

Set up the process account and complete as far as possible

Calculate cost per unit:

CPU = Input cost - scrap proceeds from normal loss Input units normal loss units

Slide 79

Valuations & transfer to process account

Introduction to WIP

Input costs - Scrap value of normal loss ________________________________ Cost per unit = Input units - Normal loss units

BUT.What if units arent finished? MAY HAVE..

Slide 80

Introduction to WIP

Finished unit

WIP units

We cant give them the same value

Slide 81

Equivalent units
Output from process includes:



1 whole unit

2 equivalent whole unit cost per equivalent unit

Slide 82

Previous processes

Process I

Process II

Process 1 is another input OWIP 100% complete for Process 1

Slide 83

Summary and question approach

1 2

Units calculation
Opening WIP + Input = Good output + NL +/(-) AL/(AG) + Closing WIP

Set up the process account and complete as far as possible Complete statement of equivalent units Calculate cost per equivalent unit Valuations & transfer to process account

4 5
Slide 84

Chapter 11

Study Text Chapter 11

Process costing, joint products and by-products

Joint products and by-products

Joint products

forestry By product
Slide 86

Joint products and by-products

Product 1


Process (Joint costs)

Product 2

Separation point


Slide 87

Joint products and by-products - accounting

Joint products
Substantial sales value

Relatively low sales value Secondary to process
Do not allocate costs USUAL occurrence: reduce process costs ONE-OFF: misc income

Apportion joint costs

Various methods: as specified in question

Slide 88

Chapter 12

Study Text Chapter 12

Job, batch and service costing

Job and batch costing

Job = a cost unit of a single order/contract
Batch = a cost unit which consists of a separate, readily identifiable group of units

Slide 90

Job cost cards

Job XYZ $

Direct materials
Direct labour (hrs @ $/hr) Variable overheads (hrs @ $/hr) Prime cost Fixed overheads Total cost Profit Selling price of job


Slide 91

Cost structures
If profit is 20% of cost Selling price Costs Profit 120% 100% 20% If profit is 20% of sales price Selling price Costs Profit 100% 80% 20%

Slide 92


What are service organisations?

Dont make or sell a tangible product

Profit making or not-for-profit sector

E.g. Accountancy firms, hotels, schools, hospitals

Service costing v. other product costing

Cost of direct materials is small Unit cost is difficult to calculate Costing will vary from one service to another
Slide 93

Cost per unit

Cost per unit =

Total costs for a period ______________________________

Number of service units in the period

But what is a service cost unit ?

Slide 94

Composite cost unit

A composite cost unit takes into account several elements of a service

e.g. excess baggage service

Cost per KG? OR Cost per mile transported?

Cost per KG/mile

Slide 95

Service department costing

Cost of an internal service Purposes of service department costing Control costs and efficiency Prevent unnecessary use of services What cost to charge to user dept
Slide 96

No charge Total actual cost Standard absorption cost Variable cost Opportunity cost Cost plus a margin for profit

Chapter 13

Study Text Chapter 13


Planning and control

Planning and control cycle
Determine objectives

Control - variances

Planning set budget

Actual operations

Slide 98

Preparation of budgets
Budget period Budget manual Budget committee

Slide 99

Fixed and flexible budgets

Fixed budget = Master (original) budget
Prepared at the start of the budget period

Flexible budget = scenario planning

Prepared at the start of the year What if? analysis Flexed budget is a flexible budget prepared at the end of the year using the actual volumes

Slide 100

Chapter 14

Study Text Chapter 14

Standard Costing


An estimated unit cost

For example:
Direct materials 3kg x $2/kg $6
Based on standard usage ie 3kg / unit Based on standard cost / kg ie $2 / kg

Slide 102

Lecture example 1
Ideal standard
Current standard Basic standard Expected standard

perfect operating conditions

use last year leave unaltered over long period attainable improvements

Slide 103

Chapter 15

Study Text Chapter 15

Basic variance analysis


actual results


expected results

Slide 105


actual results


expected results

Slide 106

Cost variances
Materials usage variance Materials price variance

Direct Materials Direct Labour

3kg x $2 / kg 4hrs x $6 / hr

Unit cost $6 $24

Labour efficiency variance

Labour rate variance

Variable overheads 4hrs x $2 / hr

Var o/h efficiency variance


Var o/h expenditure variance

Marginal cost
Slide 107


Basic cost variances

For example: materials price variance
Actual purchases SHOULD cost
Actual purchases x standard cost

x x x

Actual puchases DID cost

Actual purchases x actual cost

Slide 108

Basic cost variances

For example: Materials usage variance
Actual production SHOULD use
Units produced x standard usage

x kg x kg x kg $x

Actual production DID use

Units produced x actual usage

Value at standard cost / kg

Slide 109

Fixed overhead variances

Fixed overheads Total variance Expenditure variance

Volume variance
Efficiency variance Capacity variance

Slide 110

Causes of variances

ontrollable expenditure ccuracy measurement of data ncontrollable expenditure tandard type xpectations unrealistic standard

Slide 111

Interdependence of variances
Variances may affect each other
Cheaper materials Inferior quality Favourable price variance Adverse usage variance (& labour efficiency?)

Slide 112

Interdependence of variances
Variances may affect each other
Increase in sales price Fall in demand

Favourable price variance

Adverse sales volume variance

Slide 113

Chapter 16

Study Text Chapter 16

Further variance analysis

Operating statement MC
Budgeted contribution Sales volume variance Flexed budgeted contribution Sales price variance Variable cost variances Actual contribution Budgeted fixed o/h Fixed o/h expenditure variance Actual fixed o/h Actual profit x x/(x) x x/(x) x/(x) x
x x/(x) (x) x

Slide 115

Differences between MC and AC

For Absorption Costing: Sales volume variance
Difference between budgeted sales and actual sales units valued at standard PROFIT per unit under AC

Fixed overhead variances

Calculate a fixed overhead volume variance. This can also be split into an efficiency and capacity variance

Operating statement
Reconcile between budgeted profit and actual profit
Slide 116

Operating statement AC
Budgeted profit
Sales volume variance Flexed budgeted profit Sales price variance Cost variances (including fixed overheads

x/(x) x x/(x) x/(x)

Actual profit

Slide 117

Chapter 17

Study Text Chapter 17

Cost-volume-profit Analysis


Sales Less: VCs Contribution

Fixed costs ?

15,000 (5,000) _____ 10,000

(10,000) ? _____ 0

Must be EQUAL

Slide 119

Introduction So we will breakeven when Contribution = Fixed costs

Contn/unit x Q = Fixed costs Fixed costs __________ Q=


Slide 120

Breakeven Revenue C/S Ratio

In the last e.g. B/E Revenue = BEP x SP/unit Fixed costs B/E Revenue = __________ x SP/unit Contn/unit B/E Revenue = Fixed costs x _________ Contn/unit SP/unit _________ Contn/unit SP/unit

Fixed costs __________ B/E Revenue =ratio C/S C/S ratio

Slide 121

Margin of safety
Margin of safety (in units) =

Budgeted sales volume breakeven sales volume

Margin of safety (as %) = Budgeted sales volume breakeven sales volume __________________________________________ X 100 Budgeted sales volume

Slide 122

Breakeven chart
Total Revenue (TR)

TR = SP/unit x Q
TR = $8/unit x Q
if Q = 0, TR = 0

if Q = 5000, TR = 40,000
Slide 123

Breakeven chart
Total Cost (TC)

TC = FC + VC/unit x Q
TC = $5,700 + $6.50/unit x Q
if Q = 0, TC = 5,700

if Q = 5000, TC = 38,200
Slide 124

Breakeven chart
$ TR

38,200 30,400



Fixed cost 3,800 5,000 Q

Margin of safety
Slide 125

Profit volume chart






Margin of safety ($5,700)

Slide 126

Required profit level

Fixed costs + required profit Fixed costs Sales volume to reach ______________ Breakeven point = ______________________ required profit level Contribution/unit

Slide 127

Chapter 18

Study Text Chapter 18

Relevant costs and decision making

Relevant Costs
What is a relevant cost?




Only future costs are affected by our decision

Slide 129

i.e. incurred as a direct result of our decision

Only cash

Popular scenario with examiner

e.g. need 500kg of material for new project have 300kg in stock (cost $3/kg)

current purchase price = $5/kg

scrap value = $1/kg whats the relevant cost of the 500kg?
Slide 130

Relevant cost - materials

In stock
In continual use
If take from stock will have to replace Relevant cost = current purchase price
Slide 131

Not in stock
Just have to buy it
Relevant cost = current purchase price

No other use
If take from stock wont have to replace


If take from stock cant replace Relevant cost = opportunity cost

Relevant cost = scrap value foregone

Relevant cost - labour

Could hire more
Relevant cost = current rate of pay

Spare capacity
Relevant cost = nil

Full capacity
Relevant cost = opportunity cost

Slide 132

Relevant cost - labour

Full capacity

E.g. labour is currently working on product A Product A Lose $ $ Sales revenue 50 Lose revenue 50 Materials (3) Save materials (3) Labour (1hr) (5) _____ Labour (1hr) _____ Contribution Loss to business 47 42
What do we lose if we take the labour away to work on a new product B?
Slide 133

Relevant cost

Relevant cost - labour

Full capacity

E.g. labour is currently working on product A Alternative calc. Product A $ $ Sales revenue 50 Lost contn 42 Materials (3) Add back labour 5 _____ Labour (1hr) (5) _____ Loss to business 47 Contribution 42 Relevant cost
Slide 134

Deprival value
How to find the relevant cost of an asset
Lower of..

Replacement cost

Higher of..

Net realisable value

Slide 135

Value in use

Single limiting factor analysis

2 Identify limiting factor Calculate contribution per unit Calculate contribution per limiting factor Rank products Prepare a production plan

3 4 5
Slide 136

Chapter 19

Study Text Chapter 19

Linear programming

Limited resources
A business needs to identify the optimal production plan for utilising its resources to maximise profit
2 techniques
Single limiting factor Linear programming (>1 limiting factor)

Slide 138

A business manufactures 2 products garden gnomes and garden statues. Information for one unit of each product is given below:
Gnome Contribution Material Labour $6 2kg 5 hours Statue $9 4kg 6 hours

There are only 80 kg of material available and 180 hours of labour. Demand for the statues will not be above 10 units per week.

Slide 139

Linear programming steps

Define variables

let g = number of gnomes produced per week let s = number of statues produced per week let k = contribution per week

Slide 140

Linear programming steps


Establish constraints
Materials Labour Demand Non-negativity 2g + 4s 5g + 6s s 10 g,s > 0 80 180

subject to:

Formulate objective function

Max k = 6g + 9s

Slide 141

Linear programming steps


Plot constraints on graph

Materials 2g+4s=80
When g=0, s=20 s=0, g= 40

Find co-ordinates


When g=0, s= 30 s=0, g=36

Demand Non-negativity

s = 10 g,s > 0

Slide 142

Linear programming steps


Materials: 2g + 4s = 80

Labour: 5g + 6s = 180 Demand : s = 10



Slide 143


20 30 40

Linear programming steps


Identify feasible region

Materials: 2g + 4s 80

Labour: 5g + 6s 180 Demand : s 10



10 20 30

Slide 144


Linear programming steps Plot objective function and identify optimal point

k = 6g + 9s Pick any value for k

Say k = 6 x 9 = 54 k = 54 = 6g + 9s
When g=0, s=6 When s=0, g=9

Slide 145

Linear programming steps


Materials: 2g + 4s


Labour: 5g + 6s 180 Demand : s 10

k = 6g + 9s Optimal point = D




Slide 146





Linear programming steps


Solve using simultaneous equations

2g + 4s = 80 5g + 6s = 180
g = 40 2s

Materials Labour

(i) (ii)

Rearrange (i) to get g on own Substitute in (ii) Labour 5g + 6s = 180 (ii) 5(40 2s) + 6s = 180 200 10s + 6s = 180 200 180 = 4s s=5 Slide 147

Linear programming steps

Substitute s = 5 in (i) Materials 2g + 4s = 80 (i) 2g + (4 x 5) = 80 2g = 80 20 g = 30 Optimal production plan: 30 Gnomes 5 Statues Contribution: k = 6g + 9s k = (6 x 30) + (9 x 5) = 225
Slide 148