Suggested Study Notes

ACCA F2 Paper
Suggested Study Notes for F2 ACCA Examinations

REVIEW OF SOME KEY FUNDALMENTALS

1 Know difference in type of accountant

Management Financial
Accountant Accountant

Planning Accounts Preparation

Controlling Reporting

Decision Making Statutory Reporting

Internal Internal & External

Reporting Reporting

2 Understand RN Anthony view point

Strategic Planning / Management control / Operational Control

3 Classification of costs for manufacturing companies/entities

Production Costs Direct materials (raw materials/packaging),

direct wages, direct costs.

Production Overheads Costs relating to production.

E.g. plant repairs, plant rent, plant cleaning.

Admin / Distribution Costs Costs running the operation.

Not directly relating to production.

Marketing Selling and promotion costs.

Typically period costs but can be related
to sales volume.

4 Know formula for high-low method in working out variable cost of semi-variable
costs.

Ensure the step up cost is taken off in the formula

NB: high low figures are based on volume, from there you take the respective costs.

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5 y = a + bx Know terminology: a = fixed element or "intercept
b = slop or multiple or gradient

NB: to find a or b, make y = 1

eg. Find slope in 5y = 25 + 10x

bring y=1, so divide by 5 on each side

You get………… y = 5 + 2x…………………..solution, slope = 2.

6 Know difference between interpolation and extrapolation.

interpolation extrapolation
line within continue drawing line outside data range.
data range "making an assumption that trend
will continue"

7 Unsure elements of EOQ and EBQ formula are known exactly.

D = may be annual demand but figures presented may be monthly or quarterly figures.
so therefore x 12 or x4 to bring to same base level.

Ensure base is calculated correctly. This will be examined in the question.

8 Learn formula for volume ratios.

You may be given information with one part missing.

Ratio Ratio Ratio

efficiency x capacity = production volume

Expect hrs x Actual hrs expected hrs

Actual hrs Budget hrs budget hrs

when you multiply out, actual hrs cancel deriving

production volume ratio

9 Learn formula for Labour Turnover rate

No of replacements in staff x 100 Staff left is not the same as no. of replacements
Average employees in period Divide by 2 if two data sets given

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10 Overhead absorption rate

Budgeted overheads Remember: this is a prediction to work

Budgeted activity out the overheads in the future. When
actual overheads are known, we have a
NB: Budget figures used. difference (under or over absorbed)

Over absorbed overheads means you allocated more costs to P&L, so the
adjustment to bring back to actual is a gain or favourable variance.

Under absorbed overheads means you allocated less costs to P&L, so the adjustment
to bring back to actual is a loss or adverse variance.

Typically overheads are expressed as rates$ per machine hour or per labour hour.

11 Marginal / Absorption Costing

Know the make up and differences between margin and absorption costing.
Important to be able to quantify the difference. Lots of flexibility for examiner to ask
questions in this area.

As the absorption method has more costs, the stock valuation will be higher. With this value
higher, this gives you a higher profit. This point is nearly always tested.

If there are no changes between opening and closing stocks, there is no difference
in profit calculation.

Diff in methods = change in inventory level x production o/h absorption rate

Remember what a variance is, it brings you back to the actual results. Both methods do this
in their respective variance calculations.

Absorption costing brings in "fixed overheads" in the cost of production (or direct cost of
product). Marginal costing treats fixed overheads as a period cost. It assumes no change with
activity.

12 Know the Characteristics of services Learn SHIP

Simultaneity Unable to be inspected in advance

Heterogeneity Service repeated, always different never the exact same
Intangibility Typically intangible, not a physical product
Perishability Unable to store a service

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13 Process costing

Know elements of "T" account.

Unsure physical units balance and respective values balance.

Process Account
units value$ units value$
Op balance 100 Tsf to next stage
or finished units 1000
Inputs & 1500
process costs Normal loss 150
Abnormal loss 100

Cl balance 350

1600 value$ 1600 value$

For FIFO, crucial you breakup the finished units into "started and completed" to
work out valuation. Not relevant for weighted average method.
Ans: 1000 less 100 opening stock = 900 units started & completed in period.

Golden rule: always cost for normal. If different you have either an abnormal loss or
abnormal gain. No value is entered in for a normal loss as the units are expected.
Only enter a value if there is a by-product involved and question provides information
on the method used.

Abnormal gains/losses must therefore be valued in the process account. As these are
unexpected.

Remember equivalent units are notional and only used as a method to apportion costs.
They are not physical units and not shown on the face of the process account.

FIFO valuation method, you need to split out opening and closing stocks for equivalent units.

Weighted average method, you need to split out only closing stocks for equivalent units.

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14 Process costing / Joint costs & By-products

A by-product is not costed out separately in a process. While still an output of the process,
it is incidental but we still need to account for it and yield "some" income if we can.

Know the 4 ways to account for By-products:

1) Separate income line, 2) Just add to sales line when sold, 3) Sales proceeds reduces cost of
production, 4) Deduct net realisable value (NRV) produced in period against the cost of
production in that period.

Remember, by-products are not valued or costed individually. They may be tracked and listed
in a stock listing but not valued.

Apportionment of joint costs is normally done by the apportionment of:

units produced in period x sales value

Apportionment by units produced can be used but better to use the above as it looks at the
sales value element and the value the end product is worth in the market.

Don't use sales volume x sales value (this is tested a lot in examinations)

15 Understand activity based costing as an alternative to traditional absorption costing.

Typically ABC costing will be used against overheads that do not vary with production volume.
Overheads that vary with production would use machine or direct labour hours.
Questions asked may give two sets of overheads and testing students to select the correct
overheads (that do not vary with production volume) to use against the cost driver.

Overheads
ABC formula = Cost Driver An alternative way to allocate costs
to products

ABC cost driver examples: no of setup runs, no of orders, no of despatches, no of calls.

16 Correlation coefficient "r"

r can be 1 0 -1

Positive Negative

The degree of linear correlation between two variables.

  = coefficient of determination

Understand the meaning. It is the proportion of the total variation in value of one variable
that can be explained by variations in the value of the other variable.

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It follows the linear rule of y = a + xb. Example: 92% of variations in y can be explained by
variations in x, where
 = .92.
Therefore 8% of variations in y are due to other factors……… i.e. not x.

17 Statistics - trends

Remember actual data includes seasonal factors. Removing the seasonal factor you get
seasonally adjusted figures or deseasonalised figures or trend figures.

Question: What is the trend figure if the actual data is 26 and the seasonal adjustment is -5 ?

Ans: -5 is already included in 26, so you need to add, to remove it. Ans = 31.
If the adjustment was +5, then the trend figure would be 21.

Seasonal adjustments are not percentages but quantifiable adjustments.

Additive model: seasonal adjustments add up to zero.

This model calculates absolute seasonal variations that do not change.

Multiplicative model: seasonal adjustments add up to 4.

This model takes account of changing seasonal variations.

18 Statistics - Index numbers

Price index Price for period x100

"fixed" Price for base period fixed base index, base index does not
change.

Price index Price for period x100

"chain" Price for prior period fixed base index, base index does not
change.

19 A master budget typically includes:

1 Profit & Loss account

2 Balance Sheet
3 Cash Flow Forecast

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20 Investment appraisal

Only deals in cashflows so non cash items are irrelevant eg Depreciation.

Know payback calculation

Cashflows of project Memo Cumulative
yr 0 -10000 -10000
yr 1 3000 -7000
yr 2 4000 -3000
yr 3 5000 2000
yr 4 6000 8000

Payback happens between yr2 and yr3

Ans: 2+ 3000 Years

5000

= 2.6 years

Know the internal rate of return of the project (IRR).

IRR in a project is when NPV = 0 NPV = net present value

Taking figures above, what is the IRR of the project?

NB: only need to take to yr3 as this is when payback was delivered.

Cashflows of project at 8% at 9%
yr 0 -10000 1 -10000 1 -10000
yr 1 3000 0.926 2778 0.917 2751
yr 2 4000 0.857 3428 0.842 3368
yr 3 5000 0.794 3970 0.772 3860

176 -21

NPV is 0 between
these values

IRR is therefore 8% + 176 or 9% - 21

197 197

= 8.89%

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21 Understand interest and value of money

$1000 in a bank for 3 years at 10% pa interest. What is total in 3 years?

1000 x 1.1 x 1.1 x 1.1 = 1331

OR

I will have $1,331 in 3 years time. At 10% pa interest rate what do I need to invest now?
Or what is the present value of having $1,331 in 3 yrs at 10% interest rate?

Use present value tables. 1,331 x .751 = $1,000

Annuities

If I am offered $5,000 pa for 4 years or $17,000 now, which should I take?

Assuming interest rate of 7% on savings.

Ignoring other factors and just on a calculation, you need to find the present value of the
annuity to compare with the $17,000 offer today.

Use tables: 5,000 x 3.387 = 16935 PV of the annuity

Ans: you take the cash deal now of $17,000, this is higher.

Work out annual interest rates

2% bi-monthly, simple = 2% x 6 = 12%

(2% repeated 6 times in the year)

2% bi-monthly, compound = (1 + R) = (1 +
) n=6

1 + R = (1 + .02)

R=effective rate p.a. R = 0.126162

12.62%

Getting 2% interest every 2 months, compounded you will get more than simple interest.
Therefore the annual percentage rate (APR) will be greater.
Hence the reason why all financial deals or products must contain the APR.

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22 Standard costing

Marginal costing: sales less variable costs = contribution less fixed costs = profit/(loss)

Absorption costing: sales less variable costs less fixed prod o/h = contribution less other
fixed costs = profit / (loss)

Note: standard contribution between methods shows that absorption costing includes an
element of fixed production overhead in the cost of the product. Direct contribution of the
product will therefore be lower. The direct cost will be higher per product, hence a higher
product cost/unit, leading to a higher stock valuation.

The higher stock valuation will then lead to a higher profit than if marginal costing method was
used. See point 11.

Variance Analysis Types of variance

Price Volume
$
Sales 100 Price Volume contribution

Direct costs
Materials 30 Price Volume
Labour 20 Rate Efficiency (& idle)
Fixed Prod. o/h 5 Expenditure Volume
(Efficiency & Capacity)
Other variable costs 15 Expenditure Efficiency
Fixed costs 0 Period cost (compare to budget)

Costs 70

Standard Profit 30 per unit

We have typically two types of variances of each revenue and cost category of the standard
cost per product. There is a price and volume calculation. The terminology may change but
in principal the theory is the same.

Main rules:

Price variance
Compare budget price verses actual.
Use actual volume produced or actual sold for the sales price.
If actual price is greater than budget, it's adverse.

Once the price variance is calculated all other variances are multiplied by the respective
standard cost.

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Volume variance
In all cases compare actual production against what was used or consumed, then multiply by
respective standard cost category.
If actual usage is greater than expected then adverse variance (for costs).
If you sell more than expected, than this is favourable (for revenue).

Sometimes labour efficiency allows the calculation of idle time. This is the difference between
productive hrs and hrs paid x std labour rate. Always adverse.

Two exceptions:
1) The volume variance for sales is based on the contribution.
Marginal costing: sales volume diff x $35 (excludes fixed prod o/h)
Absorption costing: sales volume diff x $30

2) Fixed production volume variance and fixed production capacity variance.

The reverse logic rule applies. The calculation of a greater cost volume than expected is
favourable not adverse. If cost volume is less, this is adverse.
This breaks the rule for all cost variances.

E. & O. E.

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ACCA F2 Paper

The next course commences on Monday, 27th August 2012. Lectures are delivered from our
City Centre location (South Great George’s Street, D2), Templeogue (Dublin 6W), and are streamed
online live and are recored for online review.

• Exam question and solution bank

• Dedicated exam review and preview classes
• End of course tutorials, as well as memory and study technique classes
• City centre location in Dame Street, convenient for bus, LUAS, DART, etc.
• Southside Dublin location in Templeogue
• Study rooms and library in both locations
• Limited class size
• Live lectures which are also streamed live on Moodle, and are recorded for review

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Tuesday F2 F8 P3 F4
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F1 Accounting in Business Wednesday €350 €199
F2 Management Accounting Tuesday €350 €199
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F6 Taxation Wednesday €650 €295
F7 Financial Reporting Thursday €650 €295
F8 Audit & Assurance Tuesday €650 €295
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P1 Governance, Risks & Ethics Thursday €795 €325
P2 Corporate Reporting Wednesday €795 €325
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Apply online at www.citycolleges.ie or call 1850 25 27 40

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