ACCA F2 2012 Notes

ACCA Paper F2
Management Accounting
For exams in 2012
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(FIA Paper FMA)
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Notes
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ACCA F2 Management Accounting
Contents
About ExPress Notes
1. 2. 3. 4. 5.
The Nature, Source and Purpose of Management Information Cost Accounting Techniques Budgeting
Standard Costing
Performance Measurement
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2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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START About ExPress Notes
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At the door of the exam room before you go in.
The night before the real exam
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Notes
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START About The ExP Group
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Notes Notes
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Chapter 1
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The qualities of good information can be summarized in the word ACCURATE: Accurate, Complete, Cost-beneficial, User-targeted, Relevant, Authoritative, Timely and Easy to use
The Characteristics of Good Information
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The Nature, Source and Purpose of Management Information
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The process of identification, measurement, accumulation, analysis, preparation, interpretation and reporting of information used by management to set targets, plan resource allocation, evaluate investment choices and monitor/control the operating performance and the orderly conduct of the business. Differences in purpose and scope, compared to Financial Accounting
Aimed at internal users (as opposed to financial accounting, which is aimed at external stakeholders)
Focused on present and future performance (as opposed to financial accounting, which reports past performance) Not required by law and not regulated by accounting frameworks (as opposed to financial accounting, which is a legal requirement and is regulated by accounting frameworks)
Focused on specific areas or activities (as opposed to financial accounting, which provides a holistic view of companys performance) Employs non-financial indicators as well financial, while financial accounting uses only financial measures.
Managerial Processes
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The key processes which face management can be divided into:
Planning: Defining objectives and appropriate strategies for attaining them;
Decision-making: Making choices, not only with regard to the selection of strategies, but also along the way as implementation proceeds; Control: Monitoring of performance during the course of business and taking remedial action steps as necessary
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KEYKNOWLEDGE ManagementAccounting
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Planning Planning occurs at different levels of the organisation:
Responsibility centers
Related to the above is the notion of responsibility that attaches to each level of an organisation: Responsibility centres
Cost Centres
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Cost centres: Responsible for current expenses only Revenue centres: Responsible for revenues, but not current expenses other than marketing expenses Profit centres: Responsible for revenues and current expenses Investment centres: Responsible for revenues, current expenses and capital expenditure
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Strategic Tactical Operational
Revenue Centres Profit Centres
Strategic: covers the big view of the organisation. It answers the question What business or businesses should we be in and what are our objectives?
Tactical: this embraces the short-term (budgetary periods);
Functional (or operational) strategy: this refers to day-to-day target-setting
Investment Centres
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KEYKNOWLEDGE Sourcesofdata
The sources of data are almost infinite, and they must be selected and evaluated carefully based on reliability and relevance.
KEYKNOWLEDGE Classificationsofcost
In financial accounting, it is a convention to break down costs into:
KEYKNOWLEDGE Productionvs.NonProductioncosts
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Non-production costs: These are expenses that are incurred independent of production and include administrative, selling, distribution and finance costs. These costs can have the character of period costs, as they relate to the period of time in which they occur.
Direct costs: are costs that can be directly attributable to a product. Indirect costs: these are costs that cannot be directly attributable to a product.
Production costs: These are costs (both direct and indirect, also variable and fixed) which relate to the production of goods; this is also referred to as manufacturing or factory cost. It is these costs, accumulated, which provide the value at which goods are placed in inventory (prior to sale) and form the cost of goods value when sold.
KEYKNOWLEDGE Directvs.Indirectcosts
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KEYKNOWLEDGE Fixedvs.Variablecosts
Fixed costs: are costs that remain constant regardless of the volume of production. A variety of indirect costs are fixed. Variable costs: vary in proportion with the volume produced. Direct costs are by their nature variable in behaviour.
Although a variable cost increases with the level of activity, the variable cost per unit remains fixed, while a fixed cost per unit falls with a rise in the level of activity. Other types of costs:
Mixed costs: these are costs that contain a fixed and a variable element.
Step costs: costs that remain fixed within a defined range of production, but at a certain level of output increase in a significant way to a new (fixed) level.
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Chapter 2
Cost Accounting Techniques
Materials
The ordering, receiving and issuing of materials from inventory must be controlled according to procedures and documented at all stages with forms appropriate to the purpose. The controls and procedures are designed to monitor inventory movements so as to minimise discrepancies and losses and theft. Economic Order Quantity
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This is a method which seeks to minimize the costs associated with holding inventory. To determine the total costs, the following data is required: Q = order quantity D = quantity of product demanded annually P = purchase cost for one unit C = fixed cost per order (not incl. the purchase price) H = cost of holding one unit for one year
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The total cost function is as follows: Total cost = Purchase cost + Ordering cost + Holding cost which can be expressed algebraically as follows: TC
It is this total cost function which must be minimized. Recognizing that:
PD does not vary;
Ordering costs rise the more frequently one places (during the year); and
Holding costs rise the fewer times one places orders (due to larger quantities being ordered each time),
It follows that there is a trade-off between the Ordering and the Holding costs.
The optimal order quantity (Q*) is found where the Ordering and Holding costs equal each other, i.e. C x D/Q = H x Q/2
Rearranging the above and solving for Q results in
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Labour
Direct labour refers to work which is directly involved in the manufacture of a product.
Indirect labour (e.g. the supervisors salary or that of a security guard) forms part of overhead costs.
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= PxD + C x D/Q + H x Q/2
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Absorption Costing This is one method which seeks to make the link between overheads and (product) cost units. The diagram below provides a useful roadmap.
Direct Costs
It is useful to think of production costs as being those that end up as part of the inventory (valuation) while other (non-production) costs are incurred outside, and normally after the product leaves inventory.
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Contribution Contribution is defined as the difference between Sales revenue and the marginal cost of sales, or Contribution = Sales Variable costs (both production and non-production)
The focus (above) is production. Overhead costs that are not incurred at the time of production do not find their way into inventory.
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Total Production Costs Indirect costs (overheads) 2. Allocate/Apportion to Cost Centers Production A Production B Service C 1. Allocate 3. Reapportion from Service to Production Production A Production B 4. Absorb Cost Unit
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Marginal costing A marginal approach to costing focuses on the variable (marginal) costs generated in a business and considers fixed costs as period costs. This allows the company to be able to quantify the amount by which its costs rise, if it produces/sells an additional unit of output. Example
Below is data on a manufacturing company. Selling price (per unit):
Cost card (per unit): Direct materials Direct labour Variable production O/Hs Total variable costs
There is a variable selling cost of $2 per unit
Budget (normal) production Actual Production Actual Sales
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Based on the above data, a profit and loss statement for the Years 1 and 2 is shown on the next page. Assume that the beginning inventory is zero.
Actual fixed production O/Hs Actual SGA costs
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120 45 18 9 72 Year 1 (units) 1,100 Year 2 (units) 1,100 1,000 950 1,100 1,150 $16,500 $ 7,000 $16,500 $ 7,000
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Profit/Loss (Marginal costing) Year 1 $ Sales (950/1,150 units) 114,000 Year 2 $ 138,000
Less: Variable cost of sales Opening inventory Production costs: o
Variable (1,000 x $72) (1,100 X $72)
Less: closing inventory (50 x $72) Less: Variable selling costs (950 x $2) (1,150 x $2) Contribution
Less: Fixed production O/Hs Less: SGA costs Profit
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Inventory is valued at variable production costs.
Absorption Costing This method argues that focusing on marginal costs is potentially misleading in the longer run because fixed production costs have also to be covered. Accounting conventions require that fixed production costs be reflected in each unit produced.
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0 3,600 72,000 79,200 0 (3,600) (68,400) (1,900) (82,800) (2,300) 43,700 52,900 (16,500) (7,000) (16,500) (7,000) 29,400 20,200
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Revised cost card (Absorption costing) Cost card (per unit): Direct materials Direct labour Variable production O/Hs Fixed production O/Hs Total production costs 45 18 9 15 87
Profit/Loss (Absorption costing)
Sales (950/1,150 units)
Less: Variable cost of sales Opening inventory Production costs: o
Variable (1,000 x $72) (1,100 X $72) Fixed (1,000 x $15) (1,100 X $15)
Less: closing inventory (50 x $87)
Over/(under) absorption
Gross Profit
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Less: Variable selling costs (950 x $2) (1,150 x $2) Less: SGA costs
Profit Inventory is valued at the full production costs.
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Year 1 $ Year 2 $ 114,000 138,000 0 4,350 72,000 79,200 15,000 16,500 0 (4,350) 1,500 0 (84,150) 29,850 (100,050) 37,950 1,900 2,300 7,000 (8,900) 20,950 7,000 (9,300) 28,650
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Summary of Absorption costing and Marginal costing formats
Absorption Costing Revenue
Marginal Costing
Less: Cost of Sales
Less: Expenses
Net Profit
Job costing / Batch costing
This refers to the calculation of costs associated with a specific job or customer order. This is appropriate in situations where each product or service is distinct, and possibly unique, in its delivery. Batch costing is similar to job costing; the distinction lies in the identification of costs with specific batches, which are numbered (separately identified) for this purpose.
Process Costing
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Process costing is a technique that applies to the mass production of a large number of identical products, moving through a series of processing stages. The accumulated costs of production can be averaged over the number of items produced. The average cost is determined by the following formula: Average cost per unit = Total cost of inputs Scrap value of rejected units No. of units of input Normal loss
The total cost of inputs refers to labour, materials and overhead costs of production. If losses occur along the way that necessitate the scrapping of defective units, then to the
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Variable/Fixed production costs Variable production/ non-production costs Contribution Gross profit Variable/Fixed non-production costs Fixed production/ non-production costs
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ACCA Paper F2

(FIA Paper FMA)

START About ExPress Notes

ACCA F2 Management Accounting

At the start of the learning phase

At the door of the exam room before you go in.

The night before the real exam

START About The ExP Group

The Characteristics of Good Information

The Nature, Source and Purpose of Management Information

The key processes which face management can be divided into:

Planning: Defining objectives and appropriate strategies for attaining them;

Tactical: this embraces the short-term (budgetary periods);

Functional (or operational) strategy: this refers to day-to-day target-setting

In financial accounting, it is a convention to break down costs into:

Cost Accounting Techniques

It is this total cost function which must be minimized. Recognizing that:

PD does not vary;

Rearranging the above and solving for Q results in

Below is data on a manufacturing company. Selling price (per unit):

There is a variable selling cost of $2 per unit

Budget (normal) production Actual Production Actual Sales

Actual fixed production O/Hs Actual SGA costs

Less: Variable cost of sales Opening inventory Production costs: o

Variable (1,000 x $72) (1,100 X $72)

Less: Fixed production O/Hs Less: SGA costs Profit

Inventory is valued at variable production costs.

Profit/Loss (Absorption costing)

Sales (950/1,150 units)

Less: Variable cost of sales Opening inventory Production costs: o

Less: closing inventory (50 x $87)

Profit Inventory is valued at the full production costs.

Absorption Costing Revenue

Less: Cost of Sales

Job costing / Batch costing

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