ACCA Paper F5
Performance
Management
Class Notes
December 2011
© The Accountancy College Ltd, June 2011
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior written permission of The
Accountancy College Ltd.
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Contents
PAGE
INTRODUCTION TO THE PAPER
5
FORMULAE PROVIDED IN THE EXAMINATION PAPER
7
CHAPTER 1:
COST ACCOUNTING AND NEW DEVELOPMENTS
9
CHAPTER 2:
DECISION MAKING AND LINEAR PROGRAMMING
31
CHAPTER 3:
PRICING
55
CHAPTER 4:
DECISION MAKING UNDER UNCERTAINTY
69
CHAPTER 5:
BUDGETING TYPES
83
CHAPTER 6:
BUDGETARY CONTROL
91
CHAPTER 7:
QUANTITATIVE AIDS TO BUDGETING
103
CHAPTER 8:
STANDARD COSTING AND VARIANCE ANALYSIS
121
CHAPTER 9:
ADVANCED VARIANCE ANALYSIS
139
CHAPTER 10:
PERFORMANCE EVALUATION
153
CHAPTER 11:
TRANSFER PRICING
175
APPENDIX:
SOLUTIONS TO EXERCISES AND EXAMPLES
183
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Introduction to the
paper
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INTRODUCTION TO THE PAPER
AIM OF THE PAPER
To develop knowledge and skills in the application of management accounting
techniques to quantitative and qualitative information for planning, decision-making,
performance evaluation and control.
OUTLINE OF THE SYLLABUS
1.
Cost accounting techniques.
2.
Decision-making techniques including risk and uncertainty.
3.
Budgeting techniques and methods.
4.
Standard costing systems.
5.
Performance appraisal including financial and non-financial measures.
FORMAT OF THE EXAM PAPER
The syllabus is assessed by a three hour paper-based examination.
The examination consists of 5 questions of 20 marks each. All questions are
compulsory.
FAQs
How has the exam format changed and what impact will that have on
the paper?
The paper has moved to having five 20 mark questions rather than four 25 mark
questions. This move has been, it appears, to improve pass rates. Initial evidence would
suggest that this will be the case. The questions will become less complex and there will
be less emphasis on the discursive elements of answers and more emphasis on
computation. The downside for students is that there will be more time pressure due to
the fact that five separate scenarios must be understood during the limited time of the
exam. On balance this is a good thing for students in future diets.
What is the skills set that a student must bring to the paper?
As a student approaching this paper the basic requirement is an ability to understand
and compute the differing techniques and methods in the syllabus. In addition there is a
need to understand the scenario and critically be able to write in relation to the scenario
and whatever the numbers you have already calculated.
What impact will there be of having a new examiner on this paper?
There should be little or no impact of having a new examiner on the well prepared
student. The style and content of the questions will change to some degree but the new
examiner is given the same remit as the previous examiner.
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Formulae provided in
the examination paper
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FORMULAE & TABLES PROVIDED IN THE EXAMINATION PAPER
FORMULAE SHEET
Learning curve
b
Y  ax
Where: y = average cost per batch a =
cost of first batch
x = total number of batches produced b
= learning factor (log LR/log 2)
LR = the learning rate as a decimal
Regression analysis y
 a  bx
b  n∑ xy − ∑ x∑
y n∑ x − ∑ x
2
a∑
y
2
−
b∑ x n n
n∑ xy − ∑ x∑ y
r
n∑ x
2
−
∑ x2 n∑ y2
−
∑ y2 
Demand curve
P  a − bQ
b
change in price
change in quantity
a  price when Q  0
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Chapter 1
Cost accounting and
new developments
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CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS
CHAPTER CONTENT DIAGRAM
Costing methods
Absorption
costing
Activity
based costing
Other costing
methods
H
Full cost per unit
H
H
Issue:
Arbitrary
cost allocation
Accurate
costs
H
Solution:
Activity
based costing
Swap cost
units
with cost pools
H
Swap OARs with
cost driver rates
H
product
Throughput
accounting
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H
Life cycle costing
H
Target costing
Environmental
Accounting
H
Return per factory hour
H
Costing methods
H
Cost per factory hour
H
Reasons for use
H
Throughput
ratio (TPAR)
H
Decision making
accounting
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CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS
CHAPTER CONTENTS
ABSORPTION COSTING -------------------------------------------------
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ABSORPTION COSTING – A REMINDER
12
TRADITIONAL OVERHEAD ANALYSIS
12
STEPS USING ABSORPTION COSTING
12
CRITICISMS OF ABSORPTION COSTING:
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RECENT CHANGES IN MANUFACTURING
13
A REVISED ANALYSIS – ABC
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STEPS USING ABC
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CONDITIONS UNDER WHICH ABC IS MOST APPROPRIATE
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BENEFITS AND LIMITATIONS
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ACTIVITY BASED BUDGETING (ABB) ----------------------------------
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THROUGHPUT ACCOUNTING -------------------------------------------
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BASICS
19
RATIONALE
19
KEY TERMINOLOGY
19
CONCEPTS UNDERPINNING THROUGHPUT ACCOUNTING
20
FACTORS AFFECTING THE VALUE OF THROUGH ACCOUNTING PUT
20
STEPS IN THROUGHPUT ACCOUNTING
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LIMITATIONS OF THROUGHPUT ACCOUNTING
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TARGET COSTING--------------------------------------------------------
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TRADITIONAL COSTING SYSTEMS
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TARGET COSTING STEPS
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CLOSING A TARGET COST GAP
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IMPLICATIONS OF USING TARGET COSTING
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LIFE CYCLE COSTING---------------------------------------------------COMPARISON OF LIFE CYCLE COSTING AND TRADITIONAL MANAGEMENT ACCOUNTING
ENVIRONMENTAL ACCOUNTING ---------------------------------------
25
25
28
INTRODUCTION
28
TYPES OF ENVIRONMENTAL COSTS
28
M ANAGING ENVIRONMENTAL COSTS
29
ENVIRONMENTAL COSTS STRATEGIES
29
METHODS FOR ACCOUNTING OF ENVIRONMENTAL COSTS
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CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS
ABSORPTION COSTING
Absorption costing – a reminder
The linking of all production costs to the cost unit to prepare a full cost per unit.
Uses
1. Stock Valuation
2. Pricing decisions
3. Budgeting
Traditional overhead analysis
Overhead
cost item
Cost
Centres
Cost
Units
Steps using absorption costing
The steps using absorption costing are:
1
Overhead costs are collected in various cost centres
Allocation: Specific overhead costs directly relating to individual cost centres, for
example, supervision, indirect materials.
Apportionment: General or common overhead costs like rent, heating, electricity
are incurred as a whole item by the company and therefore have to be distributed
to cost centres on some sharing bases like floor area, machine hours, number of
staff etc
2 Overhead absorption is achieved by means of a predetermined Overhead Absorption
Rate.
Budgeted Overheads
a.
Overhead Absorption Rate =
Budgeted Level of Activity *
* Activity levels generally used by examiners are number of units,
labour hours or machine hours, which means overheads are
charged to units on these bases.
b.
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Number of Units:
Single product environment
Labour Hours:
Manual manufacturing operations
Machine Hours:
Mechanical manufacturing operations
Absorbed overheads
=
OAR x Actual Activity
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CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS
Example 1 2P2D Ltd
2P2D Ltd produces 2 products in 2 departments. Relevant product information is:
Direct material cost (£)
Direct labour cost in Department X
Time per unit in Department X (Hours)
Direct labour cost in Department Y
Time per unit in Department Y (Hours)
Budgeted number of units
(£)
(£)
Product A
20
20
4
25
5
2,000
Product B
35
30
6
35
7
1,000
The labour rate is £5 per hour in each department.
The Budgeted Departmental Overheads are:
Department X
Department Y
£18,000
£6,500
Required:
Calculate the cost/unit using:
(a)
Separate OARs for each department, based on labour hours.
(b)
An overall OAR, based on labour hours.
(c)
Discuss the differences.
Criticisms of absorption costing
Criticisms of absorption costing are:
H
A big amount of guess work in relating overhead costs to the products.
H
Inappropriate bases to link overheads to products
H
Can only work in single product and simple manufacturing environments
Recent changes in manufacturing
The reason for the increasing inaccuracy of absorption costing is due to two basic
issues:
1.
Increased production complexity.
2.
Increased proportion of overhead costs.
Production complexity
A wide variety of production processes have become more complex in recent years in a
number of ways:
1.
Flexible manufacturing systems allow for a number of widely differing products to
be produced on the same machinery. Absorbing overhead on a simple volume
base is unlikely to reflect the differing overhead costs incurred by each product.
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CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS
2.
Fast product development may mean that a number of differing iterations of the
same product may be produced in quick order. With such products having differing
production volumes again a volume base is unlikely to work.
3.
Wider product ranges lead to a more complex cost analysis.
Increased proportion of overhead costs
Overheads have increased in importance as a percentage of total costs due to both the
substitution of direct labour with indirect labour as companies mechanise to a greater
degree. Also the increased production complexity outlined above has given rise to
increased costs for such disciplines as production planning and logistics.
Increased proportion of support services’ costs
Activity based costing also introduces the important aspect that cost are incurred in
selling and distributing a product and the cost of servicing customers are often more
important than production therefore an accurate cause effect relationship should be
established as to what generates the cost and what is the real impact of this cost on the
volume of units sold.
A revised analysis – ABC
Overhead
Cost Item
Cost
Pool
Cost
Unit
Steps using ABC
The steps involved in ABC are:
1.
Identify an organisation’s activities.
2.
Collect the cost of each activity into what is called cost pool (equivalent to cost
centre under traditional costing).
3.
Identify the factors which determine the size of the costs of an activity. These are
called cost drivers.
Activity
Ordering
Material handling
Production scheduling
Despatching
4.
Possible Cost Drivers
number of orders
number of production run
number of production run
number of despatches
Assign the cost of activities to products according to the product’s demand for
activities.
Cost Pool is an activity that consumes resources and for which overhead costs are
identified and allocated. For each cost pool there should be a cost driver.
Cost Driver is any factor which causes a change in the cost of an activity.
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