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
Accountant
Financial
Accountant
Planning
Accounts Preparation
Controlling
Reporting
Decision Making
Statutory Reporting
Internal
Reporting
Internal & External
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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Suggested Study Notes
ACCA F2 Paper
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
line within
data range
extrapolation
continue drawing line outside 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
efficiency
Expect hrs
Actual hrs
x
x
Ratio
capacity
=
Actual hrs
Budget hrs
Ratio
production volume
expected 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
Average employees in period
x 100
Staff left is not the same as no. of replacements
Divide by 2 if two data sets given
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Suggested Study Notes
ACCA F2 Paper
10 Overhead absorption rate
Budgeted overheads
Budgeted activity
NB: Budget figures used.
Remember: this is a prediction to work
out the overheads in the future. When
actual overheads are known, we have a
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
Simultaneity
Heterogeneity
Intangibility
Perishability
Learn SHIP
Unable to be inspected in advance
Service repeated, always different never the exact same
Typically intangible, not a physical product
Unable to store a service
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Suggested Study Notes
ACCA F2 Paper
13 Process costing
Know elements of "T" account.
Unsure physical units balance and respective values balance.
Op balance
Inputs &
process costs
Process Account
units
value$
100
Tsf to next stage
or finished units
1500
Normal loss
Abnormal loss
Cl balance
1600
value$
units
value$
1000
150
100
350
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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Suggested Study Notes
ACCA F2 Paper
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.
ABC formula =
Overheads
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
Positive
-1
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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Suggested Study Notes
ACCA F2 Paper
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
"fixed"
Price for period
x100
Price for base period
Price index
"chain"
Price for period
x100
Price for prior period
fixed base index, base index does not
change.
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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Suggested Study Notes
ACCA F2 Paper
20 Investment appraisal
Only deals in cashflows so non cash items are irrelevant eg Depreciation.
Know payback calculation
Cashflows of project
yr 0
-10000
yr 1
3000
yr 2
4000
yr 3
5000
yr 4
6000
Memo Cumulative
-10000
-7000
-3000
2000
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
yr 0
-10000
yr 1
3000
yr 2
4000
yr 3
5000
at 8%
1
-10000
0.926
2778
0.857
3428
0.794
3970
at 9%
1
-10000
0.917
2751
0.842
3368
0.772
3860
176
-21
NPV is 0 between
these values
IRR is therefore 8% +
176
197
or
9% -
= 8.89%
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21
197
Suggested Study Notes
ACCA F2 Paper
21 Understand interest and value of money
$1000 in a bank for 3 years at 10% pa interest.
1000 x 1.1 x 1.1 x 1.1
=
What is total in 3 years?
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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Suggested Study Notes
ACCA F2 Paper
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
Sales
Price
Volume
$
100
Price
Volume contribution
30
20
5
Price
Rate
Expenditure
Volume
Efficiency (& idle)
Volume
Direct costs
Materials
Labour
Fixed Prod. o/h
(Efficiency & Capacity)
Other variable costs
Fixed costs
15
0
Costs
70
Standard Profit
30
Expenditure
Efficiency
Period cost (compare to budget)
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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Suggested Study Notes
ACCA F2 Paper
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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Suggested Study Notes
ACCA F2 Paper
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