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December 2014–June 2015 Edition
STUDY SYSTEM
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ACCA
Paper F5 | PERFORMANCE MANAGEMENT
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ACCA
PERFORMANCE MANAGEMENT F5
STUDY SYSTEM
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December 2014–June 2015 Edition
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Paper
F5
Contents
Page
introduction ...............................................................................................v
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Syllabus.....................................................................................................vi
aCCa Study Guide ......................................................................................ix
Formulae ................................................................................................. xiv
Examination Technique ............................................................................ xv
Sessions
Cost accounting.................................................................... 1-1
2
Developments in Management accounting............................ 2-1
3
Relevant Cost analysis ......................................................... 3-1
4
Cost Volume Profit Analysis .................................................. 4-1
5
limiting Factor Decisions...................................................... 5-1
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1
6
Pricing .................................................................................. 6-1
7
Risk and uncertainty ............................................................ 7-1
8
budgeting ............................................................................. 8-1
9
Quantitative analysis in budgeting ....................................... 9-1
10
Standard Costing .................................................................10-1
11
basic Variance analysis .......................................................11-1
12
advanced Variance analysis ................................................12-1
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
iii
Contents
Sessions
Page
Planning and operational Variances ....................................13-1
14
Performance Measurement ..................................................14-1
15
Further aspects of Performance analysis.............................15-1
16
Divisional Performance Evaluation ......................................16-1
17
Transfer Pricing ...................................................................17-1
18
Performance Management information Systems .................18-1
19
index ..................................................................................19-1
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13
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© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
Introduction
abouT ThiS STuDy SySTEM
This Study System has been specifically written for the Association of Chartered Certified
Accountants fundamentals level examination, Paper F5 Performance Management.
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It provides comprehensive coverage of the core syllabus areas and is designed to be used
both as a reference text and interactively with the ATC Learning System to provide you with
the knowledge, skill and confidence to succeed in your ACCA studies.
About the author: Nick Ryan is ATC International's lead tutor in performance management
and has more than 10 years' experience in delivering ACCA exam-based training.
How to Use This Study System
Your should start by reading through the syllabus, study guide and approach to examining
the syllabus provided in this introduction to familiarise yourself with the content of this
paper.
The sessions which follow include the following features:
These are the learning outcomes relevant to the session,
as published in the ACCA Study Guide.
Session Guidance
Tutor advice and strategies for approaching each session.
Visual overview
A diagram of the concepts and the relationships addressed
in each session.
Definitions
Terms are defined as they are introduced and larger groupings of terms will
be set forth in a Terminology section.
illustrations
These are to be read as part of the text. Any solutions to numerical
Illustrations are provided.
Exhibits
These extracts of external content are presented to reinforce concepts and
should be read as part of the text.
Examples
These should be attempted using the pro forma solution provided (where
applicable).
Key Points
Attention is drawn to fundamental rules, underlying concepts and
principles.
Exam advice
These tutor comments relate the content to relevance in the examination.
Commentaries
These provide additional information to reinforce content.
Session Summary
A summary of the main points of each session.
Session Quiz
These quick questions are designed to test your knowledge of the technical
content. A reference to the answer is provided.
Study Question
bank
A link to recommended practice questions contained in the Study Question
Bank. As a minimum you should work through the priority questions
after studying each session. For additional practice you can attempt the
remaining questions (where provided).
Example Solutions
Answers to the Examples are presented at the end of each session.
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Focus
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
v
Syllabus
F5 Performance Management
Syllabus
Aim
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.
Main Capabilities
On successful completion of this paper, candidates should be able to:
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A. Explain and apply cost accounting techniques.
B. Select and appropriately apply decision-making techniques to evaluate business choices
and promote efficient and effective use of scarce business resources, appreciating the
risks and uncertainty inherent in business and controlling those risks.
C. Identify and apply appropriate budgeting techniques and methods for planning
and control.
D. Use standard costing systems to measure and control business performance and to
identify remedial action.
E. Identify and discuss performance management information and measurement systems
and assess the performance of a business from both a financial and non-financial
viewpoint, appreciating the problems of controlling divisionalised businesses and the
importance of allowing for external aspects.
Rationale
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The syllabus for Paper F5, Performance Management, builds on the knowledge gained in
Paper F2, Management Accounting and seeks to examine candidates' understanding of how
to manage the performance of a business. It also prepares candidates for more specialist
capabilities which are covered in P5 Advanced Performance Management.
The syllabus begins by introducing more specialised management accounting topics. There
is some knowledge assumed from Paper F2—primarily overhead treatments. The objective
here is to ensure candidates have a broader background in management accounting
techniques.
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The syllabus then considers decision-making. Candidates need to appreciate the problems
surrounding scarce resource, pricing and make-or-buy decisions, and how this relates to
the assessment of performance. Risk and uncertainty are a factor of real-life decisions
and candidates need to understand risk and be able to apply some basic methods to help
resolve the risks inherent in decision-making.
Budgeting is an important aspect of many accountants' lives. The syllabus explores
different budgeting techniques and the problems inherent in them. The behavioural aspects
of budgeting are important for accountants to understand, and the syllabus includes
consideration of the way individuals react to a budget. The preparation of fixed, flexible and
incremental budgets is assumed knowledge from F2.
Standard costing and variances are then built on. All the variances examined in Paper F2
are assumed knowledge. Mix and yield variances, and planning and operational variances
are explored here and the link is made to performance management. It is important for
accountants to be able to interpret the numbers that they calculate and ask what they mean
in the context of performance.
The syllabus concludes with performance management systems, measurement and control.
This is a major area of the syllabus. Accountants need to understand how a business
should be managed and controlled and how information systems can be used to facilitate
this. They should appreciate the importance of both financial and non-financial performance
vi
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F5 Performance Management
Syllabus
measures in management. Accountants should also appreciate the difficulties in assessing
performance in divisionalised businesses and the problems caused by failing to consider
external influences on performance. This section leads directly to Paper P5. All of the
subject areas covered in this syllabus could be examined in either a public sector or private
sector context.
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Relational Diagram of Main Capabilities
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Syllabus Structure
BA (P3)
APM (P5)
PM (F5)
F2/FMA
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vii
Syllabus
F5 Performance Management
Detailed Syllabus
A. Specialist Cost and Management
Accounting Techniques
5. Material mix and yield variances
6. Sales mix and quantity variances
1. Activity-based costing
7. Planning and operational variances
2. Target costing
3. Life-cycle costing
8. Performance analysis and behavioural
aspects
4. Throughput accounting
D. Performance Measurement and Control
5. Environmental Accounting
1
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B. Decision-making Techniques
1. Relevant cost analysis
2. Cost volume profit analysis
3. Limiting factors
4. Pricing decisions
5. Make or buy and other short term
decisions
6. Dealing with risk and uncertainty in
decision-making
C. Budgeting and Control
1. Budgetary systems
2. Types of budget
Performance management information
systems
2. Sources of management information
3. Management reports
4. Performance analysis in private sector
organisation
5. Divisional performance and transfer
pricing
6. Performance analysis in not-for-profit
organisations and the public sector
7. External considerations and behavioural
aspects
3. Quantitative analysis in budgeting
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4. Standard costing
Approach to Examining the Syllabus
The syllabus is assessed by a three-hour paper-based examination.
All questions are compulsory. It will contain both computational and discursive elements.
Some questions will adopt a scenario/case study approach.
Section A of the exam comprises 20 multiple choice questions of 2 marks each.
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Section B of the exam comprises three 10 mark questions and two 15 mark questions.
The two 15 mark questions will come from decision making techniques, budgeting and
control and or performance measurement and control areas of the syllabus. The section A
questions and the other questions in section B can cover any areas of the syllabus.
Candidates are provided with a formulae sheet.
ACCA Support
For examiner's reports, guidance and technical articles relevant to this paper see
www.accaglobal.com/gb/en/student/acca-qual-student-journey/qual-resource/accaqualification/f5.html.
The ACCA's Study Guide which follows is referenced to the Sessions in this Study System.
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Session 1
FOCUS
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Cost Accounting
This session covers the following content from the ACCA Study Guide.
A. Specialist Cost and Management Accounting Techniques
1. Activity-based costing
a) Identify appropriate cost drivers under ABC.
b) Calculate costs per driver and per unit using ABC.
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c) Compare ABC and traditional methods of overhead absorption based on production units,
labour hours or machine hours.
Session 1 Guidance
Note that if you studied paper F2, sections 1 and 2 of this session should be revision. If not, be sure
to work through these sessions carefully; the material here forms the basis of much of what follows
later throughout your F5 studies.
(continued on next page)
F5 Performance Management
Becker Professional Education | ACCA Study System
VISUAL OVERVIEW
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Objective: To consider the traditional role of the management accountant and to revise
marginal and absorption costing. To learn about activity-based costing.
INTRODUCTION TO
MANAGEMENT AND COST
ACCOUNTING
SCOPE OF
MANAGEMENT
ACCOUNTING
• Marginal Costing
• Absorption Costing
ACTIVITY-BASED
COSTING
•
•
•
•
•
Introduction
Steps
Cost Drivers
Calculation
Analysis of ABC
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• Management
Accounting and
Financial Accounting
• Comparison
• Planning, Control and
Decision-Making
TRADITIONAL
COSTING
Session 1 Guidance
Read section 3 on activity-based costing. Know the steps to apply ABC and understand cost
drivers.
Attempt Example 2 to understand the mechanics of calculating ABC. Be prepared to discuss the
purpose, advantages and disadvantages of ABC.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-1
Session 1 • Cost Accounting
F5 Performance Management
1
Scope of Traditional Management Accounting
1.1
Management Accounting and Financial
Accounting
Management accounting is concerned with the preparation and
presentation of accounting information to management to help
them plan, control and make decisions about the operations of the
business.
1.2
Comparison
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Financial accounting is concerned with the preparation and
presentation of accounting information on the performance and
financial position of the business.
Management Accounting
Users of information
Format of information
Purpose of information
Shareholders, banks, lenders and
suppliers, potential investors, tax
authorities and governments
Can take any form
Presentation regulated by law
and by the profession through
Accounting Standards (e.g. IFRS)
Useful to plan, control and make
decisions
Stewardship and investment
decisions
Relevant costs
Historical costs
Planning, Control and Decision-Making
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1.3
Management
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Bases of valuation
Financial Accounting
Encompasses establishing objectives and evaluating policies and
actions required to achieve them.
1.3.1
Planning
< Planning is the setting of goals and the selection of the
<
<
<
1-2
means of achieving these goals.
As businesses become large, these procedures need to be
formalised.
Short-term plans such as an annual budget show in detail the
intended results for the forthcoming year.
Long-term plans, also called "strategic" plans, are usually
documents showing the long-term objectives of a business.
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F5 Performance Management
1.3.2
Session 1 • Cost Accounting
Control
< Control means checking that an organisation is on track to
<
<
1.3.3
Decision-Making
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<
meet its long- and short-term objectives, and taking action to
correct any deviations from these.
Long-term control includes strategic performance evaluation,
which aims to measure how an organisation is performing
against its strategic objectives.
Short-term control focuses on comparing the budgeted results
with actual results.
This usually takes the form of an operating statement,
which breaks down the difference into its component parts
(variances).
< Decision-making usually involves using the information
provided by the costing system to make decisions.
2
Traditional Costing
2.1
Marginal Costing
Under marginal costing, fixed overheads are not included in unit
costs but are treated as a period cost (i.e. written off in full in the
income statement in the period in which they occur).
Inventory valuation includes only the variable costs of production.
Absorption Costing
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2.2
Under absorption costing, system overhead costs must be
allocated, apportioned and absorbed. The rest of section 2 deals
with absorption costing.
2.2.1
Allocation
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Initially as overhead costs are incurred, they will need to be
allocated to the cost centres to which they belong. This is where
costs which relate to a single cost centre are allocated to that cost
centre.
2.2.2
Apportionment
Apportionment is where an overhead is common to more than
one cost centre and therefore needs to be shared out among
the relevant cost centres using an appropriate method of
apportionment.
Illustration 1 Apportionment
Cost
Basis of apportionment
Rent, rates, heat
—
Floor area
Supervision, canteen costs
—
Number of employees
Depreciation, plant insurance
—
Book value of plant
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-3
Session 1 • Cost Accounting
2.2.3
F5 Performance Management
Absorption
The total of the overheads in each production department must
now be absorbed into the units of production.
This is achieved using one of the following methods:
direct labour hour rate;
direct material cost rate;
direct labour cost rate;
prime cost percentage rate;
machine hour rate; or
unit of output rate.
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<
<
<
<
<
<
Example 1 Overhead Absorption
X Ltd estimates that its factory costs for the coming year will be as
follows:
$
Direct material
40,000
Direct wages
60,000
Prime cost
100,000
Factory overhead
30,000
Total factory cost
130,000
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During the year there will be 100,000 direct labour hours, 50,000
machine hours, and 200,000 units will be produced.
Required:
Calculate the absorption rate using the following methods:
Solution
(i)
Direct labour hour rate =
Direct material cost rate =
(iii)
Direct labour cost rate =
(iv)
Prime cost percentage rate =
(v)
Machine hour rate =
(vi)
Unit of output rate =
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(ii)
1-4
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F5 Performance Management
2.2.4
Session 1 • Cost Accounting
Summary of Absorption Costing
DIRECT
COSTS
Allocation
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The diagram below depicts the process describing absorption
costing:
Apportionment
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Reapportionment
Absorption
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Charging of direct costs
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-5
Session 1 • Cost Accounting
3
F5 Performance Management
Activity-Based Costing
3.1
Introduction
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Activity-based costing (ABC)—an approach to costing and activity
monitoring which assigns resources consumed to activities and
activities to cost objects (based on estimated consumption). Cost
drivers are used to apportion activity costs to output.
Traditional absorption costing uses one method of apportioning all
overhead costs among products, typically labour hours or machine
hours. This "blanket rate" means that product costs may not
accurately reflect the true overhead costs of making a product.
When overhead costs accounted for only a small portion of total
factory costs, this inaccuracy was not significant. In modern
factories however, due to the reduction in the amount of labour
used, and the increase in the amount of high technology,
overhead costs are often a significant portion of overall product
costs. The inaccuracy of absorption costing is no longer
insignificant.
Activity-based costing aims to identify the activities which
cause overhead costs to be incurred and to apportion the
overhead costs to each product based on the use of the activities
by each product.
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This approach for calculating product costs was first written about
by Cooper and Kaplan, although many organisations were using
such methods before this.
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Activity-based costing recognises that traditional ideas of fixed
and variable cost categorisations are not always appropriate
and that, as the proportion of overhead costs in manufacture
has increased, there is a need for a more accurate method of
absorbing these costs into cost units.
It looks for a clearer picture of cost behaviour and a better
understanding of what determines the level of costs (i.e. "cost
drivers").
1-6
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F5 Performance Management
3.2
Session 1 • Cost Accounting
Steps
To find total product costs, overheads are traced to individual
production departments, as usual, with common costs being
apportioned using suitable bases. Then the steps depicted in
Figure 1 are followed.
Examples
(1)
(2)
(3)
(4)
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Step 1
(1)
Step 2
(4)
Number of batch set-ups for production
scheduling
Machine hours for machining
Number of despatch orders
for despatching
Number of inspections
Cost
(1)
(2)
(3)
(4)
pool for:
all production scheduling costs
all machining costs
all despatching costs
all inspection costs
(2)
(3)
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Step 3
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Step 4
Step 5
Production scheduling
Machining
Despatching of orders
Inspections
Cost
(1)
(2)
(3)
(4)
per
batch set-up
machine hour
despatch order
inspection
e.g. Product Z
(1) No. of batch set-ups for Product Z
x Cost per batch set-up
(2) No. of machine hours for Product Z
x Cost per machine hour
(3) No. of despatch orders for Product Z
x Cost per despatch order
(4) No. of inspections for Product Z
x Cost per inspection
Step 6
e.g. Product Z
Overhead cost per unit =
x1
x2
x3
x4
y
y
No. of Zs produced
Having discovered the cost drivers within the business, the
original production departments may be reorganised to take
advantage of potential cost savings.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-7
Session 1 • Cost Accounting
3.3
F5 Performance Management
Cost Drivers
Cost driver—a factor which can cause a change in the cost of an
activity.
PL
E
Traditionally it was assumed that the volume of output is the
factor which determines costs. In activity-based costing, however,
it is recognised that the amount of cost may be determined by
factors other than the volume of output. These factors are called
cost drivers.
The cost driver for a procurement department, for example, may
be the number of purchase orders processed.
An activity can have more than one cost driver attached to it.
For example, cost drivers associated with a production activity
may be:
machine operator(s);
floor space occupied;
power consumed; and
quantity of waste and/or rejected output.
Therefore, rather than use a single absorption rate, different
types of overhead cost are absorbed into units of production using
more appropriate rates based on cost drivers. For example, for
a particular production department the following rates may be
suitable:
<
<
<
<
M
< a warehousing cost/kg of material used;
< electricity cost/machine hour;
< production scheduling cost/production order, etc.
SA
These can then be applied and aggregated to calculate an
overhead cost per unit as set out in Step 5 of the previous
section.
1-8
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F5 Performance Management
3.4
Session 1 • Cost Accounting
Calculation
Example 2 Activity-Based Costing v Absorption Costing
Total budgeted fixed overheads for a firm are $712,000. These have traditionally been absorbed
on a machine hour basis. The firm makes two products, A and B.
Direct material cost
Machine time
Annual output
B
$20
$60
$50
$40
3 hrs
4 hrs
6,000
40,000
PL
E
Direct labour cost
A
The firm is considering changing to an activity-based costing system and has analysed the
overhead cost into three activities:
Activities /cost pools:
Cost driver:
$
Machine related
Set-up related
Purchasing related
Machine hours
230,000
Set-ups
304,000
Purchase orders
712,000
Total overheads
Machine
hours/unit
3
Annual
output
6,000
Total
machine
hours
Number of
set ups
Product B
4
18,000
Number of
purchase orders
16
52
40,000
160,000
30
100
46,000
178,000
46
152
M
Product A
178,000
Required:
(a)
(b)
Calculate the cost per unit using the ABC system.
Compare the cost per unit of each product using ABC with the cost per unit using
absorption costing, and identify the main reasons for the difference.
SA
(c)
Calculate the total cost for each product on the assumption that the firm
continues to absorb overheads on a machine hour basis.
Solution
(a) Traditional
Total overhead
=
Total machine hours
=
Rate per hour
=
Direct material
A
$
20
B
$
60
Direct labour
50
40
Fixed overhead
Total
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-9
Session 1 • Cost Accounting
F5 Performance Management
Example 2 Activity-Based Costing v Absorption Costing
(continued)
Solution
(b)
ABC
Activities
Machine
related
Set-up
related
Purchasing
related
Overheads
$178,000
$230,000
$304,000
178,000 hrs
46 set ups
152 orders
Cost per unit of driver
Cost traced to products
A
B
Cost per unit
A
B
Direct material
Direct labour
Fixed overhead
B
$
60.00
50.00
40.00
Comparison of costs under ABC and absorption costing
SA
(c)
A
$
20.00
M
Total
PL
E
Consumption of activities
(cost drivers)
1-10
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F5 Performance Management
Session 1 • Cost Accounting
3.5 Analysis of ABC
3.5.1Advantages
The main advantage of activity-based costing is that the costs
per unit are more accurate, as overhead costs are apportioned to
products based on their use of the cost drivers rather than using
some arbitrary "blanket rate" as used for absorption costing. This
leads to the following benefits:
3.5.2Disadvantages
PL
E
Better decision-making. Companies will have a more accurate
knowledge of cost per unit, and therefore profit per unit. They
can stop producing loss-making products.
Where cost plus pricing is used, the use of activity-based
costing means that the price will be more likely to achieve the
desired margins.
There is a better understanding of what causes costs because
of the identification of the cost driver. This enables managers
to make more informed decisions on actions which would
reduce cost. In the previous example, the cost of Product
A could be reduced by having a lower number of production
runs. This could be achieved by producing products in
larger quantities—for example, producing 10,000 units in a
production run instead of only 5,000 units.
Control of overheads is easier, as responsibility for incoming
costs must be established before ABC can be implemented.
SA
M
ABC may be based on historical information but could be used
for future strategic decisions.
Selection of cost drivers may not be easy. There may be more
than one possible cost driver for a particular overhead, so
some judgement is required in selecting an appropriate driver.
Additional time and cost of setting up and administering the
system.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-11
Session 1 • Cost Accounting
F5 Performance Management
3.6 Comparison of ABC and Traditional Methods
The differences between traditional methods of absorbing
overheads and activity-based costing methods can be summarised
as follows:
Traditional Absorption Costing
Activity-Based Costing
Initial allocation and apportionment of
Initial allocation and apportionment of
Absorption of overheads of each cost
Absorption of overheads of each
Many different types of costs for a
Costs for a particular activity will
Since costs are assumed to depend on
Identification of cost drivers allows
Absorption costing is relatively
Activity-based costing requires a
overheads is to cost centres.
particular cost centre are included in
the blanket overhead absorption rate
of that department.
volume of output, limited information
is provided to management about
ways to reduce costs.
include only the costs of performing
that activity.
management to understand better
the causes of costs and to find more
appropriate ways to control them.
large project to identify activities and
drivers. The accounting system may
have to be amended or replaced to
provide the information needed.
M
straightforward.
cost pool is based on the "driver"
that causes the costs to vary. Thus
product costs reflect more accurately
the activities that cause them.
PL
E
centre is based on volume of output
(e.g. number of units or labour hours).
As costs may not depend on volume,
allocation of some costs may
be inappropriate.
overheads is to cost pools. Each cost
pool represents a particular activity.
3.7 Use of ABC in the Public Sector
In many countries, governments are making greater use of
management accounting techniques:
SA
< to allocate government funds more efficiently to areas where
they provide the greatest benefits;
< to reduce the amount of overall government spending;
< to provide greater transparency, so that taxpayers can see
where their money is being spent; and
< to encourage public sector bodies to become more responsive
to their customers.
ABC is useful in helping public sector bodies assess more
accurately the costs of the services they provide.
However, the disadvantages of ABC previously mentioned
(in s.3.5.2) apply also to public sector organisations. Critics
also argue that public sector resources would be better spent
improving "front line" services than in developing sophisticated
accounting techniques such as ABC.
1-12
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F5 Performance Management
Session 1 • Cost Accounting
Illustration 2 Hospital Operating
Theatre
Activity
 Preparing the
operating theatre
PL
E
A hospital needs to monitor the costs per patient; part of this is the
cost of surgery.
Under traditional methods, the operating theatre might be treated as
a cost centre. An absorption cost per minute could be calculated by
dividing the total costs of the theatre by the total number of minutes
budgeted to be available. The cost of an operation would then be
calculated by multiplying the number of minutes the operation takes
by this absorption rate.
The problem with this approach is that it is not realistic to assume
that the cost per minute of all operations is the same. Some
operations may require several surgeons and medical staff; others
may require just one or two. Different equipment and different
quantities of consumable materials will be used.
Examples of activities that could be used for an activity-based
costing approach to calculating the cost of an operation include:
 Number of operations—
the cost of preparing the
theatre does not vary
significantly between
different types of
operations.
 Number of operations—
calculated separately
for those requiring a
general anaesthetic and
those requiring only local
anaesthetics.
M
 Activity of anaesthetist
Driver
 Time taken from entering
the anaesthetic room until
entering the recovery room.
 Activity of the physician
 Time taken from "knife to
skin" until closure.
SA
 Anaesthetic drugs
 Consumable items
during surgery
 Itemised list of
consumables used during
surgery, captured by a
bar-coding device.
 Overhead activity
 A charge for management
administration and staff
training.
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1-13
Summary
<
Management accounting is concerned with the preparation and presentation of accounting
information to assist management to plan, control and make decisions.
<
Costing involves calculating the unit cost of a product or service. Traditional methods are
absorption costing and marginal costing.
<
Under absorption costing, a share of fixed production overheads is included in the unit cost.
Steps used in absorption costing are:
As fixed overheads are incurred, they are allocated to, or apportioned between, the cost
centres in the factory.
•
Overheads of the service cost centres are apportioned between the production
cost centres.
•
Total costs in each production cost centre are absorbed into the unit cost using an
appropriate basis (e.g. labour or machine hours).
PL
E
•
<
Activity-based costing aims to provide a more reliable calculation of the cost of a product,
by relating the cost to the activities used in producing it.
<
Steps in ABC:
Identify the activities which cause costs to be incurred.
•
Costs are allocated and apportioned between "activity pools"— where each pool
represents an activity.
•
•
The absorption rate per unit of driver is calculated.
Identify the drivers related to each activity (a driver is a factor which causes the cost of
the activity to rise).
The product cost is calculated using absorption rates based on the drivers.
M
The main advantage of ABC is that it focuses on "more accurate" costs.
The main disadvantage is its complexity, which makes it inappropriate for many
organisations.
SA
<
<
•
•
1-14
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
Session 1
Session 1 Quiz
Estimated time: 15 minutes
1.
List the main differences between management accounting and financial accounting. (1.2)
2.
List the TWO approaches to costing. (2)
3.
List FOUR advantages of using activity-based costing. (3.5.1)
4.
List TWO disadvantages of using activity-based costing. (3.5.2)
PL
E
Study Question Bank
Estimated time: 80 minutes
Priority
Estimated Time
MCQs – Session 1
Q3
PLB
Q4
Egerton Manufacturing
Additional
20 minutes
20 minutes
40 minutes
Abbot Manufacturing
SA
M
Q1
Completed
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1-15
EXAMPLE SOLUTIONS
Solution 1—Overhead Absorption
(i)
Direct labour hour rate =
(iii) Direct labour cost rate =
(iv) Prime cost percentage rate =
(v) Machine hour rate =
$30,000
= 75%
$40,000
$30,000
= 50%
$60,000
$30,000
= 30%
$100,000
$30,000
= $0.60
50,000 hrs
$30,000
= $0.15
200,000 units
SA
M
(vi) Unit of output rate =
= $0.30
100,000 hrs
PL
E
(ii) Direct material cost rate =
$30,000
1-16
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
Solution 2—Activity-Based Costing v Absorption
Costing
Traditional
Total overhead
=
$712,000
Total machine hours
=
178,000
Rate per hour
=
Direct material
Direct labour
Fixed overhead
178,000
= $4/hour
A
$
20
B
$
60
50
40
12
3 hrs @ $4
4 hrs @ $4
16
82
Total
(b)
$712,000
PL
E
(a)
ABC
Activities
Overheads
Consumption of activities
(cost drivers)
Machine
related
Set-up
related
Purchasing
related
$178,000
$230,000
$304,000
178,000 hrs
46 set ups
152 orders
$1 per hour
$5,000 per set-up
$2,000 per order
M
Cost per unit of driver
116
Cost traced to products
A
B
$18,000
$80,000
$104,000
$160,000
$150,000
$200,000
Cost per unit
18,000 + 80,000 + 104,000
6,000
= $33.67
SA
A
B
160,000 + 150,000 + 200,000
40,000
= $12.75
Direct material
A
$
20.00
B
$
60.00
Direct labour
50.00
40.00
Fixed overhead
Total
33.67
12.75
103.67
112.75
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-17
(c)
Comparison of costs under ABC and absorption costing
There is a significant difference in the cost per unit of Product A when
using activity-based costing compared to traditional absorption costing.
Under absorption costing, the cost per unit was calculated as $82; under
activity-based costing, the cost per unit rose to $103.67, an increase of
26%. The difference in the cost per unit of Product B is less significant.
It falls to $112.75 under activity-based costing, compared to $116 under
absorption costing, a drop of 3%.
PL
E
The calculation of the cost of Product A is significantly understated when
absorption costing is used. A significant factor in this would appear to be
set costs. The total set-up costs apportioned to Product A were $80,000,
equivalent to $13.33 per unit. Product B, by contrast, has total set-up
costs of $150,000, equivalent to $3.75 per unit. Product A used 16 setups to produce 6,000 units, which is 375 units per set-up, and Product B
used 30 set-ups to produce 40,000 units, achieving output of 1,333.33
per set-up.
Similarly in product-related costs, the cost per unit of Product A was
$17.33 ($104,000/6,000 units) and the cost per unit of Product B was $5
per unit ($200,000/40,000). This is because, on average, one purchase
order was used for 115 units of product A, (4,000/52) and one purchase
order was used for 400 units of Product B (40,000/100).
SA
M
These differences in the use of the activities are disguised when
absorption costing is used, and all costs are absorbed based on a
machine hour basis.
1-18
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
Index
A
B
PL
E
Abandonment costs .......................... 2-10
ABB, See Activity-based budgeting
ABC, See Activity-based costing
Absorption costing ....................... 1-3, 1-5
Acid-test ratio .................................. 14-7
Activity-based budgeting (ABB) .. 8-14, 9-13
Activity-based costing (ABC) ......... 1-6, 2-4
Apportionment ...................................1-3
Audit trail ...................................... 18-22
Autonomy ....................................... 17-3
Avoidable costs ..................................3-2
SA
M
Balanced scorecard ........................... 15-2
Basic standard ................................. 8-25
Behaviour
budgeting ..................................... 8-23
performance management ............ 15-10
standard costing .......................... 13-15
Blanket rate .......................................1-6
Bottlenecks...................................... 2-12
Bottom-up budgeting ..........................8-6
Breakeven
chart ..............................................4-2
point ..............................................4-2
revenue..........................................4-6
Budgetary systems .............................8-2
activity-based ............................... 8-14
bottom-up ......................................8-6
feed-forward control....................... 8-15
incremental................................... 8-10
rolling ............................................8-9
top-down ........................................8-6
zero-based ................................... 8-10
Budget-constrained
management style ...................... 8-23
Budgets
flexed .................................. 8-21, 10-9
flexible ......................................... 8-21
master ......................................... 9-12
revised ......................................... 13-2
Building block model ......................... 15-5
Business intelligence systems........... 18-11
C
Capacity
variance ....................................... 11-9
Capital
components .................................. 16-6
costs .......................................... 18-17
returns ......................................... 14-3
Chance fork .......................................7-9
Charts...............................................4-2
Closed-loop system .......................... 8-16
Closed systems .............................. 18-13
F5 Performance Management
Committed costs ........................ 2-10, 3-4
Common costs ...................................3-4
Comparator ..................................... 8-16
Competitive market ............................2-4
Complementary product pricing .......... 6-18
Confidential information .................. 18-19
Constant sales mix ........................... 4-12
Constraints
linear programming..........................5-8
theory .......................................... 2-12
Contingent costs .............................. 2-19
Contribution to sales ratio ....................4-6
Control
budgetary .......................................8-2
definition ........................................1-3
feed-forward ................................. 8-15
information ................................... 18-4
Controllability ........................... 10-8, 16-3
Controllable
costs ..............................................3-2
profit ........................................... 16-5
Core competencies ........................... 3-17
Corporate objectives ................... 8-4, 14-2
Cost accounting..................................1-1
Cost centres ........................ 1-3, 3-2, 16-2
Cost drivers .......................................1-8
Cost plus pricing.................................6-2
Cost volume profit analysis (CVP) .........4-1
Critical success factors (CSFs) .......... 14-13
Current ratio .................................... 14-6
Current standard .............................. 8-26
Customer service............................ 14-16
CVP analysis, See Cost volume profit
analysis
D
Data ............................................... 7-18
capture costs .............................. 18-17
encryption .................................. 18-22
historic ......................................... 8-10
sources ........................................ 8-19
Decentralisation ............................... 16-2
Decision fork......................................7-9
Decision-makers............................... 7-13
Decision-making.................................1-2
cost volume profit analysis .............. 4-15
expected value ................................7-3
make or buy ...................................5-5
relevant cost analysis .......................3-6
Decision Package .............................. 8-11
Decision rules .................................. 7-13
Decision support systems (DSS) ....... 18-11
Decision trees ....................................7-9
Demand
curve .............................................6-6
price elasticity ............................... 6-20
Deprival value .................................. 3-10
Dimensions...................................... 15-5
Becker Professional Education | ACCA Study System
F5 Performance Management
Session 19 • Index
Discounting, See Volume discounting
Discretionary costs ........................... 8-12
Divisional autonomy ......................... 17-3
Divisional performance evaluation ....... 16-3
DSS, See Decision support systems
Dual price..........................................5-4
Dual pricing ..................................... 17-9
Dual problem ................................... 5-24
E
Gearing ratios .................................. 14-8
Goal congruence .................8-2, 16-3, 17-2
Going-rate pricing............................. 6-19
Graphical method ............................. 5-19
Gross profit margin ........................... 14-4
H
Hacking......................................... 18-21
Hansen and Mendova ........................ 2-20
Heterogeneity .................................. 15-4
High-low forecasting method ................9-3
Hopwood ......................................... 8-23
M
PL
E
Economist's pricing model....................6-6
Effector ........................................... 8-16
Efficiency variances
fixed overhead .............................. 11-9
labour ................................. 11-7, 13-11
variable overhead .......................... 11-8
EIS, See Executive information system
EMA, See Environmental management
accounting
Employee participation ...................... 8-26
Encryption ..................................... 18-22
End-of-Life Vehicles Directive ............. 2-22
Enterprise resource planning (ERP) ... 18-10
Environmental Benefits ..................... 2-18
Environmental costs.......................... 2-19
Environmental management accounting
(EMA)........................................ 2-17
Equity ...................................... 14-3, 15-6
ERP, See Enterprise resource planning
Executive information system (EIS) .... 18-9
Expected standard ............................ 8-26
Expected value ...................................7-3
Expenditure variance ........................ 11-8
External failure costs ........................ 2-20
G
F
SA
Feasible region ................................. 5-12
Feedback......................................... 8-17
Feedback control .............................. 8-15
Feed-forward control ......................... 8-15
Financial accounting............................1-2
Financial performance indicators ......... 14-3
Fitzgerald and Moon .......................... 15-5
Fixed costs
breakeven analysis ..........................4-2
non-relevant costs ...........................3-4
throughput accounting ................... 2-12
Fixed overhead variances .................. 11-8
Flexed budgets......................... 8-21, 10-9
Flexible budgets ............................... 8-21
Flow cost accounting ......................... 2-21
Focus groups ................................... 7-18
Forecasting
budgets ........................................ 8-21
methods .........................................9-2
Full cost plus pricing ................... 6-2, 17-8
Functional analysis .............................2-7
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
I
Ideal standard ................................. 8-25
Idle time variance............................. 11-6
Imperfect information .........................7-7
Imputed interest .............................. 16-9
Income, See Residual income
Incremental budgeting ...................... 8-10
Information
external ....................................... 8-19
imperfect ........................................7-7
perfect ...........................................7-6
quality ......................................... 8-18
systems ....................................... 18-2
Information Technology (IT)............... 18-5
Input-output analysis ........................ 2-21
Inseparability ................................... 15-4
Intangibility ..................................... 15-5
Interest cover .................................. 14-9
Intranets ....................................... 18-16
Inventory ...................................... 11-13
Investment centres ........................... 16-2
Iso-contribution lines ........................ 5-11
J
Joint products .................................. 3-16
Just in Time (JIT) ..................... 2-3, 13-18
K
Kaplan and Norton ............................ 15-2
Key factor analysis..............................5-2
Key performance indicators .............. 14-13
L
Labour
standard setting ............................ 10-7
variances ............................. 11-6, 13-11
Lagging indicators ............................ 15-3
Learning curve theory ............... 9-4, 13-11
Leaverage ....................................... 14-8
19-1
Session 19 • Index F5 Performance Management
Life cycle costing.................................2-8
Limited factor.....................................5-2
Limiting factors...................................5-2
Linearity........................................... 5-19
Liquidity ratios.................................. 14-6
Logical access controls..................... 18-20
Long-term planning.............................8-3
Loss leaders..................................... 6-18
N
Net profit margin............................... 14-4
Net revenue...................................... 17-6
NFPIs, See Non-financial performance
indicators
Non-accounting management style...... 8-23
Non-financial indicators.................... 14-12
Non-financial performance indicators
(NFPIs)..................................... 14-12
Non-profit sector............................... 15-7
M
O
SA
M
PL
E
Make or buy.......................................5-5
Management
accounting.......................................1-2
by exception.................................. 10-3
control.......................................... 18-2
information.................................. 18-15
reports........................................ 18-19
reward schemes............................. 15-6
styles............................................ 8-23
tactical.......................................... 18-3
Management information systems
(MIS)......................................... 18-8
Marginal
cost................................................6-9
costing.................................. 1-3, 11-11
cost pricing.............................. 6-3, 17-8
revenue...........................................6-7
Margin of safety..................................4-7
Market conditions............................ 15-12
Marketing costs................................. 2-10
Market penetration............................ 6-17
Market price method.......................... 17-8
Market research................................ 7-18
Market share variance...................... 13-12
Market skimming............................... 6-17
Market volume variance................... 13-12
Master budgets................................. 9-12
Materials
mix and yield................................. 12-2
relevant cost....................................3-2
setting standards............................ 10-7
variances....................................... 11-5
Maximax.......................................... 7-13
Maximin........................................... 7-13
MIS, See Management information systems
Mission...................................... 8-4, 14-2
Mix variances
materials....................................... 12-2
sales margin.................................. 12-8
Motivation
managers........................................8-2
staff............................................ 13-15
Multi-limiting factors............................5-8
Multi-product analysis........................ 4-10
Multi-stage decision.............................7-9
Myopia........................................... 14-12
19-2
Objectives
budgetary control system..................8-2
corporate.........................................8-4
hierarchy.........................................8-3
not-for-profit organisations.............. 15-7
performance measurement.............. 14-2
transfer pricing............................... 17-2
value for money............................. 15-8
Open-loop system............................. 8-17
Open systems................................. 18-13
Operating statements...................... 11-10
Operational management................... 18-3
Operational variances......................... 13-3
Opportunity cost.................................3-5
pricing............................................6-4
transfer pricing............................... 17-4
Outsourcing...................................... 3-17
Overheads
absorption costing............................1-3
fixed............................................. 10-7
marginal costing...............................1-3
variable......................................... 10-7
variances..................................... 11-14
P
Passwords...................................... 18-20
Payoff matrix, See Profit tables
Perfect
competition.................................... 6-22
information......................................7-6
Performance hierarchy................. 8-3, 14-2
Performance management
behavioural aspects...................... 15-10
information systems........................ 18-2
Performance measurement.......... 14-2, 15-3
Perishability...................................... 15-4
Planning.............................................1-2
enterprise resource....................... 18-10
long-term........................................8-3
strategic........................................ 18-4
variances....................................... 13-3
Predetermined costs.......................... 10-5
Price discrimination............................ 6-18
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F5 Performance Management
Session 19 • Index
Price elasticity of demand................... 6-20
Price standards................................. 10-3
Price variance................................... 12-2
Pricing...............................................6-2
complementary product................... 6-18
cost-based.......................................6-2
dual.............................................. 17-9
full cost plus............................ 6-2, 17-8
marginal cost................................. 17-8
Primary data..................................... 7-18
Primary information......................... 18-15
Production........................................ 10-5
Product life cycle.................................2-8
Product-line pricing............................ 6-19
Profit
controllable.................................... 16-5
margins......................................... 14-4
tables.............................................7-5
target.............................................4-5
traceable....................................... 16-5
Profit centres.................................... 16-2
Profit-value chart.................................4-4
Profit-volume chart...................... 4-4, 4-12
Public sector..................................... 1-12
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Ratio analysis................................... 16-4
Relevant cost pricing............................6-4
Relevant costs.....................................3-2
Replacement costs...............................3-6
Residual income (RI).......................... 16-8
Return on capital employed (ROCE)..... 14-3
Return on equity (ROE)...................... 14-3
Return on investment (ROI).......... 6-3, 16-5
Revenue
breakeven.......................................4-5
marginal..........................................6-7
Reverse engineering............................2-7
Revision variances, See Operational
variances
Reward schemes............................... 15-6
RI, See Residual income
Risk
attitude......................................... 7-13
definition.........................................7-2
ROCE, See Return on capital employed
ROE, See Return on equity
ROI, See Return on investment
Rolling budgets........................... 8-9, 9-15
Tactical planning................................ 18-5
Target costing.....................................2-4
Target profits......................................4-5
Target setting................................. 14-16
Tear-down analysis..............................2-7
Testing........................................... 18-22
Theory of constraints......................... 2-12
Throughput accounting....................... 2-12
Top-down budgeting............................8-6
Total Quality Management (TQM)....... 13-18
Traceable profit................................. 16-5
Traditional management
accounting.......................................2-2
Traditional management accounting.......1-2
Transactions processing...................... 18-5
Transfer pricing................................. 17-2
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Quality
control........................................ 14-14
information.................................... 8-18
Quantity standards............................ 10-3
Quick ratio (acid-test ratio)................. 14-7
Sales variances........................ 11-4, 13-12
Scarce resources.................................3-5
Secondary Data............................... 18-15
Secondary information..................... 18-15
Security controls............................. 18-20
Sensitivity analysis............................ 7-15
Service industries
characteristics................................ 15-4
target costing...................................2-6
Service Industries................................2-2
Shadow price.............................. 5-4, 5-20
Shut-down decisions.......................... 3-14
Simple average growth models..............9-2
Simulation........................................ 7-16
Simultaneity..................................... 15-4
Simultaneous equations..................... 5-15
Slack....................................... 5-22, 8-10
Software audit trail.......................... 18-22
Spreadsheets.................................... 9-12
Stakeholders..................................... 15-7
Standard costing
behavioural aspects...................... 13-15
budgeting...................................... 10-2
Standard costs.................................. 10-2
Standards
Building Block model....................... 15-5
revising......................................... 13-2
setting.......................................... 10-6
Strategic planning............................. 18-3
Systems theory............................... 18-12
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Uncertainty................................. 8-21, 7-2
Uncontrollable costs.............................3-4
Unit objectives....................................8-4
Usage variance................................. 11-5
19-3
Session 19 • Index F5 Performance Management
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Value engineering................................2-7
Value for money (VFM)....................... 15-8
Variability......................................... 15-4
Variable cost.......................................4-3
Variable overhead variances................ 11-7
Variance analysis............................... 11-2
materials mix and yield................... 12-2
planning and operational................. 13-3
sales mix and quantity.................... 12-8
Variance investigation........................ 10-4
VFM, See Value for money
Volume-based discount...................... 6-10
Volume discounting............................ 6-19
Window dressing...................... 14-7,
16-10
Y
Yield variance................................... 12-2
Z
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Zero-based budgeting........................ 8-10
19-4
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This ACCA Study System has been reviewed by ACCA's examining team and includes:
An introductory session containing the Syllabus and Study Guide and approach to examining the
syllabus to familiarise you with the content of this paper
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Comprehensive coverage of the entire syllabus
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Focus on learning outcomes
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Visual overviews
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Definitions of terms
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Illustrations and exhibits
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Examples with solutions
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Key points
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Exam advice
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Commentaries
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Session summaries
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End-of-session quizzes
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A bank of questions
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