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ACCA APPROVED CONTENT PROVIDER ACCA Passcards Paper F5 Performance Management Passcards for examsup to June 2015ThiNganHang.com ThiNganHang.com
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First edition 2007, Eighth edition June 2014 All rights reserved. No part of this publication may be ISBN 9781 4727 1124 3 reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, e ISBN 9781 4727 1180 9 photocopying, recording or otherwise, without the prior British Library Cataloguing-in-Publication Data written permission of BPP Learning Media. A catalogue record for this book is available from the © British Library BPP Learning Media Ltd Published by Printed in the UK by Ricoh 2014 BPP Learning Media Ltd, UK Limited BPP House, Aldine Place, Unit 2 142-144 Uxbridge Road, Wells Place London W12 8AA Merstham RH1 3LG www.bpp.com/learningmedia Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources. ThiNganHang.com ThiNganHang.com
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Preface Contents Welcome to BPP Learning Media’s ACCA Passcards for Paper F5 Performance Management. They focus on your exam and save you time. They incorporate diagrams to kick start your memory. They follow the overall structure of the BPP Study Texts, but BPP’s ACCA Passcards are not just a condensed book. Each card has been separately designed for clear presentation. Topics are self contained and can be grasped visually. ACCA Passcards are still just the right size for pockets, briefcases and bags. Run through the Passcards as often as you can during your final revision period. The day before the exam, try to go through the Passcards again! You will then be well on your way to passing your exams. Good luck! ThiNganHang.com Page iii ThiNganHang.com
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Preface Contents Page Page 1 Costing 1 12 Planning and operational variances 99 2 Modern management accounting 13 Performance analysis and behavioural techniques 5 aspects 109 3 Cost volume profit (CVP) analysis 15 14 Performance management information 4 Limiting factor analysis 27 systems 117 5 Pricing decisions 33 15 Sources of management information and management reports 127 6 Short-term decisions 45 16 Performance measurement in private 7 Risk and uncertainty 51 sector organisations 133 8 Budgetary systems 63 17 Divisional performance and transfer 9 Quantitative analysis in budgeting 71 pricing 139 10 Budgeting and standard costing 79 18 Further aspects of performance 11 Variance analysis 83 management 145 ThiNganHang.com ThiNganHang.com
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1: Costing Topic List You will have covered the basics of these costing methods in your earlier studies but you need to make sure you are familiar with the concepts and techniques so you can Costing answer interpretation questions. Absorption costing Absorption costing vs marginal costing ThiNganHang.com ThiNganHang.com
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Costing Absorption Absorption costing costing vs marginal costing Cost accounting A management information system which analyses past, present and future data to provide a bank of data for the management accountant to use. Costing The process of determining the cost of products, services or activities. Methods include ThiNganHang.comabsorption costing and process costing. ThiNganHang.com
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Costing Absorption Absorption costing costing vs marginal costing What is absorption costing? Absorption costing is a method of sharing out overheads incurred amongst units produced. 1 Allocation 2 Apportionment 3 Absorption under/over-absorbed overhead Practical reasons for using absorption costing Inventory valuations Pricing decisions Establishing profitability of productsThiNganHang.com Page 3 1: Costing ThiNganHang.com
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Costing Absorption Absorption costing costing vs marginal costing Arguments in favour of absorption Arguments in favour of marginal costing costing When sales fluctuate because of seasonality in It shows how an organisation’s cash flows and sales demand but production is held constant, profits are affected by changes in sales volumes since contribution varies in direct proportion to absorption costing avoids large fluctations in profit. units sold. Marginal costing fails to recognise the importance By using absorption costing and setting a of working to full capacity and its effects on pricing production level greater than sales demand, profits decisions if cost plus method of pricing is used. can be manipulated. Prices based on marginal cost (minimum prices) Separating fixed and variable costs is vital for do not guarantee that contribution will cover fixed decision-making. costs. In the long run all costs are variable, and For short-run decisions in which fixed costs do not change (such as short-run tactical decisions absorption costing recognises these long-run seeking to make the best use of existing variable costs. resources), the decision rule is to choose the It is consistent with the requirements of accountingstandards. ThiNganHang.comalternative which maximisescosts being irrelevant. contribution, fixed ThiNganHang.com
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2: Modern management accounting techniques Topic List All five techniques covered are equally important and equally examinable. You need to develop a broad background in management accounting techniques. Activity based costing (ABC) In Section B in the exam, these topics may be the Target costing subject of a 10-mark question but not a 15-mark question. You should also expect them to feature in Life cycle costing Section A MCQs. Throughput accounting Environmental accountingThiNganHang.com ThiNganHang.com
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Activity based Target Life cycle Throughput Environmental costing (ABC) costing costing accounting accounting Features of a modern manufacturing Outline of an ABC system environment 1 Identify major activities. An increase in support services, which are unaffected by 2 Use cost allocation and apportionment methods to these changes in production volume, varying instead with the activities (cost pools). range and complexity of products. Identify the cost drivers which determine the size of the 3 An increase in overheads as a proportion of total costs. costs of each activity. 4 For each activity, calculate an absorption rate per unit of Inadequacies of absorption costing cost driver. 5 Charge overhead costs to products on the basis of their usage of the activity (the number of cost drivers they use). Implies all overheads are related to production volume. Developed at a time when organisations produced only a Cost drivers narrow range of products and overheads were only a small fraction of total costs. Volume related (eg labour hrs) for costs that vary with production volume in the short-term (eg power costs) Tends to allocate too great a proportion of overheads to higher volume products.Leads to over production?ThiNganHang.com Transactions in support departments for other costs (egnumber of production runs for the cost of setting-upproduction runs) ThiNganHang.com
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Example Merits of ABC Cost of goods inwards department = $10,000 Simple (once information obtained) Cost driver for goods inwards activity = number of Focuses attention on what causes costs to deliveries increase (cost drivers) During 20X0 there were 1,000 deliveries, 200 of Absorption rates more closely linked to causes of which related to product X. 4,000 units of product X overheads because many cost drivers are used were produced. Criticisms of ABC Cost per unit of cost driver = $10,000 ÷ 1,000 = $10 More complex and so should only be introduced if Cost of activity attributable to product X = $10 × provides additional information 200 = $2,000 Can one cost driver explain the behaviour of all Cost of activity per unit of X = $2,000 ÷ 4,000 = items in a cost pool? $0.50 ThiNganHang.com Cost drivers might be difficult to identify Page 7 2: Modern management accounting techniques ThiNganHang.com
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Activity based Target Life cycle Throughput Environmental costing (ABC) costing costing accounting accounting The target costing process Target costing Determine currently- Determine achievable cost product concept Involves setting a target cost by first of all identifying a target selling price and then Establish target deducting the required profit margin to reach a price Establish target cost. desired profit margin The initial estimated cost is likely to be higher than the target cost – a cost gap. Set target cost Measures to close the cost gap should be Calculate cost gap ways to reduce costs without loss of value to the customer: may involve some product re- design, removal of non-value-adding features, use of more standard components, alternative Try to close the gap ThiNganHang.commaterials for some product parts. ThiNganHang.com
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Activity based Target Life cycle Throughput Environmental costing (ABC) costing costing accounting accounting Life cycle costing 1 Development 4 Maturity This method tracks and accumulates costs 2 Introduction 5 Decline and revenues over a product’s entire life. 3 Growth Aim To obtain a satisfactory return from a product over its expected life. Life cycle costing is a planning technique rather than a traditional method of measuring and accounting for product costs. Life cycle costs include: Costs incurred at product design, development and testing stage. Advertising and sales promotion costs when the product is first introduced to the market. Expected costs of disposal/clean-up/shutdown when the product reaches the end of its life.ThiNganHang.com Page 9 2: Modern management accounting techniques ThiNganHang.com
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Activity based Target Life cycle Throughput Throughput costing (ABC) costing costing accounting accounting Advantages Maximising the return over the product life cycle Cost visibility is increased Design costs out of products Individual product profitability is better Minimise the time to market understood Minimise breakeven time More accurate feedback information is provided on success or failure of new products Maximise the length of the life span Useful planning technique, to forecast profitability Minimise product proliferation of a new product over its life. Can help to determine target sales prices and costs. Manage the product’s cashflows ThiNganHang.com ThiNganHang.com
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Activity based Target Life cycle Throughput Environmental costing (ABC) costing costing accounting accounting Theory of constraints (TOC) Principal concepts of throughput accounting An approach to production management which aims to turn materials into sales as In the short run, all costs except materials are fixed. quickly as possible, thereby maximising the net The ideal inventory level is zero and so unavoidable, idle cash generated from sales. It focuses on capacity in some operations must be accepted. removing bottlenecks (binding constraints) to WIP is valued at material cost only, as no value is added and ensure evenness of production flow. no profit earned until a sale takes place. Production concepts 1 JIT purchasing and production as much as possible 2 Use bottleneck resource to the full and as profitably as possible 3 Allow idle time on non-bottleneck resources 4 Seek to increase availability of bottleneck resource 5 ThiNganHang.comWhen constraint on bottleneck resource is lifted and it is no longera bottleneck, a different bottleneck resource takes over Page 11 2: Modern management accounting techniques ThiNganHang.com
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