ACCA paper f3 management accounting

Chapter 6Material costs Study Text Chapter 6... Chapter 7Labour costs Study Text Chapter 7... Chapter 8Overheads and absorption costing Study Text Chapter 8... Chapter 11Process costing,

ACCA Paper F2 – Management accounting

Course slides

Slide 6

Syllabus

A The nature and purpose of cost and

management accounting

spreadsheets

E Budgeting and standard costing

Format of the Exam

1 mark

question

10 questions Paper based exam: All multiple choice with a choice of 2 or 3 answers

Predominantly „wordy‟ questions.

10

2 mark

questions

40 questions Paper based exam: All multiple choice with a choice of 4 answers including words and calculations

80

Slide 8

The BPP Learning Media classroom slides

What do these slides cover?

– A selection of key areas of the syllabus

Using the slides

– Use the slides as a point of reference

– Add detail by talking around the slides (eg using

material from the corresponding Study Text chapter) – Consider adding slides yourself to suit your course – Recommend students attempt appropriate questions from the Practice & Revision Kit

Chapter 1

Information for management

Study Text Chapter 1

Slide 10

Purpose

• Assist management in running their

business to achieve an overall objective

• What is the overall objective of a

business?

Data and information

• Data is the RAW MATERIAL

• Information is the PROCESSED DATA

Slide 12

Planning, control and decision making

• Planning – Long term strategies

– Short term targets

• Control – Performance of the organisation

– Review corporate plan

• Decision making – autonomy of managers

Key roles of a management accountant

Chapter 2

Cost classification

Study Text Chapter 2

• Arrange costs into logical groups

– By function e.g production, admin, finance– By nature e.g labour, materials, stationery

• Grouping by function:

Pool of costs

Production costs Non production costs

A typical cost card for a cost unit

Direct Production costs

Direct materials (5kg @ $3/kg) 15.00 Direct labour (3hrs @ $6/hr) 18.00

Chapter 3

Cost behaviour

Study Text Chapter 3

„Hi-Low‟ Method

1 Find the highest and the lowest output and

the total costs at these levels of output

2 Find the difference in output units and total

cost

3 Calculate the variable cost per unit

(VC/unit)

4 Calculate the fixed cost by substitution

Four step approach

Chapter 4

Correlation and regression; expected

values

Study Text Chapter 4

Costs vs output - scattergraph

y = a + bx

Correlation coefficient

([n (x2) - ( x)2][n (y2) - ( y)2])

-1 < r < +1

r = +1 - perfect positive correlation

r = -1 - perfect negative correlation

r = 0 - no correlation

Chapter 5

Spreadsheets

Study Text Chapter 5

• Electronic piece of paper

• Divided into rows and columns

• Data is input into „cells‟ i.e A5, D8

• Data can either be numbers, text or symbols

• Output is derived by applying a formula to data cells e.g addition A5 + D8

Slide 32

Uses of spreadsheets

• Preparation of management accounts

• Cash flow analysis, budgeting and

forecasting

• Account reconciliation

• Revenue and cost analysis

• Comparisons and variance analysis

• Sorting and categorisation of data

Formulae with conditions

• We can build a range of options into our data

• = IF (logical_test, value_if_true, value_if_false)

Example

• = IF (A5>500,”Hurray!”,”More Sales Please!”)

Slide 34

Presentation of spreadsheets

• Split into sections; Inputs, Calculations and Results

• Use titles and column and row headings

• State data source and purpose of

spreadsheet

• Apply consistent format i.e 2 decimal

places

• Use colours, borders and shadings to

highlight and differentiate

Chapter 6

Material costs

Study Text Chapter 6

Accounting for materials

Materials inventory account

X

Slide 38

Monitoring inventory levels

• To maintain accurate records of inventory

• Visual methods of inventory control

• Theoretical methods of inventory control

Costs associated with stock

• Available above a certain order quantity

• Is it worth ordering above the EOQ to get the discount?

• Steps:

– Calculate EOQ

– Recalculate EOQ if it falls within a discount band– Calculate total costs at EOQ

– Calculate total costs at the lower boundary of

each discount band

Slide 42

Economic batch quantity

• Used when stock replenished gradually

Economic batch quantity

R

D Ch

CoD EBQ

1 2

Ch R

D

Q

1 2

period

in costs holding

Total

Co

Q

D period

in costs up

set Total

Given in Exam

Chapter 7

Labour costs

Study Text Chapter 7

Accounting for labour costs

• Direct or Indirect labour – learn

Slide 48

Labour turnover

• The rate at which employees leave the company

• Reasons may be controllable or

uncontrollable by the company

Chapter 8

Overheads and absorption costing

Study Text Chapter 8

Slide 50

Cost card

$/unitDirect materials 4kg @ $2/kg X

Total Production Costs

Slide 52

Total Production Costs

Total Production Costs

Slide 54

Reapportionment

To reapportion service cost centre overheads to

production cost centres there are 2 methods

Direct Method

Inter-service department

work is ignored

Reciprocal Method

All inter-service

department work

is recognised

Overheads – step 3

3 Absorb

Total Production Costs

Slide 56

3 Absorb

The final step is to charge these overheads to

cost units This is called absorption.

OAR (overhead absorption rate) =

Production overhead

_

Activity level

What activity level should you use?

3 Absorption bases

(d) % Direct Labour cost OAR/$ labour

(e) % Direct material cost OAR/$ mats

Slide 58

Pre-determined OARs

Businesses estimate (or pre-determine) their

OAR at the start of the year

Budgeted overhead Pre-determined OAR = _

Budgeted activity level

Activity levelProduction Overhead

BECOMES…

Businesses want to record overheads regularly

during the year

Overhead

Absorbed = Actual Activity

(eg labour hrs) x Pre-determined

OAR

Difference = under or over absorption

Reasons for under/over absorption

Why do we get an under or over absorption?

Pre-determined

OAR

Budgeted overhead _

Budgeted activity level

=

Expenditure variance

Budgeted overhead Actual overhead

Volume variance

Budgeted activity Actual activity

Slide 62

Non production overheads

• For internal reporting non-production

overheads can also be allocated to units

• One approach may be:

Production overheadOAR = Non-Production Overhead X 100

Chapter 9

Marginal and absorption costing

Study Text Chapter 9

Full product cost X

Used to value stock

Contribution = selling price less ALL variable costs

$

Variable non-production costs X

(X)

Absorption costing profit statement

Production costs:

Variable costs (mats, lab, var.overhead) X

Fixed overheads absorbed X

Slide 68

Reconciliation proforma

Year 1 Year 2

Absorption costing profit

Add: Fixed overhead in

Reconciling profits

Difference

in profit = Change in stock X OAR/unit

But which profit is higher

Chapter 10

Process Costing

Study Text Chapter 10

Introductory example – a party

• a barrel holds 100 pints

of beer and costs $100

• How much should we charge per pint to cover our costs?

$100

Slide 72

However……

Will you get the full 100 pints from your barrel??

Normal loss = 5 pints

So… what should we charge now per pint?

We only actually expect to get 95 pints

$100

95 pints = $1.05/pint

Normal loss – eg barrel dregs!

What could we do with our loss?

A local gardener likes the dregs for his plants – he‟ll pay 20p per pint, we could use this to reduce our costs

So… what should we charge now per pint?

$100 - scrap value

= $1.04/pint

- (20¢ x 5 pints)

Slide 74

Cont.

So how have we found the cost of a pint to charge our party goers?

Cost per unit = Input costs Scrap value of normal loss

-Input units - Normal loss units

Learn this formula!

What about unexpected losses??

At the end of the party we realise that we

didn‟t get the 95 pints we expected we

only got 85

Abnormal loss = 10 pints

Its too late to charge more, we have already charged $1.04 per pint….…

…its just our loss we‟ll have to cover the

Slide 76

Finally….good news

What if losses weren‟t as much as

we expected?

At the end of the party we realise that

instead of the 95 pints we were expecting

we actually got 98 pints from the barrel.

Abnormal gain = 3 pints

We expected to scrap them for 20¢

– we actually sold them for $1.04

Slide 78

Abnormal loss or gain

• Abnormal loss = unexpected loss

• Abnormal gain = unexpected gain

Good outputNormal loss

Abnormal loss / gain

Recap – Process costing

1 Units calculation

Input units = Good output + NL +/(-) AL/(AG)

2 Set up the process account and complete as

far as possible

3 Calculate cost per unit:

CPU = Input cost - scrap proceeds from normal loss

Input units – normal loss units

Slide 80

Introduction to WIP

Cost per unit = Input costs - Scrap value of normal loss

Input units - Normal loss units

BUT….What if units aren‟t finished?

MAY HAVE…

Introduction to WIP

Finished unit WIP units

We can‟t give them the same value

Slide 82

Equivalent units

cost per equivalent unit

2 equivalent whole unit

Output from process includes:

½ unit + ½ unit + 1 whole unit

Previous processes

Process I Process II

• Process 1 is another input

• OWIP 100% complete for Process 1

Slide 84

Summary and question approach

1 Units calculation

Opening WIP + Input = Good output + NL +/(-) AL/(AG) + Closing WIP

2 Set up the process account and complete as

far as possible

3 Complete statement of equivalent units

4 Calculate cost per equivalent unit

5 Valuations & transfer to process account

Chapter 11

Process costing, joint products and by-products

Study Text Chapter 11

Slide 86

Joint products and by-products

forestry

Joint products

By product

-Joint products and by-products

Slide 88

Joint products and by-products - accounting

Substantial sales value

• Apportion joint costs

– Various methods: as

specified in question

• Do not allocate costs

– USUAL occurrence: reduce process costs – ONE-OFF: misc

income

Joint products By-products

Relatively low sales valueSecondary to process

Slide 90

Job and batch costing

• Job = a cost unit of a single order/contract

• Batch = a cost unit which consists of a separate, readily identifiable group of units

Job cost cards

What are service organisations?

• Don‟t make or sell a tangible product

• Profit making or not-for-profit sector

– E.g Accountancy firms, hotels, schools,

hospitals

• Service costing v other product costing

– Cost of direct materials is small

– Unit cost is difficult to calculate

Slide 94

Cost per unit

Cost per unit = Total costs for a period

Number of service units in the period

But what is a service cost unit ?

Composite cost unit

A composite cost unit takes into account several elements of a service

e.g excess baggage service

Cost per KG? OR Cost per mile transported?

Cost per KG/mile

Slide 96

Service department costing

• Cost of an „internal service‟

• Purposes of service department costing

– Control costs and efficiency

– Prevent unnecessary use of services

• What cost to charge to user dept

– No charge

– Total actual cost

– Standard absorption cost

– Variable cost

– Opportunity cost

– Cost plus a margin for profit

Chapter 13

Budgeting

Study Text Chapter 13

Slide 98

Planning and control

• Planning and control cycle

Determine objectives

Planning – set budget

Actual operationsControl - variances

Preparation of budgets

• Budget period

• Budget manual

• Budget committee

Slide 100

Fixed and flexible budgets

• Fixed budget = Master (original) budget

– Prepared at the start of the budget period

• Flexible budget = „scenario planning‟

– Prepared at the start of the year

– What if? analysis

– Flexed budget is a flexible budget prepared at the end of the year using the actual volumes

Chapter 14

Standard Costing

Study Text Chapter 14

» Based on standard usage ie 3kg / unit

» Based on standard cost / kg ie $2 / kg

WHAT IS A STANDARD COST?

 use last year

 leave unaltered over

long period

 attainable

improvements

DIFFERENCES

= VARIANCES

actual

results

expected results

Can be FAVOURABLE

Slide 106

Variances

DIFFERENCES

= VARIANCES

actual

results

expected results

Or ADVERSE

Slide 108

Basic cost variances

• For example: materials price variance

• Actual purchases x standard cost

• Actual purchases x actual cost x

Basic cost variances

• For example: Materials usage variance

• Units produced x standard usage

• Units produced x actual usage x kg

Slide 110

Fixed overhead variances

Fixed overheads Total variance

Expenditure

variance

Volume variance

Efficiency variance

Capacity variance

absorption

tandard type xpectations – unrealistic standard

Slide 112

Interdependence of variances

Variances may affect each other

e.g.

Cheaper materials Favourable price variance

Adverse usage variance (& labour efficiency?)

Inferior quality

Interdependence of variances

Variances may affect each other

e.g.

Increase in sales price Favourable price variance

Adverse sales volume

variance

Fall in demand

Operating statement MC

Sales volume variance x/(x)

Flexed budgeted contribution x

Sales price variance x/(x) Variable cost variances x/(x)

Fixed o/h expenditure variance x/(x)

Slide 116

Differences between MC and AC

• Sales volume variance

– Difference between budgeted sales and actual sales units valued at standard PROFIT per unit under AC

• Fixed overhead variances

– Calculate a fixed overhead volume variance This can also be split into an efficiency and capacity variance

• Operating statement

– Reconcile between budgeted profit and actual profit

For Absorption Costing:

Operating statement AC

Sales volume variance x/(x)

Sales price variance x/(x)Cost variances (including fixed overheads x/(x)

Slide 120

Introduction

So we will breakeven when…

Contribution = Fixed costs Cont‟n/unit x Q = Fixed costs

Q = Fixed costs

Cont‟n/unit

_

x SP/unit _Cont‟n/unit

SP/unit

Breakeven Revenue – C/S Ratio

In the last e.g

B/E Revenue = BEP x SP/unit

B/E Revenue = Fixed costs

Cont‟n/unit x SP/unit

B/E Revenue = Fixed costs

B/E Revenue = Fixed costsC/S ratio

Slide 122

Margin of safety

Margin of safety (in units) =

Budgeted sales volume – breakeven sales volume

OR

Margin of safety (as %) =

Budgeted sales volume – breakeven sales volume

Budgeted sales volume

X 100

Profit

Q

$0

Required profit level

Breakeven point Fixed costs

Relevant Costs

• What is a relevant cost?

FUTURE INCREMENTAL CASHFLOW

Only cash

Slide 130

Popular scenario with examiner

e.g need 500kg of material for new project

have 300kg in stock (cost $3/kg)

current purchase price = $5/kg

scrap value = $1/kg

what‟s the relevant cost of the 500kg?

Relevant cost - materials

If take from stock won’t

have to replace

Relevant cost = current purchase price

If take from stock can’t

replace

Relevant cost = opportunity

In continual

No other use

Just have

to buy it

Relevant cost = opportunity

cost

Could hire

more

Full capacity Spare

capacity

Relevant cost - labour

Full capacity

E.g labour is currently working on product A

Product A

$Sales revenue

Materials

Labour (1hr)

50(3) _(5)42Contribution

-Slide 134

Relevant cost - labour

Full capacity

E.g labour is currently working on product A

Product A

$Sales revenue

Materials

Labour (1hr)

50(3) _(5)42Contribution

Add back labour 5

_

47Loss to business

E.g labour is currently working on product A

Sales revenue

Materials

Labour (1hr)

50(3) _(5)42Contribution

Lost cont‟n 42Add back labour 5

_

47Loss to business

Relevant cost