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F5PM-RevisionEssentials - Complete File - j18
F5PM-RevisionEssentials - Complete File - j18
F5PM-RevisionEssentials - Complete File - j18
F5
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ACCA
F5 PERFORMANCE MANAGEMENT
ISBN: 9781785663819
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CONTENTS
Page
Syllabus (iii)
Approach to examining (iv)
Core topics (vi)
Cost accounting 0101
Developments in management accounting 0201
Relevant cost analysis 0301
Cost volume profit analysis 0401
Limiting factor decisions 0501
Pricing 0601
Risk and uncertainty 0701
Budgeting 0801
Quantitative analysis in budgeting 0901
Standard costing 1001
Basic variance analysis 1101
Advanced variance analysis 1201
Planning and operational variances 1301
Performance measurement 1401
Further aspects of performance analysis 1501
Page
Divisional performance evaluation 1601
Transfer pricing 1701
Performance management information systems 1801
Additional reading 1901
Article – Approaching written questions 2001
Article – Target costing and lifecycle costing 2101
Article – Throughput accounting and the theory of constraints 2201
Article – Environmental management accounting 2301
Article – Cost volume profit analysis 2401
Article – The learning rate and learning effect 2501
Article – Materials mix and yield variances analysis 2601
Article – Performance measurement 2701
Article – Interpreting financial data 2801
Article – Performance measurement and the balanced scorecard 2901
Article – Transfer pricing 3001
Article – Decision trees 3101
Examiner’s report – December 2016 3201
Analysis of specimen and past examinations 3301
Examination technique 3401
CAUTION: These notes offer guidance on key issues.
Reliance on these alone is insufficient to pass the examination
Specialist cost and management accounting techniques Standard costing and variance analysis
(e.g.
Total maintenance costs Additional time and cost of setting up and administering
).
Total man hours the system.
4. Apportion costs of each activity to different products Exclusion of non-production overheads can be difficult.
based on the number of units of driver used.
Many judgemental decisions still required in the
5. Calculate the cost per unit of each product = total cost construction of an ABC system.
(calculated in 4) ÷ number of units produced.
1 TARGET COSTING Target costing is more effective if used during the design of a
new product, as costs can be “designed out”. For existing
1.1 Aim and use
products, costs will have to be “controlled out” which is
In a competitive market, a business has to sell at the normally more difficult.
market price, irrespective of the cost of production.
1.3 Application to service industries
Target costing aims to reduce the production cost per
Target costing is less useful in service industries because:
unit so that an acceptable profit margin can be made
given that the selling price cannot be increased. Services are more likely to be customised so standard
services may not exist;
$
Selling price X Higher portion of costs are indirect and it may be harder
Less: required margin (X) to reduce these;
–––
Reducing costs may have a bigger impact on quality of
Target cost X COST service.
GAP
Actual (Budgeted cost) X 1.4 Methods to narrow the gap
–––
Eliminate features of the product not valued by
1.2 Steps in target costing customers.
1. Determine the selling price using market research. Standardise components & design with lower number
of components.
2. Deduct the required profit margin and deduct from the
price to obtain the target cost. Employ lower grade staff with training.
3. Compare actual (or budgeted) cost per unit with the Outsource parts of manufacture.
target cost to ascertain the cost gap.
4. Identify ways to narrow the gap.
Bottlenecks are processes that work slower than all Return per factory hour =
others. They limit output of the whole production line.
Throughput pet unit
To maximise profit Hours of bottleneck resource used per unit
Identify the bottlenecks.
Other factory costs
Rank products in order of throughput contribution per Cost per factory hour =
Bottleneck resource hours available
hour of bottleneck (i.e. return per factory hour).
Slow down non-bottleneck resources to work at the Meaning of TPAR
speed of the bottlenecks to avoid build-up of work in TPAR > 1 product profitable
progress. TPAR = 1 break even
Find ways to eliminate the bottleneck (e.g. working TPAR < 1 product makes a loss
overtime or reducing time spent on the bottleneck).
How to improve TPAR
3.2 Throughput contribution Eliminate bottlenecks or reduce time spent on
Materials are the only truly variable cost in the short bottleneck resources.
run.
Reduce other factory costs.
EMA aims to provide internal information to management in Conventional costs – buying inputs with environmental
the form of physical information on the use of energy, water relevance (e.g. energy);
and materials (including waste), and monetary information Potentially hidden costs – items with environmental
on environment related costs and savings. relevance hidden in overheads;
Contingent costs – such as cleaning up damage;
4.2 Relevance for business
Image and relationship costs.
Bennett and James suggested six benefits of EMA:
Hansen and Mendova’s more narrow definition:
(1) Capex decisions can take account of environmental
impact of investments. Environmental prevention costs – such as redesigning
production processes to reduce pollution;
(2) Better understanding of environmental costs normally
hidden within other overheads. Environmental detection costs;
(3) Reducing waste and saving energy. Environmental internal failure costs – cost of cleaning
up pollution before it is released into the environment.
(4) Understanding environmental effects on life cycle costs
(e.g. costs of recycling at end of product life). Environmental external failure costs – cost of cleaning
up pollution after release into the environment.
(5) Stakeholders are interested in environmental
performance measures.
(6) Involving management accountants in longer term
strategic decision making for environment-related issues.
$ Total contribution
Break-even point (units)
Profit Unit contribution
Target profits
Profit at
volume Y Sales units to achieve a target profit
0 Fixed cost required profit
X BEP =
Y Volume Unit contribution
Loss at
volume X 3.3 C/S ratio (Contribution margin)
Shows portion of selling price which contributes to profits
and fixed costs
Contribution per unit
=
3 MATHEMATICAL APPROACH Selling price per unit
3.1 Contribution Fixed cost
Break even revenue
In any decision connected with varying levels of C/S ratio
production, fixed costs are not relevant. 3.4 Margin of safety
Unit contribution = Selling price – variable cost per unit. The amount by which anticipated or existing activity exceeds
break-even:
Unit contribution shows additional profit from selling
an additional unit. In units = Budgeted sales – Breakeven sales
Budgeted sales - Breakeven sales
As a percentage = 100%
Budgeted sales
1.3 Shadow price Where more than one input is limited, linear
programming is used to determine the mix of output
The additional contribution that would be generated if one that maximises contribution.
additional unit of a limited resource is made available.
At F5, iso-contribution (“graphical”) method must be
Represents the highest premium over the standard price used to solve linear programming unless equation
that should be paid for additional units of the resource. method is specifically asked for. Other methods (e.g.
simplex are outside of the syllabus).
Ignores price demand relationship. Budgeted full cost target % capital employed
Budgeted sales units
Size of mark-up is arbitrary.
Advantages
Method of absorbing fixed overheads will have an
effect on the cost and therefore the price. Considers capital invested and short-term costs.
Target ROI can be adjusted to take account of risk.
1.2 Marginal cost pricing
Disadvantage
Add a mark-up to marginal cost (production and non- Ignores price demand relationship.
production).
1.4 Opportunity cost (relevant cost pricing)
Advantage
Used for pricing one off projects and special orders
Useful for short-term decision making. If price covers Price = relevant cost + mark up
variable costs, profit will be increased.
Information available from the costing system.
Without perfect information the decision maker would select 1.4 Decision trees
action B and the EV would be $148.50. Used to show the EV of each path, to identify which
EV with perfect information path has the highest EV.
If the decision maker could commission a report to Decision fork (or point)
accurately predict the state of the market on each particular A point at which a decision maker has to decide
day, the decisions should be: between two or more decisions.
Action Unsuitable for one off decisions.
chosen Outcome Probability
1 C 200 0.3 Chance fork (or outcome point)
State of 2 B 300 0.5 Where there are several possible outcomes – normally
market 3 C 40 0.2 two or more for each decision.
Preparing budgets centrally may minimise problems The easiest and quickest method of budgeting.
(e.g. budget slack). Coordination between departments is easier.
Budget horizon is kept constant by adding another Does not encourage managers to challenge whether
month (or quarter) to the end of the budgeted period as budgeted spending is necessary.
each month (or quarter) expires.
Encourages “spend it or lose it” mentality.
Non-accounting style – financial performance is not Budgets are out of “kilter” with modern business.
seen as very important. Managers must react quickly to changes in the external
environment, while budgets are prepared many months
5.3 Level of difficulty before the period to which they relate.
If budget is too easy individuals will not be motivated Primary drivers of value today are intellectual capital
to improve performance. (e.g. brands), which are often outside the scope of
If budgets are too difficult, managers will be financial budgeting systems.
demotivated. Managers’ “gaming” activities means the budget process
Research suggests that targets that are just out of reach loses its validity.
are optimal for motivation.
2 DERIVING STANDARDS
2.1 Ideal standards
Standards that can only be obtained under ideal
operating circumstances.
Remind managers of what could be achieved.
Unlikely to be achieved leading to demotivated
managers.
2.2 Practical standards
Challenging but achievable under existing operating
conditions.
Achievable so managers will not be demotivated
Variances will highlight only abnormal conditions that
need to be brought to the attention of management.
3 CONTROLLABILITY
Managers should only be judged on things that are
within their control.
If managers’ performance is evaluated using variances
it is important to ensure that factors outside of the
control of the manager are taken into account.
2 SALES MIX AND QUANTITY VARIANCES 2.2 Calculating the sales mix variance
2.1 The concept Example
In situations where similar products are sold, perhaps Bob sells two products, A and B. He budgets to sell 8 units
differentiated by brands, the budget will assume a of A per day and 4 units of B per day. The standard margin
standard mix of sales. (contribution per unit) is $10 per unit for A and $5 per unit
for B. Actual sales on one particular day were 10 units of A
If actual sales mix varies from budget and each product
and 8 units of B.
has very different margins this will affect profits.
Total sales
Sales mix variance
variance Similar in nature to the materials mix variance. A
tabular approach works best:
Product Actual Actual Diff. Standard Sales
Price variance Volume variance sales sales margin mix
actual standard variance
mix mix
(units) (units) (units) $ $
Mix Quantity
A 10 12 (2) 10 (20)
variance variance
B 8 6 2 5 10
–– –– –– ––
18 18 0 (10)
–– –– –– ––
Sales mix variance is $10 is adverse because less units
of A have been sold and more units of B. A has a
higher margin than B.
2.3 Sales quantity variance 2.4 Interpreting sales mix and quantity variance
The difference between actual sales (in the standard Sales mix
mix) and budgeted sales. Using a tabular approach:
Only useful in situations where products are substitutes
Product Actual Diff. Standard Sales for each other.
sales margin mix
Implies consumers have switched between products,
standard Budgeted variance
buying one as an alternative to the other.
mix sales
(units) (units) (units) $ $ Adverse suggests switching from a high margin product
A 12 8 4 10 40 to a low margin one. May reflect:
B 6 4 2 5 10
hard economic circumstances (e.g. due to
–– –– –– ––
18 12 6 50 recession); or
–– –– –– –– price increases.
Favourable suggests the opposite.
Sales quantity variance
Reflects factors that affect total sales of all products.
Adverse may be due to new competitors or a fall in
incomes of consumers.
Materials price and labour rate variance Materials usage and labour efficiency variance
Traditional price (rate) variance Basic usage (efficiency) variance
$ Actual Q used X
Actual Q* × actual price** X − Standard Q for actual output X
− Actual Q × standard price X –––
––– Difference X
Price variance X × standard price ($) X
––– –––
Basic usage (efficiency) variance *** X
––– –––
2.3 Learning curve and labour variances Sales volume variance analysed into:
Labour efficiency variances may require an expected Market volume variance (a planning variance);
learning curve to be taken into account. Market share variance (an operational variance).
Standard labour hours will be based on a standard cost Market volume variance
for the first unit(s) with an expected learning rate. Revised budgeted sales (units)* X
Approach Original budgeted sales (units) X
––
Calculate the standard labour hours for actual output Difference (units) X
taking into account the learning rate. × standard margin per unit ($) X
Compare this to the actual labour hours and multiply by ––
the standard rate per labour hour. Market volume variance ($) X
__
2.4 Market volume and market share variances
* Revised budget quantity may be calculated as
Traditional sales volume variance actual market size × budgeted market share.
Market share variance
Actual sales (units) X
Units
Budgeted sales (units) X
Actual sales X
––
Revised budgeted sales X
Difference (units) X
––
× standard margin per unit ($) X
Difference X
––
× standard margin per unit ($) X
Sales volume variance ($) X
––
––
Market share variance ($) X
Budgeted sales may be revised at the end of the year if ––
the market size was bigger/smaller than expected.
Customer Vision Internal Business Difficulty in setting targets for each KPI.
Perspective And Processes
Strategy
Learning and
Growth
Executive information systems (EIS) assist senior What is outside of the system is the environment.
management’s decision making by providing Open systems react (adapt) to changes in their
summarised information from both internal and environment.
external sources relevant to meeting the strategic
goals of the organisation. Closed systems do not. (Are rare in the real
world.)
ARTICLES
The following technical articles written by members of the F5 examining team can be found on the ACCA website at
www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles.html
Decision trees **
The learning rate and learning effect **
Throughput accounting and the theory of constraints (parts 1 and 2) **
Transfer pricing *
Environmental management accounting **
Cost volume profit analysis **
Material mix and yield variances **
Comparing budgeting techniques
Target costing and lifecycle costing **
Transfer pricing **
Interpreting financial data **
Linear programming
Approaching written questions **
Examiner’s reports September and December 2015 **
* There are two articles about Transfer Pricing
** These are summarised in the sections that follow.
SPECIAL FEATURE
Examiner’s approach article – see www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5/technical-articles/examiner-approach-to-paper-f5.html
APPROACHING WRITTEN QUESTIONS Step by step approach to the exam on the day
For the full article see the ACCA’s website. ! Only the paper-based exam has an additional 15 minutes
The skills exams are usually the first in which students for reading and planning (see page (iv)).
have had to tackle “written” questions.
However, even if you are sitting CBE you must allow time,
The paper-based exams require candidates to write for Section C in particular, to:
clearly and set out workings logically and neatly.
Read all the requirements of each question;
The following four skills are required regardless of the Plan the time to be allocated to each part; and
format of the exam: Think – before you write.
(1) correctly interpret requirements; For the paper-based exam plan also the order in which you
(2) actively read scenario-based questions and will do the questions – best question first.
understand what is relevant to each requirement; When answering each question, be strict with your time
(3) using information to perform calculations that are allocation. Spending too long on one question may mean
carefully structured and clearly set out, with that you cannot do it anyway (so move on and come back to
it later) or you are going beyond what the question requires.
workings shown in an easy-to-follow layout;
How much you are expected you to write is directly linked to
(4) writing (typing) accurately and coherently using the marks available and therefore to the time available.
simple English rather than long unstructured
When reading any question:
sentences that have no real content.
Where F2 topics are repeated in F5, the skills required The requirement should be the first thing you read.
are over and above the knowledge assumed from F2. What is the point in reading a scenario if you do
not know what you are looking for?
Underline the “content” (e.g. target costing) and the
“instruction” (i.e. what it is telling you to do).
In constructed response questions, the instruction is a verb You should go into the exam with a “toolbox” of what is
(e.g. calculate, describe, interpret, discuss) that has been going to help you answer the questions. For example, for a
carefully chosen by the examining team. linear programming question, pull out your five-step guide:
If you do not read or understand it you may not answer the 1. define the variables
question set and so fail to earn marks. Common instructions 2. state the objective function
are set out below. 3. state the constraints
4. draw the graph
Answering numerical questions
5. find the solution.
Calculate – use mathematical methods to find an amount.
The problem with F5 is that students go into the exam with
Derive – sometimes requires more than calculation (e.g. only a few tools in their “box”. If you put the work in, you
using powers of deduction) or an expression of an answer will reap the rewards.
rather than a specific amount (e.g. an equation showing the
Answering “wordy” questions
relationship between price and quantity).
The real cause of poor performance in written questions is
Estimate – suggests that the answer cannot be calculated
failure to grasp what to write and how much to write:
with certainty or specific accuracy (e.g. forecasting costs
using a learning rate). Assess Judge worth, ability, extent or significance (e.g.
assess performance or quality). Requires
Prepare – suggests that the answer should be presented in a
consideration of positives (e.g. strengths) and
particularly structured way (e.g. prepare a rolling budget).
negatives (e.g. weaknesses).
Candidates who perform poorly on the numerical parts of F5
Describe Give a narrative about something. For example
often do so due to:
“describe suitable non-financial performance
failure to study the whole syllabus sufficiently well; indicators for a hospital”. A mere list
a disorganised approach (i.e. no logical progression (identification) is insufficient.
through calculations and lack of referenced workings).
TARGET COSTING AND LIFECYCLE COSTING For example, if a company normally expects a mark-up on
cost of 50% and estimates that a new product will sell
For the full article see the ACCA’s website.
successfully at a price of $12, then the maximum cost of
Typically, in conventional costing, once the absorption cost production should be $8.
of units has been calculated, a mark-up (or gross profit
This is a powerful discipline imposed on the company. The
percentage) is used to determine the selling price and the
main results are:
profit per unit.
The establishment of multi-functional teams making the
There are two flaws in this approach:
design and manufacturing decisions needed to
1. The product’s price is based on its cost, but no one determine the price and feature combinations that are
might want to buy at that price. most likely to appeal to potential buyers of products.
2. The costs incorporated are the current costs only. There An emphasis on the planning and design stage. This
may be other important costs which are not part of these becomes very important to the cost of the product.
categories, but without which the goods could not have
Here are some of the decisions, made at the design stage,
been made (e.g. research and development costs and
which can affect the cost of a product:
any close down costs at the end of the product’s life).
The features of the product;
Target costing
How to avoid “over design”;
Target costing is very much a marketing approach to costing. The number of components needed;
Whether the components are standard or specialised;
Instead of starting with cost and working to the selling price, The complexity of machining and construction;
target costing starts with the selling price of a product and
Where the product can be made;
works back to the cost by removing the profit element. This What to make in-house and what to sub-contract;
means the business has to find ways to not exceed that cost. The quality of the product;
The batch size in which the product can be made.
ABC can also play an important part in target costing. By The cost phases of a product can be identified as:
understanding the cost drivers (cost causers) a company can
Phase Examples of types of cost
better control its costs.
Design Research, development, design and tooling
Value engineering aims to reduce costs by identifying those
parts of a product or service which do not add value – where Manufacture Material, labour, overheads etc.
“value” is made up of both:
Operation Distribution, advertising and warranty claims
Use value (the ability of the product or service to do
what it sets out to do – its function) and End of life Environmental clean-up, disposal and
decommissioning
Esteem value (the status that ownership or use confers).
The four principal lessons of lifecycle costing are:
The aim of value engineering is to maximise use and esteem
values while reducing costs. All costs should be taken into account when working
out the cost of a unit and its profitability.
For example, if you are selling perfume, the design of its
packaging is important. To reduce costs by economising too Attention to all costs will help to reduce the cost per
unit and will help an organisation achieve its target cost.
much on packaging would damage the esteem value.
Many costs will be linked. For example, more attention
Lifecycle costing
to design can reduce manufacturing and warranty costs.
When seeking to make a profit on a product it is essential that
Costs are committed and incurred at very different
the total revenue arising from the product exceeds total costs,
whether these costs are incurred before, during or after the times. A committed cost is a cost that will be incurred
product is produced. in the future because of decisions that have already been
made.
Typically by the end of the design phase approximately 80%
of costs are committed. For example, the design will largely
dictate material, labour and machine costs.
THROUGHPUT ACCOUNTING AND THE THEORY The goal of the factory needs to be more clearly
OF CONSTRAINTS defined. Jonah helps Alex do this by explaining that it
will be achieved by increasing throughput while
This is a summary of a two part article written by a member
simultaneously reducing inventory and operational
of the examining team. For the full articles see the ACCA’s
expenses.
website.
Throughput: the rate at which the system generates
“The Goal: A Process of ongoing improvement” by Eli
money through sales;
Goldratt and Jeff Cox, originally published in 1984, presents
the theory of constraints and throughput accounting as a Inventory: all the money that the system has
novel. invested in purchasing things that it intends to sell;
Alex Rogo, a plant manager at a fictional manufacturing Operational expense: all the money that the system
plant, is forced to question the belief that success in spends in order to turn inventory into throughput.
manufacturing is represented by a 100% efficient
Working out how to achieve the goal
factory (i.e. everyone and every machine is busy 100%
of the time). Alex takes his son and other boys on a 10-mile hike.
Alex realises that if everyone is to stay in one group, the
Alex’s journey begins with a chance meeting with his
group can only go as fast as the slowest walker. The
old physics teacher Jonah. Alex is proudly telling
slow walker is a bottleneck that prevents the group from
Jonah about the improvements in efficiency at the
going faster.
factory. Jonah is quick to question whether these have
actually led to an improvement in profits. Identifying bottlenecks
In fact, although the plant has become seemingly more Alex and his team identify obvious bottlenecks where
efficient, it has huge inventory levels and is constantly big piles of inventory sit in front of two machines.
failing to meet order deadlines.
Observation shows that these machines are sometimes
idle because workers are taking their breaks or working
on other non-bottleneck machines.
Alex learns that an hour lost on a bottleneck machine is The five focussing steps
an hour lost for the whole system. From then on, the
The theory of constraints is applied in five focussing steps:
bottleneck machines are permanently manned.
Step 1 – Identify the system’s bottleneck
The need to accept idle time
Alex realises that all machines must work at the pace of It is usually quite simple to work out what the
the bottleneck machines. It is important to let non- bottleneck resource is.
bottleneck machines and workers sit idle when they Step 2 – Decide how to exploit the system’s bottleneck
have produced to the capacity of the bottleneck
machines. It is only wasteful to produce parts that are This means making sure that the bottleneck is actively
not needed or cannot be processed. used and producing as many units as possible (e.g. by
making sure that there are always workers at bottleneck
Throughput and just-in-time (JIT)
machines).
Given that producing excess inventory both pushes
costs up and prevents throughput, it becomes clear that Step 3 – Subordinate everything else to the decisions made in
throughput accounting and JIT operate very well Step 2
together. The production capacity of the bottleneck resource
Alex reduces batch sizes substantially. If batch sizes should determine the production schedule for the
are halved: organisation as a whole. By definition, the system does
not require-non bottleneck resources to be used to their
inventory costs are also halved; and
full capacity. Pushing more work into the system than
lead time is halved which gives a competitive the constraints can deal with results in excess work in
advantage. progress and extended lead times.
Throughput increases dramatically because of increased
sales volumes; leading to a significantly lower operating
cost per unit.
Managing environmental costs is difficult: (2) Many environment costs captured by the accounting
system are difficult to separately identify as they are
(1) It is difficult to define EMA and the actual costs
found within the category of “general overheads
involved. The US Environmental Protection Agency
made a distinction between four types of costs: UNDSD identified four management accounting
techniques for identifying and allocating environmental
(i) conventional costs (e.g. raw materials and energy);
costs:
(ii) potentially hidden costs captured by accounting
(i) input/output analysis;
systems but getting hidden in “general overheads”;
(ii) flow cost accounting;
(iii) contingent costs (e.g. site clean-up costs): and (iii) ABC; and
(iv) lifecycle costing.
(iv) image and relationship costs that, by their nature,
are intangible. Input/output analysis
On the other hand, the United Nations Division for This records material inflows and balances this with
Sustainable Development (UNDSD) described material outflows on the basis that what comes in must
environmental costs as comprising of two components: go out.
(i) costs incurred to protect the environment (e.g. Flow cost accounting
measures taken to prevent pollution); and
This uses not only material flows but also the
(ii) costs of wasted material, capital and labour organisational structure. It divides material flows into
including inefficiencies. three categories: material, system, and, delivery and
disposal. The values and costs of each of the three are
These definitions do not contradict each other; they just
calculated. The aim of flow cost accounting is to
look at the costs from slightly different angles. reduce the quantity of materials which, as well as
having a positive effect on the environment, should
have a positive effect on a business’s total costs in the
long run.
Fixed costs
It could be calculated in revenue terms as:
Budgeted sales Break-even sales Selling price
Contribution to sales (C/S) ratio
Shows how much each $ sold actually contributes
towards fixed cost.
Units sold In single product situations C/S ratio = unit contribution
÷ unit selling price:
Ascertaining sales volume to achieve a target profit
In multi-product situations, calculate a weighted
A business may want to know how many items it must sell to average C/S ratio. This can then be used to find CVP
obtain a target profit: information (e.g. breakeven point, margin of safety).
FC P Weighted average C/S ratio = total expected contribution ÷
Q=
UCM total expected sales:
It can also be used to calculate break-even revenue:
Required: Answer
Calculate the rate of learning that arose during the The easiest way to do this is to use a combination of the
period. tabular approach plus a little bit of maths:
Answer Cumulative Cumulative total Cumulative average
output hours per unit
Month Incremental Incremental Cumulative Cumulative Cumulative
1 6 6
number of labour number of total average
2 ? 6×r
batches hours batches hours hours per batch
4 ? 6 × r2
June 1 200 1 200 200
8 ? 6 × r3
16 ? 6 × r4
July 1 152 2 352 176
MATERIALS MIX AND YIELD VARIANCE ANALYSIS Material mix refers to the quantity of each material used
(i.e. inputs).
For the full article see ACCA’s website.
Yield refers to how much product is produced (i.e.
Material usage variance
output).
Recap
Materials mix variance
The material usage variance analyses the difference
The optimum mix of materials will be the one that balances
between how much actual material we have used for
the cost of each of the materials with the yield that they
our production relative to how much we expected to use
generate. The yield must also reach certain quality standards.
based on standard usage levels.
Managers may fail to adhere to the standard mix. This
Any difference between the standard and actual cost
would result in a materials mix variance.
would be dealt with by the material price variance.
How do we calculate the mix variance?
There can be many reasons for an adverse material usage
variance, e.g.: Actual
Actual quantity
inferior quality materials have been purchased;
quantity in standard
changes in the production process have been made; or
used mix Difference Variance
increased quality controls have been introduced
litres litres litres $
resulting in more items being rejected.
A XX XX XX XX
Further variance analysis involving material mix B XX XX XX XX
–––––– –––––– –––––– ––––––
Most products consist of several different materials, so the
XXX XXX XX XX
more detailed mix and yield variances can be calculated. If it –––––– –––––– –––––– ––––––
is possible to combine different levels of component
materials to make the same product, this may result in Tutorial note: When calculating the difference, calculate the
differing yields. standard mix minus the actual mix. If the resulting variance
is negative, it will be adverse.
It is essential that for every variance you calculate, you Understanding the bigger picture
state whether it is favourable or adverse. These can be
Variance analysis does not deal with quality issues.
denoted by a clear “A” or “F”. This leads to mistakes.
Changes to the product mix to make savings which
The key to variance analysis is to understand what is compromise the quality of the product may damage the
actually happening; do not rely on rote learnt formulae. business’ reputation and hence its long-term survival.
Materials yield variance In the long run, the favourable mix variance may be
Where there is a difference between the actual and standard deduced from an adverse sales volume variance, as
level of output for a given set of inputs, a material yield demand for the businesses products decreases.
variance arises. As any adverse sales volume variance due to poor
Yield variance quality products is likely to arise in a later period,
correlation may be more difficult to prove.
Expected output given materials used XXX litres
Actual output XXX litres Poor quality materials may be more difficult to work
––––––––– with and lead to:
Shortage/ surplus XX litres an adverse labour efficiency variance;
X standard cost per litre of output $X higher overhead costs and so on.
–––––––––
However, such consequences will occur in the same
Yield variance $XX
period as the mix and yield variance and are therefore
more likely to be identified and the problem resolved.
Making observations about variances
Never underestimate the extent to which a perceived
There is a direct relationship between materials mix and “improvement” in one area can lead to a real
yield variance. Using a cheaper mix of materials may deterioration in another area.
result in a significantly lower yield.
Always mention such interdependencies when
The overall net effect is the material usage variance discussing variances. The “number crunching” is
which is the sum of the two variances. relatively simple; the skills lie in their interpretation.
(b) During the early part of 20X4 TIP employed a newly Movement in sales, on the other hand, is also relatively
qualified management accountant. He quickly became small but is mentioned because:
concerned about the potential performance of TIP and
(1) sales in a key figure and cannot be ignored; and
to investigate his concerns he started to gather data to
(2) we know enough about other things going on in the
measure some non-financial measures of success. The
business (e.g. reduction in the number of visitors) to be
data he has gathered is shown in Table 2
able to draw valid conclusions about sales.
[Not reproduced].
The following workings are set out as the examiner expects
Required:
to see them (i.e. labelled and referenced). While, in the real
Assess the quality of the service that TIP provides to world, such analysis would be expected to appear after any
its customers using Table 1 and any other relevant commentary (e.g. as an appendix), since you are not being
data and indicate the risks it is likely to face if it asked for a report here it does not matter whether you show
continues with its current policies. them at the beginning or end of your answer.
Workings
Breaking down the question
(1) Sales growth is $5,320,000/$5,250,000 = 1.3%
Broadly speaking, keep the majority of comments about
non-financial aspects to part (b). (2) Average admission prices were:
Perform some preliminary calculations to ascertain the 20X4: $5,250,000/150,000 = $35 per person
relative movements been between the two years. 20X5: $5,320,000/140,000 = $38 per person
In this type of question, it makes most sense to look at An increase of $38/$35 = 8.57%
% increase or decrease in each figure (see Workings).
(3) Directors pay up by $160,000/$150,000 = 6.7%
Note the absence of a calculation for “other costs”.
This is because the movement in it from year to year is (4) Directors bonuses levels up from $15,000/$150,000 or
so small that it is not worth mentioning. 10% to $18,000/$160,000 or 12.5% of turnover. An
increase of 20%
(5) Wages are down by ($2,500,000 – A poor answer on sales would be this:
$2,200,000/$2,500,000) or 12%
“Sales
(6) Routine maintenance down by ($80,000 –
$70,000)/$80,000 = 12.5% These have increased by 1.3% in the year.”
(7) Repairs up by ($320,000 – 260,000)/$260,000 = 23% A good answer for sales would read as follows:
(9) Profits up by $1,372,000/$1,045,000 = 31.3% Sales have increased by 1.3% (W1) in 20X5, as compared to
20X4. Since inflation was 1%, the increase is barely above
(10) Return on assets: the inflation rate. This means that, in real terms, sales have
20X4: $1,045,000/$13,000,000 = 8.03% hardly increased at all. From the financial information
20X5: $1,372,000/$12,000,000 = 11.4% provided, we can see that the number of visitors in 20X5 has
fallen from 150,000 to 140,000. This means that the average
Using calculations and setting out your answer admission price in 20X5 was $38 per person, compared to
$35 per person in 20X4, an increase of 8.57% (W2). While it
These calculations are merely a starting point.
is good that the company has been able to secure an increase
“Assessing the financial performance” means
in admission price, it is not good that this has potentially
discussing it and commenting on whether it is poor or
been partly responsible for a fall in visitor numbers.
strong.
The good answer starts with the percentage increase
It is important that your answer does not become “a sea
from the referenced working and adds to it other
of words” (i.e. just pages of writing with no headings
information from the question or from the workings that
and no structure). Your headings could be taken from
is relevant to the figure being discussed (in this case,
your workings (e.g. “sales”, “directors’ pay and
inflation and admission prices). Only then is it possible
bonuses” etc).
to make comments that have any kind of validity.
INTERPRETING FINANCIAL DATA In most questions there will be some background information
– you should use it. Ties only operated in a competitive
For the full article see the ACCA’s website.
environment – as stated in the question – and so a 61%
The purpose of this article is to point students in the right increase in one-quarter sounds pretty good in a competitive
direction when studying the interpretation of financial data – situation, and to say so will earn a mark. It was also the first
which is a major topic in the F5 syllabus. two quarters of the business year and so this level of growth
is impressive – another mark. If you then go on to say that
Students are advised to look at the question “Ties only” while
such high growth rates are often hard to maintain, you will
reading this article, as extracts from the question are used to gain another mark. Top-scoring students should be aiming to
illustrate points and explain the techniques needed. make these kinds of observations.
“Ties only” is available on ACCA’s www (in December 2007
Hypothesising as to why the growth is happening is also a
exam) and included in Becker’s Study Question Bank. source of marks. Revenue growth can be the result of extra
Assessing financial performance volume or increasing prices. In the case of Ties Only, it is
much more likely to be increased volume; the price will
Candidates were asked to assess the financial performance of surely be constrained by competition, and from the
the business in its first two quarters, when sales had jumped information provided in Part (b), you can work out that prices
61% from Quarter 1 to Quarter 2. This calculation should are falling (although that calculation was not required).
present no problem ((Q2/Q1)-1) expressed as a % increase). Suggesting that Ties Only has secured more customers and
However, an “assessment” requires a qualitative comment or hence increased sales volume scored a mark.
two. A percentage alone will not gain a pass mark.
Candidates must be brave and commit themselves. You must
express an opinion. It is not acceptable to suggest that
management investigate. Although in the real world this may
well happen, in the exam hall you have to demonstrate that
you know where to look.
The economic transfer price rule The economic rule leads to decisions in the interests of
the group as a whole:
Minimum transfer price (fixed by transferring division)
marginal cost of transfer-out division. If the final selling price (for Division B) were to
fall to $25, the group could not make a contribution
Maximum transfer price (fixed by receiving division) as the group’s variable cost is $28 ($18 + $10).
net marginal revenue of transfer-in division.
The transfer price that would make both divisions
Example trade must be no less than $18 for Division A, but
Division A Division B no greater than $15 (net marginal revenue) for
$ $ Division B. No workable transfer price is available
Transfer-in price – 50 and the divisions would not trade with each other.
Own costs Variable 18 10
Fixed 12 10 Problems with this approach
Divisional profit/mark up 20 40
––– –––
Variable costs and final selling prices will change
continually in the real world.
Transfer-out/final sale price 50 90
––– ––– The range of transfer prices set (from $18 to $80) is
The minimum transfer price acceptable to Division A large, and therefore the respective profits of the two
would be $18, as this is the marginal cost of production. divisions could vary vastly depending on where within
the range they agree the final price.
For Division B the transfer-in price should be no greater
than the net marginal revenue (marginal revenue less
own marginal costs) = $80 ($90 $10).
A $50 transfer price would work, since it is $18 and
$80. Both parties will find it worth trading at that price.
For the full article see the ACCA’s website. If there are two possible courses of action (e.g. to
launch a new product or not) there will be two branches
This article takes a step-by-step approach to decision trees,
from a decision point (□).
using a simple example as a guide. The symbols used are
“squares” (□), which represent “decisions” and “circles” (○), If there are two possible outcomes (e.g. one good and
which represent “outcomes”. one bad) there will be two branches from an outcome
point (○).
DECISION TREES
A simple decision tree is shown below.
Multi-stage decision problems
A decision tree is useful where there are a series of decisions
to be made and/or several outcomes arising at each stage of
the decision-making process. Decision trees provide a useful
method of breaking down a complex problem into smaller,
more manageable pieces.
There are two phases to the decision-making process:
1. Construction – draw the decision tree (from left to
right) and put all the probabilities and financial
outcomes on the tree using relevant costing principles;
2. Evaluation and recommendation – “roll back” the
decision (from right to left) by calculating the expected
value (EV) at each outcome point.
Constructing the tree
Annotate the tree with the decisions and outcomes and
Both decision points and outcome points are always followed
their probabilities.
by branches.
! The sum of the probabilities from each outcome point must Example
be 1 (or 100%). A company is deciding whether to develop and launch a new
product. Research and development costs are expected to be
Evaluating the decision $400,000 and there is a 70% chance that the product launch
1. Working from right to left, calculate the EV at each will be successful (i.e. a 30% chance that it will fail). If
outcome point (i.e. the sum of the cash flows multiplied successful, the expected annual profits for each of the next
by their probabilities). two years and their probabilities have been estimated as
follows, depending on whether the product’s popularity is
2. Make the recommendation, based on the option that high, medium or low:
gives the highest expected value.
Probability Annual profit
Limitations of using EV High: 0.2 $500,000
EV is a long-run average of the outcome that would occur if Medium: 0.5 $400,000
a decision was to be repeated many times. For a one-off Low: 0.3 $300,000
decision, the EV may not be an actual possible outcome.
If it is a failure, there is a 0.6 probability that the research and
Probabilities are unlikely to be accurate because the exact development work can be sold for $50,000 and a 0.4
situation may not have arisen before. probability that it will be worth nothing.
The EV criterion assumes the decision maker is risk neutral.
If the decision maker is risk-averse or risk-seeking it may be ! Note that profits will be for two years, so must be doubled.
more useful to evaluate the worst-case scenario or best-case ! All amounts are expressed in $000.
scenario.
$0 $0
Do not Do not
develop develop
D High
D High
$1,000 $1,000
0.2 EV $780 0.2
Develop Medium 0.5 Develop Medium 0.5
Cost Success A $800 Cost Success A $800
$(400) 0.7 Low $(400,000) 0.7 Low
0.3 $600 0.3 $600
C EV $555 C
Sell work $50 Sell work $50
Failure Failure
0.6 0.6
0.3 0.3
B B
EV $30
Worthless $0 Worthless $0
0.4 0.4
Now, calculate the EV for each outcome (in $000s): At decision point D, compare the EV of not developing the
product ($0) with the EV of developing it: $555,000 -
At A = (0.2 × $1,000) + (0.5 × $800) + (0.3 × $600) = $780
$400,000 = $155,000.
At B = (0.6 × $50) + (0.4 × $0) = $30
At C = (0.7 × $780) + (0.3 × $30) = $555 Recommendation: develop the product because the expected
value of the profits is $155,000.
Add these EVs to the tree.
Question 31
Part (a) – prepare the company’s rolling budget for the next
four quarters.
On the whole this was answered quite well.
Part (b) – discuss the problems as a result of the previous
budgeting process.
Many simply copied out parts of the scenario without
adding any value to them.
Question 32
Part (a) – calculate the return on investment for two
divisions, based on controllable profit.
Many candidates scored well.
Part (b) – explain why items were included or excluded items
in part (a).
Simply saying that they were “controllable” or
“uncontrollable” was insufficient. Answers needed to
explain why?
1
Estimated.
! Only the paper-based exam has an additional 15 minutes Although the average time per OT item should be 3.6
for reading and planning (see page (iv)). minutes some, particularly those not involving calculations,
will require less time while others will require more.
See the earlier section “Approach to written questions”.
! If you are not close to answering after four minutes then
Overall approach make a guess but flag for review if you have time later.
Paper-based exam
When attempting computational items, initially cover up
Decide in which order you will attempt the questions and options; perform your calculation which will hopefully match
write down a timetable. For example: one of the given alternatives.
Do Section C questions first. Spend 36 minutes on each Section C
question. Do your best Section C question first.
Time must be apportioned carefully between each part and
Do Section B after completing Section C. Again do the all parts attempted.
Section B questions in order of preference with your
Numerical elements
best question first. Spend 18 minutes on each case
Before starting a computation, picture your route; note
54 minutes before the end of the exam, start Section A.
down the steps you are going to take and imagine the
CBE layout of your answer.
Be prepared to tackle sections and questions in the order In the paper-based exam, write clearly and leave space
presented to avoid having to place too much reliance on the between each step.
speed with which you can navigate the exam.
Include all your workings and cross-reference them to
the face of your answer.
Write your assumptions – if you are not sure how to Use bullet points where this seems appropriate (e.g. for
interpret something in the question then state your a list of advantages/disadvantages) – however each
assumed interpretation. bullet point must be followed by a full sentence.
If you later notice a mistake in your answer, it is not In the paper-based exam, write legibly using a good
worthwhile spending time amending the consequent quality black pen.
effects of it. The marker of your script will not punish
Style
you for errors caused by an earlier mistake.
Long philosophical debate does not impress markers.
Written elements
Several points briefly explained tend to score higher
Planning
marks than one or two points elaborately explained.
Read the requirement carefully to identify exactly what
If you write appropriate comments based on previous
is required and how many separate points you are being
calculations which contained errors, you can still
asked to address.
receive all the marks for the comments.
Note down relevant thoughts on your plan.
As you write refer back to the requirement to ensure
Give your plan a structure which you will follow when that you are answering it with relevant comments.
you write up the answer.
Keywords
Presentation
Part of the secret of doing well in these exams is to actually
Use headings and sub-headings to give your answer understand what the question is asking. See the section
structure and to make it easier to read. Approaching Written Questions for explanation of the verbs
most commonly used in this exam.
Use short sentence for each point.
Separate paragraphs by leaving at least one line of
space between each.
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