CHAPTER 1: THE FUNDAMENTALS OF COSTING

- Cost object: is anything for which we are trying to ascertain the cost
- Cost unit: is the basic measure of product or service for which costs are determined
Organisation Possible cost unit
Steelworks Tonne of steel product
Tonne of coke used
Hospital Patient/day
Operation
Out-patient visit
Freight organisation Tonne/kilometre
Passenger transport organisation Passenger/kilometre
Accounting firm Audit performed
Chargeable hour
Restaurant Meal served
Interactive question 1: Cost units
Identify which of the following cost objects would be suitable cost units for an hotel
Cost objects Suitable cost unit?
Bar
Restaurant
Room/night
Meal served
Conference delegate
Fitness suite
Conference room/day
- Direct cost: is a cost that can be traced in full to the cost unit.
- Prime cost = direct material + direct labour + direct expenses
- Indirect cost (or overhead): A cost that is incurred which cannot be traced directly and
in full to the cost unit
- Period cost: non-production overhead : Chi phí phát sinh
- Product cost >< period cost
- Controllable cost: is a cost that can be influenced by management decisions and actions
- Uncontrollable cost: is a cost that cannot be affected by management within a given
time span.
- Hầu hết thời gian của biến phí (variable costs) can be controllable in the SHORT TERM

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- Some cost not controllable by a junior manager but can be controllable by a senior
manager
- Some cost cannot be controlled by a manager in 1 department, but can be controlled by
a manager in another department.
Fixed cost: is a cost that, within a relevant range of activity levels, is not affected by
increases or decreases in the level of activity.
- Step cost/Step fixed cost: A cost that is fixed
for a certain range of activity but increases to a
new fixed level once a critical level of activity
is reached.
- Fixed cost per unit: level of activity increases -
> fixed cost per unit decreases
Examples of fixed costs include the following.
 The salary of the managing director (per month or per annum)
 The rent of a single factory building (per month or per annum)
 Straight line depreciation of a single machine (per month or per annum)
Variable cost: A variable cost is a cost that increases or decreases as the level of activity
increases or decreases.
- Variable cost per unit: stay the same
Examples of variable costs include the following.
 The cost of raw materials (where there is no
discount for bulk purchasing, since bulk
purchase discounts reduce the unit cost of
purchases).
 Direct labour costs, which are usually classed as a variable cost even though basic
wages are often fixed.
 Sales commission that is variable in relation to the volume or value of sales
Semi-variable costs (or semi-fixed costs or mixed costs): are costs that are part-fixed
and part-variable and are therefore partly
affected by changes in the level of activity
Examples of semi-variable costs include the
following.

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  Electricity and gas bills. There may be a ‘standing’ basic charge plus a charge per unit
of consumption.
 Sales representative’s salary. The sales representative may earn a basic monthly
amount plus a commission based on the value of sales made.
Interactive question 2 WB/26: Fixed, variable or semi-variable cost?
Fixed/Variable/Semi-variable?
Telephone bill
Annual salary of the chief accountant
Cost of materials used to pack 20 units of
product X into a box
Interactive question 3 WB/27: Fill in the blanks using the one of the following options:
In general, as activity levels rise within a relevant range, the variable cost per unit will (a)
rise/fall/stay the same, the fixed cost per unit will (b) rise/fall/stay the same and the total
cost per unit will (c) rise/fall/stay the same.
Self-test câu 7/37: Which of the following items might be a suitable cost unit within the sales
department of a manufacturing company?
Suitable or unsuitable?
Sales commission
Order obtained
Unit of product sold
Professional scepticism: Assessing information, estimates and explanations critically,
with a questioning mind, and being alert to possible misstatements due to error and fraud
Sustainability: The ability to “meet the needs of the present without compromising the
ability of future generations to meet their own needs”.
Corporate responsibility: The actions, activities and obligations of business in achieving
sustainability
ESG (environmental, social and governance): is a set of criteria used to measure and
report sustainability.
CHAPTER 2: CALCULATE UNIT COST (PART 1)
1. Direct material cost:
Example:
- Component parts or other materials purchased for a particular product, service, job
- Primary packing materials like cartons and boxes
2. Direct wages or direct labour costs
Example of groups of labour receiving payment as direct wages:
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 - Workers engaged in altering the condition, conformation or composition of the product
- Inspectors, analysts and testers specifically required for such production
3. Direct expenses
Example: - The cost of special designs, drawings or layouts for a particular job
- The hire of tools or equipment for a particular job
4. Indirect costs
Interactive question 1 WB/45:
Indicate whether each of the following costs would be classified as a direct cost or an indirect
cost of a particular car repair in a garage. The repair was worked on in overtime hours due to
an unusually large number of repairs being booked into the garage that day.
Cost incurred Direct or indirect?
The salary of the garage’s accountant
The cost of heating the garage
A can of engine oil used in the repair
A smear of grease used in the repair
An overtime premium paid to the mechanic carrying
out the repair
An idle time payment made to the mechanic while
waiting for a delivery of parts for a number of jobs
The wages of the supervisor overseeing the mechanic
carrying out the repair
- “specifically required, specific, particular  direct cost
- Direct cost can be fixed cost or variable cost (đa số là variable cost)
- Indirect cost can be fixed cost or variable cost (đa số là fixed cost)
Worked example/53: Inventory valuation and profitability
On 1 November 20X2, Delilah’s Dresses Ltd held 3 pink satin dresses with orange sashes,
designed by Freda Swoggs. These were valued at £120 each. During November 20X2, 12
more of the dresses were delivered as follows:
Date Dresses received Purchase cost per dress
10 November 4 £125
20 November 4 £140
25 November 4 £150
A number of the pink satin dresses with orange sashes were sold during November as follows
Date Dresses sold Purchase cost per dress
14 November 5 £200
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 21 November 5 £200
28 November 1 £200
Requirements: Calculate the gross profit from selling the pink satin dresses with orange
sashes in November 20X2, applying the following principles of inventory valuation.
(a) FIFO
(b) LIFO
(c) Cumulative weighted average pricing
Calculate gross profit using the formula: gross profit = (sales – (opening inventory +
purchases – closing inventory)).

QB câu 18/15: In a period of falling prices, four students have recorded the cost of sales of
commodity X. One student has used the FIFO method of inventory valuation and one has
used the LIFO method. The other two students have used an average cost method, using the
periodic and cumulative weighted average basis respectively.
The gross profits recorded by the students were as follows:
Student Recorded gross profit (£)
A 12,600
B 13,400
C 14,500
D 15,230
Which student was using the LIFO method of inventory valuation?
A. Student A B. Student B C. Student C D. Student D
CHAPTER 3: CALCULATE UNIT COST (PART 2)
1. Absorption costing method;
- Prime cost = direct material + direct labour + direct expense (if any)
Allocation Stage 1: apportionment
Absorption
Apportionment
- Pareshare of overhead Stage 2: re-apportionment
Absorption
 Unit cost/product cost/full cost/absorption = prime cost + pareshare of overhead
(giá trị tạo ra 1 sp)
- Cost center: là 1 bộ phận tập trung các chi phí liên quan đến bộ phận đó
- Allocation: hút tất cả các chi phí liên quan trực tiếp đến bộ phận đó, không liên quan
đến bộ phận khác.
- Apportionment basis: cơ sở phân bổ.
Total overhead cost value of apportionment
2. Overhead apportionment = *
Total value of apportionment base base of the cost centre

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 - Light and heat -> ưu tiên floor area
- Heating -> ưu tiên volume
Câu 15 QB/19: Lerna Ltd produces hydras in three production departments and needs to
apportion budgeted monthly overhead costs between those departments. Budgeted costs are
as follows:
£
Rent 2,000
Rates 1,000
Plant insurance 1,000
Plant depreciation 10,000
Factory manager’s salary 7,000
21,000
The following additional information is available.
Department A Department B Department C Total
Area (square meters) 3,800 3,500 700 8,000
Value of machinery 210 110 80 400
(£’000)
Number of employees 34 16 20 70
The total budgeted monthly overhead cost for Department C is:
A. £1,837.50
B. £4,462.50
C. £6,000.00
D. £7,000.00
Basis of
Department A Dep B Dep C
apportionment
Rent Area (2,000/8,000)*3,80 875 175
0 = 950
Rates Area (1,000/8000)*3,800 437.5 87.5
= 475
Plant Value of (1,000/400)*210 275 200
insurance machinery = 525
Plant Value of (10,000/400)*210 2,750 2000
depreciation machinery = 5,250
Factory Number of (7,000/70)*34 1,600 2,000
manager’s
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 salary employees = 3,400
Total 4,462.5

3. Reapportion the service centre costs:

- Nguyên tắc thứ 1: chọn chi phí dịch vụ cao hơn để tái phân bổ vào chi phí sản xuất
- Nguyên tắc thứ 2: thực hiện việc tái phân bổ cho các bộ phận còn lại, không phân bổ
ngược
- Nếu những cost (vd: HR cost…) không liên quan gì đến product cost -> period cost
Interactive question 5: Shah Co has 2 production departments (machining and assembly)
and 2 service departments (maintenance and canteen). The accountant has already completed
the initial allocation and apportionment of budgeted overheads to the 4 departments and now
wishes to reapportion the service department overheads to the production departments. She
has provided the following information,
Machining Assembly Maintenanc Canteen
e
Total overhead (£) 520,000 600,000 200,000 70,000
Number of employees 50 40 30 15
Maintenance works 40% of the time for Machining, 10% for Canteen and 50% for Assembly.
Requirement: Reapportion the service department overheads to the production departments,
rounding to the nearest £
Machining (£) Assembly Maintenance Canteen(£)
(£) (£)
Total overhead 520,000 600,000 200,000 70,000
First reapportionment (200,000/100%)*40% 100,000 (200,000) 20,000
= 80,000
Revised total 600,000 700,000 0 90,000
overheads
Second (90,000/(50+40))*50 40,000 0 (90,000)
reapportionment = 50,000
Revised total 650,000 740,000 0 0
overheads
Self-test câu 2 WB/89: A company has 2 production departments and 2 service department
with production overheads as shown in the following table.
Production Production Service Service
dept W dept X dept Y dept Z
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 Production overheads (£’000) 500 600 600 800
Service department Y divides its time between the other departments in the ratio 3:2:1 (for W,
X and Z respectively)
Department Z spends 40% of its time servicing department W and 60% of its time servicing
department X.
Requirement: If all service department overheads are apportioned to production
departments, the total fixed overhead cost of department W is £
W (£) X (£) Y (£) Z(£)
Total overhead 500 600 600 800
First reapportionment (600/(3+2+1))*3 200 (600) 100
= 300
Revised total overheads 800 800 0 900
Second reapportionment (900/100%)*40 540 0 (900)
%
= 360
Revised total overheads 1,160 1,340 0 0

4. OAR (Overhead absorption rate)/Overhead recovery rate/Predetermined overhead

rate
Budgeted overhead cost
a. OAR =
Budgeted level of activity
b. Overhead absorbed = OAR * (actual) level of activity
c. So sánh overhead absorbed >< actual overhead
- Nếu overhead absorbed > actual overhead => over-absorption
- Nếu overhead absorbed < actual overhead => under-absorption
 Departmental OAR (từng bộ phận) ≠ Simple OAR (~ blanket OAR) (bao trùm)
Self-test câu 5 WB/90: ABC Co has been using an overhead absorption rate of £6.25 per
labour hour in its packing department throughout the year.
During the year the overhead expenditure amounted to £257,500, and 44,848 labour hours
were used.
Overhead absorbed = OAR* actual level of activity
= 6.25*44,848 = 280,300
Overhead absorbed > actual overhead (280,300 > 257,500)
=> over-absorbed by: 280,300 – 257,500 = 22,800 => D
Requirement: Which of the following staement is correct?
8
 A. Overhead were under absorbed by £27,600
B. Overhead were under absorbed by £22,800
C. Overhead were over absorbed by £27,600
D. Overhead were over absorbed by £22,800
Self-test câu 7 WB/90: A management consultancy absorbs overheads on chargeable
consulting hours. Budgeted overheads were £615,000 and actual consulting hours were
32,150. Overheads were under-absorbed by £35,000.
If actual overheads were £694,075, what was the budgeted overhead absorption rate per
hour?
Overhead absorbed = 694,075 – 35,000 = 659,075
Overhead absorbed = OAR * actual level of activity
=> OAR = Overhead absorbed/actual level of activity = 659,075/32,150 = £20.5/hour => B
A. £19.13
B. £20.50
C. £21.59
D. £22.68
5. Activity-based costing:
- Cost drivers (factors): nhân tố tạo nên sự thay đổi chi phí về mặt hoạt động
 Volume-related cost driver
 Transaction-related cost driver
- Cost pool: nơi tập hợp tất cả các chi phí liên quan đến 1 hoạt động
 ABC: activity -> cost driver –> cost pool -> assign to product.
6. Just in time (JIT)
- “Push” systems : Supplier -- Production -- Customer
- “Pull” systems: Supplier -- Production -- Customer
Câu 28 QB/23: Which TWO of the following statements are correct?
A. Just-in-time (JIT) purchasing requires the purchase of large quantities of inventory items
so that they are available immediately when they are needed in the production process.
B. Activity based costing (ABC) is concerned only with production overhead costs.
C. Activity based costing (ABC) derives accurate product costs because it eliminates the
need for arbitrary cost apportionment.
D. Activity based costing (ABC) involves tracing resource consumption and costing final
outputs.
E. Just-in-time (JIT) systems are referred to as ‘pull’ systems because demand from a
customer pulls products through the production process.
9
7. Other costing methods:

Interactive question 9: Costing methods

Choose one costing method that would be appropriate in each of the following indutries.
Process Job Contract Batch
Fitting kitchens
Manufacturing components
Manufacturing chemicals
Buiding offices

10
 CHAPTER 4: MARGINAL COSTING AND ABSORPTING COSTING
1. Contribution (Contribution Margin)
Profit (Pr) = Total Revenue (TR) – Total cost (TC)
= TR – ( Variable cost (VC) + Fixed cost (FC))
= (TR – VC) - FC
= Contribution margin (CM) - FC
 a. CM = TR – VC (VC tính cả production và non-production)
b. CM = F + Pr
CM TR VC
c. = −  CM unit = p (selling price per unit) – v (variable cost per unit)
Q Q Q
=> CM = CM unit * Q
Interactive question 1: Contribution
A particular dining experience is sold for £1,009.99. The variable ingredients (materials) cost
per experience is £320, the variable labour cost per experience is £192 and the variable
overhead cost per experience is £132. Fixed overheads per annum are £100,000.
Requirement: The contribution per dining experience is £
CMunit = p – v = 1,009.99 – (320+192+132) = 365.99
2. Product cost:
- Product cost (AC) = prime cost + pareshare overhead Variable material
- Product cost (MC) = variable production cost Variable labour
Variable production
overheads
Notes: All fixed costs are treated as period cost => fixed costs are not included in
inventory valuation.
COGS = Beginning + Production – Closing
Closing value = Closing balance cost * Product cost
BT Kingsman Ltd QB/97:
Kingsman Ltd started business on 1 September manufacturing a single product, the A356.
The budgeted production cost per unit of the A356 is as follows:
£
Variable materials 78
Variable labour 12
Variable production overheads 6
Fixed production overheads 18
The budget showed production and sales for the first six months of 1,200 units. The budgeted
selling price is £170 per unit.

11
The budgeted selling, distribution and administration costs are as follows:
Fixed = £36,000 per annum
Variable = £2.50 per unit
Inventory at the end of September was 20 units of the A356. In October Kingsman sold 150
units and manufactured 155 units. Budgeted fixed costs are incurred evenly per month.
Actual costs and the selling price were as budgeted except for the fixed selling, distribution
and administration costs, which were 12.5% lower than budgeted.
Requirement:
1.1. Calculate the profit or loss for October using both AC and MC
(Enter costs as negative values)
Overhead absorbed = 2,790
Actual overhead = (1,200/6)*18 = 3,600
=> under-absorbed: 3,600 = 2,790 = 810
Absorption Marginal
£ £ £ £
Sales 170*150
25,500
= 25,500
Variable production 155*(78+12+
155*(78+12+6)
costs 6)
= 14,880
= 14,880
Fixed production costs 155*18
0
absorbed = 2,790
Opening inv 20*(78+12+6+1
20*(78+12+6)
8)
= 1,920
= 2,280
Closing inv 25*(78+12+6+1
25*(78+12+6)
8)
= (2,400)
= (2,850)
Production cost of sales (17,100) (14,400)
Under/over absorption (810) 0
Variable selling,
2.5*150 = 2.5*150 =
administration,distributi
(375) (375)
on
Fixed selling, (36,000/12)*( (36,000/12)*(
administration,distributi 1-12.5%) = 1-12.5%) =
12
 on (2,625) (2,625)
Fixed production costs 0 (
Profit/Loss 4,590
1.2. In the second six months of the year Kingsman plans to introduce the B786, a deluxe
version of the A356. The budgeted total absorption cost for the B786 is £420 per unit
including £40 per unit for fixed overheads. In order to set a selling price Kingsman
plans to use a margin of 25% on the absorption cost.
Requirement: If there is no inventory of the B786 at the end of the first six months of
production, the profits calculated under MC will be those calculated under
AC. (Select the correct answer: Higher than / Lower than / The same as)
1.3. Calculate the percent mark-up for the B786 using MC and the planned selling price.
%

Absorption
Sales (16,000/800)*160 = 3,200
Cost of sales (6,400/800+1,600/800)*160
= 1,600
Under/over absorption - Overhead absorbed = (1,600/800)*220 = 440
- Actual overhead = 1,600/4 = 400
=> over-absorbed = 440 – 400 = 40
Gross profit 3,200-1,600+40 = 1,640
Variable Selling and 160*(3,200/800) = 640
distribution cost

13
 Fixed selling and 2,400/4 = 600
distribution cost
Net profit = Gross profit – 1,640 – 640 – 600 = 400
Selling and administrative
cost
Marginal
Sales (16,000/800)*160 = 3,200
Total Variable cost (6,400/800+3,200/800)*160
= 1,920
Contribution 3,200 – 1,920 = 1,280
Fixed production cost 1,600/4 = 400
Fixed selling and 2,400/4 = 600
distribution cost
Net profit = Gross profit – 1,280 – 400 – 600 = 280
Selling and administrative
cost

3. Một vài tips / lưu ý khác:

a. Production = Sales / Closing blance = Opening balance
 AC profit = MC profit
b. Production > Sales / Closing blance > Opening balance (Inventory levels increase)
 AC profit > MC profit
c. Production < Sales / Closing blance < Opening balance (Inventory levels decrease)
 AC profit < MC profit
Chênh lệch Profit = Inventory * fixed production cost per unit
Câu 9 QB/28: Adams Ltd’s budget for its first month of trading, during which 1,000 units are
expected to be produced and 800 units sold, is as follows:
£
Variable production costs 95,500
Fixed production costs 25,800
Selling price is £250 per unit.
Requirement: The profit calculated on the absorption cost basis compared with the profit
calculated on the marginal cost basis is
A. £24,260 lower
B. £5,160 higher
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 C. £5,160 lower
D. £24,260 higher
Câu 10 QB/28: Bright makes and sells boats. The budget for Bright’s first month of trading
showed the following:
£
Variable production cost of boats 45,000
Fixed production costs 30,000
Production cost of 750 boats 75,000
Closing inventory of 250 boats (25,000)
Production costs of 500 boats sold 50,000
Sales revenue 90,000
Production cost of boats sold (50,000)
Variable selling costs (5,000)
Fixed selling costs (25,000)
Profit 10,000
The budget has been produced using an absorption costing system.
Requirement: If marginal costing system were used, the budgeted profit would be
A. £22,500 lower
B. £10,000 lower
C. £10,000 higher
D. £22,500 higher

CHAPTER 5: PRICING CALCULATIONS

Cost + desirable profit (= mark-up) = selling price
1. Full cost-plus pricing:
- Option 1: Production cost + mark-up = selling price
- Option 2: (Production cost + other cost) + mark-up = selling price
*other cost include selling, distribution and administration costs
 Áp dụng option nào thì đề sẽ nói trực tiếp hoặc đề sẽ cho giá trị của option nào thì áp
dụng option đó.
mark−up
 Mark-up = %mark-up * cost => %mark-up = * 100%
cost
Work example WB/121: XY Ltd has begun to supply service S, for which the following cost
estimates have been prepared.
£ per unit
Variable materials 14.00
15
 Variable labour at £12 per hour 54.000
Variable overheads at £3 per hour 13.50
Variable service cost per unit 81.50
Fixed production overheads are budgeted to be £69,000 each period. The overhead absorption
rate will be based on 17,250 budgeted direct labour hours each period.
Requirement: The company wishes to add 20% to the full service cost in order to determine
the selling price per unit for service S

Interactive question 1 WB: Adjusting the mark-up percentage

The full cost of providing a service is £40 per hour and its selling price is currently
determined as full cost plus 60%.
Requirement: In each of the following separate situations, calculate the required profit mark-
up percentage.
(1) A competitor launches a similar service for £60 per hour. In order to sell the service at
the same price as the competitor the percentage mark-up must ben reduced to:
%
(2) The full cost of providing the service increases to £50 per hour. The required mark-up
percentage to achieve the same absolute value of mark-up per hour of service provided
is:
%
2. Marginal cost-plus pricing:
- Option 1: Variable production cost + mark-up = selling price
- Option 2: (Variable production cost + variable other costs) + mark-up = selling price
Worked example WB/124:
Product Y incurs direct variable production costs of £7 per unit. Fixed production costs
amount to £17,900 each period.
Variable selling and distribution costs are £3.80 per unit and fixed selling, distribution and
administration costs amount to £24,800 each period.
Selling prices are determined on a marginal cost-plus basis, using a mark-up of 30% of the
marginal cost of sales.
Requirement: Calculate the selling price per unit of product Y and the profit that will result
from sales of 26,800 units each period.
16
MARK-UPS AND MARGINS
Mark−up
1. %Mark-up = *100%
Cost
Mark−up
2. %Margin = *100%
Selling price
Interactive question 2 WB/126:
Question Write your answer here
If the full cost is £14 per unit, calculate the price to
achive a margin of 20% of the selling price
The selling price is £27 per unit, determined on the
basis of full cost-plus. If the full cost is £18 per unit,
calculate the mark-up percentage.
A selling price of £165 per unit earns a mark-up of
106.25% of the full cost. What is the full cost per unit?
A product’s selling price is determined by adding
33.33% to its full cost. What percentage margin on
sales price does this represent?
QB câu 13/34: Details from a retailer’s records concerning product D for the latest period are
as follows.
£
Sales revenue 60,000
Purchases 40,000
Opening inventory 12,000
Closing inventory 2,000
Requirement: The profit margin for product D is
A. 16.7% B. 20.0% C. 33.3% D. 50.0%
TRANSFER PRICING (TP)
Division A ---------TP------------------ Division B
1. Goal congruence: When individuals’ goals and company goals coincide
2. Market price:
a) Full capacity (có bao nhiêu tiêu thụ bấy nhiêu) ~ perfectly competitive market
TP = market price – (costs that not incurred internally)
b) Spare capacity:
TP = marginal cost (of division A for the product)

17
Self-test câu 9 WB/133: Division M manufactures product R incurring a total cost of £30 per
unit. Fixed costs represent 40% of the total unit cost.
Product R is sold to external customers in a perfectly competitive market at a price of £50 per
unit. Division M also transfers product R to division N. It transfers are made internally then
division M does not incur variable distribution costs, which amount to 10% of the variable
costs incurred on external sales.
The total demand for product R exceeds the capacity of divison M.
Requirement: From the point of view of the company as a whole, enter the optimum price
per unit at which division M should transfer product R to divison N.
Transfer price per unit = £

CHAPTER 6: BUDGETING
Forecast Prediction
- Prediction - Qualified plan
- No control - Based on forecast
- Forces management into decision-
making and taking action
Budget committee: is the coordinating body in the preparation and administration of
budgets (là bộ phận quản lý việc lập dự toán, quan sát, đánh giá việc lập dự toán, phát
hành budget manual)
Budget officer: là bộ phận lập dự toán.
Budget document (budget manual) – Tài liệu dự toán. Bao gồm những thông tin về:
Các hoạt động trong doanh nghiệp và người chịu trách nhiệm quản lý,..
Sales budget: luôn là dự toán được ưu tiên lập đầu tiên
ROLES (OBJECTIVES) OF BUDGETING
- Compel planing - Establish a system of control
- Communicate ideas and plans - Provide a means of performance
- Coordinate activities evaluation
- Means of allocating resources - Motivate employees to improve their
- Authorisation performance
- Provide a framework for responsibility
accounting
STEPS IN THE BUDGET PREPARATION
1. Identifying the principal budget factor
- Principal budget factor: the budgeted factor which limits the activities of an organisation
18
- This factor is usually sales demand
- Principal budget factor may alternatively be machine capacity, distribution and selling
resources, the availability of key raw materials or the availability of cash
2. The order of budget preparation
- For the company that does not have any production resource limitations, the sequence for
budget preparation: Sales budget -> finished goods inventory budget -> production
budget -> materials usage budget
a. Sales budget:
Budgeted sales revenue = budgeted selling price * budgeted sales quantity
b. Production budget:
Budgeted production (unit) = budgeted sales + required closing inv – opening inv
(Units của các sản phẩm khác nhau không gom lại được với nhau)
c. Material budget:
Material usage budget (unit) = budgeted production*planned quantity of material used per
unit product
Material purchase budget (unit) = Material usage budget + closing inv – opening inv
 Budgeted material purchase (£) = Budgeted material purchase (unit) * rate (£)
Purchases = COS + Ending inv – Beginning inv = COS + Increase inv (- Decrease inv)
3. Preparing functional budgets
- Functional budgets: The budgets for the various functions of the business,
eg.production, marketing, sales, purchasing budgets.
- Functional/departmental budgets include budgets for sales, production, purchases,
labour and administration.
4. The link between budgeting and standard costing
Self-test câu4 WB/187:
Cassius Ltd manufactures two products, P and Q, from the same material, S.
A finished unit of product P contains three litres of material S and a finished unit of product
Q contains five litres. However, there is a high wastage rate of materials and 25% of the input
materials are lost in production.
The budgeted production volumes for next year are 6,000 units of P and 8,100 units of Q. At
the beginning of the year the company expects to have 20,000 litres of material S in inventory
but intends to reduce inventory levels to 5,000 litres by the end of the year.
The purchase cost of material S is £1.6 per litre.
Requirement: The purchases budget for material S is:
A. £63,000 B. £93,000 C. 100,800 D. 148,800

19
THE MASTER BUDGET
- Provides a consolidation of all the subsidiary budgets and normally consists of a
budgeted income statement, a budgeted balance sheet and a cash budget.
QB câu 4/41: When preparing the master budget, which of the following tasks would
normally be carried out first?
A. Calculate the overhead absorption rate
B. Establish the organisation’s long-term objectives
C. Identify the principal budget factor
D. Prepare the sales budget
Worked example WB/155:
A new business is to be started and details of budgeted transactions are as follows:
 Non-current assets will be purchased for £12,000. Depreciation will be charged on a
straight-line basis, assuming that the assets will have a useful life of five years after
which they will have no residual value.
 Month-end inventories will be maintained at a level sufficient to meet the forecast sales
for the following month.
 Forecast monthly sales are £4,000 for January to March, £5,000 for April to June ajnd
£6,000 per month for July onwards.
 The gross profit margin is budgeted to be 20% of sales value.
 Two months’ credit will be allowed to customers and one month’s credit will be
received from suppliers of inventory.
 Operating expenses (excluding depreciation) are budgeted to be £350 each month.
 The budgeted closing cash balance as at 30 June is £16,700.
Requirement: Use the information above to prepare a budgeted income statement for the six
months ended 30 June and a budgeted balance sheet at that date.

Budgeted income statement for six months ended 30 June

£ £
Revenue
Cost of sales
Gross profit
Operating expenses
Depreciation
Budgeted profit

20
Budgeted balance sheet as at 30 June
£ £
Non-current assets
Current assets
Inventories
Receivables
Cash
Current liabilities
Trade payables
Net current assets
Owner’s capital
QB câu 21/44: A retailing company budgets to maintain inventories at the end of each month
which are sufficient to meet the budgeted sales requirements for the following month. Two
months' credit will be received from suppliers of inventory.
Budgeted sales, which earn a gross profit margin of 20% of sales value, are as follows:
£
January 28,300
February 26,100
March 33,800
April 30,690
The budgeted balance sheet as at the end of March will show a payables balance of:
A. £47,920
B. £51,592
C. £59,900
D. £64,490

LINEAR RELATIONSHIPS: y = a + bx
- y : dependent variable
- x : independent variable
- a : constant, fixed amount
- b: constant, being the coefficient of x
For example: if there is a linear relationship between total costs and the level of activity,
y = total cost, x = level of activity, a = fixed cost and b = variable cost per unit
MEASURES OF CORRELATION

21
- The coeficient of correlation (r): the degree of correlation between two variables can be
measured. r has value between -1 (perfect negative correlation) and + 1 (perfect negative
correlation), if r = 0 then the variables are uncorrelated.
- The coefficient of determination (r2): is a measure of the proportion of the change in
one variable that can be explained by variations in the value of the other variable.
Câu32 QB/47: The correlation coefficient between two variables, x and y, is +0.72
Requirement: The proportion of variation in y that is explained by variation in x is (to two
decimal places)
A. 0.52 B. 0.72 C. 0.85 D. 1.44

HIGH-LOW METHOD
Worked example: The cost of operating the maintenance department of a computer
manufacturer, Bread and Butter Ltd, for the last four months have been as follows
Month Cost (£) Production volume (units)
1 110,000 7,000
2 115,000 8,000
3 111,000 7,700
4 97,000 6,000

22
Step 1: high? low? based on level of activity

Step 2: Calculate variable cost per unit (b)

Step 3: Substitute (b) into. Cost & volume to find (a)

Step 4: Rewrite the linear equation.

Câu 25 QB/45: A company has recorded the following costs over the last four months.
Month Cost (£) Production (units)
1 21,995 1,050
2 19,540 1,090
3 19,000 750
4 17,200 700
Requirement: Using the high-low method, the expected cost of producing 950 units is
A. £17,030
B. £18,700
C. £20,625
D. £23,343
TIMES SERIES ANALYSIS (PHÂN TÍCH CHUỖI DỮ KIỆN VỀ THỜI GIAN)
4 thành phần: 1. Trend
2. Seasonal variations (biến động trong ngắn hạn)
3. Cyclical variations (biến động trong trung hạn – dài hạn)
4. Random variations (biến động ngẫu nhiên)
DATA BIAS
- Selection bias: not selected randomly -> not representative of the population
- Self-selection: đi lấy dữ liệu từ các khảo sát có sẵn
- Observer bias: observing and recording results
- Omitted variable: biến được loại bỏ
- Cognitive: human perception and includes bias depending on how data is presented
- Confirmation: khi dữ liệu đạt mong muốn của họ -> họ có xu hướng tiếp nhận dữ liệu

23
- Survivorship (thành kiến sống sót): dữ liệu không còn tồn tại đến thời điểm kết thúc ->
loại bỏ
Câu67 QB/55: Monkie Ltd compared its advertising spend with its sales volumes for last
year. It incorrectly concluded that sales volumes are down because the advertising campaign
was poor and sacked the marketing director. It failed to account for the new competitor on the
market that has lower sales prices and higher-quality similar products.
Requirement: Which two types of bias could explain this ?

24
A. Self-selection B. Confirmation C. Survivorship D. Omitted variable

CHAPTER 7: WORKING CAPITAL

MỤC TIÊU:
- Long-term: maximise profit
- Short-term: có tính thanh khoản (liquidity) tốt
1. Net Working Capital = Current Assets – Current Liabilities
= Receivables + Inventory + Cash – Payables
Cost of sales
2. Inventory turnover ratio = (càng cao càng tốt)
( Average ) Inventory
(Rate of inventory turnover)
( Average ) Inventory
3. Inventory turnover period = * 365 (càng thấp càng tốt)
Cost of sales
( Average ) Receivables
4. Receivables collection period = * 365 (càng thấp càng tốt)
Annual sales revenue
(Thời gian bao lâu cần thiết để thu hồi khoản phải thu)
( Average ) Payables
5. Payables payment period = * 365 (càng cao càng tốt)
Annual purchases
Current Assets Receivables + Inventory +Cash
6. Current ratio = =
Current Liabilities Payables
(xác định khả năng thanh toán nợ ngắn hạn được thanh toán = tài sản ngắn hạn, càng cao
càng tốt, ưu tiên >1)
Current Assets−Inventory Receivables+Cash−Inventory
7. Quick ratio = =
Current Liabilities Payables
Notes:
- Các công thức có “nhân 365” cần sử dụng “linh hoạt”, nếu đề giả định dùng 360
ngày/năm -> “nhân 360”, còn nếu đề không nói gì -> dùng “nhân 365”
- Nếu opening inventory = closing inventory hoặc no inventories hoặc inventory levels
are constant
 Purchases = cost of sales
Self-test câu 10/225: A retailing company’s working capital consists of inventory, trade
receivables, cash and trade payables. All working capital balances were the same at the
beginning and the end of the year. The sales revenue for the year was 900,000
The financial ratios for the year include the following.
Current ratio 3.4:1
Rate of inventory turnover 15 times p.a.
Receivables collection period 73.0 days
Payables payment period 36.5 days
25
 Gross profit margin 20.0%
Requirement:
The closing cash balance was £
THE CASH OPERATION CYCLES
Average inventory of raw materials
8. Raw materials holding period = * 365
Annual usage
Average inventory of work ∈ progress
9. Average production period = * 365
Annual cost of sales
(Work-in-progress period)
Average inventory of finished goods
10. Average inventory-holding period = * 365
Annual cost of sales
(Finished goods in inventory)
 Length of cycle = Raw material holding period – Average payables payment period +
Average production period + Average inventory-holding period + Average receivables
collection period

Interactive question 3 QB/204:

Marlboro Ltd has the following estimated figures for the coming year:
Sales £3,600,000
Average receivables £306,000
Gross profit margin 25% on sales
Average inventories
Finished goods £200,000
Work in progress £350,000
Raw materials £150,000
Average payables £130,000
Inventory levels arre constant.
Raw materials represent 60% off total production cost.
Requirement: Complete the table to calculate the company’s cash operating cycle. Use the
space provided in the table for your workings.
Cost of sales = Days

Raw materials in inventory = ( )

Credit taken from suppliers =
WIP (Work-in-progress) in inventory =
Finished goods in inventory =

26
 Credit given to customers =
Number of days between payment and receipt
Overtrading: Thường là DN mới/start-up, DN phát triển quá nhanh, sức mua đối với DN
rất cao đồng thời tiêu thụ rất mạnh. Tuy nhiên, vì đây là DN mới/start-up, họ sẽ mua hàng
trả tiền liền nhưng bán ra lại cho KH nợ để thu hút KH nên dễ bị “hụt hơi” -> cần thận
trọng, nếu không sẽ dẫn đến mất lòng tin với KH và nhà CC
Solution to short-term liquidity problems:
- Reducing the inventory-holding period
- Reducing the production period
- Reducing customers’s credit period and tightening up on cash collection
- Extending the period of credit taken from suppliers

11. Economic order quantity system (EOQ) =

√ 2 cd
h
Trong đó: c = cost of placing one order
d = estimated usage of the inventory item over a particular period
h = cost of holding one unit of inventory for that period
Example WB/208: Material X cost £100 per kg. 2,000 kg are to be used per year, and
holding costs per kg per year are £5. Each order placed costs £200 in administration time
EOQ ?
Cash budgets:
Worked example WB/220:
Penny operates a retail business. Purchases are sold at cost plus 33 1/3%
Budgeted sales in month Labour cost in Expenses incurred in
(£) month (£) month (£)
January 40,000 3,000 4,000
February 60,000 3,000 6,000
March 160,000 5,000 7,000
April 120,000 4,000 7,000
(1) It is management policy to have sufficient inventory in hand at the end of each month to
meet half of next month’s sales demand.
(2) Suppliers for materials and expenses are paid in the month after the purchases are
made/expenses incurred. Labour is paid in full by the end of each month.
(3) Expenses include a monthly depreciation charge of £2,000.
(4) (1) 75% of sales are for cash
(2) 25% of sales are on one month’s credit.
27
(5) The company will buy equipment costing £18,000 for cash in February and will pay a
dividend of £20,000 in March. The opening cash balance at 1 February is £1,000.
Requirement: Prepare a cash budget for February and March
You should make an entry in every box in the cash budget. Enter a zero or a dash where
applicable. Do not leave any boxes blank

February (£) March (£)

Receipts
Receipts from cash sales
Receipts from credit sales
Payments
Payments to suppliers
Expenses
Labour
Equipment purchase
Dividend
Total payments
1. Short-term surplus:
- Pay suppliers early in return for settlement discount
- Increase receivables and inventories
- Invest short-term
2. Short-term deficit:
- Increase payables by delaying payments to suppliers
- Reduce receivables and inventories
- Arrage overdraft (thấu chi)
3. Long-term surplus:
- Invest long term
- Expand
- Diversity
- Replace non-current assets
- Increase dividends
- Buy back shares
4. Long-term deficit:
- Raise long-term finance
- Consider divestment
28
- Consider selling non-current assets
- Plan a controlled shutdown

29
 CHAPTER 8: PERFORMANCE MANAGEMENT
1. Feedback control:

- Step 1: Plans and targets are set for the future

- Step 2: Plans are put into operation
- Step 3: Actual results are recorded and analysed
- Step 4: Information about actual results is fed back
- Step 5: The feedback is used by management to compare
- Step 6: By comparing actual and planned results
 Take control action: identifying what has gone wrong, finding out why, corrective measures
 Decide to do nothing: actual result are going better than planned
 Alter the plan or target: actual results are different from plan or target
2. Style of evaluation:
- Buget constrained: short-term, dựa vào những con số để đánh giá tốt hay không
- Profit conscious: long-term, is evaluated on the basis of ability
- Non-accounting: mang tính chất chủ quan nhiều hơn, dựa vào những yếu tố xung quanh (nghiêng về
yếu tố con người nhiều hơn)
Buget constrained Profit conscious Non-accounting
Involvement with costs High High Low
Job related tension High Medium Medium
Manipulation of the accounting
Extensive Little Little
reports (bias)
Relation with supervisor Poor Good Good
Relation with colleagues Poor Good Good

30
3. Budget bias:
1) Understate revenue / Overstate costs -> “budget slack” : giảm gtrị dthu, tăng cp
2) Overstate revenue / Understate costs -> muốn gây ấn tượng cho BGĐ, tăng dthu, giảm cp
4. 4 mains types of responsibility centre:
- Cost centre weakest
- Revenue centre form
- Profit centre -> stronger form
- Investment centre -> strongest form
5. Investment centres: có quyền lực cao nhất. Vd: BOD
- Những yếu tố trong cost centre, revenue centre, profit centre có thể được áp dụng trong investment
centre. Không có chiều ngược lại.
Interactive question 1/239 sách: Controllable investment in division
The manager of division D has complete autonomy regarding the purchase and use of non-current assets and
inventory but the payment of all suppliers is undertaken by head office which maintains a central bank
account. The manager also has authority to establish the division’s own credit policy with regard to its
customers. The division operates a credit control department but all cash received from customers is remitted
immediately to head office.
Classify the following assets and liabilities to indicate whether or not they are a part of the divisional
investment that is within the control of the manager of division D
Items Part/Not part of controllable divisional investment
Non-current assets
Trade receivables
Trade payables
Inventory
6. Return on investment (ROI):
ROI = (Controllable divisional profit/Divisional capital employed) * 100%
= (Profit/Investment) *100%
= (Profit/Average operating assets)*100%
Worked example/247: ROI and goal congruence
Target ROI (= cost of capital) = 20%
Divisional profit = £300,000
Capital employed = £1m

31
Requirement: Would the division manager accept a project requiring capital of £100,000 and generating
profits of £25,000, if the manager were paid a bonus based on ROI?
ROI without project = (300,000/1m)*100% = 30%
ROI of project = (25,000/100,000)*100% = 25%
ROI with project = (325,000/1,100,000)*100% = 29.5%
=> Although the ROI of project would be acceptable to the company (25%>20%), but ROI with project < ROI
without project so the manager will not accept it
Câu 13QB/69: On the last day of the financial year a division has net assets with a total carrying amount of
£300,000. The return on investment for the division is 18%.
The division manager is considering selling a non-current asset immediately prior to the year end. The non-
current asset has a carrying amount of £15,000 and will sell for a profit of £5,000.
Requirement: What would be the division’s ROI immediately after the sale of the asset at the end of the year?
A. 17.7%
B. 19.3%
C. 20.3%
D. 20.7%
7. Residual income (RI):
RI = Profit – imputed interest cost of investment
= Profit – (investment*notional interest or cost of capital)
= Profit – Imputed interest charge
= Profit – [Capital employed x Minimum required rate of return]
= Profit – [Average Operating Assets x Minimum required rate of return]
=Profit – [Investment x Minimum required rate of return]
Interactive question 2/248: ROI và RI
An investment centre with capital employed of £570,000 is budgeted to earn a profit of £119,700 next
year. A proposed non-current asset investment of £50,000, not included in the budget at present, will earn a
profit next year of £8,500 after depreciation. The company’s cost of capital is 15%.
Requirement: Complete the boxes to show the budgeted ROI and RI for next year, both with and without
the investment.
ROI RI
Without investment
With investment

32
8. Preparation of flexible budgets:
- Step 1: determination of cost behaviour patterns
 Fixed costs remain constant as activity levels change
 If the cost is variable cost, the cost per unit will remain constant
 If the cost is semi-variable cost, the unit rate will reduce as activity levels increase
- Step 2: Calculate the budget cost allowance
Budget cost allowance = Budgeted fixed cost + (Number of units*Variable cost per unit)
= Fixed cost + variable cost + semi-variable cost
Interactive question 4/254: Analaysing semi-variable costs
One method for splitting semi-variable costs is the high/low method, which we covered in Chapter 6. Attempt
the following question to make sure you remember how to do this.
Units of output produced Cost of factory power (£)
20X1 7,900 38,700
20X2 7,700 38,100
20X3 9,800 44,400
20X4 9,100 42,300
Budgeted production for 20X5 is 10,200 units
Ignoring inflation, the cost of factory power which will be incurred is estimated to be £ ?
9. Flexible budgets and control:
(F): Favourable variance  higher profit (actual profit > budgeted profit)
 higher sales (actual sales > budgeted sales)
 lower cost (actual cost < budgeted cost)
(A): Adverse variance / (U): Unfavourable variance
 lower profit (actual profit < budgeted profit)
 lower sales (actual sales < budgeted sales)
 higher cost (actual cost > budgeted cost)
Lưu ý: Nếu tính ra con số mà không xác định được F hay A  vô nghĩa
Interactive question 5/258: Budget cost allowances
WL Co manufactures and sells a single product, R. Since the R is highly perishable, no inventories are held at
any time. WL Co’s management uses a flexible budgeting system to control costs. Extracts from the flexible
budget are as follows.
Budget cost allowances £ £
Output and sales (units) 4,000 5,500
33
 Direct material 16,000 22,000
Direct labour 20,000 24,500
Variable production overhead 8,000 11,000
Fixed production overhead 11,000 11,000
Selling and distribution overhead 8,000 9,500
Administration overhead 7,000 7,000
Total expenditure 70,000 85,000
Production and sales of product R amounted to 5,100 units during period 5.
Requirement: The total budget cost allowances in the flexible budget for period 5 will be:
(1) Direct material = ?
(2) Direct labour = ?
(3) Variable production overhead = ?
(4) Fixed production overhead = ?
(5) Selling and distribution overhead = ?
(6) Administration overhead = ?
(7) Production and sales of product R in period 6 amounted to 5,500 units. Budgeted output for the period was
4,000 units. Actual total expenditure was £82,400.
(a) The total expenditure variance for period 6 was ?
(b) The volume variance for period 6 was ?
Câu 18QB/70: A company manufactures a single product and has drawn up the following flexed budget for
the year.
60% (£) 70% (£) 80% (£)
Variable materials 120,000 140,000 160,000
Variable labour 90,000 105,000 120,000
Production overhead 54,000 58,000 62,000
Other overhead 40,000 40,000 40,000
Total cost 304,000 343,000 382,000
What would be the total cost in a budget that is flexed at the 77% level of activity?
A. £330,300
B. £370,300
C. £373,300
D. £377,300
34
Câu 22QB/71: Information concerning three divisions of Haughton plc is shown below.
Division Capital invested Return on investment
P £1,100,000 12%
Q £1,200,000 13%
R £1,500,000 14%
Select the percentage that is the highest rate for the imputed cost of capital that would produce the same
ranking for these three divisions using residual income instead of return on investment.
A. 11.9%
B. 13.9%
C. 17.9%
D. 23.9%
BT: A division has a residual income of £480,000 and a net profit before imputed interest of £1,280,000. If it
uses a rate of 10% for computing imputed interest on its invested capital, what is its return on investment?
A. 10%
B. 22%
C. 6%
D. 16%
CHAPTER 9: STANDARD COSTING AND VARIANCE ANALYSIS
1. COST VARIANCES:
- Standard cost -> AQ: purchase quantity
- Actual cost (eg: FIFO,..) -> AQ: material quantity used
a. Material variances:
- Price variance – Biến động giá = (AP – SP)*AQ
- Usage variance – Biến động lượng = (AQ – SQ*)*SP
*AP - Actual price - đơn giá NVLtt thực tế
*SP - Standard price - đơn giá NVLtt định mức
*AQ - Actual quantity - Số lượng NVLtt thực tế
*SQ* - Standard quantity of input allowed for actual level of output (số lượng NVLtt định mức dùng để
sản xuất tổng số lượng sản phẩm thực tế)
Worked example/282: Material variances
Product X has a standard material cost as follows
10 kilograms of material Y at £10 per kilogram = £100 per unit of X
35
During period 4, 1,000 units of X were manufactured, using 11,700 kilograms of material Y which cost
£98,631.
Requirement: Calculate the following variances
(a) The material total variance ?

(b) The material price variance ?

(c) The material usage variance ?

b. Labour variances:
- Labour rate variance – Biến động đơn giá = (AR – SR)*AH
- Labour efficiency variance – Biến động năng suất = (AH – SH*)*SR
*AR - Actual Rate - đơn giá lao động trực tiếp thực tế
*SR - Standard rate - đơn giá lao động trực tiếp định mức
*AH - Actual hours - Số giờ lao động trực tiếp thực tế
*SH* - Standard hours of input allowed for actual level of output (Số lượng giờ lao động định mức dùng
để sản xuất tổng số lượng sản phẩm thực tế)
Worked example/286: Labour variances
The standard labour cost of product X is as follows.
2 hours of grade Z labour at £10 per hour = £20 per unit of product X.
During period 4, 1,000 units of product X were made, and the labour cost of grade Z labour was £17,825 for
2,300 hours of work.
Requirement: Calculate the following variances.
(a) The labour total variance ?

(b) The labour rate variance ?

(c) The labour efficiency variance ?

Câu 12QB/76: During a period, 17,500 labour hours were worked at a standard cost of £6.50 per hour. The
labour efficiency variance was £7,800 favourable.
A. 1,200
B. 16,300
36
 C. 17,500
D. 18,700
c. Variable production overhead variances:
- Variable overhead expenditure/spending variance – Biến động chi tiêu = (AR –SR) x AH
Variable overhead efficiency variance – Biến động năng suất = (AH-SH) x SR
* AR - Actual Rate - đơn giá phân bổ thực tế
*SR - Standard rate - đơn giá lao động trực tiếp định mức
* AH - Actual hours - Số giờ lao động trực tiếp thực tế hoặc số giờ máy thực tế
* SH – Standard hours - standard quantity of the variable overhead cost-allocation base allowed for the
actual output (Số lượng giờ lao động (hoặc giờ máy) định mức dùng để sản xuất tổng số lượng sản phẩm
thực tế)
Worked example/287: Variable overhead variances
Suppose that the variable overhead cost of product X is as follows:
2 hours at £1.50 = £3 per unit
During the latest period, 400 units of product X were made. The labour force worked 760 hours. The variable
overhead cost was £1,672.
Requirement: Calculate the following variances.
(a) The variable overhead total variance ?

(b) The variable overhead expenditure variance ?

(c) The variable overhead efficiency variance ?

d. Fixed overhead expenditure variances

= Budgeted fixed overhead cost – Actual fixed overhead cost
2. SALES VARIANCES:
Price variance – Biến động giá = (AP – SP)*AQ
Usage variance – Biến động lượng = (AQ – BQ)*SC
*AP - Actual price - đơn giá thực tế
*SP - Standard price - đơn giá định mức
*AQ - Actual quantity - Số lượng thực tế
*BQ: Budgeted quantity
*SC: Standard contribution (per unit) = selling price – variable cost
37
Example/290: A company budgets to sell 8,000 units of product J for £12 per unit. The standard variable cost
per unit is £7. Actual sales were 7,700 units, at a price of £12.50 per unit.
Calculate sales variance?

Câu 9 Self-test/301: The following sales data are available for product P for the last period.
Budget Actual
Sales revenue £69,000 £79,530
Sales volume (units) 4,600 4,820
Requirement: The sales price variance for the period was:
A. £3,300 (F)
B. £6,900 (F)
C. £7,230 (F)
D. £10,530 (F)
Câu 4 Self-test/300: A firm incurred a total adverse labour variance of £750. The standard pay rate was £7.50
per hour while the actual pay rate was £8 per hour. The labour rate variance was £2,250. What are the flexed
budgeted hours for labour?
E. 4,300 hours
F. 4,500 hours
G. 4,600 hours
H. 4,700 hours
Câu 4,5QB/75: Telgar plc uses a standard costing system, with its material inventory account being
maintained at standard cost. The following details have been extracted from the standard cost card in respect
of materials
8 kg @ £0.80/kg = £6.40 per unit
Budgeted production in April was 850 units.
The following details relate to actual materials purchased and issued to production during April when actual
production was 870 units.
Materials purchased 8,200 kg costing £6,888
Materials issued to production 7,150kg
4. The material price variance for April was:
A. £286 adverse
B. £286 favourable
38
C. £328 adverse
D. £328 favourable
5. The material usage variance for April was:
A. £152 favourable
B. £152 adverse
C. £159.60 adverse
D. £280 adverse
CHAPTER 10: BREAKEVEN ANALYSIS AND LIMITING FACTOR ANALYSIS
1. Contribution (Contribution Margin_CM)
a. CM = TR (Total Revenue) – TV (Total Variable cost)
b. CM – F (fixed cost) = Pr (Profit) => CM = F + Pr
c. CM = CM unit * Q = (p-v) * Q (p: selling price p, v: variable cost per unit)
2. Contribution ratio: (Contribution Margin percentage)
CM% = CM/TR = CMunit / p = 1 – (TV/TR) = 1 – (v/p)
Interactive question 1: Contribution ratio
The contribution ratio of product W is 20%. IB, the manufacturer of product W, wishes to make a contribution
of £50,000 towards fixed costs.
If the selling price is £10 per unit, the number of units of W that must be sold is ?

3. Breakeven point (BVP): Điểm hòa vốn, khi Pr = 0  CM = F  CMunit * Q = F

- BVP in units ? => QBEP = F/CMunit = F/(p-v) = BEP in dollar/p
- BVP in dollar or revenue ? => TRBEP = QBEP * p
=> TRBEP = F / CM%
Worked example: Breakeven point
Expected sales 10,000 units at £8 = £80,000
Variable cost £5 per unit
Fixed costs £21,000
Requirement: Compute the breakeven point.

4. Margin of safety (MS):

- MS in units = Budgeted or Actual sales volume - QBEP
- MS in dollar or revenue = Budgeted or Actual sales revenue - TRBEP
- MS% = MS in units / Budgeted or Actual sales volume
39
 = MS in dollar or revenue / Budgeted or Actual sales revenue
Worked example: Margin of safety
Mal de Mer Co makes and sells a product which has a variable cost of £30 and which sells for £40. Budgeted
fixed costs are £70,000 and budgeted sales are 8,000 units.
Requirement: Calculate the breakeven point and the margin of safety.

5. Target Profit (Prtarget): LN trước thuế

- Qtarget = (F + Prtarget) / CMunit
- TRtarget = Qtarget * p
= (F + Prtarget) / CM%
Interactive question 2: Target profits
SLB Limited wishes to sell 14,000 units of its product, which has a variable cost of £15 to make and sell.
Fixed costs are £47,000 and the required profit is £23,000.
The required sales price per unit is £ ?

BT: (Nên tóm tắt trước khi làm)

Company C makes a product which has a variable cost of $0.15 per unit and the current sales price is $0.25
per unit. Fixed costs are $2,600 per month and the annual profit for the company at the current sales volume is
$36,000. The sales manager wishes to raise the sales price to $0.29 per cake, but considers that a price rise
will results in some loss of sales.
Ascertain the volume of sales required each month to maintain current profitability, if the selling price is
raised to $0.29 ?

BT: (Nên tóm tắt trước khi làm)

Company D has variable costs of $8 and a variable selling cost of $2 per unit. Fixed costs are $40,000 per
annum; the sales price is $18 per units; and the current volume of output and sales is 6,000 units. The
company is considering whether to hire an improved machine for production. Annual hire costs would be
$10,000 and it is expected that the variable cost of production would fall to $6 per unit. Requirements:
a/ Determine the number of units that must be produced and sold to achieve the same profit as is currently
earned, if the machine is hired.
b/ Calculate the annual profit with sales remain at 6,000 units per annum.

6. Limiting factor analysis:

40
 - Limiting factor (key factor): Anything that limits the activity of a business
Type 1: Simple version
Work example/317: Limiting factor
AB Ltd makes two products, the Ay and the Be. Unit variable costs are as follows
Ay (£) Be (£)
Materials 1 3
Labour (£9 per hour) 18 9
Overhead 1 1
Total 20 13
The sales price per unit is £26 per Ay and £17 per Be. During July 20X2 the available labour is limited to
8,000 hours. Sales demand in July is expected to be 3,000 units for Ays and 5,000 units for Bes.
Requirment: Determine the profit-maximising production mix, assuming that monthly fixed costs are
£20,000, and that no inventories are held.
Steps (limiting factor):
Step 1: Confirm limiting factors
A B Total
Sales demand 3,000 units 5,000 units
Labor hour required 2 hrs (18/9) 1 hrs
per unit
Labor hours required 6,000 hrs 5,000 hrs 11,000hrs
Labor hours available 8,000 hrs
Labor hours shortfall 3,000 hrs
 Labor (labor hour) is the limiting factor
Step 2: Calculate contribution per unit (CMunit) for each product
Step 3: Calculate contribution per limiting factor
Step 4: Rank
A B
CMunit $6/unit (26-20) $4/unit
Labor hour per unit 2 hrs 1 hrs
Contribution per limiting $3/hour $4/hour
factor
RANK 2nd 1st

41
Step 5: allocate and determine the optimal production plan
Product Rank Sales Hours Hours Production CM
demand required Available unit
B 1st 5,000 5,000h 5,000 h 5,000 units $20,000
units
A 2nd 3,000 6,000h 3,000 h 1,500 units $9,000
units (8,000-5,000) (26-20)*1,500
Total 8,000 h $29,000
Less: $20,000
fixed cost
Profit $9,000

3,000 units -> 6,000h

? -> 3,000h
Product
Sales demand 20,000 units
Labor hours required 9h/unit
per unit
Labor hours required 180,000 hours
Labor hours available 190,000 hours
Labor hours shortfall No shortfall
 Labor is Not a limiting factor
Product
Sales demand 20,000 units
Material required per 4kg
unit
Total material 80,000 kg
required
Material available 75,000 kg
Material shortfall 5,000 kg
 Material is a limiting factor
Type 2: extra supply of limiting factor
Worked example/318:
42
 HMF Ltd makes three products, the X1, Y2 and the Z3. Materials are expected to be in short supply in May
and the budget for May is as follows:
X1 Y2 Z3
Maximum demand (units) 10,000 12,000 8,000
Optimim planned production (units) 7,000 12,000
Contribution (per unit) £15 £20 £10
Material cost per unit (@£3 per kg) £9 £6 £7.5
The planned production is based on optimising the use of the current supply of materials at £3 per kg. A
new supplier has offered to supply an additional 25,000 kg of material
Requirment: Calculate the maximum total price that HMF Ltd should pay for the extra 25,000kg of
materials
Step 1: Identify the priority of ranking of products
1st: Y2; 2nd: X1, 3rd: Z3
Step 2: having production plan with extra supply of material
Extra supply of material: 25,000 kg
Product Rank Demands Kg required Kg available Production
units
X1 2nd 3,000 9,000 kg 9,000 kg 3,000 units
Z3 3rd 8,000 20,000 kg 16,000 kg 6,400 units
Total 25,000 kg

Step 3: Determine price of extra supply of limiting factor

Product Production CMunit CM
units
X1 3,000 units 15 45,000
Z3 6,400 units 10 64,000
Total 109,000
Adding back the cost of 75,000
the old material
Maximum price of extra 184,000
supply
Type 3: Limiting factor analysis and restrict freedom of action
Worked example/320WB:
43
Harvey is currently preparing its budget for the year ending 30 September 20X2. The company manufactures
and sells three products, Beta, Delta and Gamma.
The unit selling price and cost structure of each product is budgeted as follows.
Beta (£) Delta (£) Gamma (£)
Selling price 100 124 32
Variable costs:
Labour 24 48 6
Materials 26 7 8
Overhead 10 5 6
Toal variable costs 60 60 20
The labour rate is budgeted at £6 per hour, and fixed costs at £1,300,000 per annum. The company has a
maximum production capacity of 228,000 labour hours.
A meeting of the board of directors has been convened to discuss the budget and to resolve the problem as to
the quantity of each product which should be made and sold. The sales director presented the results of a
recent market survey which reveals that market demand for the company’s products will be as follows.
Product Units
Beta 24,000
Delta 12,000
Gamma 60,000
The production director proposes that since Gamma only contributes £12 per unit, the product should no
longer be produced, and the surplus capacity transferred to produce additional quantities of Beta and Delta.
The sales director does not agree with the proposal. Gamma is considered necessary to complement the
product range and to maintain customer goodwill. If Gamma is not offered, the sales director believes that
sales of Beta and Delta will be seriously affected. After further discussion the board decided that a minimum
of 10,000 units of each product should be produced. The remaining production capacity would then be
allocated so as to achieve the maximum profit possible.
Requirment: Prepare a budget statement which clearly shows the maximum profit which could be
achieved in the year ending 30 September 20X2.
Step 1: Confirm limiting factors
Beta Delta Gamma Total
Sales demand 24,000 units 12,000 units 60,000 units
Labor hour 4 hrs 8 hrs 1 hr
required per unit
44
 Labor hours 96,000 hrs 96,000 hrs 60,000 hrs 252,000 hrs
required
Labor hours 228,000 hrs
available
Labor hours 24,000 hrs
shortfall
 Labor hour is limiting factor
Step 2: Calculate contribution per unit (CMunit) for each product
Step 3: Calculate contribution per limiting factor
Step 4: Rank
Beta Delta Gamma
CMunit $40/unit $64/unit $12/unit
Labor hour per unit 4 hrs 8 hrs 1 hr
Contribution per $10/hour $8/h $12/hour
limiting factor
RANK 2nd 3rd 1st
Step 5: execute the required action
Required making 10,000 units for each product
Beta Delta Gamma Total
Production units 10,000 units 10,000 units 10,000 units
Labor hour per unit 4 hrs 8 hrs 1 hr
Labor hours used 40,000 hrs 80,000 hrs 10,000 hrs 130,000 hrs
Labor hours 98,000 hrs
available after
taking the action

Step 6: allocate and determine the optimal production plan with remaining available limiting factor
Product Rank Sales Hours Hours Production
demand required Available unit
Gamma 1st 50,000 50,000h 50,000 h 50,000
units units
Beta 2nd 14,000 56,000h 48,000 h 12,000
units units
45
 Total 98,000 h

CM = CM(Gamma) + CM (Beta) + CM (Delta) = (60,000 x 12) + (22,000 x 40) + (10,000 x 64) = $

2,240,000
Pr = CM – F = 2,240,000 – 1,300,000 = $ 940,000
TYPE 4: Make or Buy Decision
Worked example/322WB:
MM manufactures three components, S, A and T using the same machines for each and assembles them into a
single product. The budget for the next year calls for the production and assembly of 4,000 of each
component. The variable production cost per unit of the final product is as follows.
Machine hours Variable cost (£)
1 unit of S 3 20
1 unit of A 2 36
1 unit of T 4 24
Assembly 100
Only 24,000 hours of machine time will be available during the year, and a subcontractor has quoted the
following unit prices for supplying components: S £29; A £40; T £34.
Requirement: Advise MM on its most profitable plan
Step 1: Confirm limiting factors
S A T Total
Demand 4,000 units 4,000 units 4,000 units
Machine hour 3 hrs 2 hrs 4 hrs
required per unit
Machine hours 12,000 hrs 8,000 hrs 16,000hrs 36,000 hrs
required
Machine hours 24,000 hrs
available
Machine hours 12, 000 hrs
shortfall
 Machine hour is the limiting factor
Step 2: Calculate cost saving per unit by making internally
Step 3: Savings per limiting factor
Step 4: Rank
46
 S A T
Variable cost of making $20 $36 $24
Variable cost of buying $29 $40 $34
cost saving per unit by $9 $4 $10
making
Machine hours 3 hrs 2 hrs 4 hrs
required per unit
Savings per limiting $3 $2 $2.5
factor
RANK 1 3 2
Step 5: Make and buy plan
MAKE PLAN
Machine hours Number of Variable cost of
units making
S 12,000 h 4,000 $80,000
T 12,000 h 3,000 $72,000
Total 24,000 152,000

BUY PLAN
Number of Variable cost of
units buying
T 1,000 $34,000
A 4,000 $160,000
Total $194,000

Total variable cost: $152,000 + $194,000 = $346,000

Interactive Q5/276WB:
POV Ltd manufactures three products – X, Y and Z – that use the same machines. The budgeted income
statements for the three products are as follows.
X (£’000) Y (£’000) Z(
Sales 1,000 1,125 625
Variable material and labour costs (500) (563) (438)
47
 Variable overheads (250) (187) (62)
Fixed overheads (200) (315) (130)
Profit/(loss) 50 60 (5)
Annual sales demand (units) 5,000 7,500 2,500
Machine hours per unit 20 21 26
However, after the budget had been formulated, an unforeseen condition has meant that during the next period
the available machine capacity has been limited to 296,500 hours.
(a) The shortfall in available machine hours for next period is …………… hours
(b) The contribution earned per machine hour used on product X is £ ……………
The contribution earned per machine hour used on product Y is £ ……………
The contribution earned per machine hour used on product Z is £ ……………
(c) The number of units of each product that should be manufactured next period is:
(i) Product X…………… units
(ii) Product Y …………… units
(iii) Product Z …………… units

Step 1: Confirm limiting factors

X Y Z Total
Demand 5,000 units 7,500 units 2,500 units
Machine hour 20h 21h 26h
required per unit
Machine hours 100,000 hrs 157,500 hrs 65,000 hrs 322,500h
required
Machine hours 296,500h
available
Machine hours 26,000h
shortfall
 Machine hour is limiting factor
Step 2: Calculate contribution per unit (CMunit) for each product
Step 3: Calculate contribution per limiting factor
Step 4: Rank
X Y Z
Sale price per unit 200 150 250
48
 Variable cost per unit 150 100 200
CMunit $50/unit $50/unit $50/unit
Machine hour per unit 20h 21h 26h
Contribution per $2.5/hour $2.38/hour $1.92/hour
limiting factor
RANK 1st 2nd 3rd
Step 5: Production plan
Product Rank Sales Hours Hours Production
demand required Available unit
X 1st 5,000 100,000h 100,000h 5,000 units
Y 2nd 7,500 157,500h 157,500h 7,500 units
Z 3rd 2,500 65,000h 39,000h 1,500 units
Total 296,500

Interactive question 6/323WB:

TW manufactures two products, the D and the E, using the same material for each. Annual demand for the D
is 9,000 units, while demand for the E is 12,000 units. The variable production cost per unit of the D is £10,
and that of the E £15. The D requires 3.5 kgs of raw material per unit, the E requires 8 kgs of raw material per
unit. Supply of raw material will be limited to 87,500 kgs during the year.
A sub contractor has quoted prices of £17 per unit for the D and £25 per unit for the E to supply the product.
How many of each product should TW manufacture in order to maximise profits?
Requirement: TW should manufacture ? units of D and ? units of E to maximise profits

49
 CHƯƠNG 11: INVESTMENT APPRAISAL TECHNIQUES
1. The investment decision-making process
A typical model for investment decision making has a number of distinct stages.
- Origination of proposals
- Project screening -> use payback method
- Analysis and acceptance
- Monitoring and review
2. The payback period: (xác định thời gian hoàn vốn)
- The time required for the cash inflows from a capital investment project to equal the initial cash
outflow(s) (Tgian cần thiết cho dòng tiền nhận được bằng với khoản tiền đầu tiên ban đầu)
- When payback is calculated, we use profits before depreciation in the calculation
Project P (£) Project Q (£)
Capital cost of assets 60,000 60,000
(~ Initial investment)
Profit before depreciation
Year 1 20,000 50,000
Year 2 30,000 20,000
Year 3 40,000 5,000
Year 4 50,000 5,000
Year 5 60,000 5,000
 Q hoàn vốn nhanh hơn nhưng P thu về nhiều tiền hơn  đây là nhược điểm của payback period method
- Residual value: giá trị còn lại
Worked example/336WB:
An asset costing £120,000 is to be depreciated over ten years to a nil residual value. Profits after
depreciation for the first five years are as follows.
Year £
1 12,000
2 17,000
3 28,000
4 37,000
5 8,000
Requirement: Calculate the payback period to the nearest month.
Year Profit after dep Depreciation Cash flow Cumulative CF
50
 0 (120,000) 0 (120,000) (120,000)
1 12,000 12,000 24,000 (96,000)
2 17,000 12,000 29,000 (67,000)
3 28,000 12,000 40,000 (27,000)
4 37,000 12,000 49,000 22,000
5 8,000 12,000 20,000 42,000
Payback period = 3 years + ((27,000/49,000)*12) = 3years 7 months
Self-test câu 4/361: £50,000 is to be spent on a machine having a life of five years and a residual value of
£5,000. Operating cash inflows will be the same each year, except for year 1 when the figure will be
£6,000. The accounting rate of return on the initial investment has been calculated at 30% pa.
What is the payback period?
A 2.75 years
B 2.55 years
C 2.54 years
D 2.33 years
ARR = (Average profit after depreciation/initial investment)*100% = 30%
=> Average profit after depreciation = 15,000
=> profit after depreciation 5 years = 15,000*5 = 75,000
Profit before dep = Profit after dep + Dep = 75,000+(50,000-5,000) = 120,000
Cash inflow year 2 to year 5 = 120,000 – 6,000 = 114,000
Cash inflow each year = 114,000/4 = 28,500
Year Cash inflow Cumulative CF
0 (50,000) (50,000)
1 6,000 (44,000)
2 28,500 (15,500)
3 28,500 13,000
4 28,500 44,500
5 28,500 70,000
Payback period = 2 years + (15,500/28,500) = 2.54years
3. The accounting rate of return method: (ARR method)
 Đây là PP duy nhất sử dụng profit after depreciation
There are two different ways of calculating the ARR

51
- The average investment is calculated as ½ x (initial investment + final or scrap value).
 Rate of return càng cao càng tốt
Worked example/338:
A project involves the immediate purchase of plant at a cost of £110,000. It would generate annual profits
before depreciation of £24,000 for five years. Scrap value will be £10,000 at the end of the fifth year.
Requirement: Calculate the ARR using the initial and average investment.
Depreciation 5 years = 110,000 – 10,000 = 100,000
Profit before depreciation 5 years= 24,000*5 = 120,000
Profit after depreciation 1 year = (120,000 – 100,000)/5 = 4,000
ARR using intial investment = (4,000/110,000) * 100% = 3.6%
Average investment = (110,000+10,000)/2 = 60,000
ARR using average investment = (4,000/60,000)*100% = 6.67%
Interactive question 1/339:
Arrow wants to buy a new item of equipment. Two models of equipment are available, one with a slightly
higher capacity and greater reliability than the other. The expected costs and profits of each item are as
follows.
Equipment item X Equipment item Y
Capital cost £100,000 £175,000
Life 5 years 5 years
Profits before depreciation
Year 1 £50,000 £50,000
Year 2 £50,000 £50,000
Year 3 £30,000 £60,000
Year 4 £20,000 £60,000
Year 5 £10,000 £60,000
Disposal value for equipment £20,000 £25,000
52
 ARR is measured as the average annual profits divided by the average investment
Fill in the boxes below to determine which equipment item should be purchased, if the company’s target
ARR is 25%.
Item X (£) Item Y (£)
Total profit over life of equipment x x
Before depreciation 160,000 280,000
After depreciation (160,000-(100,000-20,000)) = (280,000-(175,000-25,000)) =
80,000 130,000
Average annual accounting profit 16,000 (80,000/5) 26,000 (130,000/5)
Average investment 60,000 [(100,000+20,000)/2] 100,000 [(175,000+25,000)/2]
ARR, based on average investment 26.67% 26%
 ARR X > ARR Y => chọn ARR X
The equipment that should be purchased is item ?

4. The net present value method:

Compounding: Calculating the terminal value (=future value): tích lũy, tiếp tục sinh lời từ lãi suất
trước đó
- V = X*(1+r)n (Trong đó: V: future value/terminal value, X: present value, r: compound rate of return)
Worked example/341: Terminal value
What is the terminal value of £200 invested today at an interest rate of 7% per annum in ten years’ time?
TV = 200* (1+7%)10 = £393.43
Discounting formula
- X = V/(1+r)n (Trong đó: X: present value, V: Future value)
Discount factor = 1/(1+r)n
Interactive question 3: Present value calculation
Spender expects the cash inflow from an investment to be £40,000 after two years and another £30,000
after three years. Its target rate of return is 12%.
Requirement: Use the table below to calculate the present value of these future returns
Year Cash flow (£) Multiplied by 12% discount factor Present value PV (£)
2 40,000 1/(1+12%)2 = 0.797 31,880
3 30,000 1/(1+12%)3 = 0.712 21,360
Total PV 53,240
53
5. Net present value (NPV):
NPV = present value of cash inflows less present value of cash outflows
- NPV > 0  project should be undertaken
- NPV < 0  project should not be undertaken
- NPV = 0  project will have a neutral impact on shareholder wealth and therefore would not be
worth undertaking because of the inherent risks in any project
Worked example/343: NPV
Slogger has a cost of capital of 15% and is considering a capital investment project, where the estimated
cash flows are as follows.
Year Cash flow (£)
0 (ie now) (100,000)
1 60,000
2 80,000
3 40,000
4 30,000
Requirement: Calculate the NPV of the project, and assess whether it should be undertaken.
Year CF Discount factor 15% PV
0 (100,000) 1/(1+15%)0 = 1 (100,000)
1 60,000 1/(1+15%)1 = 0.87 52,200
2 80,000 1/(1+15%)2 = 0.756 60,480
3 40,000 1/(1+15%)3 = 0.658 26,320
4 30,000 1/(1+15%)4 = 0.572 17,160
Total NPV 56,160

Notes:
- The discount factor for any cash flow ‘now’ (time 0) is always 1, whatever the cost of capital.
- A cash flow which occurs during the course of a time period is assumed to occur all at once at the end
of the time period (at the end of the year)
- A cash flow which occurs at the beginning of a time period is taken to occur at the end of the previous
time period
QB câu 10/362: An investment of £100,000 now is expected to generate equal annual cash flows to
perpetuity of £15,000 pa, commencing in five years’ time.
If the discount rate is 10% pa, what is the net present value of the investment (to the nearest £10)?
54
 A. – £15,330
B. – £6,860
C. + £2,450
D. + £50,000

ANNUITY:
PV = cash flow * annuity factor
 Annuity factor = 1/r * [1 – 1/(1+r)n]
NET TERMINAL VALUE (NTV) is the cash surplus remaining at the end of a project after taking
account of interest and capital repayments.
The NTV discounted at the cost of capital will give the NPV of the project.
NTV = TV of inflows – TV of outflows
= Future value of NPV = NPV * (1+r)n
Worked example/345: The net terminal value
A project has the following cash flows
Year £
0 (5,000)
1 3,000
2 2,600
3 6,200
The project has an NPV of £4,531 at the company’s cost of capital of 10% (workings not shown).
Requirement: Calculate the net terminal value of the project.
NTV = NPV*(1+r)n = 4,531*(1+10%)3 = 6,030.76
Interactive question 3/346: Non-standard discount factors
A project has the following cash flows
Year £
0 (280,000)
1 149,000
2 128,000
3 84,000
4 70,000
Requirement: Using two decimal places in all discount factors, complete the following table to calculate the
net present value of the project at a cost of capital of 16.5%
55
Year Cash flow (£) 16.5% discount factor Present value PV (£)
0 (280,000) 1 (280,000)
1 149,000 0.86 128,140
2 128,000 0.74 94,720
3 84,000 0.63 52,920
4 70,000 0.54 37,800
Net PV 33,580
DISCOUNTED PAYBACK:
- The payback method can be combined with DCF to calculate a discounted payback period.
- The discounted payback period (DPP) is the time it will take before a project’s cumulative NPV turns
from being negative to being positive.
Worked example/350: Annuities in advance and delayed annuities
What is the present value of £1,000 received annually for five years if the first receipt is:
(a) In one year’s time?
(b) Now?
(c) In three years’ time?
Use a discount rate of 15%.

a. PV = cash flow * annuity factor = 1,000*[1/15% * [1 - 1/(1+15%)5] = £3,352

b. PV = 1,000 now + [1,000*[1/15% * [1 - 1/(1+15%)4]] = £3,855
c. PV = 1,000*(annuity factor 7 years – annuity factor 2 years)
= 1,000*([1/15% * [1 - 1/(1+15%)7]] - [1/15% * [1 - 1/(1+15%)2]])= £2,535
ANNUAL CASH FLOWS IN PERPETUITY
A constant annual cash flow that continues forever (a perpetual annuity)
PV = Cash flow/r
56
 Worked example/351: Perpetuities
(a) What is the present value of £3,000 received in one year’s time and forever if the annual interest rate is
10%?
PV = 3,000/10% = 30,000
(b) What would be the present value if the first receipt is in four years’ time?
PV of the end of year 3 = 3,000/10% = 30,000
Discount factor year 3 = 1/(1+10%)3 = 0.751
PV year 0 = 30,000*0.751 = 22,530
CHANGING DISCOUNT RATES:
If the discount rate changes over time the net present value is calculated as follows
Year 0 Year 1 Year 2
NPV = Outflow + inflow/(1+r1) + inflow/(1+r1)(1+r2) etc
Worked example/351: Changing discount rates
A project’s estimated cash flows are as follows
Year 0 (£m) Year 1 (£m) Year 2 (£m)
Cash flow (10) 6 8
Re: Calculate the NPV if the cost of capital is 10% for the first year and 20% for the second year.
NPV = -10 + 6/(1+10%) + 8/(1+10%)*(1+20%) = 1.52
6. The internal rate of return method:
FORMULA:

Notes:
+ a = is the cost of capital
+ b = is the cost of capital
+ NPVa = is the net present value of cashflow by using the cost of capital (a)
+ NPVb = is the net present value of cashflow by using the cost of capital (b)
* Giá trị NPVa và NPVb phải trái dấu nhau. Nếu NPVa là giá trị âm thì NPVb phải là giá trị dương hoặc
ngược lại
* TH1: a  NPVa > 0
 Ước tính b phải tăng lên (b>a)  b -> NPVb <0
57
 TH2: a  NPVa < 0
 Ước tính b phải giảm (b<a)  b -> NPVb >0
Worked example/353: The IRR method and interpolation
A company is trying to decide whether to buy a machine for £80,000 which will save costs of £20,000
per annum for five years and which will have a resale value of £10,000 at the end of year 5.
Requirement: If it is the company’s policy to undertake projects only if they are expected to yield a DCF
return of 10% or more, ascertain using the IRR method whether this project should be undertaken.
a = 2/3ARR based on average investment
ARR = Average profit / Average investment = (20,000-(80,000-10,000)/5)/((80,000+10,000)/2) = 13.33%
=> a = 2/3*13.33% = 9%
NPVa = -80,000+[20,000*(1/9%)*(1-(1/(1+9%)5))] + 10,000/(1+9%)5= 4,292
Try b = 12%: -> NPVb = -80,000+[20,000*(1/12%)*(1-(1/(1+12%)5))] + 10,000/(1+12%)5 = -2,230
=> IRR = 9% + [4,292/(4,292-(-2,230))]*(12%-9%) = 11%
Interactive question 4/354: IRR
Time £
0 Investment (4,000)
1 Receipts 1,200
2 Receipts 1,410
3 Receipts 1,875
4 Receipts 1,150
Requirement: Calculate the IRR of the project above
a= 2/3 ARR based on average investment
Average investment = 4,000/2 = 2,000
Average profit after dep = (-4,000+1,200+1,410+1,875+1,150)/4 = 408.75
a= 2/3 * (408.75/2,000) = 14%
NPVa = -4,000+1,200/(1+14%)1+1,410/(1+14%)2+1,875/(1+14%)3+1,150/(1+14%)4= 84
Try b = 16%:
-> NPVb = -4,000+1,200/(1+16%)1+1,410/(1+16%)2+1,875/(1+16%)3+1,150/(1+16%)4= -81
=> IRR = 14% + [84/(84-(-81))]*(16%-14%) = 15%

58
SCENARIO-BASED QUESTIONS
1. Sunshine Ltd
Sunshine Ltd manufactures and sells a range of three umbrella – the Standard, the Easy Opener and the
Dome. Production and sales data for April was as follows:
Standard Easy Opener Dome
Selling price £36 per unit £10 per unit £25 per unit
Variable materials £6 per unit £2 per unit £5 per unit
Variable labour £6 per unit £2 per unit £4 per unit
Variable production
£2 per unit £1 per unit £2 per unit
overhead
Actual production 10,000 units 6,000 units 4,000 units
Closing inventory 1,000 units 1,000 units 1,000 units
The variable labour cost is £10 per hour and Sunshine’s fixed overheads for April were £88,000
Requirement:
1.1. Calculate the total value of the closing inventory for each product under MC:
Standard £
Easy Opener £
Dome £
1.2. Sunshine is considering the impact of changing to absorption costing.
Requirement:
Calculate the fixed overhead absorption rate per labour hour for April:
Fixed overhead absorption rate = £ per labour hour
1.3. During May the fixed overhead absorption rate was calculated as £15 per labour hour and the value of
the closing inv under MC, and the number of units, was as below. The labour cost per hour and per unit
remained at their April values.
Closing inv value (£) Closing inv (units)
Standard 19,500 1,500
Easy Opener 3,000 500
Dome 5,000 500
Requirement:
Calculate the total value of the closing inv for May for each product under AC.
Standard £
59
 Easy Opener £
Dome £
1.4. During June, Sunshine sold all of the opening inv and all the units it manufactured during the month.
Sales price and MC information for June was as follows:
Standard Easy Opener Dome
Selling price (per unit) £36 £10 £25
MC (per unit) as May £13 £6 £10
Requirement: Assuming the same actual production data and fixed production overheads in June as for April,
complete the table below which calculates Sunshine’s gross profit for June under MC and AC
MC (£) AC (£)
Sales revenue:
Standard
Easy opener
Dome
Total sales revenue
Total marginal cost of sales
Total AC of sales
Fixed production overheads (88,000)
Gross profit
1.5. During July sales matched production and Sunshine was again left holding no inventories for any of its
products
Requirement: Assuming the same actual production data and costs in July as for April, select whether the
gross profit in July was:
A. Higher under marginal costing
B. Higher under absorption costing
C. Exactly the same under MC and AC
2. Numan Ltd
Number Ltd began manufacturing a new product named Gazza in March. The budgeted data per unit of
Gazza was as follows:
Cost Resource required
Variable materials £48 per m2 5m2
Variable labour £16 per hour 3.5 hours
Variable production £6 per hour As labour
60
 overheads
2.1. Requirement: Calculate the budgeted prime cost per Gazza for March
£
2.2. The budgeted cost and resource requirements for March were all met except for materials price and
usage. Owing to higher quality supplies, only 4.5m2 of material were actually used per Gazza but at a
cost of £52 per m2. Numan absorbs fixed overheads into all its products using a rate of 115% of actual
materials cost.
Requirement: Calculate the actual absorption cost per Gazza for March.
£
2.3. During April the actual absorption cost per Gazza was £592 and Numan set a target of a 33.33%
margin on the selling price per Gazza.
Requirement: Calculate the selling price per Gazza in April.
£
2.4. During May Numan changed the production process. This resulted in a saving of 30 minutes of labour
time per Gazza compared with March. Materials actual price and usage were as in March. Actual
labour and variable production overhead costs were as March’s budget. Numam decided to absorb
fixed overheads at a rate of 60% of price cost.
Requirement: Calculate the actual absorption cost per Gazza in May.
£
2.5. In June, the materials usage and labour and variable overhead costs were as the March budget, but
materials were 10% cheaper per m2. The labour time per unit was the same as in May. The fixed
overhead absorption rate was £56 per Gazza and 1,400 units were produced.
Requirement: Calculate the actual marginal cost per Gazza in June.
£
2.6. Before finalising the selling price for July, which was to be based on the June costs, the accountant
noticed an error in the costing information and this resulted in the actual marginal cost per unit for
June being corrected. The fixed overhead per Gazza remained at its June level. A target mark-up on
absorption cost was now set.
Requirement: Using a corrected marginal cost of £302 and a target mark-up on abssorption cost of
22%, calculate the selling price for July.
£

61
2.7. Numan’s accountant decided to experiment with different ways of calculating the fixed overhead
absorption rate in August. In particular she wanted to see the effect of using a blanket absorption rate
(based on all of Numan’s products) on selling prices. The target mark-up remained at 22%.
The following actual data from August is available:
Data related to Gazzas
Total variable cost per unit £305
Units produced 1,450
Fixed overheads £82,650
Labour hours per unit 3
Data related to all of Numan’s products
Total fixed overheads £1,239,500
Total number of units produced 18,500
Requirement: Calculate the difference in the selling price of Gazzas that results from switching from a fixed
overhead absorption rate based on Gazza’s labour hours to a blanket fixed overhead absorption rate based on
all of Numan’s products.
£
2.8. The budgeted blanket fixed overhead absorption rate for August was £66.25 per unit of output.
Requirement: Calculate the total under or over absorption of fixed overheads for all of Numan’s
products using the blanket rate in August.
£ absorption
3. Oaklea plc
Oaklea plc manufactures high quality dining tables. The standard cost per table is as follows:
£
Materials 4kg @ £10/kg 40
Labour 12 hours @ £16/hour 192
Variable overheads 12 hours @ £4/hour 48
Fixed overheads 12 hours @ £2.5/hour 30
Total absorption cost 310
The budgeted production and sales for each month are 400 tables selling for £600 each.
In April everything went according to budget except that only 380 tables were sold.
Requirement:
3.1. Calculate the difference between the AC and MC profits for April.
Difference £
62
3.2. Actual results for May are as follows:
6% fewer tables than budgeted were produced and sold at a price of £620 each. 1,600 kg of materials
were used costing £16,800. Labour was paid £69,020 for 4,060 hours. Fixed and variable overheads
were £13,050 and £17,255 respectively
Requirement: Complete the table to generate the MC operating statement for May
Make one entry (adverse or favourable) for each variance and enter a zero or dash in the other column.
Enter the net total of adverse and favourable variances as either a positive number (favourable total) or
negative number (adverse total) in the final column.
Favourable Adverse
£ £ £
Bugeted profit
Sales volume variance
Sales price variance
Cost variances
Materials price
Materials usage
Labour rate
Labour efficiency
Variable overhead
expenditure
Variable overhead
efficiency
Fixed overhead
expenditure
Total variances
Actual profit
4. Basket Ltd
Basket Ltd produces a range of three picnic products: Large Hampers, Medium Hampers and Small
Hampers. The budgeted data per Large Hamper for January was as follows:
Cost Resource required
Variable materials (all imported) £6 per kg 5 kg
Variable labour £8 per hour 3 hours
Variable production costs £2 per hour As labour
63
4.1. Requirement: Calculate the budgeted prime cost per Large Hamper for January.
£
4.2. In January a total of 2,400 labour hours were worked, shared equally between the three types of
hamper. The actual cost of Medium Hampers was the same as the January budgeted cost of Large
Hampers, except for materials usage. Owing to their smaller size Medium Hampers used 4kg of
material per hamper. During January Basket incurred fixed production overheads of £85,000 of which
£24,000 related to the manufacture of Medium Hampers. The other two sizes of hampers shared the
remaining fixed production overhead equally. The accountant at Basket absorbed each hamper’s fixed
overheads into output using at a rate per labour hour based upon actual labour hours worked.
Requirement: Calculate the actual absorption cost per Medium Hamper for January. £
4.3. During January the actual absorption cost per Large Hamper was £165 and Basket’s accountant
recommend setting all its selling prices using a target mark-up of 40% on the actual absorption cost per
unit
Requirement: Calculate the selling price per Large Hamper for January.
£
4.4. During February, Basket took delivery of new weaving equipment that resulted in a 22% reduction in
the labour time per unit for each hamper size from the January level. However, as a result of the new
equipment, February’s fixed production overheads were 10% higher than their level in January.
Material costs and usage and variable overheads were at the same level as budgeted for January, as
was the volume of ouput for all products.
Requirement: Calculate the fixed overhead absorption rate per labour hour in February per Large
Hampers.
£
4.5. During March, the materials usage and variable overhead costs for Large Hampers were the same as
February but due to movements in foreign exchange rates the materials cost was 15% higher per kg.
The labour time per unit was the same as the January budget adjusted for the saving made in February.
The fixed overhead absorption rate was £48 per hamper.
Requirement: Calculate the absorption cost per Large Hamper for March.
£
4.6. When preparing the monthly cost reports for March, Basket’s accountant calculated the absorption cost
per Small Hamper to be £84. In order to stimulate demand a target margin of 20% was set.
Requirement: Calculate the selling price per Small Hamper for March.
£
64
4.7. Basket’s board asked the accountant to demonstrate the effect of calculating the fixed overhead
absorption rate in different ways. In particular it wanted to see the effect of using a blanket absorption
rate (based on all of Basket’s hampers) on selling prices. The target margin remained at 20%.
During April Basket manufactured 1,000 hampers of each size (3,000 in total) and the variable cost per
Large Hamper was £100. Total fixed overheads were £88,000 of which 30% were attributable to Large
Hampers. Labour hours per unit were 80% of the original January budget
Requirement: Calculate the decrease in the selling price per Large Hamper that result from switching
to a fixed overhead rate absorption rate based on the labour hours for Large Hampers from a blanket
fixed overhead absorption rate based on all three hamper sizes.
£
4.8. The budgeted company-wide blanket fixed overhead absorption rate for April was £38 per hamper
Requirement: Calculate the total under or over absorption of fixed overheads for all three hamper
sizes using the Basket’s wide blanket absorption rate in April.
£ absorption
5. Geartop plc
Geartop plc manufactures components for the car industry. Data for three of its products for July was as
follows:
AVX12 PUH78 YTF65
Selling price per unit £45 £60 £70
Variable materials per unit £15 £14 £21
Variable labour per unit £6 £8 £9
Variable production
£2 £3 £4
overhead per unit
Actual production (units) 3,000 2,500 1,800
Closing inventory (in units) for each product was 10% of July’s production. The variable labour rate is £12 per
hour and Geartop’s fixed overheads for these three products for July were £80,000. There was no opening
inventory of any of the products.
Requirement:
5.1. Calculate the total value of the cost of sales for each product for July using MC
AVX12: £
PUH78: £
YTF65: £
5.2. Geartop’s accountant now wishes to change to absorption costing.
65
 Requirement: Calculate the fixed overhead absorption rate as a percentage of the labour cost for July.
Fixed overhead absorption rate = % of labour cost
5.3. During August the fixed overhead absorption rate was calculated as £18 per labour hour and the value
of the closing inventory using AC, and number of units, was as below. The labour cost per hour and
per unit remained at their July values.
Closing inv (£) Closing inv (units)
AVX12 7,000 200
PUH78 6,000 150
YTF65 5,000 100
Requirement: Calculate the total value of the closing inv for each product line for August using MC.
AVX12: £
PUH78: £
YTF65: £
5.4. During September Geartop sold all the units it produced during the month together with the entire
opening inventory of the three product lines. Sales price, absorption cost, production and inventory
information for September was as follows:
AVX12 PUH78 YTF65
Selling price (per unit) £45 £60 £70
Total absorption cost (per unit) as
£35 £40 £50
of August
Actual production (units) 3,000 2,500 1,800
Opening inventory (units) 200 150 100
Requirement: Assuming fixed production overheads of £81,300 were incurrred during September and
that there was a total of £4,950 of fixed production overheads included in the AC value of opening
inventory, complete the table below which calculates Geartop’s profit for September under MC and
AC.
Marginal costing (£) Absorption costing (£)
Sales revenue
AVX12
PUH78
YTF65
Total sales revenue

66
 Total marginal cost of sales
Total absorption cost of sales
Fixed production overheads (81,300)
Gross profit
5.5. In October Geartop sold all the units of each product that it produced.
Requirement: Select the correct answer.
Assuming the same actual production data and costs in October as for September, the gross profit in
October was
 Exactly the same under AC and MC
 Higher under AC
 Higher under MC
6. Borehole Ltd
Borehold Ltd is a specialist manufacturer of water pumps for the water extraction industru. Borehole
produces three types of pumps and data for these for May was as follows:
High load Standard load Low load
Actual production (units) 250 400 500
Selling price per unit £265 £220 £195
Variable materials per unit £150 £125 £100
Variable labour per unit £36 £36 £30
Variable production overhead
£20 £18 £16
per unit
Closing inventory (units) 25 30 10
7.1. Borehole has a variable labour rate of £10 per hour and its fixed overheads for these three pumps for May
totalled £22,000. There was no opening inventory of any of the pumps.
Requirement: Calculate the total value of the cost of sales for each pump for May using marginal costing.
High load: £
Standard load: £
Low load: £
7.2. The board of directors of Borehole has decided to stop using marginal costing and instead adopt
absorption costing.
Requirement: Calculate the fixed overhead absorption rate as a percentage of the labour cost for May.
Fixed overhead absorption rate: % of labour cost

67
7.3. During June Borehole’s accountant calculated the company’s fixed overhead absorption rate as £6 per
labour hour. She also calculated the value of the closing inventory for each pump type using AC as
below. The labour cost remained at £10 per hour.
Requirement: Calculate the total value of the closing inventory for each pump for June using marginal
costing.
High load: £
Standard load: £
Low load: £
7.4. July was a very dry month with almost no rainfall and as a consequence Borehole sold all the pumps it
could produce during the month together with the entire opening inventory of the three pump types.
Fixed production overheads for July were £31,000 and the sales price, absorption cost, production and
inventory information for July was as follows:
High load Standard load Low load
Selling price (per unit) £270 £230 £195
Total absorption cost (per unit) as
£230 £200 £160
June
Opening inventory (units) 20 30 5
Actual production (units) 300 400 600
Requirement: Assuming there was a total of £1,170 of fixed production overheads included in the AC
value of opening inventory, complete the table below which calculates Borehole’s profit for July under
both MC and AC.
Marginal costing (£) Absorption costing (£)
Sales revenue
High load
Standard load
Low load
Total sales revenue
Total marginal cost of sales
Total absorption cost of sales
Fixed production overheads (31,000)
Gross profit
7.5. In August the dry weather ended and Borehole did not sell all the pumps that it produced but the
month’s production data and costs were the same as in July.
68
 Requirement: Select the correct answer.
Borehole’s profit in August was
 Exactly the same under AC and MC
 Higher under AC
 Higher under MC

Apportionment/ Basis of
Assembly Finishing Maintenance Canteen
Allocation apportionment
Indirect
Allocation 7,000 8,000 3,000 2,000
materials
Rent Apportionment Area 3,750 7,500 1,875 1,875
Electricity kW hours
Apportionment 2,750 4,500 1,975 775
consumed
Machine
Apportionment Machine value 2,250 1,750 550 450
depreciation

69
Indirect
Allocation 1,600 2,220 11,200 1,500
labor
Total 17,350 23,970 18,600 6,600

70