ACCA F2 Management Accounting - 2010 - Study text

Syllabus and study guide

(d) Explain the structure of linear functions and equations.

C Business mathematics and computer spreadsheets

1 Dealing with uncertainty

(a) Explain and calculate an expected value.

(b) Demonstrate the use of expected values in simple decision making

situations.

(c) Explain the limitations of the expected value technique.

Note: Decision trees and conditional profit tables are excluded.

2 Statistics for business

(a) Calculate a correlation coefficient and a coefficient of

determination.

(b) Explain the concepts in (a) and interpret the coefficients calculated

in (a).

(c) Establish a linear function using regression analysis and interpret

the results.

3 Use of computer spreadsheets

(a) Explain the role and features of a computer spreadsheet system.

(b) Demonstrate a basic understanding of the use of computer

spreadsheets.

(c) Identify applications for computer spreadsheets in cost and

management accounting.

D Cost accounting techniques

1 Accounting for materials

(a) Describe the different procedures and documents necessary for the

ordering, receiving and issuing of materials from inventory.

(b) Describe the control procedures used to monitor physical and

‘book’ inventory and to minimise discrepancies and losses.

(c) Interpret the entries and balances in the material inventory

account.

(d) Identify and explain the costs of ordering and holding inventory.

(e) Calculate and interpret optimal reorder quantities.

(f) Calculate and interpret optimal reorder quantities when discounts

apply.

(g) Produce calculations to minimise inventory costs when inventory

is gradually replenished.

(h) Describe and apply appropriate methods for establishing reorder

levels where demand in the lead time is constant.

2 Accounting for labour

(a) Calculate direct and indirect costs of labour.

(b) Explain the methods used to relate input labour costs to work

done.

(c) Prepare the journal and ledger entries to record labour cost inputs

and outputs.

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(d) Describe different remuneration methods: time-based systems,

piecework systems and individual and group incentive schemes.

(e) Calculate the level, and analyse the costs and causes of labour

turnover.

(f) Explain and calculate labour efficiency, capacity and production

volume ratios.

(g) Interpret the entries in the labour account.

3 Accounting for overheads

(a) Explain the different treatment of direct and indirect expenses.

(b) Describe the procedures involved in determining production

overhead absorption rates.

(c) Allocate and apportion production overheads to cost centres using

an appropriate basis.

(d) Reapportion service cost centre costs to production cost centres

(using the reciprocal method where service cost centres work for

each other).

(e) Select, apply and discuss appropriate bases for absorption rates.

(f) Prepare journal and ledger entries for manufacturing overheads

incurred and absorbed.

(g) Calculate and explain the under and over absorption of overheads.

(h) Apply methods of relating non-production overheads to cost

units.

4 Marginal and absorption costing

(a) Explain the importance of, and apply, the concept of contribution.

(b) Demonstrate and discuss the effect of absorption and marginal

costing on inventory valuation and profit determination.

(c) Calculate profit or loss under absorption and marginal costing.

(d) Reconcile the profits or losses calculated under absorption and

marginal costing.

(e) Describe the advantages and disadvantages of absorption and

marginal costing.

5 Job and batch costing

(a) Describe the characteristics of job and batch costing.

(b) Describe the situations where the use of job or batch costing would

be appropriate.

(c) Prepare cost records and accounts in job and batch costing

situations.

(d) Establish job costs from given information.

6 Process costing

(a) Describe the characteristics of process costing.

(b) Describe the situations where the use of process costing would be

appropriate.

(c) Explain the concepts of normal and abnormal losses and abnormal

gains.

(d) Calculate the cost per unit of process outputs.

Syllabus and study guide

(e) Prepare process accounts involving normal and abnormal losses

and abnormal gains.

(f) Calculate and explain the concept of equivalent units.

(g) Apportion process costs between work remaining in process and

transfers out of a process using the weighted average and FIFO

methods.

(h) Prepare process accounts in situations where work remains

incomplete.

(i) Prepare process accounts where losses and gains are identified at

different stages of the process.

(j) Distinguish between by-products and joint products.

(k) Value by-products and joint products at the point of separation.

(l) Prepare process accounts in situations where by-products and/or

joint products occur.

Note: Situations involving work in process and losses in the same

process are excluded.

7 Service/operation costing

(a) Identify situations where the use of service/operation costing is

appropriate.

(b) Illustrate suitable unit cost measures that may be used in different

service/operation situations.

(c) Carry out service cost analysis in simple service industry

situations.

E Budgeting and standard costing

1 Nature and purpose of budgeting

(a) Explain why organisations use budgeting.

(b) Explain the administrative procedures used in the budgeting

process.

(c) Describe the stages in the budgeting process.

2 Functional budgets

(a) Explain the term ‘principal budget factor’.

(b) Prepare budgets for sales, production, materials (usage and

purchases), labour and overheads.

3 Flexible budgets and standard costing

(a) Explain and prepare fixed, flexible and flexed budgets.

(b) Explain the purpose and principles of standard costing.

(c) Establish the standard cost per unit under absorption and

marginal costing.

4 Basic variance analysis under absorption and marginal costing

(a) Calculate the following variances:

(i) Sales price and volume

(ii) Materials total, price and usage

(iii) Labour total, rate and efficiency

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(iv) Variable overhead total, expenditure and efficiency

(v) Fixed overhead total, expenditure and, where appropriate,

volume, capacity and efficiency.

(b) Interpret all the variances in 4(a).

(c) Explain possible causes of all the variances in 4(a).

(d) Describe the interrelationships between the variances in 4(a).

(e) Calculate actual or standard figures where the variances in 4(a) are

given.

5 Reconciliation of budgeted profit and actual profit

(a) Reconcile budgeted profit with actual profit under standard

absorption costing.

(b) Reconcile budgeted profit or contribution with actual profit or

contribution under standard marginal costing.

F Short-term decision-making techniques

1 Cost-volume-profit (CVP) analysis

(a) Calculate and interpret a break-even point and a margin of safety.

(b) Demonstrate an understanding of, and use, the concepts of a target

profit or revenue and a contribution to sales ratio.

(c) Identify the elements in traditional and contribution break-even

charts and profit/volume charts.

(d) Apply CVP analysis to single product situations.

Note: Multi-product break-even charts and profit/volume charts are

excluded.

2 Relevant costing

(a) Explain the concept of relevant costing.

(b) Calculate the relevant costs for materials, labour and overheads.

(c) Calculate the relevant costs associated with non-current assets.

(d) Explain and apply the concept of opportunity cost.

3 Limiting factors

(a) Identify a single limiting factor.

(b) Determine the optimal production plan where an organisation is

restricted by a single limiting factor.

(c) Formulate a linear programming problem involving two variables.

(d) Determine the optimal solution to a linear programming problem

using a graphical approach.

(e) Use simultaneous equations, where appropriate, in the solution of

a linear programming problem.

Paper F2

Management accounting

ƒ

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Formulae

Regression analysis

n

xb

n

y

a

∑

−

∑

=

b =

n ∑ xy −∑x∑y

n ∑ x

2

−(∑ x)

2

r =

n ∑ xy −∑x∑ y

n ∑ x

2

−(∑ x)

2

) (n ∑ y

2

−(∑ y)

2

()

Economic order quantity =

h

0

C

D2C

Economic batch quantity =

⎟

⎠

⎞

⎜

⎝

⎛

−

R

D

1C

D2C

h

0

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Paper F2

Management Accounting

CHAPTER

1

The nature and purpose of

cost and management

accounting

Contents

1 Accountingformanagement

2 Costandmanagementaccountingversus

financialaccounting

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Accounting for management

 Introduction to cost and management accounting

 Data and information

 Attributes of good information

 Planning, decision-making and control

 Strategic, tactical and operational planning

 Cost, revenue, profit and investment centres

1 Accounting for management

1.1 Introduction to cost and management accounting

Accounting has several purposes, but the main purposes might be stated as follows.

 To provide a record of the financial value of business transactions, and in doing

so to establish financial controls and reduce the risks of fraud

 To assist with the management of the financial affairs of an entity

 To provide information - mainly information of a financial nature.

Accounting information is provided for:

 Management, so that managers have the information they need to run the

company

 Other users of information, many of them outside the entity. For example, a

company produces accounting information for its shareholders in the form of

financial statements, and financial statements are also used by tax authorities,

investors, trade union representatives and others.

Cost and management accounting is concerned with the provision of information,

mainly of a financial nature, for management. A management accounting system is

a management information system.

1.2 Data and information

The terms ‘data’ and ‘information’ are often used as if they have the same meaning.

However, there is a difference between data and information:

 Data consists of unprocessed facts and statistics. Data is collected and processed

to produce information. Data has no meaning until it has been processed into

information.

 Information has a meaning and a purpose. It is produced from ‘data’. It is

processed data that has relevance to a particular useful purpose.

Chapter 1: The nature and purpose of cost and management accounting

Data may be collected from many different sources, both inside and outside an

organisation.

A cost accounting system records data about the costs of operations and activities

within the entity. The sources of cost accounting data within an organisation

include invoices, receipts, inventory records and time sheets. Many of the

documents from which cost data is captured are internally-generated documents,

such as time sheets and material requisition notes.

Data is analysed and processed to produce management information, often in the

form of:

 routine reports, or

 specially-prepared reports, or

 answers to ‘one-off’ enquiries that are input to a computer system.

Information produced from cost accounting data is management accounting

information. Management accounting systems also obtain information from other

sources, including external sources, but the cost accounting system is a major source

of management accounting information.

1.3 Attributes of good information

Information is only useful to managers if it possesses certain qualities or attributes.

 Understandable. Information should be understandable to the individuals who

use it. For accountants, this often means having to make sure that the figures

provided to managers are set out clearly and are properly explained.

 Purpose and relevance. Information should have a purpose and should be

needed by management for a particular reason. Unless information has a

purpose it has no value at all and it makes no sense to provide it. The

information provided should also be relevant to this purpose.

 Reliable. Management information must be reliable. This means that the user of

the information can rely on the information to make a decision, and should not

be worried about whether the information is correct. Information does not have

to be 100% accurate. In many cases, information might be provided in the form

of an estimate or forecast. However, information should be as accurate or

reliable as it needs to be for its purpose. It might also need to be up-to-date.

 Sufficiently complete. Information should be as complete as it needs to be.

There should be no important omissions. However, information in management

reports should not be excessive, because important information may be hidden

in the unimportant information, and it will take managers too long to read and

understand.

 Timeliness. Information must be timely. This means that it must be made

available to managers in time to use it for making a decision. If information is

provided too late for its purpose, it has no value. With the widespread

computerisation of accounting systems, including cost accounting systems, it

might be appropriate for up-to-date management accounting information to be

available on line and on demand whenever it is needed.

 Comparability. In accounting it is often useful to make comparisons, such as

comparisons of current year results with previous years, or comparisons of

Paper F2: Management Accounting

actual results with planned results. To make comparisons possible, information

should be prepared on the same basis, using the same methods and the same

‘rules’.

 Communicated to the right person. Management information should be

communicated to the proper person. This is the person with the authority to

make a decision on the basis of the information received and who needs the

information to make the decision.

 Its value must exceed its cost. Management information has a value. If

information has no value (= no purpose) there is no point in having it. The value

of information comes from improving the quality of management decisions.

However providing information involves some expense. More information is

worth having only if it helps to improve management decisions, and the benefits

from those decisions exceed the cost of providing the additional information.

This is why many small business entities do not have a formal cost accounting

system – the manager is familiar with the costs and revenues of the business and

the cost of operating a cost accounting system might not be worth the expense.

1.4 Planning, decision-making and control

The purpose of management information is to assist management in making

decisions. Management decisions can be grouped into three broad categories:

 Planning decisions

 Control decisions

 ‘One-off’ decisions.

Planning

Planning involves the following:

 setting the objectives for the organisation

 making plans for achieving those objectives.

The planning process is a formal process and the end-result is a formal plan,

authorised at an appropriate level in the management hierarchy. Formal plans

include long-term business plans, budgets, sales plans, weekly production

schedules, capital expenditure plans and so on.

Information is needed in order to make sensible plans – for example in order to

prepare an annual budget, it is necessary to provide information about expected

sales prices, sales quantities and costs, in the form of forecasts or estimates.

Control

Control of the performance of an organisation is an important management task.

Control involves the following:

 monitoring actual performance, and comparing actual performance with the

objective or plan

 taking control action where appropriate

 evaluating actual performance.

When operations appear to be getting out of control, management should be alerted

so that suitable measures can be taken to deal with the problem. Control

ACCA F2 Management Accounting - 2010 - Study text - Emile Woolf Publishing

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