ACCA F5 Performance Management - 2010 - Study text

Syllabus and study guide

(e) Explain different price strategies, including:

(i) all forms of cost plus

(ii) skimming

(iii) penetration

(iv) complementary product

(v) product-line

(vi) volume discounting

(vii) discrimination

(viii) relevant cost

(f) Calculate a price from a given strategy using cost plus and

relevant cost.

3 Make-or-buy and other short-term decisions

(a) Explain the issues surrounding make vs. buy and outsourcing

decisions.

(b) Calculate and compare “make” costs with “buy-in” costs.

(c) Compare in-house costs and outsource costs of completing tasks

and consider other issues surrounding this decision.

(d) Apply relevant costing principles in situations involving make or

buy in, shut down, one-off contracts and the further processing of

joint products.

4 Dealing with risk and uncertainty in decision-making

(a) Suggest research techniques to reduce uncertainty e.g. Focus

groups, market research.

(b) Explain the use of simulation, expected values and sensitivity.

(c) Apply expected values and sensitivity to decision-making

problems.

(d) Apply the techniques of maximax, maximin, and minimax regret

to decision-making problems including the production of profit

tables.

(Excluding decision trees and the value of perfect information)

C Budgeting

1 Objectives

(a) Outline the objectives of a budgetary control system.

(b) Explain how corporate and divisional objectives may differ and

can be reconciled.

(c) Identify and resolve conflicting objectives and explain

implications.

2 Budgetary systems

(a) Explain how budgetary systems fit within the performance

hierarchy.

(b) Select and explain appropriate budgetary systems for an

organisation (Systems to include: Top down, bottom up, rolling,

zero based, activity based, incremental and feed-forward control).

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(c) Describe the information used in budget systems and the sources

of the information needed.

(d) Explain the difficulties of changing a budgetary system.

(e) Explain how budget systems can deal with uncertainty in the

environment.

3 Types of budgets

(a) Indicate the usefulness and problems with different budget types

(Zero based, activity based, incremental, master, functional,

flexible).

(b) Explain the difficulties of changing the type of budget used.

4 Quantitative analysis in budgeting

(a) Analyse fixed and variable cost elements from total cost data

(High Low and regression). Evaluate these methods.

(b) Explain the use of forecasting techniques. (Techniques: Time

series, simple average growth models and estimates based on

judgement and experience). Predict a future value from provided

time series analysis data using both additive and proportional

data.

(c) Estimate the learning effect and apply the learning curve to a

budgetary problem. This includes calculations on steady states.

(d) Discuss the reservations with the learning curve.

(e) Apply expected values and explain the problems and benefits.

(f) Explain the benefits and dangers inherent in using spreadsheets in

budgeting.

5 Behavioural aspects of budgeting

(a) Identify the factors which influence behaviour.

(b) Discuss the issues surrounding setting the difficulty level for a

budget.

(c) Explain the benefits and difficulties of the participation of

employees in the negotiation of targets.

D Standard costing and variances analysis

1 Budgeting and standard costing

(a) Explain the use of standard costs.

(b) Outline the methods used to derive standard costs and discuss the

different types of costs possible.

(c) Explain the importance of flexing budgets in performance

management.

(d) Prepare budgets and standards that allow for waste and idle time.

(e) Explain and apply the principle of controllability in the

performance management system.

(f) Prepare a flexed budget and comment on its usefulness.

2 Basic variances and operating statements

(a) Calculate, identify the cause of and interpret all basic variances:

Syllabus and study guide

(i) Sales price and volume

(ii) Materials total, price and usage

(iii) Labour total, rate and efficiency

(iv) Variable overhead total, expenditure and efficiency

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

volume, capacity and efficiency.

(b) Explain the effect on labour variances where the learning curve

has been used in the budget process.

(c) Produce full operating statements in both a marginal cost and full

absorption costing environment, reconciling actual profit to

budgeted profit.

(d) Calculate the effect of idle time and waste on variances including

where idle time has been budgeted for.

(e) Explain the possible causes of idle time and waste and suggest

methods of control.

(f) Calculate, using a simple situation, ABC based variances.

(g) Explain the different methods available for deciding whether or

not too investigate a variance cause.

3 Material mix and yield variances

(a) Calculate, identify the cause of and explain mix and yield

variances.

(b) Explain the wider issues involved in changing mix e.g. cost,

quality and performance measurement issues.

(c) Identify and explain the interrelationship between price, mix and

yield.

(d) Suggest and justify alternative methods of controlling production

processes.

4 Planning and operational variances

(a) Calculate a revised budget.

(b) Identify and explain those factors that could and could not be

allowed to revise an original budget.

(c) Calculate planning and operational variances for sales (including

market size and market share), materials and labour.

(d) Explain and resolve the manipulation issues in revising budgets.

5 Behavioural aspects of standard costing

(a) Describe the dysfunctional nature of some variances in the modern

environment of JIT and TQM.

(b) Discuss the behavioural problems resulting from using standard

costs in rapidly changing environments.

(c) Discuss the effect that variances have on staff motivation and

action.

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E Performance measurement and control

1 The scope of performance measurement

(a) Describe and calculate and interpret financial performance

indicators (FPIs) for profitability, liquidity and risk in both

manufacturing and service businesses. Suggest methods to

improve these measures.

(b) Describe, calculate and interpret non-financial performance

indicators (NFPIs) and suggest method to improve the

performance indicated.

(c) Explain the causes and problems created by short-termism and

financial manipulation of results and suggest methods encourage

a long term view.

(d) Explain and interpret the Balanced Scorecard, and the Building

Block model proposed by Fitzgerald and Moon.

(e) Discuss the difficulties of target setting in qualitative areas.

2 Divisional performance and transfer pricing

(a) Explain the basis for setting a transfer price using variable cost,

full cost and the principles behind allowing for intermediate

markets.

(b) Explain how transfer prices can distort the performance

assessment of divisions and decisions made.

(c) Explain the meaning of, and calculate, Return on Investment (ROI)

and Residual Income (RI), and discuss their shortcomings.

(d) Compare divisional performance and recognise the problems of

doing so.

3 Performance analysis in not for profit organisations and the public

sector

(a) Comment on the problems of having non-quantifiable objectives in

performance management.

(b) Explain how performance could be measured in these sectors.

(c) Comment on the problems of having multiple objectives in these

sectors.

(d) Outline Value for Money (VFM) as a public sector objective.

4 External considerations and behavioural aspects

(a) Explain the need to allow for external considerations in

performance management. (External considerations to include

stakeholders, market conditions and allowance for competitors).

(b) Suggest ways in which external considerations could be allowed

for in performance management.

(c) Interpret performance in the light of external considerations.

(d) Identify and explain the behaviour aspects of performance

management

Paper F5

Performance management

ƒ



Formulae sheet

Learning curve

Y = ax

b

Where y = average cost per batch

a = cost of first batch

x = total number of batches produced

b = learning factor (log LR/log 2)

LR = the learning rate as a decimal

Regression analysis

y= a + bx

()

2

xxn

y

xx

y

n

b

∑−∑

∑∑−∑

=

n

xb

n

y

a

∑

−

∑

=

()

2

yyn)xxn

y

xx

y

n

r

∑−∑∑−∑

∑∑−

∑

=

Demand curve

P = a – bQ

quantityinchange

priceinchange

b =

a = price when Q = 0

Paper F2: Management accounting

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Paper F5

Performancemanagement

CHAPTER

1

Activity-based costing

Contents

1 Traditional costing systems

2 Activity based costing

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Traditional costing systems

 Absorption costing

 Brief revision of absorption costing

 Under- and over-absorption

 Criticisms of absorption costing

 Brief revision of marginal costing

 Alternative costing systems

1 Traditional costing systems

1.1 Absorption costing

Absorption costing is a form of costing in which the costs of products are calculated

by adding an amount for indirect costs (overheads) to the direct costs of production.

Although it is possible to absorb administration, selling and distribution costs into

the cost of a product, it has been more usual in practice to restrict absorption costing

to production costs.

$

Direct materials X

Direct labour X

Other direct expenses (if any) X

Direct costs of production X

Absorbed production overheads X

Full production cost X

A full cost can also be calculated for a service as well as a product. For example, a

telephone company may calculate the full cost per minute of making a telephone

call.

1.2 Brief revision of absorption costing

You should be reasonably familiar with absorption costing from your previous

studies, but a brief revision is provided here.

 Overheads are indirect costs, which means that the costs (unlike direct costs)

cannot be attributed directly to the specific item (product) for which a cost is

calculated.

 A ‘fair’ share of overhead costs is added to the direct costs of the product, using

an absorption rate.

 A suitable absorption rate is selected. This is usually a rate per direct labour

hour, a rate per machine hour or possibly a rate per unit of product.

Chapter 1: Costing systems

 Production overheads may be calculated for the factory as a whole; alternatively,

separate absorption rates may be calculated for each different production

department. (In the F5 exam, it is much more likely that a question involving

absorption costing will give a factory-wide absorption rate rather than separate

departmental absorption rates.)

 The overhead absorption rate (or rates) is determined in advance for the

financial year. It is calculated in one of the following ways:

Budgeted production overhead expenditure OR Budgeted production overhead expenditure

Budgeted activity Normal annual level of activity

The ‘activity’ is the number of labour hours in the year, the number of machine

hours or the number of units produced, depending on the basis of absorption

(labour hour rate, machine hour rate or rate per unit) that is selected.

Although an exam question is likely to assume that the absorption rate is

obtained from the budgeted level of activity, the normal level of activity might be

used instead in a question. The normal level of activity is the average annual

level of production activity.

Example

A manufacturing company makes two products, X and Y. Budget information about

these products is as follows.

Product X Product Y

Direct cost per unit $10 $7

Direct labour time to make each unit 15 minutes 20 minutes

Budgeted production for the year 8,000 units 9,000 units

The budgeted production overheads for the year are $120,000. The company uses an

absorption costing system and a direct labour hour absorption rate.

What is the absorption rate for overheads and what is the budgeted cost per unit of

X and unit of Y?

Answer

Hours

Budgeted labour hours: Product X: 8,000 × 15/60

2,000

Budgeted labour hours: Product Y: 9,000 × 20/60

3,000

Total budgeted hours for the year 5,000

Budgeted production overheads $120,000

Absorption rate per direct labour hour $24

Paper F5: Performance management

Product

X

Product

Y

$ per unit $ per unit

Direct cost 10 7

Production overheads: $24 × 15/60

6

$24 × 20/60

8

Full production cost 16 15

1.3 Under- and over-absorption

The overhead absorption rate is decided in advance, before the beginning of the

financial year. Overheads are added to product costs at this predetermined rate,

even though actual overhead expenditure and the actual volume of production

might differ from the estimates used in the budget to work out the absorption rate.

As a consequence, the amount of overheads added to the cost of products

manufactured is likely to be different from actual overhead expenditure in the

period. The difference is under- or over-absorbed overheads.

$

Overheads absorbed into production costs using the absorption rate X

Actual overhead expenditure X

Under- or over-absorbed overheads (X) or X

Overheads are under-absorbed when the amount of overheads absorbed into

production costs is less than the actual amount of overhead expenditure.

Overheads are over-absorbed when the amount of overheads absorbed into

production costs is more than the actual amount of overhead expenditure.

The amount of under- or over-absorbed overheads is written to profit or loss for the

year as an adjusting figure. If there are under-absorbed overhead the profit is

adjusted down (because production costs have been under-stated); and if there are

over-absorbed overheads the profit is adjusted upwards.

Example

A manufacturing company has a system of absorption costing and the overhead

absorption rate for the year just ended was $24 per direct labour hour. This rate was

based on budgeted overhead expenditure for the year of $120,000 and 5,000

budgeted direct labour hours.

Actual production during the year amounted to 5,400 direct labour hours and actual

production overhead expenditure was $148,000.

What was the under- or over-absorbed overhead for the year? Can the reasons for

this under- or over-absorption be explained?

ACCA F5 Performance Management - 2010 - Study text - Emile Woolf Publishing

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