CIMA CO1 Official Learning System - Fundamentals of Management Accounting
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CIMA Official
Learning System
Relevant for Computer-Based
Assessment
C1— Fundamentals
of Management
Accounting
CIMA Certifi cate in
Business Accounting
Janet Walker
CIMA Publishing is an imprint of Elsevier
Linacre House, Jordan Hill, Oxford OX2 8DP, UK
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First edition 2008
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Contents
The CIMA Learning System xi
How to use your CIMA Learning System x i
Guide to the Icons used within this text xii
Study technique xii
Computer-Based Assessment xiv
Fundamentals of Management Accounting and Computer-Based Assessment xv
Learning Outcomes and Indicative Syllabus Content xvi
1 Basic Aspects of Cost Accounting 1
Learning Outcomes 3
1.1 Introduction 3
1.2 Why organisations need costing systems 3
1.3 What is meant by ‘ cost ’ ? 4
1.4 Cost units 4
1.4.1 Composite cost units 5
1.5 Cost centres 6
1.6 Cost objects 6
1.7 Classifi cation of costs 7
1.7.1 Classifi cation of costs according to their nature 7
1.7.2 Classifi cation of costs according to their purpose: direct costs 8
and indirect costs
1.8 Elements of cost 9
1.9 Cost behaviour 12
1.9.1 Fixed cost 12
1.9.2 Variable cost 14
1.9.3 Semi-variable cost 15
1.9.4 Analysing semi-variable costs 16
1.9.5 Using historical data 18
1.9.6 The importance of time scale in analysing cost behaviour 18
1.10 Summary 19
Revision Questions 21
Solutions to Revision Questions 27
2 Accounting for the Value of Inventories 31
Learning Outcomes 33
2.1 Introduction 33
2.2 Valuing inventory at cost 33
2.3 First in, fi rst out (FIFO) 34
2.4 Last in, fi rst out (LIFO) 35
2.5 Cumulative weighted average (AVCO) 35
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FUNDAMENTALS OF MANAGEMENT ACCOUNTING C1
iv
CONTENTS
2.6 Comparison of FIFO, LIFO and AVCO 36
2.6.1 Historical cost compared with economic cost and economic value 37
2.7 Inventory valuation and the effect on gross profi t 37
2.8 Periodic weighted average 38
2.9 Materials documentation 39
2.9.1 Perpetual inventory system 39
2.9.2 Recording the receipt of goods 39
2.9.3 Recording the movement of inventory items 39
2.10 Summary 40
Revision Questions 41
Solutions to Revision Questions 45
3 The Analysis of Overhead 51
Learning Outcomes 53
3.1 Introduction 53
3.2 What is an overhead cost? 53
3.2.1 Defi nition 53
3.2.2 Functional analysis of overhead costs 54
3.3 Overhead allocation and apportionment 54
3.4 Absorption of overheads into saleable cost units 56
3.4.1 General principles 56
3.4.2 Applying the overhead absorption rate 57
3.4.3 Other absorption bases 57
3.4.4 Selecting the most appropriate absorption rate 58
3.5 Predetermined overhead absorption rates 59
3.5.1 Under- or over-absorption of overheads 59
3.5.2 The reasons for under- or over-absorption 61
3.5.3 The problems caused by under- or over-absorption of overheads 61
3.6 Illustrative example 61
3.6.1 Solution 62
3.7 Reciprocal servicing 64
3.7.1 Taking account of reciprocal servicing 64
3.7.2 The usefulness of reapportioned service centre costs 65
3.8 Activity-based costing (ABC) 66
3.9 The use of cost information in pricing decisions 66
3.9.1 Marginal cost pricing 66
3.9.2 Full cost-plus pricing 67
3.9.3 Example: full-cost pricing to achieve a specifi ed return on sales 67
3.9.4 Example: full-cost pricing to achieve a specifi ed return on 68
investment
3.9.5 Second example: full-cost pricing to achieve a specifi ed return 68
on investment
3.10 Summary 69
Revision Questions 71
Solutions to Revision Questions 79
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FUNDAMENTALS OF MANAGEMENT ACCOUNTING
CONTENTS
4 Cost–Volume–Profi t Analysis 85
Learning Outcomes 87
4.1 Introduction 87
4.2 Breakeven or cost–volume–profi t analysis 87
4.2.1 The concept of contribution 88
4.2.2 Calculating the breakeven point 88
4.3 The margin of safety 88
4.4 The contribution to sales (C/S) ratio 89
4.5 Drawing a basic breakeven chart 90
4.6 The contribution breakeven chart 92
4.7 The profi t–volume chart 92
4.7.1 The advantage of the profi t–volume chart 93
4.8 The limitations of breakeven (or CVP) analysis 94
4.9 The economist’s breakeven chart 95
4.10 Using CVP analysis to evaluate proposals 96
4.11 Limiting factor analysis 98
4.11.1 Decisions involving a single limiting factor 98
4.12 Summary 102
Revision Questions 103
Solutions to Revision Questions 111
5 Standard Costing and Variance Analysis 117
Learning Outcomes 119
5.1 Introduction 119
5.2 What is a standard cost? 120
5.3 Performance levels 121
5.3.1 A standard 121
5.3.2 Ideal standard 122
5.3.3 Attainable standard 122
5.3.4 Current standard 122
5.4 Setting standard costs 122
5.4.1 Standard material price 122
5.4.2 Standard material usage 123
5.4.3 Standard labour rate 123
5.4.4 Standard labour times 123
5.4.5 Variable production overhead costs 123
5.5 Updating standards 123
5.6 Standard costing in the modern business environment 124
5.7 What is variance analysis? 124
5.8 Variable cost variances 124
5.8.1 Direct material cost variances 125
5.8.2 The direct material price variance and inventory valuation 126
5.8.3 Direct labour cost variances 127
5.8.4 Variable overhead cost variances 128
FUNDAMENTALS OF MANAGEMENT ACCOUNTING C1
vi
CONTENTS
5.9 Sales variances 129
5.9.1 Sales price variance 129
5.9.2 Sales volume contribution variance 130
5.10 Summary 130
Revision Questions 131
Solutions to Revision Questions 137
6 Further Standard Costing 143
Learning Outcomes 145
6.1 Introduction 145
6.2 Reconciling actual contribution with budgeted contribution 145
6.3 Idle time variances 148
6.4 Interpreting variances 149
6.4.1 The reasons for variances 149
6.4.2 The signifi cance of variances 150
6.5 Standard hour 152
6.6 Labour incentive schemes 153
6.6.1 Bonus schemes 153
6.6.2 Piecework systems 154
6.6.3 Guaranteed minimum wage 155
6.6.4 Differential piece rate 155
6.6.5 Piecework hours 156
6.6.6 Group incentive schemes 156
6.7 Summary 157
Revision Questions 159
Solutions to Revision Questions 163
7 Integrated Accounting Systems 169
Learning Outcomes 171
7.1 Introduction 171
7.2 An integrated accounting system 171
7.3 Accounting for the cost of labour 172
7.3.1 Deductions from employees ’ wages 172
7.3.2 Overtime premium 172
7.3.3 Bonus earnings 173
7.3.4 Idle time 173
7.3.5 Example: analysis of labour costs 173
7.4 Integrated accounts in operation 174
7.4.1 Example: the main accounting entries in an integrated system 174
7.4.2 Accounting for under- or over-absorbed overheads 176
7.4.3 Example: integrated accounts 177
7.5 Standard cost bookkeeping 184
7.6 Recording variances in the ledger accounts 184
7.6.1 General rules for recording variances 184
7.6.2 The income statement 185
7.7 Standard cost bookkeeping: an example 185
7.8 Valuing material inventory at actual cost 192
7.8.1 Which inventory valuation method is generally preferred? 193
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FUNDAMENTALS OF MANAGEMENT ACCOUNTING
CONTENTS
7.9 Summary 193
Revision Questions 195
Solutions to Revision Questions 203
8 Specifi c Order Costing 207
Learning Outcomes 209
8.1 Introduction 209
8.2 Job costing 209
8.2.1 Job cost sheets and databases 210
8.2.2 Collecting the direct costs of each job 210
8.2.3 Attributing overhead costs to jobs 212
8.2.4 A worked example 213
8.2.5 Preparing ledger accounts for job costing systems 214
8.3 Batch costing 218
8.3.1 Example: batch costing 218
8.4 Contract costing 220
8.4.1 Architect’s certifi cates and progress payments 220
8.4.2 Retention money 220
8.4.3 Contract accounts 220
8.4.4 Accounting for contract materials 221
8.4.5 Accounting for plant used on the contract 221
8.4.6 Cost classifi cation in contract costing 221
8.4.7 Calculating contract profi t and preparing balance sheet entries 222
8.4.8 Contract costing: a worked example 222
8.4.9 Accounting for a loss-making contract 226
8.4.10 Contract costing: a second example 227
8.4.11 Contract costing: a fi nal example 230
8.5 Summary 232
Revision Questions 233
Solutions to Revision Questions 239
9 Process Costing 245
Learning Outcomes 247
9.1 Introduction 247
9.2 Process accounts 247
9.3 Losses in process 249
9.4 Abnormal losses and gains 250
9.5 Closing work in progress: the concept of equivalent units 252
9.6 Previous process costs 256
9.7 Opening work in progress 256
9.8 Process costing: a further example 258
9.9 Contrasting process costing and specifi c order costing 260
9.10 Summary 260
Revision Questions 263
Solutions to Revision Questions 271
FUNDAMENTALS OF MANAGEMENT ACCOUNTING C1
viii
CONTENTS
10 Presenting Management Information 279
Learning Outcomes 281
10.1 Introduction 281
10.2 Subjective and objective classifi cation 281
10.2.1 Responsibility centres 282
10.2.2 Reporting management accounting information 282
10.3 Coding of costs 282
10.3.1 Composite codes 282
10.3.2 The advantages of a coding system 283
10.3.3 The requirements for an effi cient coding system 284
10.4 Preparing fi nancial statements that inform management 284
10.4.1 Value added 284
10.4.2 Contribution 285
10.4.3 Gross margin 286
10.5 Managerial reports in a service organisation 287
10.5.1 Establishing a suitable cost unit 287
10.5.2 Establishing the cost per unit 287
10.5.3 The instantaneous and perishable nature of services 287
10.5.4 Managerial reporting in a charity: example 291
10.6 Summary 292
Revision Questions 293
Solutions to Revision Questions 297
11 Financial Planning and Control 301
Learning Outcomes 303
11.1 Introduction 303
11.2 The purposes of budgeting 303
11.2.1 Budgetary planning and control 304
11.2.2 What is a budget? 304
11.2.3 The budget period 304
11.2.4 Strategic planning, budgetary planning and 305
operational planning
11.3 The preparation of budgets 305
11.3.1 Coordination: the budget committee 306
11.3.2 Participative budgeting 306
11.3.3 Information: the budget manual 306
11.3.4 Early identifi cation of the principal budget factor 307
11.3.5 The interrelationship of budgets 307
11.3.6 Using computers in budget preparation 308
11.3.7 The master budget 308
11.4 Preparation of functional budgets 309
11.4.1 Budget interrelationships 311
11.5 The cash budget 311
11.5.1 Preparing cash budgets 312
11.5.2 Interpretation of the cash budget 313
11.6 A complete exercise 315
11.7 Rolling budgets 322
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FUNDAMENTALS OF MANAGEMENT ACCOUNTING
CONTENTS
11.8 Budgets for non-operating functions 322
11.8.1 Incremental budgeting 323
11.8.2 Zero-based budgeting 323
11.9 Budgetary control information 323
11.9.1 Budget centres 324
11.9.2 Budgetary control reports 324
11.10 Fixed and fl exible budgets 325
11.10.1 Flexible budgets: an example 325
11.10.2 Preparing a fl exible budget 325
11.10.3 The total budget variance 327
11.10.4 Using fl exible budgets for planning 328
11.10.5 Flexible budgets: another example 328
11.10.6 Extrapolating outside the relevant range 331
11.10.7 Example: producing a fl exible budget control statement 331
11.11 Using budgets as a basis for rewards 333
11.11.1 Example 333
11.11.2 Factors to consider in the design of budget reward 333
schemes
11.12 Summary 334
Revision Questions 335
Solutions to Revision Questions 343
Preparing for the Assessment 351
Format of the assessment 353
Revision technique 353
How to tackle the assessment 355
Revision Questions 357
Solutions to Revision Questions 389
Mock Assessment 1 423
Mock Assessment 2 451
Index 479