PM Study Text 2024-25 ACCA PDF

Valid for September 2024, ACCA (PM) December 2024, March 2025 and June 2025 Exam-focused...

Valid for September 2024, ACCA (PM) December 2024, March 2025 and June 2025 Exam-focused ACCA Kaplan’s vast classroom experience helps many students pass first time. The books are designed to cover the whole syllabus and they reflect how topics are taught in the classroom, focusing on what will be Management Performance required of you in the exam. Performance Student-friendly Using accessible language and engaging Management formats to help you understand more complex areas, Kaplan simplifies the learning process (PM) to make it easier for you to succeed. December 2024, March 2025 and June 2025 Valid for September 2024, Written by our expert tutors All Kaplan study materials are written by our subject specialists, experienced tutors who teach the paper so they know what works for students and how best to deliver it. Innovative solutions More than just books, our study materials are supported by a wealth of free online resources, including testing and course assessments. All accessible from our online learning environment MyKaplan. All the resources have been designed to keep you on your study plan and help you pass first time. Kaplan Publishing UK Study Text Study Text ISBN 978-1-83996-666-8 9 781839 966668  ACCA Applied Skills Performance Management (PM) Study Text  KAPLAN PUBLISHING’S STATEMENT OF PRINCIPLES LINGUISTIC DIVERSITY, EQUALITY AND INCLUSION We are committed to diversity, equality and inclusion and strive to deliver content that all users can relate to. We are here to make a difference to the success of every learner. Clarity, accessibility and ease of use for our learners are key to our approach. We will use contemporary examples that are rich, engaging and representative of a diverse workplace. We will include a representative mix of race and gender at the various levels of seniority within the businesses in our examples to support all our learners in aspiring to achieve their potential within their chosen careers. Roles played by characters in our examples will demonstrate richness and diversity by the use of different names, backgrounds, ethnicity and gender, with a mix of sexuality, relationships and beliefs where these are relevant to the syllabus. It must always be obvious who is being referred to in each stage of any example so that we do not detract from clarity and ease of use for each of our learners. We will actively seek feedback from our learners on our approach and keep our policy under continuous review. If you would like to provide any feedback on our linguistic approach, please use this form (you will need to enter the link below into your browser). https://docs.google.com/forms/d/1Vc4mltBPrfViy8AhfyKcJMHQKBmLaLPoa_WPqFNf4MI/edit We will seek to devise simple measures that can be used by independent assessors to randomly check our success in the implementation of our Linguistic Equality, Diversity and Inclusion Policy. P.2 KAPLAN PUBLISHING  British library cataloguing-in-publication data A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 978-1-83996-666-8 © Kaplan Financial Limited, 2024 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. Printed and bound in Great Britain. Acknowledgements We are grateful to the Association of Chartered Certified Accountants and the Chartered Institute of Management Accountants for permission to reproduce past examination questions. The answers have been prepared by Kaplan Publishing. KAPLAN PUBLISHING P.3 P.4 KAPLAN PUBLISHING  Contents Page Chapter 1 A revision of Management Accounting (MA) topics 1 Chapter 2 Management information systems 21 Chapter 3 Information systems and data analytics 51 Chapter 4 Specialist cost and management accounting techniques 81 Chapter 5 Cost volume profit analysis 149 Chapter 6 Planning with limiting factors 179 Chapter 7 Pricing 213 Chapter 8 Relevant costing 247 Chapter 9 Risk and uncertainty 281 Chapter 10 Budgeting 309 Chapter 11 Quantitative techniques 353 Chapter 12 Advanced variances 397 Chapter 13 Performance measurement and control 465 Chapter 14 Divisional performance measurement and transfer pricing 505 Chapter 15 Performance measurement in not-for-profit organisations and the public sector 537 Chapter 16 Employability and technology skills 547 Index I.1 KAPLAN PUBLISHING P.5 P.6 KAPLAN PUBLISHING  Introduction KAPLAN PUBLISHING P.7  How to use the Materials These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your examinations. The product range contains a number of features to help you in the study process. They include: 1 Detailed study guide and syllabus objectives 2 Description of the examination 3 Study skills and revision guidance 4 Study text 5 Question practice The sections on the study guide, the syllabus objectives, the examination and study skills should all be read before you commence your studies. They are designed to familiarise you with the nature and content of the examination and give you tips on how to best to approach your learning. The Study text comprises the main learning materials and gives guidance as to the importance of topics and where other related resources can be found. Each chapter includes  The learning objectives contained in each chapter, which have been carefully mapped to the examining body's own syllabus learning objectives or outcomes. You should use these to check you have a clear understanding of all the topics on which you might be assessed in the examination.  The chapter diagram provides a visual reference for the content in the chapter, giving an overview of the topics and how they link together.  The content for each topic area commences with a brief explanation or definition to put the topic into context before covering the topic in detail. You should follow your studying of the content with a review of the illustration/s. These are worked examples which will help you to understand better how to apply the content for the topic.  Test your understanding sections provide an opportunity to assess your understanding of the key topics by applying what you have learned to short questions. Answers can be found at the back of each chapter.  Summary diagrams complete each chapter to show the important links between topics and the overall content of the examination. These diagrams should be used to check that you have covered and understood the core topics before moving on.  Question practice is provided at the back of each text. P.8 KAPLAN PUBLISHING  Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to [email protected] with full details, or follow the link to the feedback form in MyKaplan. Our Quality Coordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. Icon Explanations Definition – Key definitions that you will need to learn from the core content. Test your understanding – Exercises for you to complete to ensure that you have understood the topics just learned. Illustration – Worked examples help you understand the core content better. Supplementary reading – These sections will help to provide a deeper understanding of core areas. The supplementary reading is NOT optional reading. It is vital to provide you with the breadth of knowledge you will need to address the wide range of topics within your syllabus that could feature in an exam question. Reference to this text is vital when self- studying. On-line subscribers Our on-line resources are designed to increase the flexibility of your learning materials and provide you with immediate feedback on how your studies are progressing. If you are subscribed to our on-line resources you will find: 1 On-line reference ware: reproduces your Study Text on-line, giving you anytime, anywhere access. 2 On-line testing: provides you with additional on-line objective testing so you can practice what you have learned further. 3 On-line performance management: immediate access to your on-line testing results. Review your performance by key topics and chart your achievement through the course relative to your peer group. Ask your local customer services staff if you are not already a subscriber and wish to join. KAPLAN PUBLISHING P.9  ACCA Performance Objectives In order to become a member of the ACCA, as a trainee accountant you will need to demonstrate that you have achieved nine performance objectives. Performance objectives are indicators of effective performance and set the minimum standard of work that trainees are expected to achieve and demonstrate in the workplace. They are divided into key areas of knowledge which are closely linked to the exam syllabus. There are five Essential performance objectives and a choice of fifteen Technical performance objectives which are divided into five areas. The performance objectives which link to this exam are: 1 Ethics and professionalism (Essential) 2 Strategy and innovation (Essential) 3 Leadership and management (Essential) 4 Evaluate management accounting systems (Technical) 5 Plan and control performance (Technical) 6 Monitor performance (Technical) The following link provides an in depth insight into all of the performance objectives: https://www.accaglobal.com/content/dam/ACCA_Global/Students/per/PER- Performance-objectives-achieve.pdf P.10 KAPLAN PUBLISHING  Progression There are two elements of progression that we can measure: first how quickly students move through individual topics within a subject; and second how quickly they move from one course to the next. We know that there is an optimum for both, but it can vary from subject to subject and from student to student. However, using data and our experience of student performance over many years, we can make some generalisations. A fixed period of study set out at the start of a course with key milestones is important. This can be within a subject, for example ‘I will finish this topic by 30 June’, or for overall achievement, such as ‘I want to be qualified by the end of next year’. Your qualification is cumulative, as earlier papers provide a foundation for your subsequent studies, so do not allow there to be too big a gap between one subject and another. We know that exams encourage techniques that lead to some degree of short term retention, the result being that you will simply forget much of what you have already learned unless it is refreshed (look up Ebbinghaus Forgetting Curve for more details on this). This makes it more difficult as you move from one subject to another: not only will you have to learn the new subject, you will also have to relearn all the underpinning knowledge as well. This is very inefficient and slows down your overall progression which makes it more likely you may not succeed at all. In addition, delaying your studies slows your path to qualification which can have negative impacts on your career, postponing the opportunity to apply for higher level positions and therefore higher pay. You can use the following diagram showing the whole structure of your qualification to help you keep track of your progress. KAPLAN PUBLISHING P.11  The diagram below shows links between this exam and other exams preceding or following it. Some exams are directly underpinned by other exams such as Advanced Performance Management by Performance Management. This diagram indicates where students are expected to have underpinning knowledge and where it would be useful to review previous learning before undertaking study: P.12 KAPLAN PUBLISHING  Syllabus Introduction Syllabus objectives We have reproduced the ACCA’s syllabus below, showing where the objectives are explored within this book. Within the chapters, we have broken down the extensive information found in the syllabus into easily digestible and relevant sections, called Content Objectives. These correspond to the objectives at the beginning of each chapter. Syllabus learning objective Chapter reference A INFORMATION, TECHNOLOGIES AND SYSTEMS FOR ORGANISATIONAL PERFORMANCE 1 Managing information systems (a) Explain the role of information systems in 2 organisations. (b) Discuss the costs and benefits of information 2 systems. (c) Explain the uses of the internet, intranet, wireless 2 technology and networks. (d) Identify the accounting information requirements and 3 describe the different types of information systems used for strategic planning, management control and operational control and decision-making. (e) Define and discuss the main characteristics of 3 transaction processing systems; management information systems; executive information systems; enterprise resource planning systems and customer relationship management systems. 2 Uses and control of information (a) Demonstrate how principal sources of management 2 information might be used for control purposes. (b) Discuss the principal controls required in generating 2 and distributing internal information. (c) Discuss the controls and procedures which may be 2 necessary to ensure the security of highly confidential information that is not for external consumption. (d) Discuss the importance of data visualisation in the 2 presentation of management information. KAPLAN PUBLISHING P.13  3 Big data and data analytics (a) Describe the characteristics (volume, velocity, variety, 3 veracity and value) of big data. (b) Explain the purpose of the big data pyramid (data, 3 information, knowledge, wisdom). (c) Explain the uses and benefits of big data, data mining 3 and data analytics, e.g. predictive analytics for planning, costing, decision-making and performance management. (d) Discuss the challenges and risks of implementing and 3 using big data and data analytics in an organisation. B SPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES 1 Activity-based costing (a) Identify appropriate cost drivers under ABC. 4 (b) Calculate costs per driver and per unit using ABC. 4 (c) Compare ABC and traditional methods of overhead 4 absorption based on production units, labour hours or machine hours. 2 Target costing (a) Derive a target cost in manufacturing and service 4 industries. (b) Explain the difficulties of using target costing in service 4 industries. (c) Suggest how a target cost gap might be closed. 4 3 Life-cycle costing (a) Identify the costs involved at different stages of the 4 lifecycle. (b) Derive a life cycle cost or profit in manufacturing and 4 service industries. (c) Identify the benefits of life cycle costing. 4 4 Throughput accounting (a) Discuss and apply the theory of constraints. (b) Calculate and interpret a throughput accounting ratio 4 (TPAR). (c) Suggest how a TPAR could be improved. 4 (d) Apply throughput accounting to a multi-product decision 4 making problem. P.14 KAPLAN PUBLISHING  5 Accounting for environmental and sustainability factors (a) Discuss the issues business face in the management of 4 environmental costs. (b) Describe the different methods a business may use to 4 account for its environmental costs. (c) Discuss the issues organisations face in accounting for 4 environmental and sustainability factors. (d) Discuss the role of the management accountant in 4 supporting the business to develop sustainable practices. C DECISION-MAKING TECHNIQUES 1 Relevant cost analysis (a) Explain the concept of relevant costing. 8 (b) Identify and calculate relevant costs for specific 8 decision situations from given data. (c) Explain and apply the concept of opportunity costs. 8 2 Cost volume profit analysis (a) Explain the nature of CVP analysis. 5 (b) Calculate and interpret breakeven point and margin of 5 safety. (c) Calculate the contribution to sales ratio, in single and 5 multi-product situations, and demonstrate an understanding of its use. (d) Calculate target profit or revenue in single and multi- 5 product situations, and demonstrate an understanding of its use. (e) Interpret break-even charts and profit-volume charts 5 and interpret the information contained within each, including multi-product situations. (f) Discuss the limitations of CVP analysis for planning and 5 decision-making. 3 Limiting factors (a) Identify limiting factors in a scarce resource situation 6 and select an appropriate technique. (b) Determine the optimal production plan where an 6 organisation is restricted by a single limiting factor, including within the context of make-or-buy decisions. (c) Formulate and solve multiple scarce resource problems 6 using both linear programming graphs and simultaneous equations as appropriate. KAPLAN PUBLISHING P.15  (d) Explain and calculate shadow prices (dual prices) and 6 discuss their implications on decision-making and performance management. (e) Calculate slack and explain the implications of the 6 existence of slack for decision-making and performance management (excluding simplex and sensitivity to changes in objective functions). 4 Pricing decisions (a) Explain the factors that influence the pricing of a 7 product or service. (b) Calculate and explain the price elasticity of demand. 7 (c) Derive and manipulate a straight line demand equation. Derive an equation for the total cost function (including volume-based discounts). (d) Calculate the optimum selling price and quantity for a 7 product, equating marginal cost and marginal revenue. (e) Evaluate a decision to increase production and sales 7 levels considering incremental costs, incremental revenues and other factors. (f) Determine prices and output levels for profit 7 maximisation using the demand based approach to pricing (both tabular and algebraic methods). (g) Explain different price strategies, including: 7 (i) all forms of cost-plus (ii) skimming (iii) penetration (iv) complementary product (v) product-line (vi) volume discounting (vii) discrimination (viii) relevant cost. (h) Calculate a price from a given strategy using cost-plus 7&8 and relevant cost. P.16 KAPLAN PUBLISHING  5 Make-or-buy and other short-term decisions (a) Explain the issues surrounding make-or-buy and 8 outsourcing decisions. (b) Calculate and compare ‘make’ costs with ‘buy-in’ 8 costs. (c) Compare in-house costs and outsource costs of 8 completing tasks and consider other issues surrounding this decision. (d) Apply relevant costing principles in situations involving 8 shut down, one-off contracts and the further processing of joint products. 6 Dealing with risk and uncertainty in decision making (a) Suggest research techniques to reduce uncertainty, 9 e.g. focus groups, market research. (b) Explain the use of simulation, expected values and 9 sensitivity. (c) Apply expected values and sensitivity to decision- 9 making problems. (d) Apply the techniques of maximax, maximin, and 9 minimax regret to decision-making problems including the production of profit tables. (e) Interpret a decision tree and use it to solve a multi- 9 stage decision problem. (f) Calculate the value of perfect information and imperfect 9 information. D BUDGETING AND CONTROL 1 Budgetary systems and types of budget (a) Explain how budgetary systems fit within the 10 performance hierarchy. (b) Select and explain appropriate budgetary systems for 10 an organisation, including top-down, bottom-up, rolling, zero-based, activity-based, incremental and feed- forward control. (c) Describe the information used in budget systems and 10 the sources of the information needed. (d) Indicate the usefulness and problems with different 10 budget types (including fixed, flexible, zero-based, activity-based, incremental, rolling, top-down bottom- up, master, functional). (e) Prepare flexed budgets, rolling budgets and activity- 10 based budgets. KAPLAN PUBLISHING P.17  (f) Explain the beyond budgeting model, including the 10 benefits and problems that may be faced if it is adopted in an organisation. (g) Discuss the issues surrounding setting the difficulty 10 level for a budget. (h) Explain the benefits and difficulties of the participation 10 of employees in the negotiation of targets. (i) Explain the difficulties of changing a budgetary system 10 or type of budget used. (j) Explain how budget systems can deal with uncertainty 10 in the environment. (k) Discuss ethical and sustainability considerations when 10 setting budgets. 2 Analytical techniques in budgeting and forecasting (a) Analyse fixed and variable cost elements from total cost 11 data using high/low method. (b) Explain and apply analysis techniques including 11 correlation, regression and time series. (c) Estimate the learning rate and learning effect. 11 (d) Apply the learning curve model to a budgetary problem, 11 including calculations on steady states. (e) Discuss the benefits and limitations of correlation, 11 regression and time series techniques, and also the reservations with the learning curve model. 3 Standard costing (a) Explain the use of standard costs. 1 (b) Outline the methods used to derive standard costs and 1 discuss the different types of costs possible. (c) Explain and illustrate the importance of flexing budgets 1 & 10 in performance management. (d) Explain and apply the principle of controllability in the 1 performance management system. 4 Material mix and yield variances (a) Calculate, identify the cause of and explain mix and 12 yield variances. (b) Explain the wider issues involved in changing mix 12 e.g. cost, quality and performance measurement issues. P.18 KAPLAN PUBLISHING  (c) Identify and explain the relationship of the material 12 usage variance with the material and mix and yield variances. (d) Suggest and justify alternative methods of controlling 12 production processes. 5 Sales mix and quantity variances (a) Calculate, identify the cause of, and explain sales mix 12 and quantity variances. (b) Identify and explain the relationship of the sales volume 12 variances with the sales mix and quantity variances. 6 Planning and operational variances (a) Calculate a revised budget. 12 (b) Identify and explain those factors that could and could 12 not be allowed to revise an original budget. (c) Calculate, identify the cause of and explain planning 12 and operational variances for: (i) sales, including market size and market share (ii) materials (iii) labour, including the effect of the learning curve. (d) Explain and discuss the manipulation issues in revising 12 budgets. 7 Performance analysis (a) Analyse and evaluate past performance using the 12 results of variance analysis. (b) Use variance analysis to assess how future 12 performance of an organisation or business can be improved. (c) Identify the factors which influence behaviour. 10 & 12 (d) Discuss the effect that variances have on staff 12 motivation and action. (e) Describe the dysfunctional nature of some variances in 12 the modern environment of JIT and TQM. (f) Discuss the behavioural problems resulting from using 12 standard costs in rapidly changing environments. KAPLAN PUBLISHING P.19  E PERFORMANCE MEASUREMENT AND CONTROL 1 Performance analysis in private sector, public sector and not-for-profit organisations (a) Describe and calculate and interpret suitable financial 13 performance indicators (FPIs) for profitability, liquidity, efficiency and gearing. (b) Describe, calculate and interpret suitable non-financial 13 & 15 performance indicators (NFPIs). (c) Analyse past performance and suggest ways for 13 & 15 improving financial and non-financial performance. (d) Explain the causes and problems created by short- 13 termism and financial manipulation of results. (e) Discuss the issues organisations face by favouring 13 short-term financial gain over long-term sustainability. (f) Explain and interpret the Balanced Scorecard, and the 13 Building Block model proposed by Fitzgerald and Moon. (g) Discuss the difficulties of target setting in qualitative 13 & 15 areas. (h) Explain the need to allow for external considerations in 13 performance management, including stakeholders, market conditions and allowance for competitors. (i) Interpret performance in the light of external 13 considerations and the need to consider sustainability. 2 Divisional performance and transfer pricing (a) Explain and illustrate the basis for setting a transfer 14 price using variable cost, full cost and the principles behind allowing for intermediate markets. (b) Explain how transfer prices can distort the performance 14 assessment of divisions and decisions made. (c) Explain the meaning of, and calculate, Return on 14 Investment (ROI) and Residual Income (RI), and discuss their shortcomings. (d) Compare divisional performance and recognise the 14 problems of doing so. 3 Specific performance analysis issues in not-for-profit organisations and the public sector (a) Comment on the problems of having non-quantifiable 15 objectives in performance management. (b) Comment on the problems of having multiple objectives 15 in not-for-profit organisations and the public sector. P.20 KAPLAN PUBLISHING  (c) Explain how performance could be measured in not-for- 15 profit organisations and the public sector. (d) Explain Value for Money (VFM) as a public sector 15 objective and how the 3Es can be used to achieve VFM. The superscript numbers in square brackets indicate the intellectual depth at which the subject area could be assessed within the examination; this is the level at which students should understand a particular subject or topic area. These levels of understanding, known as cognitive levels, are important as they indicate the depth to which each part of the syllabus may be examined. Level 1 (Applied Knowledge) tasks might concern knowledge and comprehension (asking students to ‘list’, ‘define’, ‘identify’, ‘calculate’, ‘explain’.) Level 2 (Applied Skills) tasks concern application and analysis (‘compute, ‘contrast’, ‘explain’, ‘discuss’). Examination format The CBE exam duration is of 3 hours, plus 10 minutes to read pre-exam instructions. Examination tips Spend time reading the examination paper carefully. We recommend that 10 minutes should be spent reading, paying particular attention to Sections B and C, where questions will be based on longer scenarios than the 2 marks OTs in Section A. If 10 minutes are spent reading the examination paper, this leaves three hours to attempt the questions:  Divide the time you spend on questions in proportion to the marks on offer.  One suggestion for this examination is to allocate 1.8 minutes to each mark available (180 minutes/100 marks), so a 20-mark question should be completed in approximately 36 minutes. If you plan to spend more or less time than 10 minutes reading the paper, your time allocation per mark will be different. The Performance Management (PM) exam is divided into three different sections, requiring the application of different skills to be successful. KAPLAN PUBLISHING P.21  Section A Section A questions can cover any area of the syllabus. Stick to the timing principle of 1.8 minutes per mark. This means that the 15 OT questions in Section A (30 marks) should take 54 minutes. Work steadily. Rushing leads to careless mistakes and the OT questions are designed to include answers which result from careless mistakes. If you don't know the answer, eliminate those options you know are incorrect and see if the answer becomes more obvious. Remember that there is no negative marking for an incorrect answer. After you have eliminated the options that you know to be wrong, if you are still unsure, guess. The different types of OT questions are:  Multiple choice questions: students need to choose one answer from a number of given options.  Multiple response questions are a kind of multiple choice question, except students need to select more than one answer from a number of given options. The question will specify how many answers need to be selected, but the system won’t stop students from selecting more answers than this, so it’s important to read the question carefully.  Fill in the blank questions require students to type an answer into a box. The unit of measurement will sit outside the box, and if there are specific rounding requirements these will be displayed.  Drag and drop questions involve students dragging an answer and dropping it into place. Some questions could involve matching more than one answer to a response area and some questions may have more answer choices than response areas, which means not all available answer choices need to be used.  Drop down list questions require students to select one answer from a drop down list. Some of these questions may contain more than one drop down list and an answer has to be selected from each one.  Hot Spot questions, students are required to select one point on an image as their answer. When the cursor is hovered over the image, it will display as an “X”. To answer, students will place the X on the appropriate point on the diagram. The image will have been set so that as long as part of the X is touching the specific part of the image that represents the correct answer, it will be marked correct, but not if it is also touching another possible answer.  Hot areas questions are similar to hot spot questions, but instead of selecting a specific point students are required to select one or more areas in an image. It’s important to read the question carefully because the Navigator and Item Review screens will show these questions as complete, even if students have not provided a full answer. P.22 KAPLAN PUBLISHING  Section B Section B questions can cover any area of the syllabus. Each OT case contains a group of five OT questions based around a single scenario. These can be any combination of the single OT question types and they are auto-marked in the same way as the single OT questions. OT cases are worth 10 marks (each of the five OTs within it are worth two marks, and as with the OT questions described above, students will receive either two marks or zero marks for those individual questions). OT cases are written so that there are no dependencies between the individual questions. So, if a student gets the first question wrong, this does not affect their ability to get the other four correct. The OT case scenario remains on screen so students can see it while answering the questions. However, a moveable splitter bar enables the student to focus on either the scenario or the questions. There is likely to be a significant amount of information to read through for each case. You should begin by reading the OT questions that relate to the case, so that when you read through the information for the first time, you know what it is that you are required to do. Each OT question is worth two marks. Therefore you have 18 minutes (1.8 minutes per mark) to answer the five OT questions relating to each case. It is likely that all of the cases will take the same length of time to answer, although some of the OT questions within a case may be quicker than other OT questions within that same case. Once you have read through the information, you should first answer any of the OT questions that do not require workings and can be quickly answered. You should then attempt the OT questions that require workings utilising the remaining time for that case. All of the tips for section A are equally applicable to each section B question. Section C The constructed response questions in section C will require a written response rather than being OT questions. Therefore, different techniques need to be used to score well. Section C will contain one question from the performance measurement and control area of the syllabus, and one question from decision making and/or budgeting and control areas of the syllabus. These questions may also include requirements related to the management information systems and data analytics, and accounting for environmental and sustainability areas of the syllabus. For these question types, students produce individual written and numerical answers which they insert into blank word processing pages, blank spreadsheets, or pre-formatted templates. A number of standard word processing and spreadsheet functions are available via the menu and tool bar for students to use when responding to the question. Because students provide unique answers, either in their own words or by calculating and presenting numerical answers in spreadsheets, this section will be marked by an expert. All workings and calculations will be viewed and assessed, just like in paper exams – this means, for example, that if students use any formulae for the spreadsheet questions, markers will see the formulae and not just the final answer, so they will understand how students have reached their answers. KAPLAN PUBLISHING P.23  Unless you know exactly how to answer the question, spend some time planning your answer. Stick to the question and tailor your answer to what you are asked. Pay particular attention to the verbs in the question e.g. 'Calculate', 'State', 'Explain'. If you get completely stuck with a question, leave it and return to it later. If you do not understand what a question is asking, state your assumptions. Even if you do not answer in precisely the way the examining team hoped, you should be given some credit, provided that your assumptions are reasonable. You should do everything you can to make things easy for the marker. The marker will find it easier to identify the points you have made if your answers are well structured with a separate paragraph for each key point. Computations: It is essential to include all your workings in your answers. Many computational questions require the use of a standard format. Be sure you know these formats thoroughly before the examination and use the layouts that you see in the answers given in this book and in model answers. Adopt a logical approach and cross reference workings to the main computation to keep your answers tidy. All sections Don’t skip parts of the syllabus. Spend time learning the rules and definitions. Practice plenty of questions to improve your ability to apply the techniques and perform the calculations. Spend the last five minutes reading through your answers and making any additions or corrections. Method of examination For examinations from September 2019, only computer-based examinations (CBE) will be available in respect of the ACCA Applied Skills Level. OT questions in sections A and B will be of varying styles. These styles include multiple choice, number entry, pull down list, multiple response, hot area, and drag and drop. A full explanation of these question types is included in the Kaplan Exam Kit. In Section C, the response areas for each part of each question will be either a spreadsheet or a word processing field. If you would like further information on sitting a CBE examination please contact either Kaplan, or ACCA. Case studies: Most questions will be based on specific scenarios. To construct a good answer first identify the areas in which there are problems, outline the main principles/theories you are going to use to answer the question, and then apply the principles/theories to the case. It is essential that you tailor your comments to the scenario given. P.24 KAPLAN PUBLISHING  Essay questions: Some questions may contain short essay-style requirements. Your answer should have a clear structure. It should contain a brief introduction, a main section and a conclusion. Be concise. It is better to write a little about a lot of different points than a great deal about one or two points. Computations: It is essential to include all your workings in your answers. Many computational questions require the use of a standard format. Be sure you know these formats thoroughly before the exam and use the layouts that you see in the answers given in this book and in model answers. Reports, memos and other documents: some questions ask you to present your answer in the form of a report or a memo or other document. So use the correct format – there could be easy marks to gain here. ACCA Support For additional support with your studies, please also refer to www.accagobal.com Study skills and revision guidance This section aims to give guidance on how to study for your ACCA exams and to give ideas on how to improve your existing study techniques. Preparing to study Set your objectives Before starting to study decide what you want to achieve – the type of pass you wish to obtain. This will decide the level of commitment and time you need to dedicate to your studies. Devise a study plan Determine which times of the week you will study. Split these times into sessions of at least one hour for study of new material. Any shorter periods could be used for revision or practice. Put the times you plan to study onto a study plan for the weeks from now until the exam and set yourself targets for each period of study – in your sessions make sure you cover the course, course assignments and revision. If you are studying for more than one exam at a time, try to vary your subjects as this can help you to keep interested and see subjects as part of wider knowledge. When working through your course, compare your progress with your plan and, if necessary, re-plan your work (perhaps including extra sessions) or, if you are ahead, do some extra revision/practice questions. KAPLAN PUBLISHING P.25  Effective studying Active reading You are not expected to learn the text by rote, rather, you must understand what you are reading and be able to use it to pass the exam and develop good practice. A good technique to use is SQ3Rs – Survey, Question, Read, Recall, Review: Trying to summarise a chapter without referring to the text can be a useful way of determining which areas you know and which you don't. 1 Survey the chapter – look at the headings and read the introduction, summary and objectives, so as to get an overview of what the chapter deals with. 2 Question – whilst undertaking the survey, ask yourself the questions that you hope the chapter will answer for you. 3 Read through the chapter thoroughly, answering the questions and making sure you can meet the objectives. Attempt the exercises and activities in the text, and work through all the examples. 4 Recall – at the end of each section and at the end of the chapter, try to recall the main ideas of the section/chapter without referring to the text. This is best done after a short break of a couple of minutes after the reading stage. 5 Review – check that your recall notes are correct. You may also find it helpful to re-read the chapter to try to see the topic(s) it deals with as a whole. Note-taking Taking notes is a useful way of learning, but do not simply copy out the text. The notes must:  be in your own words  be concise  cover the key points  be well-organised  be modified as you study further chapters in this text or in related ones. Trying to summarise a chapter without referring to the text can be a useful way of determining which areas you know and which you don't. P.26 KAPLAN PUBLISHING  Three ways of taking notes: Summarise the key points of a chapter. Make linear notes – a list of headings, divided up with subheadings listing the key points. If you use linear notes, you can use different colours to highlight key points and keep topic areas together. Use plenty of space to make your notes easy to use. Try a diagrammatic form – the most common of which is a mind-map. To make a mind-map, put the main heading in the centre of the paper and put a circle around it. Then draw short lines radiating from this to the main sub- headings, which again have circles around them. Then continue the process from the sub-headings to sub-sub-headings, advantages, disadvantages, etc. Highlighting and underlining You may find it useful to underline or highlight key points in your study text – but do be selective. You may also wish to make notes in the margins. Revision The best approach to revision is to revise the course as you work through it. Also try to leave four to six weeks before the exam for final revision. Make sure you cover the whole syllabus and pay special attention to those areas where your knowledge is weak. Here are some recommendations: Read through the text and your notes again and condense your notes into key phrases. It may help to put key revision points onto index cards to look at when you have a few minutes to spare. Review any assignments you have completed and look at where you lost marks – put more work into those areas where you were weak. Practise exam standard questions under timed conditions. If you are short of time, list the points that you would cover in your answer and then read the model answer, but do try to complete at least a few questions under exam conditions. Also practise producing answer plans and comparing them to the model answer. If you are stuck on a topic find somebody (a tutor) to explain it to you. Read good newspapers and professional journals, especially ACCA's Student Accountant – this can give you an advantage in the exam. Ensure you know the structure of the exam – how many questions and of what type you will be expected to answer. During your revision attempt all the different styles of questions you may be asked. Further reading You can find further reading and technical articles under the student section of ACCA's website. KAPLAN PUBLISHING P.27  FORMULAE SHEET Regression analysis y = a + bx ഥ y ഥ x a= –b n n nxy – xy b= 2 nx2 – (x) Learning curve Y = axb Where y = cumulative average time per unit to produce × units a = the time taken for the first unit of output x = the cumulative number of units produced b = the index of learning (log LR/log2) LR = the learning rate as a decimal Demand curve P = a − bQ Change in price b= Change in quantity a = price when Q = 0 MR = a – 2bQ P.28 KAPLAN PUBLISHING Chapter 1 A revision of Management Accounting (MA) topics Chapter learning objectives The contents of this chapter are now assumed knowledge from the Management Accounting (‘MA’) syllabus. Absorption, marginal and standard costing, and the basics of variance analysis, were encountered in Management Accounting (MA). In the ACCA Performance Management (PM) exam, you will have to cope with the following:  new, more advanced variances,  more complex calculations,  discussion of the results and implications of your calculations. Upon completion of this chapter you will be able to:  Explain the use of standard costs.  Outline the methods used to derive standard costs and discuss the different types of costs possible.  Explain and illustrate the importance of flexing budgets in performance management.  Explain and apply the principle of controllability in the performance management system. KAPLAN PUBLISHING 1 A revision of Management Accounting (MA) topics 1 What is the purpose of costing? In Management Accounting (MA), we learnt how to determine the cost per unit for a product. We might need to know this cost in order to:  Value inventory – the cost per unit can be used to value inventory in the statement of financial position (balance sheet).  Record costs – the costs associated with the product need to be recorded in the statement of profit or loss.  Price products – the business will use the cost per unit to assist in pricing the product. For example, if the cost per unit is $0.30, the business may decide to price the product at $0.50 per unit in order to make the required profit of $0.20 per unit.  Make decisions – the business will use the cost information to make important decisions regarding which products should be made and in what quantities. How can we calculate the cost per unit? There are a number of costing methods available, most of them based on standard costing. 2 KAPLAN PUBLISHING  Chapter 1 Standard costing A standard cost for a product or service is a predetermined unit cost set under specified working conditions. The main purposes of standard costs are:  Control: the standard cost can be compared to the actual costs and any differences investigated.  Planning: standard costing can help with budgeting.  Performance measurement: any differences between the standard and the actual cost can be used as a basis for assessing the performance of cost centre managers.  Inventory valuation: an alternative to methods such as LIFO and FIFO.  Accounting simplification: there is only one cost, the standard. Standard costing is most suited to organisations with:  mass production of homogenous products  repetitive assembly work. The large scale repetition of production allows the average usage of resources to be determined. Standard costing is less suited to organisations that produce non-homogenous products or where the level of human intervention is high. McDonaldisation Restaurants traditionally found it difficult to apply standard costing because each dish is slightly different to the last and there is a high level of human intervention. McDonalds attempted to overcome these problems by:  Making each type of product produced identical. For example, each Big Mac contains a pre-measured amount of sauce and two gherkins. This is the standard in all restaurants.  Reducing the amount of human intervention. For example, staff do not pour the drinks themselves but use machines which dispense the same volume of drink each time. KAPLAN PUBLISHING 3 A revision of Management Accounting (MA) topics Test your understanding 1 Which of the following organisations may use standard costing? (i) a bank (ii) a kitchen designer (iii) a food manufacturer (a) (i), (ii) and (iii) (b) (i) and (ii) only (c) (ii) and (iii) only (d) (i) and (iii) only Preparing standard costs A standard cost is based on the expected price and usage of material, labour and overheads. Test your understanding 2 K Ltd makes two products. Information regarding one of those products is given below: Budgeted output/sales for the year: 900 units Standard details for one unit Direct materials 40 square metres at $5.30 per square metre Direct wages Bonding department: 24 hours at $5.00 per hour Finishing department: 15 hours at $4.80 per hour Variable overheads $1.50 per bonding labour hour $1 per finishing labour hour Fixed production overhead $36,000 Fixed non-production overhead $27,000 Note: Variable overheads are recovered (absorbed) using hours, fixed overheads are recovered on a unit basis. 4 KAPLAN PUBLISHING  Chapter 1 Required: (a) Prepare a standard cost card for one unit and enter on the standard cost card the following subtotals: (i) Prime cost (ii) Variable production cost (iii) Total production cost (iv) Total cost. (b) Calculate the selling price per unit allowing for a profit of 25% of the selling price. Types of standard There are four main types of standard: Attainable standards  They are based upon efficient (but not perfect) operating conditions.  The standard will include allowances for normal material losses, realistic allowances for fatigue, machine breakdowns, etc.  These are the most frequently encountered type of standard.  These standards may motivate employees to work harder since they provide a realistic but challenging target. Basic standards  These are long-term standards which remain unchanged over a period of years.  Their sole use is to show trends over time for such items as material prices, labour rates and efficiency and the effect of changing methods.  They cannot be used to highlight current efficiency.  These standards may demotivate employees if, over time, they become too easy to achieve and, as a result, employees may feel bored and unchallenged. Current standards  These are standards based on current working conditions.  They are useful when current conditions are abnormal and any other standard would provide meaningless information.  The disadvantage is that they do not attempt to motivate employees to improve upon current working conditions and, as a result, employees may feel unchallenged. KAPLAN PUBLISHING 5 A revision of Management Accounting (MA) topics Ideal standards  These are based upon perfect operating conditions.  This means that there is no wastage or scrap, no breakdowns, no stoppages or idle time; in short, no inefficiencies.  In their search for perfect quality, Japanese companies use ideal standards for pinpointing areas where close examination may result in large cost savings.  Ideal standards may have an adverse motivational impact since employees may feel that the standard is impossible to achieve. Preparing standard costs which allow for idle time and waste Attainable standards are set at levels which include an allowance for:  Idle time, i.e. employees are paid for time when they are not working.  Waste, i.e. of materials. Test your understanding 3 The fastest time in which a batch of 20 ‘spicy meat special’ sandwiches has been made was 32 minutes, with no hold-ups. However, work studies have shown that, on average, about 8% of the sandwich makers’ time is non-productive and that, in addition to this, setup time (getting ingredients together etc.), is 2 minutes. If the sandwich-makers are paid $4.50 per hour, what is the attainable standard labour cost of one sandwich? Flexible budgeting Before introducing the concept of flexible budgeting it is important to understand the following terms:  Fixed budget: this is prepared before the beginning of a budget period for a single level of activity.  Flexible budget: this is also prepared before the beginning of a budget period. It is prepared for a number of levels of activity and requires the analysis of costs between fixed and variable elements.  Flexed budget: this is prepared at the end of the budget period. It provides a more meaningful estimate of costs and revenues and is based on the actual level of output. 6 KAPLAN PUBLISHING  Chapter 1 Budgetary control compares actual results against expected results. The difference between the two is called a variance. The actual results may be better (favourable variance) or worse (adverse variance) than expected. It can be useful to present these figures in a flexible budget statement. (Note: This is not the same as a flexible budget). Test your understanding 4 A business has prepared the following standard cost card based on producing and selling 10,000 units per month: $ Selling price 10 Variable production costs 3 Fixed production cost 1 ––– Profit per unit 6 ––– Actual production and sales for month 1 were 12,000 units and this resulted in the following: $000 Sales 125 Variable production costs 40 Fixed production cost 9 ––– Total profit 76 ––– Required: Using a flexible budgeting approach, prepare a table showing the original fixed budget, the flexed budget, the actual results and the total meaningful variances. Controllability and performance management A cost is controllable if a manager is responsible for it being incurred or is able to authorise the expenditure. A manager should only be evaluated on the costs over which they have control. It is worth emphasising that this concept of controllability is an important idea that will be revisited many times throughout the syllabus. KAPLAN PUBLISHING 7 A revision of Management Accounting (MA) topics Test your understanding 5 The materials purchasing manager is assessed on:  total material expenditure for the organisation  the cost of introducing safety measures, regarding the standard and the quality of materials, in accordance with revised government legislation  a notional rental cost, allocated by head office, for the material storage area. Required: Discuss whether these costs are controllable by the manager and if they should be used to appraise the manager. Test your understanding 6 Explain whether a production manager should be accountable for direct labour and direct materials cost variances. 2 Traditional costing methods: AC and MC Chapter 4, focuses on one of the modern costing techniques: Activity Based Costing (ABC). However, in order to understand ABC and the benefits that it can bring, it is useful to start by reminding ourselves of the two main traditional costing methods: Absorption Costing (AC) and Marginal Costing (MC). These will be referred to again in the Advanced Variances chapter. Absorption costing The aim of traditional absorption costing is to determine the full production cost per unit. 8 KAPLAN PUBLISHING  Chapter 1 When we use absorption costing to determine the cost per unit, we focus on the production costs only. We can summarise these costs into a cost card: Standard Cost Card Product Widget, Ref. ABG56A Direct materials Cost Requirement $ Material A $2.00 per kg 6 kgs p.u. 12.00 Material B $3.00 per kg 2 kgs p.u. 6.00 Material C $4.00 per litre 1 litre 4.00 ––––– 22.00 ––––– Direct labour Grade I labour $4.00 3 hours p.u. 12.00 Grade II labour $5.40 5 hours p.u. 27.00 ––––– PRIME COST 61.00 ––––– Variable production overhead $1.00 8 hours 8.00 Fixed production overhead $3.00 8 hours 24.00 ––––– Standard full production cost 93.00 ––––– It is relatively easy to estimate the cost per unit for direct materials and labour. In doing so we can complete the first two lines of the cost card. Prime cost is the total of all direct costs. However, it is much more difficult to estimate the production overhead per unit. This is an indirect cost and so, by its very nature, we do not know how much is contained in each unit. Therefore, we need a method of attributing the production overheads to each unit. All production overheads must be absorbed into units of production, using a suitable basis, e.g. units produced, labour hours or machine hours. The assumption underlying this method of absorption is that overhead expenditure is connected to the volume produced. KAPLAN PUBLISHING 9 A revision of Management Accounting (MA) topics Illustration 1 – Absorption costing Saturn, a chocolate manufacturer, produces three products:  The Sky Bar, a bar of solid milk chocolate.  The Moon Egg, a fondant filled milk chocolate egg.  The Sun Bar, a biscuit and nougat based chocolate bar. Information relating to each of the products is as follows: Sky Moon Sun Bar Egg Bar Direct labour cost per unit ($) 0.07 0.14 0.12 Direct material cost per unit ($) 0.17 0.19 0.16 Actual production/sales (units) 500,000 150,000 250,000 Direct labour hours per unit 0.001 0.01 0.005 Direct machine hours per unit 0.01 0.04 0.02 Selling price per unit ($) 0.50 0.45 0.43 Annual production overhead = $80,000 Required: Using traditional absorption costing, calculate the full production cost per unit and the profit per unit for each product. Comment on the implications of the figures calculated. Solution As mentioned, it is relatively easy to complete the first two lines of the cost card. The difficult part is calculating the production overhead per unit, so let’s start by considering this. We need to absorb the overheads into units of production. To do this, we will first need to calculate an overhead absorption rate (OAR): Production overhead ሺthis is $80,000, as per the questionሻ OAR = Activity level (this must be chosen) The activity level must be appropriate for the business. Saturn must choose between three activity levels:  Units of production – This would not be appropriate since Saturn produces more than one type of product. It would not be fair to absorb the same amount of overhead into each product. 10 KAPLAN PUBLISHING  Chapter 1  Machine hours or labour hours – It is fair to absorb production overheads into the products based on the labour or machine hours taken to produce each unit. We must decide if the most appropriate activity level is machine or labour hours. To do this we can look at the nature of the process. Production appears to be more machine intensive than labour intensive because each unit takes more machine hours to produce than it does labour hours. Therefore, the most appropriate activity level is machine hours.  To calculate the OAR we need to identify the total activity level for the period i.e. the total machine hours needed to produce all three products. Working – OAR $80,000 production overhead $80,000 = (0.01 × 500k) + (0.04 × 150k) + (0.02 × 250k) hours 16,000 hours = $5 per machine hour We can now absorb these into the units of production: Sky Moon Sun Bar Egg Bar Production overheads ($) = machine hours per unit × $5 0.05 0.20 0.10 This is the difficult part done. We can now quickly complete the cost card and answer the question: Sky Moon Sun Bar Egg Bar $ $ $ Direct labour cost per unit 0.07 0.14 0.12 Direct material cost per unit 0.17 0.19 0.16 Production overhead per unit 0.05 0.20 0.10 Full production cost per unit 0.29 0.53 0.38 Selling price per unit 0.50 0.45 0.43 Profit/(loss) per unit 0.21 (0.08) 0.05 KAPLAN PUBLISHING 11 A revision of Management Accounting (MA) topics Outcome of absorption costing Based on absorption costing, the Sky Bar and the Sun Bar are both profitable. However, the Moon Egg is loss making. Managers would need to consider the future of the Moon Egg. They may look at the possibility of increasing the selling price and/or reducing costs. If this is not possible, they may make the decision to stop selling the product. However, this may prove to be the wrong decision because absorption costing does not always result in an accurate calculation of the full production cost per unit. Activity Based Costing (ABC) can be a more accurate method of calculating the full production cost per unit and as a result should lead to better decisions. 3 Under– and over-absorption A predetermined overhead absorption rate is used to smooth out seasonal fluctuations in overhead costs, and to enable unit costs to be calculated quickly throughout the year. Budgeted overhead Pre-determined overhead absorption rate = Budgeted volume 'Budgeted volume' may relate to total units, direct labour hours, machine hours, etc. If either or both of the actual overhead cost or activity volume differ from budget, the use of this rate is likely to lead to what is known as under- absorption or over-absorption of overheads. (a) Over absorption occurs if absorbed > actual (b) Under absorption occurs if absorbed < actual To calculate over or under absorption, follow 3 steps: Budgeted overhead cost 1 OAR = Budgeted level of activity 2 Overhead absorbed = actual activity × OAR 3 Overhead absorbed (in Step 2) – Actual overhead = Over/(Under) absorbed overheads 12 KAPLAN PUBLISHING  Chapter 1 Illustration 2 – Under- and over-absorption of overheads A company budgeted to produce 3,000 units of a single product in a period at a budgeted cost per unit as follows: $ per unit Direct costs 17 Fixed overheads 9 Total costs 26 per unit In the period covered by the budget, actual production was 3,200 units and actual fixed overhead expenditure was 5% above that budgeted. All other costs were as budgeted. What was the amount, if any, of over- or under-absorption of fixed overhead? Solution The budgeted fixed overhead amounts to 3,000 units × $9 = $27,000. Over/(under)absorption = Absorbed overheads – Incurred overheads. $ Fixed overhead absorbed (3,200 units × $9) 28,800 Fixed overhead incurred ($27,000 × 1.05) 28,350 Over-absorbed fixed overheads 450 What does this mean?  During the period concerned, overheads will be accounted for as units are made.  Thus by the end of the period $28,800 of overheads will have been incorporated. The precise location will depend on – whether the units concerned have been sold (in which case the costs will have ended up in cost of sales in the Statement of profit or loss) – or are remaining in closing inventory (in which case the costs will have ended up in the valuation of closing inventory on the Statement of Financial Position).  At the end of the period the company then determines that the actual overheads are $28,350 so recognise that they have accounted for $450 too many. This amount will need to be reversed out to ensure the correct costs are included.  The simplest way of dealing with this adjustment is as a separate item in the Profit and Loss account. In this case the adjustment will be a CREDIT of $450. KAPLAN PUBLISHING 13 A revision of Management Accounting (MA) topics 4 Marginal costing Marginal costing is the accounting system in which variable costs are charged to cost units, and fixed costs of the period are written off in full against the aggregate contribution. Its special value is in recognising cost behaviour, and hence assisting in decision making. The marginal cost is the extra cost arising as a result of making and selling one more unit of a product or service, or is the saving in cost as a result of making and selling one less unit. Contribution is the difference between sales value and the variable cost of sales. It may be expressed per unit or in total. It is short for 'Contribution to fixed costs and profits'. Contribution is a key concept we will come back to time and time again in management accounting. With marginal costing, contribution varies in direct proportion to the volume of the units sold. Profits will increase as sales volume rises, by the amount of extra contribution earned. Since fixed cost expenditure does not alter, marginal costing gives an accurate picture of how a firm's cash flows and profits are affected by changes in sales volumes. Illustration 3 – Marginal costing A company manufactures only one product called XY. The following information relates to the product: $ Selling price per unit 20 Direct material cost per unit (6) Direct labour cost per unit (2) Variable overhead cost per unit (4) Contribution per unit 8 Fixed costs for the period are $25,000. Required: Complete the following table: Level of activity 2,500 5,000 7,500 10,000 units units units units Revenue Variable costs Total contribution Fixed costs Total profit/(loss) Contribution per unit Profit/(loss) per unit 14 KAPLAN PUBLISHING  Chapter 1 Solution Level of activity 2,500 5,000 7,500 10,000 units units units units Revenue 50,000 100,000 150,000 200,000 Variable costs 30,000 60,000 90,000 120,000 Total contribution 20,000 40,000 60,000 80,000 Fixed costs 25,000 25,000 25,000 25,000 Total profit/(loss) (5,000) 15,000 35,000 55,000 Contribution per unit $8 $8 $8 $8 Profit/(loss) per unit $(2) $3 $4.67 $5.50 The table illustrates that contribution per unit remains constant at all levels of activity. However, profit per unit changes. Hence marginal costing is a more useful method than absorption costing for decision making, say when trying to analyse and manage costs. However, marginal costing is less useful for financial reporting – for example, inventory needs to be valued at total production cost, not just variable cost. 5 Advantages and disadvantages of AC and MC Absorption costing presents the following advantages:  It includes an element of fixed overheads in inventory values, in accordance with IAS 2.  Analysing under/over absorption of overheads is a useful exercise in controlling costs of an organisation.  In small organisations, absorbing overheads into the cost of products is the best way of estimating job costs and profits on jobs. The main disadvantage of absorption costing is that it is more complex to operate than marginal costing, and it does not provide any useful information for decision making, like marginal costing does. KAPLAN PUBLISHING 15 A revision of Management Accounting (MA) topics Marginal costing presents the following advantages:  Contribution per unit is constant, unlike profit per unit which varies with changes in sales volumes.  There is no under or over absorption of overheads (and hence no adjustment is required in the statement of profit or loss).  Fixed costs are a period cost and are charged in full to the period under consideration.  Marginal costing is useful in the decision-making process.  It is simple to operate. The main disadvantage of marginal costing is that closing inventory is not valued in accordance with IAS 2 principles, and that fixed production overheads are not shared out between units of production, but written off in full instead. 16 KAPLAN PUBLISHING  Chapter 1 6 Chapter summary KAPLAN PUBLISHING 17 A revision of Management Accounting (MA) topics Test your understanding answers Test your understanding 1 D A bank and a food manufacturer would have similar repetitive output for which standard costs could be calculated whereas a kitchen designer is likely to work on different jobs specified by the customer. Test your understanding 2 (a) $ Direct materials (40 × $5.30) 212 Direct labour: Bonding (24 hours × $5.00) 120 Finishing (15 hours at $4.80) 72 –––– (i) Prime cost 404 Variable overhead: Bonding (24 hours at $1.50 per hour) 36 Finishing (15 hours at $1 per hour) 15 –––– (ii) Variable production cost 455 Production overheads ($36,000 ÷ 900) 40 –––– (iii) Total production cost 495 Non-production overheads ($27,000 ÷ 900) 30 –––– (iv) Total cost 525 (b) Profit ((25/75) × 525) 175 –––– Price ($525 + $175) 700 –––– 18 KAPLAN PUBLISHING  Chapter 1 Test your understanding 3 Per batch of 20 Ideal time (92%) 32.0 minutes Non-productive idle time (8%) 2.8 minutes –––––––––––– (100%) 34.8 minutes Setup time 2.0 minutes –––––––––––– Total time 36.8 minutes Total cost @ $4.50/hr $2.76 Standard labour cost per sandwich ($2.76/20) $0.138 Test your understanding 4 Original Flexed Actual Meaningful fixed budget results variance = budget flexed – actual Based on 10,000 units 12,000 units 12,000 units – production/ sales of: Sales 10,000 units 12,000 units $125,000 $5,000 Fav × $10/unit = × $10/unit = $100,000 $120,000 Variable 10,000 units 12,000 units $40,000 $4,000 Adv Production × $3/unit = × $3/unit = cost $30,000 $36,000 Fixed 10,000 units As per $9,000 $1,000 Fav Production × $1/unit = original cost $10,000 budget = $10,000 –––––––––– –––––––––– –––––––––– –––––––––– Profit $60,000 $74,000 $76,000 $2,000 Fav –––––––––– –––––––––– –––––––––– –––––––––– KAPLAN PUBLISHING 19 A revision of Management Accounting (MA) topics Test your understanding 5 The total material expenditure for the organisation will be dependent partly on the prices negotiated by the purchasing manager and partly by the requirements and performance of the production department. If it is included as a target for performance appraisal the manager may be tempted to purchase cheaper material which may have an adverse effect elsewhere in the organisation. The requirement to introduce safety measures may be imposed but the manager should be able to ensure that implementation meets budget targets. A notional rental cost is outside the control of the manager and should not be included in a target for performance appraisal purposes. Test your understanding 6  The production manager will be responsible for managing direct labour and direct material usage.  However, the manager may not be able to influence: – the cost of the material – the quality of the material – the cost of labour – the quality of labour.  Performance should be measured against the element of direct cost which the manager can control. 20 KAPLAN PUBLISHING Chapter 2 Management Information Systems Chapter learning objectives Upon completion of this chapter, you will be able to:  Explain the role of information systems in organisations.  Discuss the costs and benefits of information systems.  Explain the uses of the internet, intranet, wireless technology and networks.  Demonstrate how principal sources of management information might be used for control purposes.  Discuss the principal controls required in generating and distributing internal information.  Discuss the controls and procedures which may be