ACCA MA2 Pocket Notes 2020/2021 PDF

MA2 - Pocket Notes - 2020/2021 Managing Costs and Finance Big Thanks to KAPLAN Promoter - www.ACCAGlobalBox.com Downloaded From "http://www.ACCAGlobalBox.com" x Bo Exam MA2 l...

MA2 - Pocket Notes - 2020/2021 Managing Costs and Finance Big Thanks to KAPLAN Promoter - www.ACCAGlobalBox.com Downloaded From "http://www.ACCAGlobalBox.com" x Bo Exam MA2 l ba Managing Costs and Finance lo Pocket Notes G A C AC www.ACCAGlobalBox.com Managing Costs and Finance (MA2) 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 x British library the content as the basis for any investment Bo or other decision or in connection with any cataloguing-in-publication advice given to third parties. Please consult data l your appropriate professional adviser as ba A catalogue record for this book is available necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly lo from the British Library. disclaim all liability to any person in respect G Published by: of any losses or other claims, whether Kaplan Publishing UK direct, indirect, incidental, consequential or Unit 2 The Business Centre A otherwise arising in relation to the use of C Molly Millars Lane such materials. AC Wokingham Berkshire All rights reserved. No part of this publication RG41 2QZ may be reproduced, stored in a retrieval system, or transmitted, in any form or ISBN 978-1-78740-633-9 by any means, electronic, mechanical, photocopying, recording or otherwise, © Kaplan Financial Limited, 2020 without the prior written permission of Printed and bound in Great Britain. Kaplan Publishing. P.2 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Managing Costs and Finance (MA2) Contents Chapter 1 Management information........................................................................................... 1 Chapter 2 Maintaining an appropriate cost accounting system.................................................. 9 Chapter 3 Cost classification and cost behaviour...................................................................... 15 x Chapter 4 Costing of materials.................................................................................................. 23 Bo Chapter 5 Materials inventory control........................................................................................ 29 Chapter 6 Labour costs............................................................................................................ 39 l ba Chapter 7 Other expenses........................................................................................................ 47 Chapter 8 Absorption costing.................................................................................................... 51 lo Chapter 9 Marginal costing and absorption costing................................................................... 61 G Chapter 10 Job costing and batch costing.................................................................................. 65 Chapter 11 A Process costing........................................................................................................ 69 C Chapter 12 Service costing......................................................................................................... 79 AC Chapter 13 CVP analysis............................................................................................................ 83 Chapter 14 Decision making...................................................................................................... 89 Chapter 15 Discounted cash flow and capital expenditure appraisal.......................................... 97 Chapter 16 The nature of cash and cash flows......................................................................... 109 Chapter 17 Cash management, investing and finance.............................................................. 117 KAPLAN PUBLISHING P.3 www.ACCAGlobalBox.com Managing Costs and Finance (MA2) Chapter 18 Cash budgets......................................................................................................... 131 Chapter 19 Information for comparison.................................................................................... 137 Chapter 20 Reporting management information....................................................................... 149 Index................................................................................................................................... I.1 x l Bo ba lo G A C AC P.4 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Managing Costs and Finance (MA2) Preface Quality and accuracy are of the utmost importance to us so if you spot an error in These Pocket Notes contain everything you any of our products, please send an email need to know for the exam, presented in a to [email protected] with full unique visual way that makes revision easy details, or follow the link to the feedback and effective. form in MyKaplan. x Bo Written by experienced lecturers and authors, Our Quality Co-ordinator will work with our these Pocket Notes break down content technical team to verify the error and take into manageable chunks to maximise your l action to ensure it is corrected in future ba concentration. editions. lo G A C AC KAPLAN PUBLISHING P.5 www.ACCAGlobalBox.com Managing Costs and Finance (MA2) x l Bo ba lo G A C AC P.6 KAPLAN www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" chapter 1 x Bo Management information l ba In this chapter lo Purpose of management information. G Data and information. Qualities of useful management information. A Sources of data for management accounting. C Cost centres, profit centres and investment centres. AC IT and management accounting. 1 www.ACCAGlobalBox.com Management information Purpose of management Identify objectives information Plannin Planning is about making decisions about what should be done. Search for alternative courses of action x Control is about monitoring what is actually Bo happening, and if anything seems to be going wrong, deciding what should be done Gather data about alternatives to correct the problem. l ba Select course of action lo G Implement plan in the A form of a bud et C AC Monitor actual results Control Respond to diver ences from plan The budget cycle 2 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 1 Data and information Purchase Invoice x Purchase Invoice Bo Purchase Invoice Total purchases = $50,000 l ba Purchase Invoice lo G Purchase Invoice A C AC Definition Definition Data is a collection of unprocessed facts or Information is data that has been processed opinions. so that it has a purpose and meaning. Managers need information not data. The cost accountant processes data about income and expenditures into meaningful figures about the costs of products, services and processes. KAPLAN PUBLISHING 3 www.ACCAGlobalBox.com Management information Qualities of useful management information Purposeful Relevant x Timely Bo Accurate Complete l ba Communicated properly Cost effective lo G A C AC 4 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 1 Sources of data for management accounting Data for preparing management information comes from a variety of sources, both within the organisation (internal sources) and from outside the organisation (external sources). Accounting system Production records Suppliers Newspapers and trade journals x Non-current assets Performance of machinery Product prices Developments in technolo y Bo Purchases Output Specifications Information on competitors Sales Quality Share prices Payroll External l Internal ba sources Sales and sources marketing records lo overnment Personnel Customer profiles Customers Industry statistics G Wa e demands Market research Product requirements Taxation policy Workin conditions Demand patterns Price sensitivity Inflation rates A C AC KAPLAN PUBLISHING 5 www.ACCAGlobalBox.com Management information Cost centres, profit centres Investment centre and investment centres A profit centre with additional Hi hest responsibilities for capital Definition responsibility investment and possibly for financin x A responsibility centre is an individual part Bo of a business whose manager has personal Profit centre responsibility for its performance. A part of the business for which both the costs incurred l Responsibility centres can be defined and and the revenues earned are ba identified appraised in several different ways: lo Revenue centre G A part of the or anisation that earns sales revenue A Lowest C responsibility Cost centre AC A part of the or anisation that incurs costs Responsibility centres 6 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 1 A manager in charge of a cost or revenue IT and management centre would be evaluated on his or her accounting ability to meet cost or revenue targets. IT has brought many advantages for The manager in charge of a profit centre providing management information: is judged on the ability to meet or exceed x profit targets and so must be authorised to information can be gathered more easily Bo manage both costs and revenues. and cheaply, much more information can be gathered The manager in charge of an investment and stored, l ba centre also has the responsibility for investment. He or she is judged on return information can be transmitted quickly via the internet, lo on capital employed (ROCE). computers can process and interpret G Profit data more quickly, and ROCE = A Capital employed there is a wide range of software which C In addition to ROCE, an investment centre can simplify the entire process. AC manager may be judged on net profit margin and asset turnover. ROCE = Net profit margin × Asset turnover KAPLAN PUBLISHING 7 www.ACCAGlobalBox.com Management information x l Bo ba lo G A C AC 8 KAPLAN www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" chapter 2 x Bo Maintaining an appropriate cost accounting system l ba lo In this chapter G A cost accounting system. Documentation for the source data. A C Cost units. AC Recording and coding of costs. 9 www.ACCAGlobalBox.com Maintaining an appropriate cost accounting system A cost accounting system Direct costs and indirect costs Definition Cost accounting systems make a distinction between direct costs and indirect costs. The cost accounting system can interact with An item of cost directly attributable the financial accounting system: x to a specific product or service Bo Integrated accounts are a set of accounting records which provides both financial and cost accounts using a l Direct cost ba common input of data for all accounting purposes. lo Interlocking accounts are a system Indirect cost G in which the cost accounts are distinct from the financial accounts, the two sets A of accounts being kept continuously C in agreement by the use of control An item of expense that cannot be directly attributed to a specific product or service AC accounts or reconciled by other means. 10 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 2 Building up costs of final outputs The accounts that are used to do this are: the stores account, for recording the costs of raw materials x the work-in-progress account, which Bo records the costs of items manufactured. The opening balance and closing balance on this account at the start and l ba end of a period represent the total cost of unfinished production lo the finished goods account, which G records the cost of finished production that has not yet been sold to a customer A the cost of sales account, which records C the cost of finished production that has AC been sold to customers. KAPLAN PUBLISHING 11 www.ACCAGlobalBox.com Maintaining an appropriate cost accounting system Documentation for the source data The details of costs incurred are obtained from source data and recorded in the costing system. The nature of the source documentation used varies between organisations. Source documents include: x Document Contains details... Bo For materials Goods received note confirming receipt into stores purchased Purchase invoice of purchase costs l ba for materials issued to a particular Materials requisition note For materials used department lo Job cost card materials used in a particular job G total labour costs, analysed between Payroll records departments A C Labour costs Job cost cards labour time/costs on particular jobs AC Job sheets/job time cards time spent on different activities and costs of the time spent Expenses Purchase invoices Job cost cards Costs of production Production analysis sheets 12 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 2 Cost units to monitor changes in costs over time. In a manufacturing business, the cost units Definition that are used will depend on the nature of A cost unit is a unit of production or a unit the manufacturing process. of activity, in relation to which a cost is When the firm manufactures different x measured. In other words, a cost unit is an products, the cost unit will be a unit of Bo item for which an output cost or an activity the product, and each product will have a cost is measured. different cost unit. l ba Cost units are measured for several reasons: When a firm manufactures standard units in batches, the cost unit will be the batch to establish how much it has cost to lo of output. produce an item or perform an activity G When a firm carries out jobs or contracts to measure the profit or loss on the item for customers, the cost unit will be the A to put a valuation to closing inventory of the item cost of each specific job or contract. C to compare actual costs of the item with AC budgeted costs to plan future costs, by basing future costs on historical costs to decide on a selling price for the item, where the selling price is derived by a ‘cost plus’ formula KAPLAN PUBLISHING 13 www.ACCAGlobalBox.com Maintaining an appropriate cost accounting system Recording and coding of costs Cost codes are attached to costs in order to make them easily identifiable and typically have three components: x Bo a cost centre/responsibility centre code (for example, 2 numbers to identify the canteen and a different two numbers to l ba represent maintenance etc.) generic or functional code (for example, lo 2 numbers which represent purchases) G a specific item code (for example, oil might have its own 2 digit code) A C The combination of the 6 numbers would then quickly identify what the cost is for. AC 14 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" chapter 3 x Bo Cost classification l and cost behaviour ba lo In this chapter G Classification of costs. A Cost behaviour. C Estimating future costs. AC High-low method. 15 www.ACCAGlobalBox.com Cost classification and cost behaviour Classification of costs Direct and indirect costs, prime cost and overheads Functional analysis of costs The classification of costs into direct and Categories of functional costs commonly indirect costs is a very important technique used are: which is used to build up the full cost of a x manufacturing costs cost unit. Bo administration costs Definition selling and distribution costs (or l A direct cost is expenditure that can ba marketing costs) be directly identified with a specific cost possibly, research and development unit (e.g. materials that go into making lo costs. a product and labour that is actually G engaged in manufacturing). Expense type A Another basic classification of costs widely Prime cost is the total of direct materials cost, direct labour cost and (if there are C used in cost accounting is to distinguish any) direct expenses. AC between the cost of materials, such as raw Indirect costs or overheads are materials or components, the cost of labour expenditure which cannot be directly and other expenses (e.g. overheads). identified with a specific cost unit and must be ‘shared out’ on an equitable basis. 16 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 3 The total production cost or full factory cost of a cost unit is its prime cost or direct cost, plus its share of production overheads, consisting of indirect materials, indirect labour and indirect expenses. x Bo Analysis of a cost unit $ l ba Direct materials X Direct labour X lo Direct expenses X G ––– Prime cost X Production overhead A X C ––– AC Full factory cost X ––– KAPLAN PUBLISHING 17 www.ACCAGlobalBox.com Cost classification and cost behaviour Cost behaviour As the activity level increases, fixed costs remain the same in total but the cost per unit Definition of activity falls. Cost Fixed costs are costs that are not affected cost $ in total by the level of activity, but remain x unit Bo the same amount regardless of how much or how little work is done in a period (e.g. factory rent). l ba Total Fixed costs Output cost $ lo G A C Output AC 18 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 3 As the level of activity increases, total Definition variable costs increase in direct proportion to Variable costs are costs that change in the increase in activity, but the variable cost direct proportion to the level of activity (e.g. per unit of activity remains the same. direct materials costs). Cost x Total Variable costs per $ Bo cost $ unit l ba Output lo Output G A C AC KAPLAN PUBLISHING 19 www.ACCAGlobalBox.com Cost classification and cost behaviour Definition Definition Semi-variable costs, also called mixed Stepped-fixed costs, also called step costs or costs, are those that have both fixed and mixed costs, are costs that are constant for variable elements (e.g. telephone costs, a range of activity levels, and then change, which consist of a fixed period rental and and are constant again for another range. x Bo charges for calls made). Total Stepped-fixed costs Total cost $ cost $ l ba lo G Output Output An example of stepped-fixed costs is A With semi-variable costs, as the level of supervisors’ salaries. C activity increases, the total cost increases AC (not in direct proportion to the level of activity) and the cost per unit falls. In cost accounting, it is usual to analyse semi-variable costs into their fixed and variable components in order to estimate future costs. 20 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 3 Estimating future costs Estimates of future costs may be shown as a cost function: Cost behaviour analysis has two main purposes: y = a + bx estimating what future costs should be where y = total cost x comparing actual costs with expected a = total fixed cost Bo costs (as estimated in a flexed budget). b = variable cost per unit l x = number of units of output ba Total lo cost $ y=a+bx G =total cost line radient = b (variable cost A a=fixed cost per unit) C Volume of activity x AC KAPLAN PUBLISHING 21 www.ACCAGlobalBox.com Cost classification and cost behaviour High-low method Total cost observation (hi h) X The high-low method estimates fixed and variable costs by comparing the costs of the highest and lowest activity levels and X Fixed cost Total cost observation (low) analysing the difference between them. x Bo Start with the cost information for the Output highest activity level and for the lowest activity level from the data available. l ba The assumption is that the total cost line goes through these two points. lo Since fixed costs are the same at both G activity levels, the difference in total cost between the highest and the lowest A activity levels must be attributable to C variable costs entirely. The difference must be the variable cost for the number AC of units of activity between the lowest and the highest points. This allows us to calculate a variable cost per unit. Having done this, we can apply the variable cost value to either the low cost or the high cost data, to calculate the fixed costs. 22 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" chapter 4 x Bo Costing of materials l ba In this chapter lo Documentation for materials. G Pricing issues of materials. Accounting for materials costs. A Inventory losses and waste. C AC 23 www.ACCAGlobalBox.com Costing of materials Documentation for materials Pricing issues of materials Materials requisition note FIFO – first in first out LIFO – last in first out This records all requests for materials and Assume oldest Assume newest serves two purposes: inventory is used first inventory is used first x authorises the storekeeper to release the Bo goods acts as a record for updating stores records. Inventory l ba valuation methods Stores records lo This is a continual record of each item of G inventory held in store. In a computerised system a record is held of: A the quantity and value of inventory AVCO – weighted average cost Periodic weighted C received Assume inventory is average cost AC combined and a new Calculate avera e the quantity and value of inventory price is calculated each price at end of issued time there is a new relevant period delivery the current inventory balance. 24 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 4 Example Weighted average cost (AVCO). There was no inventory of materials on hand at the start of the month. 50 tonnes Assume that the inventory is was purchased on the 2nd of the month combined and each unit is priced for $40 per tonne and a further 40 tonnes at the average cost of inventory on x was purchased on the 10th for $45 per hand: Bo tonne. On the 15th a consignment of (50 tonnes at $40) + (40 tonnes at 30 tonnes was taken and used in the $45) = 90 tonnes costing $3,800 = l manufacturing process. ba $42.22 per tonne. First in first out (FIFO) lo Issue of 30 tonnes priced at $42.22 Assume that the oldest inventory is per tonne. G used first: Periodic weighted average cost A Issue of 30 tonnes priced at $40 per With the periodic weighted average C tonne. cost method of pricing inventory an AC Last in first out (LIFO) average price is calculated at the end of the period which is then used to Assume that the newest inventory is price all issues. used first: Periodic weighted average price = Issue of 30 tonnes priced at $45 per Cost of opening inventory + Receipts in the period tonne. Units in opening inventory + Unites received KAPLAN PUBLISHING 25 www.ACCAGlobalBox.com Costing of materials The relative advantages and disadvantages of FIFO, LIFO and AVCO are therefore discussed below, particularly in relation to inflationary situations. Method Advantages Disadvantages FIFO Produces current Produces out-of-date production costs and values for closing therefore potentially overstates profits. x inventory. Bo Complicates inventory records as inventory must be analysed by delivery. l LIFO Produces realistic Produces unrealistically low closing inventory ba production costs values. and therefore more lo Complicates inventory records as inventory must realistic/prudent profit be analysed by delivery. G figures. Weighted Simple to operate – A Produces both inventory values and production average calculations within the costs which are likely to differ from current C price inventory records are values. AC minimised. 26 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 4 Whichever method is adopted it should be Inventory losses and waste applied consistently from period to period. In some manufacturing processes, there Accounting for materials is wastage or loss of inventory. When wastage is expected during processing, the costs department using the materials should allow x Inventory ledger account – item 2345 for the losses when it orders materials. Bo $ $ Wastage is usually measured as a Opening balance b/d X Issues X percentage of the quantities of materials l ba Receipts X Closing balance c/d X input. –– –– lo X X G –– –– Balance b/d X A C Issues of materials are credited to the AC stores account with the value or cost of the materials issued determined by whichever valuation method is used (FIFO, LIFO, weighted average cost, etc). The corresponding double entry is to a work-in- progress account, for direct materials or an overhead account, for indirect materials. KAPLAN PUBLISHING 27 www.ACCAGlobalBox.com Costing of materials Example If wastage is 3% of input, output will be 97% of input. In formula terms: 100% Input = Output x x (100% – Wastage rate percentage) Bo So if the required output is 500 units, the input material requirements are: l ba 100 Input = 500 units x (100 – 3) lo = 515.5 units, say 516 units. G A If wastage is a normal part of the production C process, control measures should be AC calculated and actual wastage rates compared to the control measures, to check that the wastage rates are as expected. If wastage is greater or less than expected, the reasons why this has happened must be investigated and action taken as necessary. 28 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" chapter 5 x Bo Materials inventory control l ba In this chapter lo Monitoring inventory and inventory losses. G Costs of inventory holding and stockouts. Economic order quantity (EOQ). A Inventory re-order level. C Other inventory re-ordering systems. AC 29 www.ACCAGlobalBox.com Materials inventory control Monitoring inventory and Costs of inventory holding inventory losses and stockouts Periodic stocktakes are carried out at a The total costs associated with inventories specified time, for example at the end of the include the following costs: accounting year. This can be very disruptive x purchase costs to production, as it may involve closing the Bo holding inventory (interest on capital, stores for several days. This approach also the costs of storage space and means that there are long periods between equipment, administration costs, and l stocktakes and substantial discrepancies ba losses from deterioration, pilferage and may build up. obsolescence) lo Continuous stocktakes involve checking ordering inventory (e.g. buyer’s time G a proportion of items on a rotating basis. All spent contacting the supplier, and the items are checked at least once a year but storekeeper’s time spent checking the A items which are of high value or are used goods received) C frequently can be checked more often. stockouts (i.e. the costs of being without AC inventory when it is needed). 30 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 5 Buffer stock, or safety stock, is a basic Lead time is the time gap that arises level of inventory held to cover unexpected between an order being placed and its demand or uncertainty of lead time for eventual delivery. an item of inventory. A further problem for management could be to decide how much buffer stock to hold for each item of x Bo inventory, to minimise the combined costs of: stockouts if the buffer stock is not held; and l ba the additional inventory holding costs that arise from having buffer stock. lo Three questions about inventory control have G to be resolved: A What inventory C How much When to control system to order re-order AC to use When demand and When demand and/or lead time are known lead time are not known with certainty with uncertainty KAPLAN PUBLISHING 31 www.ACCAGlobalBox.com Materials inventory control Economic order quantity There is a formula for calculating the (EOQ) economic order quantity for any item of inventory, given these assumptions, which is: Question 1: How much to order? 2CoD Economic order quantity (EOQ) is the Q = EOQ = where x order quantity for an item of inventory that CH Bo will minimise the combined costs of inventory CO is the cost of placing an order of the ordering plus inventory holding over a given inventory item period of time, say each year. l ba CH is the annual cost of holding one unit of The economic order quantity for an inventory the inventory for one year lo item is calculated on the basis of the following assumptions. D is the annual demand for the inventory G There should be no stockout of the item. item There is no buffer stock. A Q is the order quantity C A new delivery of the inventory item is AC received from the supplier at the exact time that existing inventories run out. The inventory item is used up at an even and predictable rate over time. The delivery lead time from the supplier is predictable and reliable. 32 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 5 Holding costs are often based on average 3 Recalculate the annual inventory holding inventory held which is estimated as: EOQ/2. costs, inventory ordering costs and inventory purchase costs for a purchase Ordering costs are often based on the order size that is only just large enough number of orders per year (or month, to qualify for the bulk discount. or week) which is estimated as: Annual x demand/EOQ. 4 Compare the total costs when the order Bo quantity is the EOQ with the total costs EOQ and bulk purchase discounts when the order quantity is just large l The EOQ problem can be complicated by enough to obtain the discount. Select ba the availability of discounts for large quantity the minimum cost alternative. orders. lo 5 If there is a further discount available for an even larger order size, repeat the G To minimise costs, it is necessary to identify the order quantity that minimises the total same calculations for the higher discount A costs of holding inventory, ordering inventory level. C and the material purchase costs: AC 1 Calculate the EOQ, ignoring discounts. 2 If the EOQ is smaller than the minimum purchase quantity to obtain a bulk discount, calculate the total for the EOQ of the annual inventory holding costs, inventory ordering costs and inventory purchase costs. KAPLAN PUBLISHING 33 www.ACCAGlobalBox.com Materials inventory control Inventory re-order level Example Question 2: When to re-order? The following information relates to When demand and lead time are known Product X: with certainty, the re-order level may be Daily demand = 50 units x calculated exactly. Bo Lead time = 4 days Buffer stock = 10 units l ba Re-order level = Buffer stock + (Demand × Lead lo time) G = 10 + (50 × 4) A = 210 units C If it were not company policy to hold AC buffer stock, then the re-order level would simply be (Demand × Lead time) = 200 units. 34 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 5 If demand and lead time are uncertain, the re-order level is calculated as follows: Re-order level = Maximum demand × Maximum lead time. x Maximum and minimum inventory control Bo levels Minimum inventory control level warns l management that inventory levels are ba dangerously low. It is calculated as follows: lo Re-order level – G (Average demand × Average lead time) Maximum inventory control level warns A management that inventory levels are C dangerously high. It is calculated as follows: AC Re-order quantity + Re-order level – (Minimum demand × Minimum lead time) KAPLAN PUBLISHING 35 www.ACCAGlobalBox.com Materials inventory control Other inventory re-ordering This system is unlikely to achieve the lowest systems possible inventory costs, but it is useful for dealing with high volume, low value items There are other systems for inventory such as nuts and bolts. There is little in the re-ordering, in addition to the fixed re-order way of supervision or management review level system. and so it releases time to focus on the more x Bo important items of inventory. Two-bin system Periodic review system Buy two boxes (or fill two bins) of an item: l ba The inventory level is reviewed at fixed intervals, for example every four weeks. lo When this bin in The inventory in hand is then made up to a predetermined level, which takes account G empty... of likely demand before the next review and start usin A this one, during the lead time. C and... This shares the simplicity of the two-bin order more AC method. Suppliers might like the fact that to refill this one. they receive a regular order, although the quantity ordered will vary from period to period. The same effect can be had from painting a line inside a bin and re-ordering whenever the line starts to show. 36 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 5 Just-in-time scheduling The relative costs and benefits of such a JIT purchasing policy are as follows: In theory, ‘just-in-time’ (JIT) purchasing means that inventory will approach zero, warehousing costs are almost eliminated with supplies of goods arriving just in time to the quality control function has been meet demand. However, a JIT purchasing made the responsibility of the supplier x policy is only possible when suppliers can problems of obsolescence, deterioration, Bo be relied on to deliver fresh supplies of an theft, cost of capital tied up and all item at the required time and to the required other costs associated with holding l quality standard. inventory have been avoided. (However, ba In order that such a system can be the production and unloading facilities may have to be specially designed or lo successfully adopted, the following features must be present: redesigned.) G stable, high volume of inventory consumption A C co-ordination of the daily production AC programmes of the supplier and the consumer co-operation of the supplier a convenient, reliable transport system, or the supplier being in close proximity to the consumer. KAPLAN PUBLISHING 37 www.ACCAGlobalBox.com Materials inventory control x l Bo ba lo G A C AC 38 KAPLAN www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" chapter 6 x Bo Labour costs l ba In this chapter lo Labour remuneration. G Accounting for payroll. Direct and indirect labour costs. A Documentation of labour time. C Labour turnover. AC Labour efficiency and utilisation. 39 www.ACCAGlobalBox.com Labour costs Labour remuneration Accounting for payroll There are many different ways in which The payroll is usually prepared every labour can be paid: week or month, depending on the pattern Salary – a fixed amount paid each period of payment. It calculates each individual regardless of hours worked or output employee’s: x Bo produced. gross pay Hourly wage – a fixed amount per hour employer’s National Insurance worked. contribution l ba Time based contract – an hourly wage employer’s pension contribution. paid for a fixed amount of time, with any lo The total cost of labour to the business is the ‘overtime’ paid at a premium. sum of gross pay employer’s NI and pension G Piecework – payment based on volume contributions. of output produced. A C AC 40 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 6 $ Direct and indirect labour Gross pay X costs Income tax (X) Definition Employer’s N.I. (X) Direct labour means employees who are x Pension contributions (X) directly involved in producing goods or Bo Other deductions (X) ––– services for customers. Net pay X ––– l Definition ba Indirect labour means employees who are lo not directly involved in this work. G The allocation of labour costs between direct A and indirect can be calculated in the case of production workers, some of whose time C may be treated as indirect costs: AC the costs of idle time (i.e. time paid for that is non-productive) the costs of overtime premium (i.e. the additional hourly rate – if any – paid for overtime) KAPLAN PUBLISHING 41 www.ACCAGlobalBox.com Labour costs costs of labour time not spent in production, such as the cost of time Basic labour cost = Overtime premium = Direct cost Direct cost spent on training courses, and the cost of payments during time off work through illness. x Worked at specific request of customer Note that all the costs of indirect labour Bo employees are indirect labour costs. Overtime premium Overtime l ba The treatment of overtime worked by direct workers depends on the reasons why the lo overtime was worked. Not worked for a specific reason/request G A C Basic labour cost = Overtime premium AC Direct cost = Indirect cost 42 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 6 Documentation of labour Labour turnover time Definition The most common methods of recording how much time has been spent on particular Labour turnover is a measure of the speed activities, products or jobs are: at which employees leave an organisation x Bo time sheets (record of how a person’s and are replaced. time at work has been spent) Labour turnover is often calculated as: job sheets (records the work done – l ba as well as materials, etc, used – on a Average annual number of particular job) leavers who are replaced x 100% lo cost cards (a card that records the costs Average number of employees G involved in a particular job). A Managing labour turnover is important C because of the ‘replacement costs’ AC associated with replacing staff: advertising employment agency fees time spent interviewing, choosing and taking on the new employee the costs of training a new employee KAPLAN PUBLISHING 43 www.ACCAGlobalBox.com Labour costs the loss of efficiency whilst new Labour efficiency and employees are learning the job utilisation the effect on the morale of the existing work force when labour turnover is high, Two other reasons why a workforce leading to a loss of efficiency. might produce more or less output than expected are labour efficiency and labour x ‘Preventative costs’ may also be incurred to utilisation. Bo reduce labour turnover: Definition improving employee remuneration or l ba benefits Efficiency is the relationship between improving the working environment actual productivity in a given period and the lo training existing employees and offering standard amount that should be produced in G career progression. that time. A If the labour force is inefficient then it is working more slowly than anticipated or C producing less goods than anticipated in a AC set period of time. Labour efficiency or productivity can be measured by means of an efficiency ratio: Average output measured in standard hours x 100% Actual production in hours 44 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 6 Over 100% indicates that overall production Definition is above planned levels and below 100% A standard hour is the output expected in indicates a shortfall compared to plans. one hour of production at normal efficiency. Production/volume ratio Definition x Bo Labour utilisation refers to how much labour time is used, compared to how much Capacity x Efficiency l ratio ratio ba available time was expected. This can be expressed as a capacity ratio: lo Actual hours worked Definition G x 100% Budgeted hours Idle time ratio gives an indication of the A Labour efficiency and labour utilisation can percentage of labour hours lost because of C be brought together with the production/ idle time. AC volume ratio, which assesses how the overall production level compares to planned Idle hours Idle time ratio = x 100% levels: Total hours available Average output measured in standard hours x 100% Budgeted production hours KAPLAN PUBLISHING 45 www.ACCAGlobalBox.com Labour costs x l Bo ba lo G A C AC 46 KAPLAN www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" chapter 7 x Bo Other expenses l ba In this chapter lo Direct and indirect expenses. G Accounting for expenses and expenses costing. Capital and revenue expenditure. A C AC 47 www.ACCAGlobalBox.com Other expenses Direct and indirect expenses Examples of direct expenses: running costs of a machine used only for To a cost accountant there are three types of one product business expenditure. These are materials, labour and expenses. packaging costs for a product royalties payable per product x Definition Bo subcontractors’ fees attributable to a single product or job Expenses are all business costs that the cost of machinery or equipment hired l are not classified as materials or labour ba costs. for a particular job or contract. A direct expense is an expense that can lo be identified in full with a specific cost G unit. A An indirect expense is expenditure which cannot be identified with a specific C cost unit. AC 48 KAPLAN PUBLISHING www.ACCAGlobalBox.com  Downloaded From "http://www.ACCAGlobalBox.com" Chapter 7 Accounting for expenses and Capital and revenue expenses costing expenditure In a costing system, expenses are not Definition debited directly to the income statement. Instead: Capital expenditure is expenditure by a x business on non-current assets. Bo direct expenses are debited to the work-in-progress account The accounting treatment of capital indirect expenses are debited to a expenditure is that the cost of the non- l ba production overhead, administration current asset is included in the balance overhead or sales and distribution sheet. The cost of the non-current asset is lo overhead account. written off over its expected useful life as a G depreciation charge in the income statement. A Definition C Revenue expenditure is all expenditure AC other than capital expenditure and represents day-to-day or operating expenses. Revenue expenditure is treated as an expense in the income statement in the period in which the expense is incurred. KAPLAN PUBLISHING 49 www.ACCAGlobalBox.com Other expenses Product units method Definition The depreciation is computed in two steps: Depreciation is the measure of the wearing out, consumption or other reduction in the 1 Compute