ACCA APPROVED CONTENT PROVIDER ACCA Passcards Paper F5 Performance Management Passcards for exams up to June 2015 ACF5PC14.indd 30/05/2014 10:46 (000)ACF5PC_FP_RICOH_UK.qxp 5/28/2014 11:09 PM Page i Fundamentals Paper F5 Performance Management (000)ACF5PC_FP_RICOH_UK.qxp 5/28/2014 First edition 2007, Eighth edition June 2014 ISBN 9781 4727 1124 e ISBN 9781 4727 1180 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd, BPP House, Aldine Place, 142-144 Uxbridge Road, London W12 8AA Printed in the UK by Ricoh UK Limited Unit Wells Place Merstham RH1 3LG www.bpp.com/learningmedia Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources 11:09 PM Page ii All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media © BPP Learning Media Ltd 2014 (000)ACF5PC_FP_RICOH_UK.qxp 5/28/2014 11:09 PM Page iii Preface Contents Welcome to BPP Learning Media’s ACCA Passcards for Paper F5 Performance Management They focus on your exam and save you time They incorporate diagrams to kick start your memory They follow the overall structure of the BPP Study Texts, but BPP’s ACCA Passcards are not just a condensed book Each card has been separately designed for clear presentation Topics are self contained and can be grasped visually ACCA Passcards are still just the right size for pockets, briefcases and bags Run through the Passcards as often as you can during your final revision period The day before the exam, try to go through the Passcards again! You will then be well on your way to passing your exams Good luck! Page iii (000)ACF5PC_FP_RICOH_UK.qxp 5/28/2014 11:09 PM Page iv Preface 10 11 Costing Modern management accounting techniques Cost volume profit (CVP) analysis Limiting factor analysis Pricing decisions Short-term decisions Risk and uncertainty Budgetary systems Quantitative analysis in budgeting Budgeting and standard costing Variance analysis Page 15 27 33 45 51 63 71 79 83 12 13 14 15 16 17 18 Contents Page 99 Planning and operational variances Performance analysis and behavioural aspects 109 Performance management information systems 117 Sources of management information and management reports 127 Performance measurement in private sector organisations 133 Divisional performance and transfer pricing 139 Further aspects of performance management 145 (001)ACF5PC_CH01.qxp 5/28/2014 11:28 PM Page 1: Costing Topic List Costing Absorption costing Absorption costing vs marginal costing You will have covered the basics of these costing methods in your earlier studies but you need to make sure you are familiar with the concepts and techniques so you can answer interpretation questions (001)ACF5PC_CH01.qxp 5/28/2014 11:28 PM Page Costing Absorption costing Absorption costing vs marginal costing Cost accounting A management information system which analyses past, present and future data to provide a bank of data for the management accountant to use Costing The process of determining the cost of products, services or activities Methods include absorption costing and process costing (001)ACF5PC_CH01.qxp 5/28/2014 11:28 PM Page Costing Absorption costing Absorption costing vs marginal costing What is absorption costing? Absorption costing is a method of sharing out overheads incurred amongst units produced Allocation Apportionment Absorption under/over-absorbed overhead Practical reasons for using absorption costing Inventory valuations Pricing decisions Establishing profitability of products Page 1: Costing (001)ACF5PC_CH01.qxp 5/28/2014 11:28 PM Page Costing Arguments in favour of absorption costing When sales fluctuate because of seasonality in sales demand but production is held constant, absorption costing avoids large fluctations in profit Marginal costing fails to recognise the importance of working to full capacity and its effects on pricing decisions if cost plus method of pricing is used Prices based on marginal cost (minimum prices) not guarantee that contribution will cover fixed costs In the long run all costs are variable, and absorption costing recognises these long-run variable costs It is consistent with the requirements of accounting standards Absorption costing Absorption costing vs marginal costing Arguments in favour of marginal costing It shows how an organisation’s cash flows and profits are affected by changes in sales volumes since contribution varies in direct proportion to units sold By using absorption costing and setting a production level greater than sales demand, profits can be manipulated Separating fixed and variable costs is vital for decision-making For short-run decisions in which fixed costs not change (such as short-run tactical decisions seeking to make the best use of existing resources), the decision rule is to choose the alternative which maximises contribution, fixed costs being irrelevant (002)ACF5PC_CH02.qxp 5/28/2014 11:28 PM Page 2: Modern management accounting techniques Topic List All five techniques covered are equally important and equally examinable.You need to develop a broad background in management accounting techniques Activity based costing (ABC) In Section B in the exam, these topics may be the subject of a 10-mark question but not a 15-mark question.You should also expect them to feature in Section A MCQs Target costing Life cycle costing Throughput accounting Environmental accounting (017)ACF5PC_CH17.qxp 5/28/2014 11:25 PM Page 142 Divisionalisation Performance measures Return on investment (ROI) = Profit before interest × 100% Capital employed Residual income = Profit – Notional interest cost RI and ROI RI will increase when investments earning above the cost of capital are undertaken Under ROI a marginally profitable investment is less likely to be undertaken RI is more flexible as different costs of capital can be used to reflect different risk RI does not facilitate comparisons between investment centres RI does not relate the size of a centre's income to the size of the investment Transfer pricing (017)ACF5PC_CH17.qxp 5/28/2014 11:25 PM Page 143 Performance measures Divisionalisation Aims Promote divisional autonomy Equitable divisional performance measurement Overall corporate profit maximisation Page 143 Transfer pricing Transfer price is the price at which goods and services are transferred from one division to another MINIMUM Marginal cost plus opportunity cost of item transferred Opportunity cost is the maximum contribution foregone by transferring internally MAXIMUM Lowest external market price minus internal cost saving on packaging and delivery Disadvantages ✗ ✗ ✗ ✗ Market price may be temporary Disincentive to use up spare capacity No market price available Imperfect external market 17: Divisional performance and transfer pricing (017)ACF5PC_CH17.qxp 5/28/2014 11:25 PM Page 144 Divisionalisation Performance measures Transfer pricing Transfer prices based on cost If there is no external market, the transfer price has to be based on cost Standard or actual? The use of standard costs is fairer because if actual costs are used the transferring division has no incentive to control its costs – it can pass on its inefficiencies to the receiving division Variable cost? The transferring division does not cover its fixed costs (although this problem can be overcome by central decisions or by some form of dual pricing or twopart charging system) Full cost? The transferring division makes no profit Full cost plus? What margin will all parties perceive as fair? Optimal transfer price reflects opportunity costs and where there is a perfect external market this will be the market price If not, the ideal transfer price will be found by negotiation and careful analysis (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 145 18: Further aspects of performance management Topic List Not-for-profit organisations and the public sector have non-quantifiable and multiple objectives which causes problems in performance measurement Not-for-profit organisations Organisations must also consider external influences on performance External considerations Behaviour aspects (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 146 Not-for-profit organisations Not-for-profit organisations have a range of multiple objectives which are difficult to define Value for money Efficiency: Relationship between inputs and outputs (getting out as much as possible for what goes in) Effectiveness: Relationship between outputs and objectives (getting done what was supposed to be done) Economy: Obtaining the right quality and quantity of inputs at lowest cost (being frugal) External considerations Behaviour aspects Problem with performance measurement Multiple objectives Measuring outputs Lack of profit measure Nature of service provided Financial constraints Political, social and legal considerations Solutions Judge performance in terms of inputs Use experts’ subjective judgement Use benchmarking Use unit cost quantitative measures (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 147 External considerations Not-for-profit organisations Behaviour aspects Performance measurement needs to allow for external considerations Stakeholders Internal Connected Employees Shareholders Customers Morale index Page 147 Market conditions External Government Economic growth Local economic trends Inflation Interest rates Exchange rates Government fisal policy Government spending Competitors Pricing strategies Information on competitors’ prices and cost structures React quickly to changing market conditions Share price % of products Warranty cost conforming to % of repeat customers environmental regulations 18: Further aspects of performance management (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 148 Not-for-profit organisations External considerations Behaviour aspects Management performance measures should only include those items that are directly controllable by the manager Conflict between individual and corporate goals Danger people will concentrate only on what is being measured Difficult to devise performance measures relating specifically to a manager’s performance as a manager Reward schemes can encourage dysfunctional behaviour (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 149 Notes (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 150 Notes (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 151 Notes (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 152 Notes (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 153 Notes (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 154 Notes (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 155 Notes (018)ACF5PC_CH18.qxp 5/28/2014 11:26 PM Page 156 Notes [...]... to achieve target profit = $55,000/0.6111 = $90 ,000 Margin of safety = (2,000/8,000) × 100% = 25% Required sales of M = $90 ,000 × (42,000/72,000) = $52,500 Actual sales can fall short of the budget by 25% (in the budgeted proportions in the sales mix) before the company fails to break even Required sales of N = $90 ,000 × (30,000/72,000) = $37,500 (003)ACF5PC_CH03.qxp Breakeven point 5/28/2014 C/S ratio... customer: may involve some product redesign, removal of non-value-adding features, use of more standard components, alternative materials for some product parts (002)ACF5PC_CH02.qxp 5/28/2014 Activity based costing (ABC) 11:28 PM Target costing Page 9 Life cycle costing Throughput accounting Environmental accounting Life cycle costing 1 Development 4 Maturity This method tracks and accumulates costs... 0.6667 Market share (2/7:5/7) × 0.2857× _ 0.7143 _ 0.1632 _ 0.4762 _ _ _ Total 0.6 394 The overall C/S ratio has increased because of the increase in the proportion of the mix of the Beta, which has the higher C/S ratio * 0.4761/0.8333 Page 19 3: Cost volume profit (CVP) analysis (003)ACF5PC_CH03.qxp Breakeven point 5/28/2014 C/S ratio 11:15 PM Sales/product mix decisions Calculating... for costs that vary with production volume in the short-term (eg power costs) Transactions in support departments for other costs (eg number of production runs for the cost of setting-up production runs) (002)ACF5PC_CH02.qxp 5/28/2014 11:28 PM Example Page 7 Merits of ABC Cost of goods inwards department = $10,000 Simple (once information obtained) Cost driver for goods inwards activity = number of... Advertising and sales promotion costs when the product is first introduced to the market Expected costs of disposal/clean-up/shutdown when the product reaches the end of its life Page 9 2: Modern management accounting techniques (002)ACF5PC_CH02.qxp Activity based costing (ABC) 5/28/2014 11:28 PM Target costing Advantages Cost visibility is increased Individual product profitability is better understood More... budgeted sales mix will alter the weighted average contribution per unit and the weighted average C/S ratio, and this will change the breakeven point (003)ACF5PC_CH03.qxp Breakeven point 5/28/2014 C/S ratio 11:15 PM Sales/product mix decisions Page 19 Target profit and margin of safety Multi-product breakeven charts Further aspects of CVP analysis Changing the product mix ABC Co sells products Alpha and... often ignored (004)ACF5PC_CH04.qxp 5/28/2014 11:28 PM Page 27 4: Limiting factor analysis Topic List Limiting factor analysis is a technique used to determine an optimum product mix which will maximise contribution and profit Formulating the problem Linear programming is used where there is more than one resource constraint Finding the solution Slack, surplus and shadow prices (004)ACF5PC_CH04.qxp 5/28/2014... 4,250 Step 2 Establish constraints Labour Material Non-negativity 5x + 10y ≤ 4,000 10x + 5y ≤ 4,250 x ≥ 0, y ≥ 0 Step 3 Construct objective function Contribution (C) = 15x + 20y (004)ACF5PC_CH04.qxp 5/28/2014 11:28 PM Page 29 Formulating the problem There are two methods you need to know about when finding the solution to a linear programming problem Graphical method Step 1 Graph the constraints Labour... 10x + 5y = 4,250 x = 0, y = 850 y = 0, x = 425 Slack, surplus and shadow prices Graphical method Using equations y 850 Feasible region Material 400 150 Labour 200 Page 29 Finding the solution 425 800 x 4: Limiting factor analysis (004)ACF5PC_CH04.qxp 5/28/2014 11:28 PM Page 30 Formulating the problem Step 2 Establish the feasible area/region This is the area where all inequalities are satisfied (area... Environmental costs are considered from the design stage right up to end-of-life costs such as decomissioning and removal This may influence the design of the product itself, saving on future costs (003)ACF5PC_CH03.qxp 5/28/2014 11:15 PM Page 15 3: Cost volume profit (CVP) analysis Topic List You need to be completely confident of the aspects of breakeven analysis covered in your earlier studies Breakeven ... permission of BPP Learning Media © BPP Learning Media Ltd 2014 (000)ACF5PC_FP_RICOH_UK.qxp 5/28/2014 11: 09 PM Page iii Preface Contents Welcome to BPP Learning Media’s ACCA Passcards for Paper F5 Performance...(000)ACF5PC_FP_RICOH_UK.qxp 5/28/2014 11: 09 PM Page i Fundamentals Paper F5 Performance Management (000)ACF5PC_FP_RICOH_UK.qxp 5/28/2014 First edition 2007, Eighth edition June 2014 ISBN 97 81 4727... the BPP Study Texts, but BPP s ACCA Passcards are not just a condensed book Each card has been separately designed for clear presentation Topics are self contained and can be grasped visually ACCA