ACCA Paper F2 and FIA Diploma in Accounting and Business Management Accounting (MA/FMA) Study Text British library cataloguing-in-publication data A catalogue record for this book is available from the British Library Published by: Kaplan Publishing UK Unit The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 978-1-78740-050-4 © Kaplan Financial Limited, 2017 The text in this material and 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 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 Kaplan Publishing ii KAPLAN PUBLISHING Contents Page Chapter Accounting for Management Chapter Sources of data 27 Chapter Presenting information 45 Chapter Cost classification 63 Chapter Accounting for materials 103 Chapter Accounting for labour 145 Chapter Accounting for overheads 171 Chapter Absorption and marginal costing 207 Chapter Job, batch and process costing 225 Chapter 10 Service and operation costing 287 Chapter 11 Alternative costing principles 299 Chapter 12 Statistical techniques 315 Chapter 13 Budgeting 365 Chapter 14 Capital budgeting 419 Chapter 15 Standard costing 465 Chapter 16 Performance measurement techniques 527 Chapter 17 Performance measurement in specific situations 565 Chapter 18 Spreadsheets 601 Chapter 19 Questions 621 Chapter 20 Answers 663 KAPLAN PUBLISHING iii iv KAPLAN PUBLISHING chapter Introduction Paper Introduction v Introduction 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: vi • 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 KAPLAN PUBLISHING • Summary diagrams complete each chapter to show the important links between topics and the overall content of the paper 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 chapter A Question Bank is also included at the back of the book Appropriate question practice is fundamental – to increase your chances of passing the Exam, you must make sure that you have practised these questions before entering the Exam hall 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 mykaplanreporting@kaplan.com with full details, or follow the link to the feedback form in MyKaplan Our Quality Co-ordinator 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 Key Point – Identifies topics that are key to success and are often examined Illustration – Worked examples help you understand the core content better Test Your Understanding – Exercises for you to complete to ensure that you have understood the topics just learned Tricky topic – When reviewing these areas care should be taken and all illustrations and test your understanding exercises should be completed to ensure that the topic is understood 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 Ask your local customer services staff if you are not already a subscriber and wish to join If you are subscribed to our on-line resources you will find: (1) On-line referenceware: reproduces your StudyText on-line, giving you anytime, anywhere access KAPLAN PUBLISHING vii Introduction (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 Paper introduction Paper background The aim of ACCA Paper F2, Management accounting/FIA Diploma in Accounting and Business, Management accounting, is to develop knowledge and understanding of management accounting techniques to support management in planning, controlling and monitoring performance in a variety of business context Objectives of the syllabus • • • • • Explain the nature, source and purpose of management information Explain and apply cost accounting techniques Prepare budgets for planning and control Compare actual costs with standard costs and analyse any variances Explain and apply performance measurements and monitor business performance Core areas of the syllabus • • • • • viii The nature, source and purpose of management information Cost accounting techniques Budgeting Standard costing Performance measurement KAPLAN PUBLISHING 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 A Chapter reference THE NATURE, SOURCE AND PURPOSE OF MANAGEMENT INFORMATION (1) Accounting for management (a) Describe the purpose and role of cost and management accounting within an organisation.[k] (b) Compare and contrast financial accounting with cost and management accounting.[k] (c) Outline the managerial processes of planning, decision making and control.[k] (d) Explain the difference between strategic, tactical and operational planning.[k] (e) Distinguish between data and information.[k] (f) Identify and explain the attributes of good information.[k] (g) Explain the limitations of management information in providing guidance for managerial decision-making.[k] 1 (2) Sources of data KAPLAN PUBLISHING (a) Describe sources of information from within and outside the organisation (including government statistics, financial press, professional or trade associations, quotations and price list).[k] (b) Explain the uses and limitations of published information/data (including information from the internet).[k] (c) Describe the impact of general economic environment on costs/revenues.[k] (d) Explain sampling techniques (random, systematic, stratified, multistage, cluster and quota).[k] (e) Choose an appropriate sampling method in a specific situation (Note: Derivation of random samples will not be examined).[s] ix Introduction (3) Cost classification (a) Explain and illustrate production and non-production costs [k] (b) Describe the different elements of non production costs – administrative, selling, distribution and finance.[k] (c) Describe the different elements of production cost – materials, labour and overheads.[k] (d) Explain the importance of the distinction between production and non-production costs when valuing output and inventories.[k] (e) Explain and illustrate with examples classifications used in the analysis of the product/service costs including by function, direct and indirect, fixed and variable, stepped fixed and semi variable costs.[s] (f) Explain and illustrate the use of codes in categorising transaction.[k] (g) Describe and illustrate, graphically, different types of cost behaviour.[s] (h) Use high/low analysis to separate the fixed and variable elements of total costs including situations involving semi variable and stepped fixed costs and changes in the variable cost per unit.[s] (i) Explain the structure of linear functions and equations.[s] Explain and illustrate the concept of cost objects, cost units and cost centres.[s] (k) Distinguish between cost, profit, investment and revenue [k] centres (l) Describe the differing needs for information of cost, profit, (j) investment and revenue centre managers.[k] (4) Presenting information (a) Prepare written reports representing management information in suitable formats according to purpose.[s] (b) Present information using table, charts and graphs (bar charts, line graphs, pie charts and scatter graphs).[s] (c) Interpret information (including the above tables, charts and graphs) presented in management reports.[s] x KAPLAN PUBLISHING Accounting for Management • Relevant – are the objectives relevant for the people involved and to the mission of the business? • Timed – are deadlines being set for the objectives that are achievable? Are there any stage reviews planned to monitor progress towards the objective? By following the SMART hierarchy a business should be able to produce plans that lead to goal congruence throughout the departments, centres and/or regional offices (the whole business) There are three different levels of planning (known as ‘planning horizons’).These three levels differ according to their time span and the seniority of the manager responsible for the tasks involved Strategic planning 'Strategic planning' can also be known as 'long-term planning' or 'corporate planning' It considers: • • the longer term (five years plus) the whole organisation Senior managers formulate long-term objectives (goals) and plans (strategies) for an organisation as a whole These objectives and plans should all be aiming to achieving the company's mission Tactical planning Tactical planning takes the strategic plan and breaks it down into manageable chunks i.e shorter term plans for individual areas of the business to enable the strategic plan to be achieved Senior and middle managers make short to medium term plans for the next year Operational planning Operational planning involves making day-to-day decisions about what to next and how to deal with problems as they arise All managers are involved in day to day decisions 12 KAPLAN PUBLISHING chapter A simple hierarchy of management tasks can be presented as follows: Strategic, tactical and operational planning The table shown below illustrates the three different categories of planning Private school Profit-seeking business Objective (mission) To provide a high quality of education so that, within five years, 95% of pupils achieve grades A or B in their final examinations To achieve a 20% return on capital every year To increase earnings per share by 10% every year for the next five years Strategic plans Reduce class sizes Raise new funds to invest $1 million in new equipment and facilities Attract the highest quality of teacher by paying good salaries Cut costs by 15% in domestic markets Expand into markets in Asia Increase domestic market share by 10% in the next five years Tactical plans Set a target for this year for examination results Increase the number of teachers by 10% by the end of the year Carry out a cost reduction program next year Establish business relationships with customers in Asia and carry out market research Increase the size of the work force in order to improve total sales Plan the launch of a fundraising campaign KAPLAN PUBLISHING 13 Accounting for Management Operational plans Prepare teaching schedules for the next term Monitor the marks gained by students in mock examinations Provide whiteboard training to teaching staff Obtain prices from more than one supplier before purchasing materials Offer a bulk purchase discount of 10% to a major customer 5 Cost centres, profit centres, investment centres and revenue centres Responsibility accounting Responsibility accounting is based on identifying individual parts of a business which are the responsibility of a single manager A responsibility centre is an individual part of a business whose manager has personal responsibility for its performance The main responsibility centres are: • • • • cost centre revenue centre profit centre investment centre Cost centres A cost centre is a production or service location, function, activity or item of equipment whose costs are identified and recorded 14 • For a paint manufacturer cost centres might be: mixing department; packaging department; administration; or selling and marketing departments • For an accountancy firm, the cost centres might be: audit; taxation; accountancy; word processing; administration; canteen Alternatively, they might be the various geographical locations, e.g the London office, the Cardiff office, the Plymouth office • Cost centre managers need to have information about costs that are incurred and charged to their cost centres • The performance of a cost centre manager is judged on the extent to which cost targets have been achieved KAPLAN PUBLISHING chapter Revenue centres A revenue centre is a part of the organisation that earns sales revenue It is similar to a cost centre, but only revenues, and not costs, are recorded • Revenue centres are generally associated with selling activities, for example, a regional sales managers may have responsibility for the regional sales revenues generated • Each regional manager would probably have sales targets to reach and would be held responsible for reaching these targets • Sales revenues earned must be able to be traced back to individual (regional) revenue centres so that the performance of individual revenue centre managers can be assessed Profit centres A profit centre is a part of the business for which both the costs incurred and the revenues earned are identified • Profit centres are often found in large organisations with a divisionalised structure, and each division is treated as a profit centre • Within each profit centre, there could be several costs centres and revenue centres • The performance of a profit centre manager is measured in terms of the profit made by the centre • The manager must therefore be responsible for both costs and revenues and in a position to plan and control both • Data and information relating to both costs and revenues must be collected and allocated to the relevant profit centres Investment centres Managers of investment centres are responsible for investment decisions as well as decisions affecting costs and revenues • Investment centre managers are therefore accountable for the performance of capital employed as well as profits (costs and revenues) • The performance of investment centres is measured in terms of the profit earned relative to the capital invested (employed) This is known as the return on capital employed (ROCE) • ROCE = Profit/Capital employed This calculation will be met in more detail in a later chapter KAPLAN PUBLISHING 15 Accounting for Management Overview of responsibility centres What is it? 16 Cost centre Revenue centre Profit centre Investment centre Part of the business for which costs are identified and recorded Part of the business for which revenues earned are identified and recorded Part of the business for which costs incurred and revenue earned are identified and recorded Part of the business for which profits and capital employed are measured Sales Where might Any divisions it be found? production or service location, function, activity, item of equipment Divisions of Business large units of large organisations organisations May include several cost and revenue centres Have cost What revenue How is targets been has been performance achieved? earned? measured? What profit has been made by the centre? What is the return from investments? What are the manager's information needs? Costs incurred and charged to the cost centre Sales revenue earned by the individual revenue centre Information about costs and revenues allocated to the profit centre Information on costs, revenues and capital employed by the investment centre Example accountancy departments in an accountancy firm Regional sales areas with the retail division of a manufacturing company Wholesale and retail divisions in a paint company UK and European divisions of a multinational company KAPLAN PUBLISHING chapter 6 Financial, cost and management accounting Financial accounting Financial accounting involves recording the financial transactions of an organisation and summarising them in periodic financial statements for external users who wish to analyse and interpret the financial position of the organisation • The main duties of the financial accountant include: maintaining the bookkeeping system of the nominal ledger, payables control account, receivables control account and so on and to prepare financial statements as required by law and accounting standards • Information produced by the financial accounting system is usually insufficient for the needs of management for decision making Cost accounting Managers usually want to know about the costs and the profits of individual products and services In order to obtain this information, details are needed for each cost, revenue, profit and investment centre Such information is provided by cost accounting and management accounting systems Cost accounting is a system for recording data and producing information about costs for the products produced by an organisation and/or the services it provides It is also used to establish costs for particular activities or responsibility centres • Cost accounting involves a careful evaluation of the resources used within the enterprise • The techniques employed in cost accounting are designed to provide financial information about the performance of the enterprise and possibly the direction that future operations should take • The terms ‘cost accounting’ and ‘management accounting’ are often used to mean the same thing Management accounting Management accounting has cost accounting at its essential foundation KAPLAN PUBLISHING 17 Accounting for Management Non-financial information Information provided by cost accounting systems is financial in nature Financial information is important for management because many objectives of an organisation are financial in nature, such as making profits and avoiding insolvency Managers also need information of a non-financial nature • At a strategic level, management need to know about developments in their markets and in the economic situation They also need to know about any new technology that emerges, and about the activities of competitors • At a tactical level, they might want to know about issues such as product or service quality, speed of handling customer complaints, customer satisfaction levels, employee skills levels and employee morale • At an operational level, they may want to know about the number of rejects per machine, the lead time for delivering materials and the number of labour and machine hours available The management accounting systems in many organisations are able to obtain non-financial as well as financial information for reporting to management The importance of non-financial information within the reporting system should not be forgotten Differences between management accounting and financial accounting The following illustration compares management accounting with financial accounting 18 KAPLAN PUBLISHING chapter Illustration – Management versus financial accounting Management accounting Financial accounting Information mainly produced for Internal use e.g managers External use e.g and employees shareholders, payables, lenders, banks, government Purpose of information To aid planning, controlling and decision making To record the financial performance in a period and the financial position at the end of that period Legal None requirements Limited companies must produce financial accounts Formats Management decide on the information they require and the most useful way of presenting it Format and content of financial accounts intending to give a true and fair view should follow accounting standards and company law Nature of information Financial and nonfinancial Mostly financial Time period Historical and forwardlooking Mainly a historical record The role of management accounting within an organisation’s management information system The management information system of an organisation is likely to be able to prepare the following: • • • • • • • annual statutory accounts budgets and forecasts product profitability reports cash flow reports capital investment appraisal reports standard cost and variance analysis reports returns to government departments, e.g Sales Tax returns KAPLAN PUBLISHING 19 Accounting for Management Management information is generally supplied to management in the form of reports Reports may be routine reports prepared on a regular basis (e.g monthly) or they may be prepared for a special purpose (e.g ad hoc report) Test your understanding The following assertions relate to financial accounting: (i) The main purpose of financial information is to provide a true and fair view of the financial position of an organisation at the end of an accounting period (ii) Financial information may be presented in any format deemed suitable by management Which of the following statements are true? A Assertions (i) and (ii) are both correct B Only assertion (i) is correct C Only assertion (ii) is correct Test your understanding The Management Accountant has communicated a detailed budget to ensure that cost savings targets are achieved in the forthcoming period This is an example of: A Operational planning B Tactical planning C Strategic planning 7 The limitations of management information There are a number of respects in which management accounting information may fail to meet its objective of assisting management in the decision making process These can be summarised as follows: • • 20 failure to meet the requirements of useful information the problem of relevant costs and revenues KAPLAN PUBLISHING chapter • • non-financial information external information Failure to comply with the qualities of useful information If information supplied to managers is deficient in any of these respects then inappropriate management decisions may be made Consider the following: • Accuracy – overestimating costs may result in a decision not to produce a product which in fact is profitable; on the other hand, overestimating the price at which the output can be sold may result in the organisation producing output which cannot be sold in sufficient volume to be profitable • Timeliness – in connection with a decision to close a division or department if the information is presented to management after a decision had been made to lay off staff that could have been profitably employed in other divisions or activities, the company has incurred unnecessary redundancy costs, lost possible future revenues and demotivated the remaining employees when they learn of the redundancies • Understandable – excessive focus by management accountants on more complex techniques of which general management have little or no knowledge or understanding may mean that the accountant’s advice will be ignored There is significant attention being given to the role of the management accountant as an educator within the organisation – explaining the information and training general management to help them to understand the information better Relevant costs and revenues Not all information produced by an accounting system is relevant to the decisions made by management In particular, information produced mainly for financial reporting purposes and then taken as the basis for management decisions will often need significant modification to be useful to management The principle here is that the figures presented to assist in management decision-making are those that will be affected by the decision, i.e they should be: • Future – costs and revenues that are going to be incurred some time in the future Costs and revenues that have already been incurred are known as sunk costs and are not relevant to the decision to be made • Incremental – the extra cost or revenue that is created as a result of a decision taken • Cash flows – actual cash being spent or received not monetary items that are produced via accounting convention e.g book or carrying values, depreciation charges KAPLAN PUBLISHING 21 Accounting for Management Non-financial information Managers will not always be guided by the sort of financial and other (hard) information supplied by the management accounting system They will also look at qualitative, behavioural, motivational, even environmental factors These non-financial factors can be just as important in relation to a decision as financial information – but they are often more difficult to estimate and quantify Illustration – Non-financial factors A processing company needs to increase its output in order to take advantage of an increase in the total market for its product The company has identified alternative ways of achieving this increase in output Alternative A The cheapest (in financial terms) method of providing additional production capacity is to erect a new factory extension However, there is a danger that the extension will be seen by the local council and by residents as an eyesore Some landscaping and re-design work may be carried out at extra cost to company to make the extension more environmentally acceptable Alternative B This entails keeping the factory at its current size but increasing the working hours per week for all production staff by 20% The latter may be a cheaper solution in financial terms but may have an adverse impact on staff morale and result in a significant increase in staff turnover It is not easy for the company to build the non-financial costs into it's decision making process as they are often difficult to quantify External information The environment refers to all of the external factors which affect a company and includes government actions, competitor actions, customer demands and other factors for example the weather Conventional accounting systems focus entirely on internal information such as production costs and volume of output produced Companies and organisations not, of course exist in a vacuum – they live in an environment in which they are influenced by a number of other organisations and forces arising from outside the organisation itself This leads into an area of study often referred to as environmental analysis 22 KAPLAN PUBLISHING chapter We not need to go into this area in detail here, but, as with the non financial factors referred to above, you should be aware that the environment (this is simply the external circumstances in which the company operates) will have an influence on a company’s actions which should be reflected in its decision making processes It follows from this that an organisation should have information on its environment available to it within its accounting information systems – the organisation needs external information as well as internal information KAPLAN PUBLISHING 23 Accounting for Management 8 Chapter summary 24 KAPLAN PUBLISHING chapter Test your understanding answers Test your understanding C The two terms are frequently used synonymously but strictly speaking they mean different things Data is obtained from a survey and is turned into information by sorting and analysis Both data and information can comprise either facts or figures Test your understanding Preparation of the annual budget for a cost centre Revise budgets for next period for a cost centre Implement decisions based on information provided Set organisation’s objectives for next period Compare actual and expected results for a period Planning Control Decision making √ √ √ √ √ √ √ √ √ Note that all planning and control functions are part of the decision making process and are therefore identified as being both The only exception is ‘implement decisions based on information provided’ which is not part of planning and control, but the one decision making task that there is Test your understanding B Financial information should be presented in accordance with accounting standards and company law KAPLAN PUBLISHING 25 Accounting for Management Test your understanding B The management accountant is providing a new budget for the forthcoming period – i.e a senior manager making a short term plan 26 KAPLAN PUBLISHING ... topics and chart your achievement through the course relative to your peer group Paper introduction Paper background The aim of ACCA Paper F2, Management accounting/ FIA Diploma in Accounting and Business, ... and Business, Management accounting, is to develop knowledge and understanding of management accounting techniques to support management in planning, controlling and monitoring performance in a... management accounting within an organisation • compare and contrast financial accounting with cost and management accounting • explain the limitations of management information in providing guidance