ACCA paper f2 management accounting essential text

ACCA Paper F2 Management accounting Essential text British library cataloguinginpublication 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 84710 535 6 © Kaplan Financial Limited, 2008 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 permisssion 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 The nature and purpose of management accounting Chapter Types of cost and cost behaviour 15 Chapter Business mathematics 41 Chapter Ordering and accounting for inventory 57 Chapter Order quantities and reorder levels 71 Chapter Accounting for labour 89 Chapter Accounting for overheads 109 Chapter Marginal and absorption costing 139 Chapter Relevant costing 165 Chapter 10 Dealing with limiting factors 181 Chapter 11 Job, batch and process costing 201 Chapter 12 Service and operation costing 239 Chapter 13 Budgeting 251 Chapter 14 Standard costing 275 KAPLAN PUBLISHING iii iv KAPLAN PUBLISHING chapter Intro Paper Introduction v 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) Complete text or essential 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 complete text or essential 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 KAPLAN PUBLISHING • 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 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 text 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 Expandable Text Expandable text provides you with additional information about a topic area and may help you gain a better understanding of the core content. Essential text users can access this additional content online (read it where you need further guidance or skip over when you are happy with the topic) 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 KAPLAN PUBLISHING vii For more details about the syllabus and the format of your exam please see your Complete Text or go online Online subscribers The Syllabus Paper background Objectives of the syllabus Core areas of the syllabus Syllabus objectives and chapter references The examination Examination format Paperbased examination tips Study skills and revision guidance Preparing to study Effective studying Further reading You can find further reading and technical articles under the student section of ACCA's website viii KAPLAN PUBLISHING chapter The nature and purpose of management accounting Chapter learning objectives Upon completion of this chapter you will be able to: • • describe the difference between data and information • describe, in overview, the managerial processes of: planning, decision making and control • explain the characteristics of and difference between strategic, tactical and operational planning • explain the characteristics and differences between cost, profit, investment and revenue centres • describe the different information needs of managers of cost, profit, investment and revenue centres • describe the purpose and role of cost and management accounting within an organisation’s management information system • compare and contrast, for a business, financial accounting with cost and management accounting explain, using the ‘ACCURATE’ acronym the attributes of good information The nature and purpose of management accounting 1 The nature of good information Data and information ‘Data’ means facts. Data consists of numbers, letters, symbols, raw facts, events and transactions which have been recorded but not yet processed into a form suitable for use Information is data which has been processed in such a way that it is meaningful to the person who receives it (for making decisions) • • The terms data and information are often used interchangeably in everyday language. Make sure that you can distinguish between the two As data is converted into information, some of the detail of the data is eliminated and replaced by summaries which are easier to understand Expandable text KAPLAN PUBLISHING Standard costing (Note the underlines in bold highlight the differences from the marginal costing version.) Test your understanding Chapel Ltd manufactures a chemical protective called Rustnot. The following standard costs apply for the production of 100 cylinders: $ Materials 500 kgs @ $0.80 per kg 400 Labour 20 hours @ $1.50 per hour 30 Fixed overheads 20 hours @ $1.00 per hour 20 –––– 450 –––– Chapel Ltd uses absorption costing The monthly production/sales budget is 10,000 cylinders.Selling price = $6 per cylinder For the month of November the following actual production and sales information is available: Produced/sold 10,600 cylinders Sales value $63,000 Material purchased and used 53,200 kgs $42,500 Labour 2,040 hours $3,100 Fixed overheads $2,200 The following variances were calculated for November: 298 Sales volume variance $900 (F) Sales price variance $600 (A) Materials price variance $60 (F) Materials usage variance $160 (A) Labour rate variance $40 (A) Labour efficiency variance $120 (F) Fixed overhead expenditure variance $200 (A) KAPLAN PUBLISHING chapter 14 Fixed overhead volume variance $120 (F) Prepare an operating statement for November using the variances given above If you wish to gain further practice in calculating variances, use the information given in the question to calculate the variances. The Expandable Text after the solution shows how the individual entries in the operating statement were calculated Expandable text 9 Operating statements – marginal costing The main differences between absorption and marginal costing operating statements are as follows: • The marginal costing operating statement has a sales volume variance that is calculated using the standard contribution per unit (rather than a standard profit per unit as in absorption costing) • There is no fixed overhead volume variance Illustration Operating statement – marginal costing Marginal costing operating statement $ Budgeted contribution Sales volume variance (using contribution per unit) —— Standard contribution on actual sales Sales price variance —— Cost variances: F A $ $ Material price Material usage Labour rate Labour efficiency KAPLAN PUBLISHING 299 Standard costing Variable overhead rate Variable overhead efficiency Actual contribution Budgeted fixed on Fixed overhead expenditure – Production Fixed overhead expenditure – Nonproduction —— —— Total —— Actual profit —— Note The sales volume variance is calculated using the standard contribution per unit There is no fixed overhead volume variance (and therefore capacity and efficiency variances) in a marginal costing operating statement Test your understanding Place an ‘X’ in the relevant column to show which variances are found in marginal costing (MC) and which are found in absorption costing (AC) operating statements Variance MC AC Sales volume profit variance Sales volume contribution variance Material cost variances Labour cost variances Variable overhead variances Fixed overhead expenditure variance Fixed overhead volume variance Fixed overhead capacity variance Fixed overhead efficiency variance Fixed overhead total variance 300 KAPLAN PUBLISHING chapter 14 10 Working backwards One way that the examiner can easily test your understanding of variances is to ask you to calculate the following instead of straightforward variance calculations: • • actual figures from variances and standards standards from variances and actual figures Illustration 10 Working backwards ABC Ltd uses standard costing. It purchases a small component for which the following data are available: Actual purchase quantity 6,800 units Standard allowance for actual production 5,440 units Standard price $0.85/unit Material price variance (Adverse) ($544) Required: Calculate the actual price per unit of material Expandable text Test your understanding 10 A business has budgeted to produce and sell 10,000 units of its single product. The standard cost per unit is as follows: Direct materials $15 Direct labour $12 Variable overhead $10 Fixed production overhead $8 During the period the following variances occurred: fixed overhead expenditure variance $ 4,000 adverse fixed overhead volume variance $12,000 favourable KAPLAN PUBLISHING 301 Standard costing Calculate the following (a) Actual fixed overheads in the period (b) Actual production volume in the period Illustration 11 Working backwards In a period, 11,280 kilograms of material were used at a total standard cost of $46,248. The material usage variance was $492 adverse Required: Calculate the standard allowed weight of material for the period Expandable text Test your understanding 11 In a period 6,500 units were made and there was an adverse labour efficiency variance of $26,000. Workers were paid $8 per hour, total wages were $182,000 and there was a nil rate variance Calculate how many standard labour hours there were per unit 302 KAPLAN PUBLISHING chapter 14 11 Chapter summary KAPLAN PUBLISHING 303 Standard costing Test your understanding answers Test your understanding (a) Standard cost per unit under absorption costing $ Direct materials 150,000 Direct labour 200,000 Production overhead Variable 50,000 Fixed 25,000 ––––––– Total production cost 425,000 ––––––– Budgeted production units = 5,000 Standard cost per unit – absorption costing = $425,000/5,000 units = $85 (b) Standard cost per unit under marginal costing $ Direct materials 150,000 Direct labour 200,000 Variable overhead costs 50,000 ––––––– Total variable cost 400,000 ––––––– Budgeted production units = 5,000 304 KAPLAN PUBLISHING chapter 14 Standard cost per unit – marginal costing = $400,000/5,000 units = $80 Test your understanding Price variance = ($2.50 – $2.00) x 500 = $250 (A) Volume variance = (500 – 400) x $0.70* = $70 (F) _ $180 (A) *Standard contribution per unit = $(2.50 – 1.80) = $0.70 Test your understanding Price variance = ($60 – $61) x 6,000 = $6,000 (F) Volume variance = (6,500 – 6,000) x $5* = $2,500 (A) –––––– $3,500 (F) * Standard gross profit per unit Test your understanding Material variances $ $ Actual quantity x Actual price = 20,900 Price variance 1,100 (F) Actual quantity x Standard price = 2,200 x $10 = 22,000 Usage variance 2,000 (A) Standard quantity x Standard price = 1,000 x 2 x $10 = 20,000 Total variance 900 (A) KAPLAN PUBLISHING 305 Standard costing Test your understanding Labour variances $ Actual hours x Actual rate = 17,680 Price variance 680 (A) Actual hours x Standard rate $ = 3,400 hours x $5 ($15,000/3,000 = $5 per hour) 17,000 = Efficiency variance 500 (A) Standard hours x Standard rate = 1,100 x 3 hours x $5 = 16,500 Total variance 1,180 (A) 306 KAPLAN PUBLISHING chapter 14 Test your understanding Variable overhead variances $ $ Actual hours x Actual rate = 5,544 Expenditure variance 396 (F) Actual hours x Standard rate = 1,980 hours x $3 = 5,940 Efficiency variance 540(A) Standard hours x Standard rate = 900 x 2 hours x $3 = 5,400 Total variance 144 (A) Variable overhead variances: $ $ Actual hours x Actual rate = 5,544 Expenditure variance 396 (F) Actual hours x Standard rate = 1,980 hours x $3 = 5,940 Efficiency variance 540(A) Standard hours x Standard rate = 900 x 2 hours x $3 = 5,400 Total variance 144 (A) The variable overhead total variance is the sum of the expenditure and efficiency variances, i.e $396 (F) + $540 (A) = $144 (A) Proof: The variable overhead total variance in the Finishing department is the difference between: (a) the standard variable overhead of the actual production (flexed budget) $5,400 and (b) the actual cost of the variable overhead $5,544 KAPLAN PUBLISHING 307 Standard costing Difference = $(5,400 – 5,544) = $144 (A) which is what was calculated above Test your understanding (a) FOAR per unit = $12,000/1,000 = $12 per unit Under/overabsorption Overheads absorbed = 1,100 x $12 $13,200 Overheads incurred $13,000 Overabsorption $200 (b) Fixed overhead expenditure variance Actual expenditure $13,000 Budgeted expenditure $12,000 ––––––– Expenditure variance $1,000 (A) ––––––– (c) Fixed overhead volume variance Budgeted expenditure 12,000 Actual units x FOAR (1,100 x $12) 13,200 ––––––– Volume variance $1,200 (F) (d) Fixed overhead total variance The fixed overhead total variance is the sum of the expenditure and volume variances Fixed overhead expenditure variance $1,000 (A) Fixed overhead volume variance $1,200 (F) ––––––– Fixed overhead total variance $200 (F) Proof: the fixed overhead total variance is the same as the over absorbed overhead ($200) as calculated in part (a) above 308 KAPLAN PUBLISHING chapter 14 Test your understanding Chapel Ltd – Operating statement for November Budgeted profit (W1) 15,000 Sales volume variance (W3) 900 Sales price variance (W3) (600) 15,300 Cost variances: F A Materials price (W4) 60 Materials usage (W4) 160 Labour rate (W5) 40 Labour efficiency (W5) 120 Fixed overhead expenditure (W6) 200 Fixed overhead volume (W6) 120 Total 300 400 (100) Actual profit (W2) 15,200 KAPLAN PUBLISHING 309 Standard costing Test your understanding Variance MC AC Sales volume profit variance x Sales volume contribution variance x Material cost variances x x Labour cost variances x x Variable overhead variances x x Fixed overhead expenditure variance x x Fixed overhead volume variance x Fixed overhead capacity variance x Fixed overhead efficiency variance x Fixed overhead total variance x x 310 KAPLAN PUBLISHING chapter 14 Test your understanding 10 (a) The actual fixed overheads are calculated as follows Actual fixed overheads ? Budgeted fixed overheads ($8 x 10,000) $80,000 ––––––– Fixed overhead expenditure variance $4,000 (A) ––––––– Because the fixed overhead expenditure variance is adverse, this means that the actual fixed overheads were $4,000 more than budgeted. Actual fixed overheads = Budgeted fixed overheads = $80,000 + $4,000 + Fixed overhead expenditure variance = $84,000 (b) The actual production volume is calculated as follows The fixed overhead volume variance (in units) Fixed overhead volume variance in $ = ––––––––––––––––––––––––––––– Standard fixed overhead rate per unit $12,000 = ––––––– = 1,500 units (F) $8 Because the variance is favourable, this means that 1,500 more units were produced than budgeted, i.e. 10,000 + 1,500 = 11,500 units This can also be proved as follows Budgeted expenditure $80,000 Actual units x standard fixed overhead rate per unit ? KAPLAN PUBLISHING 311 Standard costing ? x $8 –––––––– Fixed overhead volume variance $12,000 (F) Actual units x standard fixed overhead rate per unit = $80,000 + $12,000 = $92,000 Actual units = $92,000 ––––––– = 11,500 units $8 Test your understanding 11 $ Actual hours × Actual rate $ 182,000 Rate variance Nil Actual hours × Standard rate = ? × $8 = 4 182,000 Efficiency variance Standard hours × Standard rate = 6,500 × Standard hours × $8 = 26,000 (A) 156,000 Standard labour hours per unit = $156,000 ———— = 3 6,500× 8 312 KAPLAN PUBLISHING ... • 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... between management accounting and financial accounting The following illustration compares? ?management? ?accounting? ?with financial accounting Illustration 2– Management accounting and management. .. profit, investment and revenue centre. Such information is provided by cost? ?accounting? ?and? ?management? ?accounting? ?systems Expandable text KAPLAN PUBLISHING The nature and purpose of? ?management? ?accounting Cost accounting Cost? ?accounting? ?is a system for recording data and producing information