ACCA paper f5 performance management study text for exams

S T U D Y PERFORMANCE MANAGEMENT BPP Learning Media is the sole ACCA Platinum Approved Learning Partner – content for the ACCA qualification In this, the only Paper F5 study text to be reviewed by the examiner: • We discuss the best strategies for studying for ACCA exams • We highlight the most important elements in the syllabus and the key skills you will need • We signpost how each chapter links to the syllabus and the study guide • We provide lots of exam focus points demonstrating what the examiner will want you to • We emphasise key points in regular fast forward summaries • We test your knowledge of what you've studied in quick quizzes • We examine your understanding in our exam question bank • We reference all the important topics in our full index BPP's i-Pass product also supports this paper FOR EXAMS IN 2011 T E X T First edition 2007 Fourth edition November 2010 ISBN 9780 7517 8921 (Previous ISBN 9870 7517 6367 6) 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 London W12 8AA All our 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 Ltd www.bpp.com/learningmedia Printed in the United Kingdom We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd, except where otherwise stated Your learning materials, published by BPP Learning Media Ltd, are printed on paper sourced from sustainable, managed forests © BPP Learning Media Ltd 2010 ii Contents Page Introduction Helping you to pass – the ONLY F5 Study Text reviewed by the examiner! Studying F5 The exam paper v vii xi Part A Specialist cost and management accounting techniques 2a 2b 2c 2d 2e Costing Activity based costing Target costing Lifecycle costing Throughput accounting Environmental accounting 21 33 41 49 63 Part B Decision-making techniques Cost volume profit (CVP) analysis Limiting factor analysis Pricing decisions Short-term decisions Risk and uncertainty 73 95 123 157 173 Part C Budgeting 10 Objectives of budgetary control Budgetary systems Quantitative analysis in budgeting 199 215 233 Part D Standard costing and variances analysis 11 12 13 Budgeting and standard costing Variance analysis Behavioural aspects of standard costing 267 287 319 Part E Performance measurement and control 14 15 16 Performance measurement Divisional performance measures Further performance management Exam question bank Exam answer bank Index 337 365 387 403 419 463 Review form and free prize draw Contents iii A note about copyright Dear Customer What does the little © mean and why does it matter? 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BPP Learning Media – the sole Platinum Approved Learning Partner - content As ACCA’s sole Platinum Approved Learning Partner – content, BPP Learning Media gives you the unique opportunity to use examiner-reviewed study materials for the 2011 exams By incorporating the examiner’s comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA-approved support for your studies NEW FEATURE – the PER alert! Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three year practical experience requirement (PER) To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the ‘PER alert’ feature You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success Developing exam awareness Our Texts are completely focused on helping you pass your exam Our advice on Studying F5 outlines the content of the paper, the necessary skills the examiner expects you to demonstrate and any brought forward knowledge you are expected to have Exam focus points are included within the chapters to highlight when and how specific topics were examined, or how they might be examined in the future Using the Syllabus and Study Guide You can find the syllabus and Study Guide on page xi of this Study Text Testing what you can Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt We include Questions – lots of them - both within chapters and in the Exam Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content Introduction v Chapter features Each chapter contains a number of helpful features to guide you through each topic Topic list Topic list Syllabus reference Tells you what you will be studying in this chapter and the relevant section numbers, together the ACCA syllabus references Introduction Puts the chapter content in the context of the syllabus as a whole Study Guide Links the chapter content with ACCA guidance Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined Knowledge brought forward from earlier studies What you are assumed to know from previous studies/exams FAST FORWARD Summarises the content of main chapter headings, allowing you to preview and review each section easily Examples Demonstrate how to apply key knowledge and techniques Key terms Definitions of important concepts that can often earn you easy marks in exams Exam focus points Tell you when and how specific topics were examined, or how they may be examined in the future Formula to learn Formulae that are not given in the exam but which have to be learnt This is a new feature that gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER) vi Introduction Question Give you essential practice of techniques covered in the chapter Case Study Provide real world examples of theories and techniques Chapter Roundup A full list of the Fast Forwards included in the chapter, providing an easy source of review Quick Quiz A quick test of your knowledge of the main topics in the chapter Exam Question Bank Found at the back of the Study Text with more comprehensive chapter questions Cross referenced for easy navigation Studying F5 The F5 examiner wants candidates to be able to apply management accounting techniques in business environments The key question you need to be able to answer is 'what does it all actually mean?' Modern technology is capable of producing vast amounts of management accounting information but it has to be used to help managers to make good decisions and manage effectively The emphasis in this paper is therefore on practical elements and application to the real world The examiner does not want to trick you and papers will be fair The F5 examiner The examiner for this paper is Ann Irons, who replaced Geoff Cordwell from the December 2010 sitting onwards Ann Irons has written several articles in Student Accountant, including one on how to approach the paper (September 2010 issue) Make sure you read these articles to gain further insight into what the examiner is looking for Syllabus update The F5 syllabus has been updated for the June 2011 sitting onwards The full syllabus and study guide can be found in this Study Text on pages xi to xviii The main changes are the omission of backflush accounting and the inclusion of environmental accounting and cost volume profit (CVP) analysis The syllabus order has also been changed, which has been reflected in this Study Text A full summary of the changes to the F5 syllabus is given on the next page Introduction vii viii Introduction Introduction ix 460 Answer bank Index 461 462 Note Key Terms and their page references are given in bold ABC, 22 ABC and variance analysis, 301 Absorption costing 5, Absorption rate, Accounts payable payment period, 347 Accounts receivable days, 347 Acid test ratio, 347 Activity based budgeting, 222 Activity based costing, 22 outline of an ABC system, 23 Activity based costing (ABC), 23 Additive model, 233 Advanced manufacturing technology (AMT), 22 Apportioned costs, 283 Apportionment, Asset turnover, 344 Attainable standard, 273 Balanced scorecard, 353 Base package, 220 Basic standard, 273 Beyond Budgeting, 226 Bottleneck resources, 50 Bottom-up budgeting, 210 Breakeven charts, 75, 79, 85 Breakeven point, 75 Breakeven point for multiple products, 77 Budget, 216 sales, 217 Budget cost allowance, 276 Budget manual, 217 Budget systems and uncertainty, 228 Budgetary control, 282 Budgetary planning and control systems, 206 Building Block model, 357 C/S ratio, 79 Capital structure, 344 Cash budget, 217 Changing budgetary systems, 227 Committed fixed costs, 283 Competition, 125 Complementary product pricing, 148 Complementary products, 148 Computer aided design/computer aided manufacture (CADCAM), 329 Conflicting objectives, 201 Connected stakeholders, 395 Conservatism, 176 Continuous budgets, 224 Contract manufacturing, 164 Contribution, 11 Contribution breakeven chart, 75 Contribution centre, 368 Contribution chart, 75 Contribution tables, 181 Control chart, 304 Controllability principle, 398 Controllable costs, 282 Corporate objectives, 200 Corporate planning process, 200 Cost centre, 367 Cost driver, 23 Cost gap, 36 Cost plus pricing, 141 Cost pools, 23 Costing, Cost-volume-profit (CVP) analysis, 74 Cumulative average time, 251 Current ratio, 347 Current standard, 273 Customer life cycle, 46 Cyclical variations, 244 Decentralisation, 366 Decision packages, 220 Decision tree, 170 Demand, 128 completely elastic, 128 completely inelastic, 128 Demand curve, 128 Dependent variable, 236 Deriving a target cost, 35 Deriving the demand equation, 131 Direct cost, Direct costs, Discontinuance of products or departments, 168 Discretionary fixed costs, 283 Divisional autonomy, 374 Divisional performance measurement, 378 Divisionalisation, 366 Double loop feedback, 205 Dual price, 117 Dual responsibility, 284 Dynamic conditions, 224 Earnings per share (EPS), 342 Economy, 391 Effectiveness, 391, 393 Efficiency, 391, 393, 394 Elastic demand, 128 Index 463 Environmental costs, 65 Environmental management accounting (EMA), 64 Environmental taxes, 64 Expectations budget, 209 Expected values, 177 External stakeholder, 395 Extrapolation, 238 Joint products, 165, 166 Feedback, 205 Feedforward control, 205 Financial leverage/gearing, 345 Financial performance indicators (FPIs), 340 Financial risk, 344 Fixed budget, 219 Fixed production overhead volume efficiency variance, 289 Flexibility, 358 Flexible budget, 219 Flow cost accounting, 68 Forecasting, 240 Full cost-plus pricing, 142 Functional budgets, 217 Further processing decisions, 165 Labour efficiency variance, 289 Gearing ratios, 345 General rules for setting transfer prices, 375 Goal congruence, 202 Graphical solution to linear programming problems, 105 H eterogeneity, 38 High-low method, 234 Histogram, 241 Ideal standard, 273 Idle time, 275 Idle time and waste, 294 Idle time variance, 294 Incremental budgeting, 217 Incremental costs, 134 Incremental revenues, 134 Indirect costs, Inelastic demand, 118, 144 Inequalities, 103 Information used in budget systems, 227 Innovation, 353 Input/output analysis, 67 Inseparability, 357 Intangibility, 357 Internal and external services, 164 Index Joint costs, 166 Feasible area, 108 Gearing, 344 464 Internal opportunity cost, 118 Internal stakeholders, 395 Interpolation, 238 Inventory days, 348 Investment centre, 368 Iso-contribution lines, 111 Labour rate variance, 289 Labour total variance, 289 Labour variances and the learning curve, 293 Learning curve formula, 254 Learning curve theory, 251 Learning rate, 254 Least squares technique, 236 Life cycle costing, 42 Life-cycle costing, 69 Limiting factor, 96 Linear programming, 102 Linear regression analysis, 236 Liquidity, 346 Loss leader, 148 Make or buy decisions, 162 Make or buy decisions and scarce resources, 100 Margin of safety, 68, 81 Marginal cost, 11, 135 Marginal cost plus pricing, 133, 144 Marginal costing, 5, 10, 11 Marginal revenue, 135 Market research, 175 Mark-up pricing, 144 Master budget, 217 Material price variance, 289 Material total variance, 289 Material usage variance, 289 Maximax criterion, 179 Maximin decision rule, 179 Microeconomic theory and profit maximisation, 135 Minimax regret rule, 180 Mix variance, 308 Monetary measures, 340 Monopolistic competition, 125 Monopoly, 125 Moon, 356 Motivation, 208 Moving averages, 244 Multiplicative model, 247 Multi-product breakeven charts, 85 Negative feedback, 193 NFPIs in relation to employees, 350 in relation to product/service quality, 350 Non-controllable costs, 270 Non-negativity constraints, 103 Non-profit seeking organisation, 389 O bjective function, 103 Objectives, 200, 205 Oligopoly, 125 Operating gearing or leverage, 330 Operational variance, 320 Opportunity cost, 161 Optimal transfer price, 380 Outsourcing, 163 Over absorption, Overhead absorption, 6, Overhead recovery rates, Overheads, P/V chart, 75 P/V ratio, 74, 79 Participation in budgeting, 209 Pay-off tables, 178 Penetration pricing, 147 Perfect competition, 125 Perfect information, 188 Perfect information and decision trees, 190 Performance measurement in non-profit seeking organisations, 389 Perishability, 37 Planning and control cycle, 202 Planning variance, 320 Position audit, 203 Positive feedback, 205 Predetermined absorption rate, Price discrimination, 148 Price elasticity of demand, 127 Price sensitivity, 124 Price skimming, 147 Pricing policy, 124 and the market, 124 Principle of controllability, 282 Probabilistic budgeting, 228 Product life cycle, 42 Product mix decision, 96 Production capacity, 217 Production constraints, 96 Product-line pricing, 148 Profit centre, 367 Profit margin, 34 Profit/volume (P/V) chart, 75 Profit/volume (P/V) ratio, 74 Profitability, 340 Profit-maximising selling price, 137 Proportional (multiplicative), 248 Qualitative data, 175 Qualitative performance measures, 329 Qualitative research, 176 Quantitative performance measures, 329 Quick ratio, 347 R&D, 359 Random numbers, 192 Random variations, 242 Reconciling profits, 14 Regret, 180 Relevant cost pricing, 150 Relevant costs, 158 of materials, 159 Residual Income, 372 Responsibility accounting, 282 Return on Capital Employed, 343 Return on investment (ROI), 368 Revenue centre, 367 Revised budget, 327 Reward schemes and performance measurement, 398 Risk, 174 Risk averse, 174 Risk neutral, 174 Risk preference, 174 Risk seeker, 174 Rollback analysis, 182 Rolling budget, 225 Rule-of-thumb models, 304 Sales budget, 217 Sales margin, 272 Sales mix and quantity variances, 312 Sales mix variance, 313 Sales quantity variance, 313 Scarce resources, 100 Seasonal variations, 243 Sensitivity analysis, 191 Services, 37 Shadow price, 117 Short-termism, 352 Shut down decisions, 168 Simple average growth models, 240 Simulation models, 192 Simultaneity, 37 Simultaneous equations, 114 Single loop feedback, 205 Slack, 117 Split off point, 165 Index 465 Spreadsheet packages, 259 Stakeholders, 395 Standard cost, 268 Standard costing, 269 Standard costing and TQM, 329 Statistical control charts, 304 Sub-contracting, 163 Surplus, 117 Target cost gap, 36 Target costing, 32 Target prices, 146 Target profits for multiple products, 83 Theory of constraints (TOC), 50 Throughput accounting, 50 Time series, 241 Top-down, 209 Total Quality Management (TQM), 319 Transfer price, 373 Transfer prices, 379 at marginal cost, 379 based on full cost, 379 Transfer pricing using market price, 378 Trend, 243 Uncertain events, 174 Under absorption of overheads, User costs, 158 466 Index Value for money, 393 Value for money audits (VFM audits), 393 Value of perfect information, 188 Variance analysis, 268 Variance investigation models, 304 Variance trend, 303 Variances, 287 Volume discount, 148 Wastage, 274 What if analysis, 260 Worst/most likely/outcome estimates, 179 Yield variance, 307 Zero based budgeting, 219 Notes Notes Notes Notes Notes Notes Review Form & Free Prize Draw – Paper F5 Performance Management (11/10) All original review forms from the entire BPP range, completed with genuine comments, will be entered into one of two draws on 31 July 2011 and 31 January 2012 The names on the first four forms picked out on each occasion will be sent a cheque for £50 Name: Address: How have you used this Text? 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Yes No On the reverse of this page are noted particular areas of the text about which we would welcome your feedback The BPP author of this edition can be e-mailed at: ianblackmore@bpp.com Please return this form to: Lesley Buick, ACCA Publishing Manager, BPP Learning Media Ltd, FREEPOST, London, W12 8BR Review Form & Free Prize Draw (continued) TELL US WHAT YOU THINK Free Prize Draw Rules Closing date for 31 July 2011 draw is 30 June 2011 Closing date for 31 January 2012 draw is 31 December 2011 Restricted to entries with UK and Eire addresses only BPP employees, their families and business associates are excluded No purchase necessary Entry forms are available upon request from BPP Learning Media Limited No more than one entry per title, per person Draw restricted to persons aged 16 and over Winners will be notified by post and receive their cheques not later than weeks after the relevant draw date The decision of the promoter in all matters is final and binding No correspondence will be entered into ...S T U D Y PERFORMANCE MANAGEMENT BPP Learning Media is the sole ACCA Platinum Approved Learning Partner – content for the ACCA qualification In this, the only Paper F5 study text to be reviewed... standard costing 267 287 319 Part E Performance measurement and control 14 15 16 Performance measurement Divisional performance measures Further performance management Exam question bank Exam... standard costing PERFORMANCE MEASUREMENT AND CONTROL xx Introduction 14 The scope of performance measurement 15 Divisional performance and transfer pricing 16 Performance analysis in not -for- profit