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ACCA Paper F2

Management Accounting Interactive Support Notes

© Interactive World Wide Ltd, February 2013 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 Interactive World Wide Ltd.

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Contents PAGE INTRODUCTION TO THE PAPER

5

FORMULAE AND TABLES PROVIDED IN THE EXAMINATION PAPER

9

CHAPTER 1:

INTRODUCTION TO COST ACCOUNTING

13

CHAPTER 2:

COST CLASSIFICATION AND BEHAVIOUR

23

CHAPTER 3:

MATERIALS, LABOUR, STOCK CONTROL

33

CHAPTER 4:

OVERHEADS AND ABSORPTION COSTING

53

CHAPTER 5:

COST BOOKKEEPING

65

CHAPTER 6:

MARGINAL COSTING AND CONTRIBUTION THEORY

71

CHAPTER 7:

COSTING FOR JOBS, BATCHES, AND SERVICES

79

CHAPTER 8:

PROCESS COSTING, JOINT AND BY-PRODUCTS

95

CHAPTER 9:

BUDGETS

117

CHAPTER 10: STATISTICAL TECHNIQUES

133

CHAPTER 11: INVESTMENT APPRAISAL TECHNIQUES

149

CHAPTER 12: STANDARD COSTING AND VARIANCE ANALYSIS

163

CHAPTER 13: PERFORMANCE MEASUREMENT

179

SOLUTIONS TO EXERCISES

199

PAST EXAM QUESTIONS

251

SOLUTIONS TO PAST EXAM QUESTIONS

261

ACCA STUDY GUIDE AND INDEX

269

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Introduction to the paper

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IN TR OD U CTI ON TO T H E P A P E R

AIM OF THE PAPER The aim of the paper is to develop knowledge and understanding of how to prepare and process basic cost and quantitative information to support management in planning and decision-making in a variety of business contexts.

MAIN CAPABILITIES On successful completion of this paper candidates should be able to: A

Explain the nature and purpose of cost and management accounting

B

Explain and apply cost accounting techniques

C

Prepare and coordinate budgets including the application of statistical techniques to aid budgeting

D

Explain and apply standard costing for planning, feedback and control

E

Explain and apply financial and non financial performance measurement techniques

Within these main capabilities, ACCA provides a more detailed guidance on the syllabus. This can be found in the last section of these Notes beginning on page 270. RELATIONAL DIAGRAM OF MAIN CAPABILITIES The nature, source and purpose of cost and management accounting (A)

Budgeting (C)

Standard costing (D)

Cost accounting techniques (B)

Performance measurement (E)

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IN TR OD U CTI ON TO T H E P A P E R

EXAMINER The paper F2 examiner is David Forster. David also wrote the F2 pilot paper, which gives us a good indication of how the syllabus areas will be examined under F2.

FORMAT OF THE EXAM PAPER Paper F2 can be sat as a written or a computer based paper. 2 hour paper. Both computational and non-computational questions. 50 two mark questions = 100 marks in total. Question forms may be multiple choice, multiple response, multiple-response matching, or number entry.

ALL QUESTIONS ARE COMPULSORY

ARTICLES How to prepare for knowledge module exams 07 Jan 2009 by Gareth Owen Computer based exams put to the test 19 Aug 2008 by student accountant

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IN TR OD U CTI ON TO T H E P A P E R

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Formulae and tables provided in the examination

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F OR MUL A E A N D T A B L E S P R OV I D E D I N T H E E X A M I N A T I ON

Formulae Regression analysis

a=

n∑ xy − ∑ x∑ y

b=

r =

∑ y b∑ x − n n

n∑ x 2 − (∑ x )2

n ∑ xy − ∑ x ∑ y

[(n∑ x

2

)(

2 2 2 − (∑ x ) n ∑ y − (∑ y )

)]

Economic order quantity

=

2C 0D Ch

Economic batch quantity

=

10

2C 0D D  C h 1 −  R 

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F OR MUL A E A N D T A B L E S P R OV I D E D I N T H E E X A M I N A T I ON

Present value table Present value of 1 ie (1 + r)-n Where r = discount rate n = number of periods until payment

Discount rate (r) Periods

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% ________________________________________________________________________________ 1 2 3 4 5

0.990 0.980 0.971 0.961 0.951

0.980 0.961 0.942 0.924 0.906

0.971 0.943 0.915 0.888 0.863

0.962 0.925 0.889 0.855 0.822

0.952 0.907 0.864 0.823 0.784

0.943 0.890 0.840 0.792 0.747

0.935 0.873 0.816 0.763 0.713

0.926 0.857 0.794 0.735 0.681

0.917 0.842 0.772 0.708 0.650

0.909 0.826 0.751 0.683 0.621

1 2 3 4 5

6 7 8 9 10

0.942 0.933 0.923 0.914 0.905

0.888 0.871 0.853 0.837 0.820

0.837 0.813 0.789 0.766 0.744

0.790 0.760 0.731 0.703 0.676

0.746 0.711 0.677 0.645 0.614

0.705 0.665 0.627 0.592 0.558

0.666 0.623 0.582 0.544 0.508

0.630 0.583 0.540 0.500 0.463

0.596 0.547 0.502 0.460 0.422

0.564 6 0.513 7 0.467 8 0.424 9 0.386 10

11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 11 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 12 13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 13 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 14 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 15 ________________________________________________________________________________ (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% ________________________________________________________________________________ 1 2 3 4 5

0.901 0.812 0.731 0.659 0.593

0.893 0.797 0.712 0.636 0.567

0.885 0.783 0.693 0.613 0.543

0.877 0.769 0.675 0.592 0.519

0.870 0.756 0.658 0.572 0.497

0.862 0.743 0.641 0.552 0.476

0.855 0.731 0.624 0.534 0.456

0.847 0.718 0.609 0.516 0.437

0.840 0.706 0.593 0.499 0.419

0.833 0.694 0.579 0.482 0.402

6 7 8 9 10

0.535 0.482 0.434 0.391 0.352

0.507 0.452 0.404 0.361 0.322

0.480 0.425 0.376 0.333 0.295

0.456 0.400 0.351 0.308 0.270

0.432 0.376 0.327 0.284 0.247

0.410 0.354 0.305 0.263 0.227

0.390 0.333 0.285 0.243 0.208

0.370 0.314 0.266 0.225 0.191

0.352 0.296 0.249 0.209 0.176

0.335 6 0.279 7 0.233 8 0.194 9 0.162 10

11 12 13 14 15

0.317 0.286 0.258 0.232 0.209

0.287 0.257 0.229 0.205 0.183

0.261 0.231 0.204 0.181 0.160

0.237 0.208 0.182 0.160 0.140

0.215 0.187 0.163 0.141 0.123

0.195 0.168 0.145 0.125 0.108

0.178 0.152 0.130 0.111 0.095

0.162 0.137 0.116 0.099 0.084

0.148 0.124 0.104 0.088 0.074

0.135 0.112 0.093 0.078 0.065

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11 12 13 14 15

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F OR MUL A E A N D T A B L E S P R OV I D E D I N T H E E X A M I N A T I ON

Annuity table Present value of an annuity of 1 ie

Where

1 - (1+ r)-n r

r

=

discount rate

n

=

number of periods

Discount rate (r) Periods

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% ________________________________________________________________________________ 1 2 3 4 5

0.990 1.970 2.941 3.902 4.853

0.980 1.942 2.884 3.808 4.713

0.971 1.913 2.829 3.717 4.580

0.962 1.886 2.775 3.630 4.452

0.952 1.859 2.723 3.546 4.329

0.943 1.833 2.673 3.465 4.212

0.935 1.808 2.624 3.387 4.100

0.926 1.783 2.577 3.312 3.993

0.917 1.759 2.531 3.240 3.890

0.909 1.736 2.487 3.170 3.791

1 2 3 4 5

6 7 8 9 10

5.795 6.728 7.652 8.566 9.471

5.601 6.472 7.325 8.162 8.983

5.417 6.230 7.020 7.786 8.530

5.242 6.002 6.733 7.435 8.111

5.076 5.786 6.463 7.108 7.722

4.917 5.582 6.210 6.802 7.360

4.767 5.389 5.971 6.515 7.024

4.623 5.206 5.747 6.247 6.710

4.486 5.033 5.535 5.995 6.418

4.355 6 4.868 7 5.335 8 5.759 9 6.145 10

11 10.37 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 11 12 11.26 10.58 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 12 13 12.13 11.35 10.63 9.986 9.394 8.853 8.358 7.904 7.487 7.103 13 14 13.00 12.11 11.30 10.56 9.899 9.295 8.745 8.244 7.786 7.367 14 15 13.87 12.85 11.94 11.12 10.38 9.712 9.108 8.559 8.061 7.606 15 ________________________________________________________________________________ (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% ________________________________________________________________________________ 1 2 3 4 5

0.901 1.713 2.444 3.102 3.696

0.893 1.690 2.402 3.037 3.605

0.885 1.668 2.361 2.974 3.517

0.877 1.647 2.322 2.914 3.433

0.870 1.626 2.283 2.855 3.352

0.862 1.605 2.246 2.798 3.274

0.855 1.585 2.210 2.743 3.199

0.847 1.566 2.174 2.690 3.127

0.840 1.547 2.140 2.639 3.058

0.833 1.528 2.106 2.589 2.991

6 7 8 9 10

4.231 4.712 5.146 5.537 5.889

4.111 4.564 4.968 5.328 5.650

3.998 4.423 4.799 5.132 5.426

3.889 4.288 4.639 4.946 5.216

3.784 4.160 4.487 4.772 5.019

3.685 4.039 4.344 4.607 4.833

3.589 3.922 4.207 4.451 4.659

3.498 3.812 4.078 4.303 4.494

3.410 3.706 3.954 4.163 4.339

3.326 6 3.605 7 3.837 8 4.031 9 4.192 10

11 12 13 14 15

6.207 6.492 6.750 6.982 7.191

5.938 6.194 6.424 6.628 6.811

5.687 5.918 6.122 6.302 6.462

5.453 5.660 5.842 6.002 6.142

5.234 5.421 5.583 5.724 5.847

5.029 5.197 5.342 5.468 5.575

4.836 4.988 5.118 5.229 5.324

4.656 4.793 4.910 5.008 5.092

4.486 4.611 4.715 4.802 4.876

4.327 4.439 4.533 4.611 4.675

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1 2 3 4 5

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Chapter 1

Introduction to cost accounting

SYLLABUS CONTENT (as set by ACCA’s study guide) A

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.

b)

Compare and contrast financial accounting with cost and management accounting.

c)

Outline the managerial processes of planning, decision making and control.

d)

Explain the difference between strategic, tactical and operational planning.

e)

Distinguish between data and information.

f)

Identify and explain the attributes of good information.

g)

Explain the limitations of management information in providing guidance for managerial decision-making.

2.

Sources of data

a)

Describe sources of information from within and outside the organisation (including government statistics, financial press, professional or trade associations, quotations and price list.

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CH A P TE R 1 – I N TR OD U CTI ON T O COS T A CC OUN TIN G

b)

Explain the uses and limitations of published information/data (including information from the internet).

c)

Describe the impact of general economic environment on costs/revenue.

d)

Explain sampling techniques (random, systematic, stratified, multistage, cluster and quota).

e)

Choose an appropriate sampling method in a specific situation.

(Note: Derivation of random samples will not be examined.)

3.

Cost classification

a)

Explain and illustrate the concept of cost objects, cost units and cost centres.

b)

Distinguish between cost, profit, investment and revenue centres.

c)

Describe the differing needs for information of cost, profit, investment and revenue centre managers.

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CH A P TE R 1 – I N TR OD U CTI ON T O COS T A CC OUN TIN G

CHAPTER CONTENTS INTRODUCTION ---------------------------------------------------------- 16 DATA AND INFORMATION ---------------------------------------------- 17 MANAGEMENT ACTIVITIES --------------------------------------------- 18 LEVELS OF MANAGEMENT----------------------------------------------- 19 ORGANISATIONS -------------------------------------------------------- 20 SOURCES OF INFORMATION-------------------------------------------- 21 EXTERNAL INFORMATION

21

ECONOMIC ENVIRONMENT

21

SAMPLING TECHNIQUES

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CH A P TE R 1 – I N TR OD U CTI ON T O COS T A CC OUN TIN G

INTRODUCTION Accounting is divided into two main areas – financial accounting and management accounting. Whereas financial accounting looks at the performance of the organisation (in the past), management accounting looks at past performance as well as providing information which is used for decision making within the organisation (for the future).

Financial Accounting

Management Accounting

●

External use

●

Internal use

●

Strict rules for content and format

●

Content and format adopted to company needs

●

Primarily financial information

●

Both financial information

●

Prepared annually

●

Prepared as often as necessary

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and

non-financial

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CH A P TE R 1 – I N TR OD U CTI ON T O COS T A CC OUN TIN G

DATA AND INFORMATION Many people assume that data and information are the same. They are not. Data is raw, unprocessed information. Information is processed data. meaningful to the user.

It must be processed in a way that makes it

Examples: ●

Sales revenue by region

●

Cost by type or by department

For data to be meaningful it must have certain characteristics or attributes. These are many but can be summarised by the acronym – ACCURATE. Can you identify what you think would be an attribute for each of the letters of accurate?

A C C U R A T E What do we use information for?

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CH A P TE R 1 – I N TR OD U CTI ON T O COS T A CC OUN TIN G

MANAGEMENT ACTIVITIES In organisations information is used for management activities such as planning, decision making and control. Each of these three uses will be highlighted throughout this subject. Before that, how would you describe each of these techniques?

Planning:

Decision making:

Control:

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CH A P TE R 1 – I N TR OD U CTI ON T O COS T A CC OUN TIN G

LEVELS OF MANAGEMENT Management may be on either an operational, tactical or strategic level within the organisation. How can we differentiate between these?

Strategic

Tactical

Operational

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Long-term

0

0

0

Medium-term

Short-term

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CH A P TE R 1 – I N TR OD U CTI ON T O COS T A CC OUN TIN G

ORGANISATIONS Many organisations are divided into various departments. Some of these departments would be dealing with producing our products while others would be providing a service, both to our customers and to our production departments. These will be highlighted later in the course.

Cost centre Is defined as a production or service location, a function, an activity or an item of equipment for which costs can be ascertained.

Revenue centre A centre devoted to raising revenue only.

Profit centre A centre accountable for costs and revenues.

Investment centre A centre which has its performance evaluated by its return on capital employed.

Cost unit A unit of product or services for which costs can be ascertained. These are usually classed in relation to the unit the product is sold in. Examples: Petrol

- per litre

Paint

- per tin

Bread

- per loaf

Using these cost units assist us being able to cost the products made. We also need to identify service units. These will be discussed in the session on service costing.

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CH A P TE R 1 – I N TR OD U CTI ON T O COS T A CC OUN TIN G

SOURCES OF INFORMATION The information which is used by management can be sourced both internally (from within the organisation) and externally (from outside the organisation). Examples of internal information: ●

Wage rates

●

Production rates

●

Sales price and volume statistics.

External information External sources of information: ●

Government statistics

●

Professional/trade publications

●

Internet.

There are numerous government statistics that are available to organisations that may be useful in planning future activities. These range from general information about the macro-economy (covering such things as current and future prediction of the exchange rate, the rate of inflation) to detailed analysis of such things as consumer expenditure. Professional and trade statistics can also be used for decision making purposes. Professional bodies may produce either information in their specific field (eg purchasing or insurance) across all se...