ACCA F2

Management Accounting

June2015

Sample note

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© Lesco Group Limited, April 2015
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 Lesco Group Limited.

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 Content
Introduction to management accounting ...............................................................................................5
Cost classification ....................................................................................................................................6
High low method: .................................................................................................................................16
Stock management ...............................................................................................................................11
Stock(inventory) valuation ....................................................................................................................29
Labour Cost System ...............................................................................................................................31
Absorption costing ................................................................................................................................38
Cost bookkeeping..................................................................................................................................44
Marginal costing....................................................................................................................................46
Job costing ............................................................................................................................................52
Pricing: ..................................................................................................................................................58
Service costing ......................................................................................................................................59
Alternative costing systems (introduction) ...........................................................................................60
Process costing ......................................................................................................................................64
Budget ...................................................................................................................................................75
Forecasting techniques .........................................................................................................................83
Investment appraisal techniques: .........................................................................................................92
Variance analysis .................................................................................................................................102
Performance management .................................................................................................................112

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 Exam format in June2015:
Exam:
2hours
100 marks
50% pass mark

Structure:
Section A:
35 objective questions with 2 marks each

Section B:
3 multi task questions with 10 marks each and total 30 marks
Form budgeting, standard costing and performance measurement.
Containing multiple choice, response, response matching, number entry, gapfill and hotspot.

For the exam structure illustration, please watch this video produced by ACCA:
https://www.youtube.com/watch?v=UQIwbDX9z0w

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 Introduction to management accounting

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 Chapter1 Introduction to management accounting

Management accounting:
① is to provide useful information
② in assisting management
in the management activities③.

Overview:

If you want to open up a high fashion clothes manufacturing company in India so what
you should do?

Information required: internal & external

-existing financial information?
-company resources-staff?
-government report/industry report

Management activities: use the above information in:

-Planning: Plan future activities, budget
-Decision making: Whether to set up company and what
further investment that company
may try to make

-Control: Variance-Compare results of

operation with expected(meet
sales/ cost target?)

①Difference between Management accounting & Financial Accounting

Idea: Management accounting is for the use of management to make decisions

Financial accounting is used for paying taxes, borrowing money from bank or
attracting investors.

Management accounting Financial Accounting

Use Internal External
Format Adapted Strict
Content Detailed Summary
(reflect past and future) (reflect past)
Information Financial+Non-financial Financial
Time Depends Per year

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② information

1, Difference between information and data

-Data + meaning=information

-If I give you data profit is $5,000 and you may think it’s good but what if I tell
you that company has a sales revenue of $50m and you may think that $5,000
is too small so you decide not to invest in this company.

-Without given context that $5,000 is just data(raw data) and you can’t make
your decision whether to invest in this company unless you are given
information, ie, incorporate the data with specific context(give some meaning
to it.)

2, How to assess whether this information is good?

Accurate They should be accurate not too vague and if you’re given information that
company has made profit this year but not told how much then it’s useless
to help you make decisions.
Cost efficient You should weigh the benefit you get after getting this information and the
cost you have to pay.
Complete If you are told that there’s a competitor emerging then you should need to
obtain its price and skills they have mastered as well.
User-focused Eg, a shop manager may wish to have a summary of the shop’s daily takings
and a sales manager may want detailed customers details to complete their
sales target.
Relevant If you want to know the price that competitor is currently charging so any
information provided about the history about the competitor may deem to
be irrelevant.
Authoritative The information should be reliable so if you are told that inflation rate this
year is 5% so you need to check where is this information coming from, eg,
from government report?
Timely Information must be produced in advance of the time when it’s needed. Eg,
budgets need to be set in advance of a period in order to compare with
actual performance as a benchmark.
Ease of use We need to make sure Information produced can be used by users, eg, easy
language.

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3, where does information come from?

Internal: wage rate; production rate; sales volumes.

External: government report; industry statistics.

Inflation rate; industry report.

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③management activities

Once we’ve looked at how to generate into information we now need to know where do
we use these information for and by.

Where:

The information should be used to management activities

Planning (budget); [regularly]
Decision making; (launch new products/enter into new market) [any time]
Control(variance analysis) [regularly]

By:

The information should be used by different level of management within the

business.
Strategic level (directors and senior management; more than 1year)
Tactical Level (divisional/departmental manager; somewhere between
1month-1year)
Operational Level (team leader; factory supervisor; daily/weekly)

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Centers:

To achieve better control over the organization, companies would always divide
themselves up into different centers.

Cost Center:

Break group costs into different areas like in products line; managers; location; region;
location; department;
Performance would be assessed using cost variance analysis.

Revenue Center:

Break group revenue into different areas like in products line; managers; location;
region; location; department. Eg, Sales department.
Performance would be assessed using revenue variance analysis.

Profit Center:

Senior management here will control both revenue and costs in order to maximize
profit. Usually this would be divisions within organization.

Performance would be assessed using cost&revenue variance analysis, focusing on

controllable profit.

Investment Center:

They are not only responsible for control over revenue and costs but also for some
capital. This would be done by quite senior persons within business usually.

Performance would be measured using returned on capital employed. Ie, focusing on

profit + capital employed(capital expenditure).

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 Chapter2 Cost classification

Since we know that cost is important to business then we should try to control the costs
incurred within business.

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.

Cost object

A cost object is anything that we want to know the cost of. We might want to know the
cost of making one unit of product, or a batch of product, or all of Tuesday’s production,
in which case the cost objects are one unit of product, a batch of product, or Tuesday’s
production, respectively. We might want to know the cost of operating a department or
a factory, in which case the cost object is the department or factory. In a service sector
company, we might want to know the cost of treating a patient in a hospital, or the cost
of conducting an audit, in which case the cost object is the patient or the audit client.
In a government setting, a cost object might be a program such as “Meals on Wheels.”

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Classification of costs:

Cost can be classified through the following 4 categories:

 By Nature
 By Traceability
 By Cost behavior
 By production & Non production costs

By nature:

This means that it can be classified as material costs, labour costs and other expenses.

By traceability:

This means that it can be classffied as direct cost and indirect cost.
Direct cost is the cost that can be traced back to the production of product.
Indirect cost is the cost that is difficult to be traced back to the production of product.
 Typical direct cost: direct material and labour into production of product.
 Typical indirect cost: electricity expenses
The sum of direct costs would be prime costs while the sum of indirect costs would be
overhead costs.

By costs behavior:

This means costs can be classified depending on different the behavior of costs at
different volume of production or sales.
The costs can be classified either variable costs or fixed costs .

Variable cost:
 If the level of activity changes then cost changes.
 If you produce more tables then you need more materials as well as labors.
 Eg,direct material, direct labout, variable overhead(Repair and maintenance,
Power, fuel, Indirect labor etc.)

Fixed cost: Are the cost still incurred even though business is not operating .
Within variable costs it would be step costs and semi-variable costs.

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 Total cost Variable
cost/unit

LofA LofA

Fixed costs: If the level of activity

changes then cost would not change.

Total
Fixed
costs
cost/unit

LofA LofA

Eg, rent bills; fixed salary.

Step costs: If the level of activity hits a point then fixed cost changes.
If the capacity of your factory doesn't satisfy the current production plan
then you need to open up a new factory and this

Total
costs

LofA

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Semi-variable costs: This is a cost containing both variable and fix element.
Example: phone bill(fixed connection fee and variable costs/call)
Total
costs

Fix
element

LofA

By production & non-production costs

Production cost: costs must be incurred to produce this products.

Material, labour, machine etc.
Forms cost of sales within Income Statement.

Non-production cost: costs not necessarily incur to produce products.

Tax expenses; administration expenses; finance cost etc.
Forms other expenses within Income Statement.

Profit or loss statement:

Sales revenue X
Costs of sales(production costs) (X)
Gross profit X
Other expense (non-production costs) (X)
Profit after tax X

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Example: Tonic Water

If you were to manufacture a bottle of tonic water:

Materials Labor Other expenses

Soda water Front line production workers Electricity
Sugar Factory supervisor Insurance costs
Aluminum -sales manager Utilities
Machine -human resource manager Royalties
Factory building
Lorry

Required:
State costs which can be classified under:
(i) Nature
(ii)Traceability

Answer:
Materials Labor Other expenses
(D)Soda water (D)Front line production workers (ID)Electricity
(D)Sugar (ID)Factory supervisor (ID)Insurance
costs
(D)Aluminum -sales manager (ID)Utilities
(ID)Machine -human resource manager (ID)Royalties
(ID)Factory building
(ID)Lorry

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High low method:

We can use high low method to separate fixed and variable cost within semi-variable
costs.

We assume a linear relationship that changes in totals cost are because of the changes
in the level of activities.

1, Total costs= total variable costs + total fixed cost

2, Total variable costs = variable costs/unit X level of activity
variable cost/unit = cost at highest level – cost at lowest level
Highest level activity-lowest level activity
3, Total fixed cost= total costs-total variable costs
4, Use formula to predict future costs given the level of activity.

Note: we must ensure that any variable cost/unit is constant and the total fixed cost is
constant as well.

Q Kenny (High low method)

Kenny manufactures bottles for tonic water and the following information is presented
as the output of the number of bottles that Kenny made and the related costs as well.

Output 65,000 units 105,000 units

Cost $133,000 $210,000

Required:
Use the above data calculate:
(i) The fixed and variable costs for Kenny;
(ii) The total costs if the output if 200,000 units.

Answer:
(i)Total costs= variable costs+ fixed costs
Variable costs= variable costs/unit X outputs
= 210,000-133,000
105,000-65,000 X output
=1.925 X65,000
=$125,125
fixed costs =$133,000(total cost)-$125,125=$7,875

(ii)total cost= total variable costs + total fixed cost

= $1.925 X 200,000units +7,875
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 =$392,875
Q John (consider other costs as well)

John has the following total costs at two activity levels:

Output 17,000 units 22,000 units
Cost $140,000 $170,000

Variable cost per unit is constant in this range of activity and there is a step cost of
$5,000 in the total fixed costs when activity exceeds 19,000 units.

Required:
Use the above data calculate:
(i) The fixed and variable costs for John;
(ii) The total costs if the output if 21,000 units.

Answer:
Total costs= total variable costs + total fixed costs

Total variable costs= variable cost/unit Xoutput

= ($170,000-$5,000) - $140,000
22,000-17,000
=$5/unit X17,000units
=$85,000
Total fixed costs= total costs-total variable costs
=$140,000-$85,000
=$55,000

(ii) The total costs if the output if 21,000 units.

Total costs= total variable costs + total fixed costs
=$5/unit X 21,000 +$55,000 +$5,000(step costs)
=$165,000

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