Chapters 4 & 5 extract from our ExPress notes for use with the current video. A full set of F2 ExPress notes can be downloaded free of charge at www.theexpgroup.com.
Notes ACCA Paper F2 Management Accounting For exams in 2011
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ExPress Notes ACCA F2 Management Accounting
Summary of Absorption costing and Marginal costing formats
Absorption Costing
Marginal Costing
Variable/Fixed production costs
Variable production/ non-production costs
Revenue Less: Cost of Sales
Gross profit
Contribution
Less: Expenses Variable/Fixed non-production costs
Fixed production/ non-production costs
Net Profit
Job costing / Batch costing This refers to the calculation of costs associated with a specific job or customer order. This is appropriate in situations where each product or service is distinct, and possibly unique, in its delivery. Batch costing is similar to job costing; the distinction lies in the identification of costs with specific batches, which are numbered (separately identified) for this purpose.
Process Costing Process costing is a technique that applies to the mass production of a large number of identical products, moving through a series of processing stages. The accumulated costs of production can be averaged over the number of items produced. The average cost is determined by the following formula: Average cost per unit =
Total cost of inputs – Scrap value of rejected units No. of units of input – Normal loss
The total cost of inputs refers to labour, materials and overhead costs of production. If losses occur along the way that necessitate the scrapping of defective units, then to the
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ExPress Notes ACCA F2 Management Accounting
extent that these items fetch a scrap value, then that (scrap) value will reduce the total costs. Similarly, an accounting is made of the number of units introduced into a process with the expectation that a normal loss will be incurred. The number of good units emerging from a process will therefore be the number of units entering it, minus the expected number lost in processing. Abnormal gains and losses are accounted for as an adjustment to the accounts using the same value as the “good” output (deducted in the case of loss and added in the case of gains). Equivalent units (EU) This refers to the way in which partially-completed output (“work-in-progress” or WIP) is expressed. If an unfinished unit of product contains 35% of the labour and materials costs of a complete unit, then the unit has a degree of completion of 35% in terms of value. It is therefore considered to have an EU of 35%, which is normally expressed in monetary terms. Weighted average method The weighted average method makes no distinction between units that were started (but not finished) in a previous process and those started in the current process. Since all the units, when completed, are visually identical, processing costs are averaged over all the units. First-In-First-Out (FIFO) method The FIFO method does make a distinction between units that were started in a previous process and those begun in a current process. FIFO costing separates the costs that were incurred in the previous period from costs of the current period.
Joint products / By-products Joint products are two or more products that share a common processing path until the point of separation. Until they go their own (separate) ways, the costs of production during the joint processing cannot be physically distinguished. There are different methods used to apportion common costs to such products at the point of separation:
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Market value (based on expected sales price)
Number of units (litres, tons, or some other objective physical measurement)
Net realizable value = Final sales value – Incremental processing costs
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes ACCA F2 Management Accounting
By-products are goods which are incidental to the production process and which generate cash from sales, though the amount is modest in comparison to the overall revenues of the firm. The cash received for by-products can be viewed as a bonus that reduces production costs.
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© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes ACCA F2 Management Accounting
Chapter 5
Budgeting and Standard Costing
Budgeting: definition and purpose
Quantitative plan for the future, used to:
a) Communicate Objectives
b) Motivate Employees
b) Control Activities
b) Evaluate Performance
The master budget process
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Annual frequency, preferably revised on a regular basis (rolling budget) Based on organization’s objectives, expressed in financial, quantitative and qualitative measures
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes ACCA F2 Management Accounting
The operating budget sequence
Sales budget Production budget Ending inventory budget Direct materials budget, Direct labour budget, Factory overhead budget Cost of Sales budget R&D budget, Marketing budget, Distribution budget, Customer service budget, Admin budget Pro-forma income statement
The financial budget sequence
Capital budget Cash budget Pro-forma balance-sheet and pro-forma statement of cash-flows
Operating budgets These are budgets that quantify the revenues and costs relating to a company’s activities at a disaggregated level, meaning that there is direct input from department and functional levels. They require both volume (e.g. units of output, quantities, hours, etc.) and price specifications. Operating budgets are modelled on what will emerge as the company’s income statement. Examples include:
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Sales budget
Production budget
Direct material usage
Direct material purchases
Direct labour budget
Factory overhead budget
Selling & distribution budget
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes ACCA F2 Management Accounting
Administrative expenses budget
The “disaggregation” of budgets referred to above allows the practice of “responsibility” accounting. Principal budget factor When a budget is prepared, management must identify any factors that will prevent the company from surpassing a certain level of activity. A bank, for example, may be constrained from developing an extensive branch network owing to the scarcity of suitably-skilled professional staff; or production may be constrained by the built capacity of the plant or by the level of demand for a company’s products. In each of these cases, there is a limiting factor at work.
Fixed vs. flexible budgets Traditional budgets tended to be rigid, i.e. they were not subject to modification during the period to which they referred. Example A producer of office equipment has a budget for the coming year: Output: 1,000 Costs: Materials Labour Fixed O/Hs Total
units 75,000 200,000 100,000 375,000
After 3 months, the company observes that sales are running ca. 20% higher than originally projected and it has therefore increased its production by a similar amount. In order to look back at what its budget would have been had the actual (higher) level of activity been anticipated, management can prepare a “flexed” budget; this is effectively a re-calibration of the original budget. It allows management to re-focus their efforts without losing time tracking “artificial” spending excesses according to the original budget. Output: 1,200 units Costs: Materials 90,000
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