Acca f2 Notes j15

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ACCA
F2
FIA
FMA
Ju Lec
ne tu
20 re
15 No
ex tes
am
s
Management
Accounting
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June 2015 Examinations
Paper F2
ACCA F2 / FIA FMA
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CONTENTS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Accounting for Management

Sources of Data
Presenting Information
Cost Classification
Inventory Control
Accounting for labour
Accounting for Overheads
The Management Accountants Profit Statement Absorption Costing
The Management Accountants Profit Statement Marginal Costing
Process Costing Introduction
Process Costing Losses
Process Costing Work-in-Progress
Process Costing Joint Products
Alternative cost accounting
Budgeting
Behavioural aspects of budgeting
Semi-Variable Costs
Time Series Analysis
Index Numbers
Interest
Investment Appraisal
Variance Analysis
Performance Measurement Overview
Financial Performance Measurement
Non-financial performance measurement
Divisional Performance Measurement
Answers To Examples
Answers To Multiple Choice Tests

1
5
9
13
23
33
37
45
49
57
61
65
73
79
81
89
91
99
103
109
115
121
131
133
139
143
147
171
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Paper F2
ACCA F2 / FIA FMA
FORMULAE
FORMULAE SHEET
Regression analysis
a=
y bx
n
n
y bx
a= nxy-xy
n
n
2
nx2 -(x)
y bx
a= nnxy-xy
n
b=
nxy-xy
2
nx -(x)2
r=
2 nxy-xy
-(x)2 )(ny 2 -(y)2 )
(nxb=
nx2 -(x)2
nxy-xy
r=
2
2
2C0D
n
x
-(x)
)(ny 2 -(y)2 )
(
=
Economic order nxy-xy
quantity
Ch r=
(nx2 -(x)2 )(ny 2 -(y)2 )
2C0D
=
2C0D
Ch
=
2C0D
D
Ch (1-= ) C
h
R batch
Economic
2C0Dquantity
=
D
Ch (12C
DR)
0
=
D
Ch (1- )
R
b=
ii
June
2015 Examinations

December
2011 Examinations

ACCA F2 /Paper
FIA FMA
F2
Formulae
Chapter 2

8
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tutor support StudyBuddy Largest ACCA forums

December
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ACCA F2 /Paper
FIA FMA
F2
Formulae
Chapter 2

End of Question Paper
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Chapter 1
ACCA F2 / FIA FMA
ACCOUNTING FOR MANAGEMENT
1 Introduction
The purpose of management accounting is to assist management in running the business in ways
that will improve the performance of the business.
2 Data and information

One way of assisting management is to provide them with good information to help them with
their decisions.
The information can be provided to them in different ways, but is usually in the form of reports. For
example, a report analysing costs of producing each of several products may assist management in
deciding which products to produce.
It is the management accountant who will be expected to provide the information, and in order to
do so he/she needs to collect data. Data consists of the facts that are gathered and stored. Data has
no clear meaning until it is processed analysed and sorted into information.
3 What makes good information?

Good quality information should:
have a purpose and be relevant for the purpose
be timely
be understandable (to the manager using it)
be accurate
be complete (but not excessive)
be communicated to the right person
be communicated by an appropriate channel (for example, be printed or be sent electronically)
ACCA F2 / FIA FMA
Chapter 1
4 The main managerial processes

The main areas of management accounting are:
Costing
Cost accounting is identifying the cost of producing an item (or providing a service) in order to,
for example, assist in deciding on a selling price.
Planning
e.g. plan how many staff will be required in the factory next year
Decision making
e.g. decide on what selling price to charge for a new product
Control
e.g. check month-by-month whether the company is over or under spending on wages
5 The different levels of planning
strategic planning
long-term plans (e.g. 5 to 10 years) for the business
e.g. what new offices to open? / what new products to launch?
tactical planning
medium-term, more detailed, plans usually involving producing budgets for the next year
e.g. how many staff to employ next year?
operational planning
short-term planning and decisions
e.g. which supplier to choose for a purchase next week
ACCA F2 / FIA FMA
Chapter 1
6 Comparison of management accounting with financial accounting

E xample 1
Financial Accounting
Management Accounting
ACCA F2 / FIA FMA
Chapter 1
TEST
Q uestion 1
The following statements relate to financial accounting and to cost accounting:
(i) The main users of financial accounting information are external to an organisation.
(ii) Cost accounting is that part of financial accounting which records the cash received and payments
made by an organisation.
Which of the following statements are true?
A
Statements (i) and (ii) are both correct.
Only statement (i) is correct.
Only statement (ii) is correct.
Q uestion 2
Data is information that has been processed in such a way as to be meaningful to its recipients.
Is this statement true or false?
A
True
B False
Q uestion 3
The following statement refers to a quality of good information:
The cost of producing information should be greater than the value of the benefits of that information to
management.
A
True
B False
Chapter 2
ACCA F2 / FIA FMA
SOURCES OF DATA
1 Introduction
The management accountant needs data in order to be able to process it into information.
This chapter lists various sources of data and also various sampling techniques.
2 Primary and secondary sources of data

Primary data are data that have been collected for the specific purpose.
Secondary data are data that have been collected for some other purpose but which we then use
for our purposes.
3 Internal and external sources data

Internal data are data collected from our own records. These are the main source of primary data.
External data are data collected from elsewhere e.g. the internet, government statistics, financial
newspapers. These will be secondary data.
4 Sampling
It is common to collect data from a sample rather than from the whole population. Data from the
sample are used as representative of the whole population.
5 Sampling methods
You should be aware of the following methods of sampling:
random sampling
Every item in the population has an equal chance of being selected
systematic sampling
Select (for example) every 10th item in the population
ACCA F2 / FIA FMA
Sources of Data
Chapter 2
stratified sampling
multistage sampling
cluster sampling
Take a random sample of (say) 5 offices and check every invoice at each of these offices.
quota sampling
Split the population into groups, and then select at random. For example, if 60% of the
population are women and 40% are men, then 60% of the sample should be women and 40%
men.
For example, suppose a company has several thousand purchase invoices filed, filling 20 files.
Take a random sample of (say) 5 files, and then a random sample of (say) 20 invoices from
each of these files.
For example, suppose a company has 100 offices through the country, each issuing sales
invoices.
Suppose the population is 60% women and 40% men, and that we want to question a sample
of 200 total. Decide on a quota of 120 women (60%) and 80 men (40%) and then stop people
as they appear until we have the required number of each.
Sources of Data
ACCA F2 / FIA FMA
Chapter 2
TEST
Q uestion 1
A sample of people is taken with the same proportion of individuals in separate age bands as in the population
as a whole.
This is an example of which type of sampling?
A
Random sampling
Systematic sampling
Stratified sampling
Cluster sampling
Q uestion 2
It was decided to take a sample by selecting the 12th item and thereafter every 20th item.
This is an example of which type of sampling?
A
Random sampling
Systematic sampling
Stratified sampling
Cluster sampling
Q uestion 3
Which of the following statements about stratified sampling is true?
A
The sample will not be representative
The structure of the sample will not reflect that of the population
Knowledge is needed of each item in the population
The sample is chosen entirely at random
ACCA F2 / FIA FMA
Sources of Data
Chapter 2
ACCA F2 / FIA FMA
Chapter 3
PRESENTING INFORMATION
1 Introduction
The management accountant has to provide information to management to help them make
decisions, and it is important that the information is presented to them in a form that is easy for
them to use.
This may be in the form of a report, or a table of figures, or as a chart or graph.
Although you will not be required to produce any of these, it is important that you are aware of
the various formats available.
2 Tables
These are a way of presenting actual numbers in a format that is easy to understand.
e.g.
Year
2006
2007
2008
2009
2010
Sales $000s
2.7
3.2
4.8
5.1
5.2
10
ACCA F2 / FIA FMA
Chapter 3
3 Charts and graphs

In many cases, management do not need to see the actual numbers (and indeed the actual numbers
may confuse them). Often a chart or graph can present the information more clearly.
Simple bar chart:

e.g.
Compound bar chart:

e.g.
Component bar chart:
e.g.
Pie chart:
e.g.
ACCA F2 / FIA FMA
Chapter 3
11
12
ACCA F2 / FIA FMA
Scatter graph:
e.g.
Chapter 3
Chapter 4
ACCA F2 / FIA FMA
COST CLASSIFICATION
1 Cost classification
Cost classification is the arrangement of cost items into logical groups. For example: by their
nature (materials, wages etc.); or function (administration, production etc.).
The eventual aim of costing is to determine the cost of producing a product/service; for profitability
analysis, selling price determination and stock valuation purposes.
Cost unit
A cost unit is a unit of product or service in relation to which costs may be ascertained.
The cost unit should be appropriate to the type of business, for example:
E xample 1
Suggest appropriate cost units for the following businesses
Solution
Business Appropriate cost unit
Car manufacturer
Cigarette manufacturer
Builder
Audit company
13
14
ACCA F2 / FIA FMA
Cost Classification
Chapter 4
Types of expenses
Production/manufacturing costs
Administration costs
Selling and distribution costs
TOTAL EXPENSES
$
X
X
X
X
Only the production costs will be relevant in costing.
Direct costs
Direct costs are those costs which can be identified with and allocated to a particular cost unit.
TOTAL DIRECT COSTS = PRIME COST
E xample 2
Direct costs
Indirect production costs (overheads)

Indirect production costs (known as production overheads) are those costs which are incurred in
the course of making a product/service but which cannot be identified with a particular cost unit.
E xample 3
Indirect production costs
TOTAL PRODUCTION COST = PRIME COST + PRODUCTION OVERHEADS
Cost Classification
ACCA F2 / FIA FMA
Chapter 4
Non-production costs
Other costs required to run the business.
E xample 4
Non-manufacturing/production costs
TOTAL COSTS = PRODUCTION COSTS + NON-PRODUCTION COSTS
2 Cost behaviour
It is expected that costs will increase as production increases (i.e. as output increases) but the
exact way in which costs behave with output may differ.
E xample 5
Types of behaviour
(a)
Variable cost
(b)
Fixed cost
(c)
Stepped fixed cost
(d)
Semi variable/fixed cost
15
16
ACCA F2 / FIA FMA
Cost Classification
Chapter 4
Linear assumption
For this examination we will assume that total variable costs vary linearly with the level of
production (or that the variable cost per unit remains constant). In practice this may not be the
case, but we will not consider the effect of this until later examinations.
Behaviour of manufacturing costs
With the linear assumption all costs can be categorised as either fixed or variable. This fits together
with previous definitions:
Direct costs
By their nature direct costs will be variable costs.
Indirect costs/overheads
Overheads can be fixed or variable
Fixed
Variable
Direct costs
Production overheads
Non-manufacturing costs
Semi-variable costs
It is necessary to determine the fixed and variable elements of semi-variable costs. A method
known as High-Low can be used to establish the fixed and variable elements. This technique is
best illustrated by the use of an example.
E xample 6
The total costs of a business for differing levels of output are as follows:
Output
(units)
200
1,000
(a)
(b)
Total Costs
($000)
30
110
What are the fixed and variable elements of the total cost using the High-Low method?
Describe the relationship between the output and costs in the form of a linear equation.
ACCA F2 / FIA FMA
Cost Classification
Chapter 4
A better approximation of the fixed and variable elements can be obtained using Regression
Analysis. This will be considered in a later chapter of these notes.
Typical cost card for a cost unit

Direct costs:
- Direct materials
- Direct labour
Prime cost
Indirect costs
- Variable overheads
- Fixed overheads
Full product cost
$/unit
(2kg @ $1.50/kg)
(3 hrs @ $4/hr)
3.00
12.00
15.00
2.00
3.00
20.00
3 Responsibility centres
C
ost centres:
P
rofit centres:
Revenue centres:
I nvestment centres:
Cost centres are areas where costs are collected e.g. individual departments or individual machines
Profit centres are where both costs and revenues are collected. Many companies will have separate
divisions and make the divisional manager responsible for the profit of that division.
Here, the manager is only responsible for the revenues of his division or department not for the
costs.
This is like a profit centre except that the manager also has the responsibility for new capital
investment (i.e. the purchase of new machines etc.). You will see in a later chapter that more
thought needs to be given as to how to measure the performance of a manager of an investment
centre.
17
18
ACCA F2 / FIA FMA
Cost Classification
Chapter 4
Test
Q uestion 1
An organisation has the following total costs at two activity levels:
Activity level (units)
16,000
22,000
Total costs ($)
135,000 170,000
Variable cost per unit is constant within this range of activity but there is a step up of $5,000 in the total fixed
costs when the activity exceeds 17,500 units.
What is the total cost at an activity of 20,000 units?
A
$155,000
B $158,000
C $160,000
D $163,000
Q uestion 2
Which one of the following should be classified as indirect labour?
A
Assembly workers on a car production line
Bricklayers in a house building company
Machinists in a factory producing clothes
Forklift truck drivers in the stores of an engineering company.
Q uestion 3
A manufacturing organisation incurs costs relating to the following:
(1) Commission payable to salespersons.
(2) Inspecting all products.
(3) Packing the products at the end of the manufacturing process prior to moving them to the
warehouse.
Which of these costs are classified as production costs?
A
(1) and (2) only
(1) and (3) only
(2) and (3) only
(1), (2) and (3)
Q uestion 4
What would be the most appropriate cost unit for a cake manufacturer? Cost per:
A Cake
B Batch
C Kg
D
Production run
ACCA F2 / FIA FMA
Cost Classification
Chapter 4
Q uestion 5
Up to a given level of activity in each period the purchase price per unit of a raw material is constant. After
that point a lower price per unit applies both to further units purchased and also retrospectively to all units
already purchased.
Which of the following graphs depicts the total cost of the raw materials for a period?
$
$
A
B
Q uestion 6
In an organisation manufacturing a number of different products in one large factory, the rent of that factory
is an example of a direct expense when costing a product.
A
True
B False
19
20
ACCA F2 / FIA FMA
Cost Classification
Chapter 4
Q uestion 7
An organisation operates a piecework system of remuneration, but also guarantees its employees 80% of a
time-based rate of pay which is based on $20 per hour for an eight hour working day. Three minutes is the
standard time allowed per unit of output. Piecework is paid at the rate of $18 per standard hour.
If an employee produces 200 units in eight hours on a particular day, what is the employees gross pay
for that day?
A
$128
B $144
C $160
D $180
Q uestion 8
A semi-variable cost is one that, in the short term, remains the same over a given range of activity but beyond
that increases and then remains constant at the higher level of activity.
A
True
B False
Q uestion 9
Which of the following are indirect costs?
(i) The depreciation of maintenance equipment
(ii) The overtime premium incurred at the specific request of a customer
(iii) The hire of a tool for a specific job
A
Item (i) only
Items (i) and (ii) only
Items (ii) and (iii) only
All of them
ACCA F2 / FIA FMA
Cost Classification
Chapter 4
Q uestion 10
The following is a graph of cost against level of activity
Cost
Level of activity
To which one of the following costs does the graph correspond?
A
Electricity bills made up of a standing charge and a variable charge
Bonus payment to employees when production reaches a certain level
Salesmans commission payable per unit up to a maximum amount of commission
Bulk discounts on purchases, the discount being given on all units purchased
Q uestion 11
Which of the following costs are part of the prime cost for a manufacturing company?
A
Cost of transporting raw materials from the suppliers premises
Wages of factory workers engaged in machine maintenance
Depreciation of lorries used for deliveries to customers
Cost of indirect production materials
21
22
ACCA F2 / FIA FMA
Cost Classification
Chapter 4
Chapter 5
ACCA F2 / FIA FMA
INVENTORY CONTROL
1 Introduction
There are many approaches in practice to ordering goods from suppliers. In this chapter we will
consider one particular approach that of ordering fixed quantities each time.
For example, if a company needs a total of 12,000 units each year, then they could decide to
order 1,000 units to be delivered 12 times a year. Alternatively, they could order 6,000 units to be
delivered 2 times a year. There are obviously many possible order quantities.
We will consider the costs involved and thus decide on the order quantity that minimises these
costs (the economic order quantity).
2 Costs involved
The costs involved in inventory ordering systems are as follows:
the purchase cost

the reorder cost
the inventory-holding cost
Purchase cost
This is the cost of actually purchasing the goods. Over a year the total cost will remain constant
regardless of how we decide to have the items delivered and is therefore irrelevant to our decision.
(Unless we are able to receive discounts for placing large orders this will be discussed later in
this chapter)
Re-order cost
This is the cost of actually placing orders. It includes such costs as the administrative time in
placing an order, and the delivery cost charged for each order.
If there is a fixed amount payable on each order then higher order quantities will result in fewer
orders needed over a year and therefore a lower total reorder cost over a year.
Inventory holding cost

This is the cost of holding items in inventory. It includes costs such as warehousing space and
insurance and also the interest cost of money tied up in inventory.
Higher order quantities will result in higher average inventory levels in the warehouse and
therefore higher inventory holding costs over a year.
23
24
ACCA F2 / FIA FMA
Inventory Control
Chapter 5
3 Minimising costs
One obvious approach to finding the economic order quantity is to calculate the costs p.a. for
various order quantities and identify the order quantity that gives the minimum total cost.
E xample 1
Janis has demand for 40,000 desks p.a. and the purchase price of each desk is $25. There are ordering costs of
$20 for each order placed. Inventory holding costs amount to 10% p.a. of inventory value.
Calculate the inventory costs p.a. for the following order quantities, and plot them on a graph:
(a)
500 units
(b)
750 units
(c)
1,000 units
(d)
1,250 units
ACCA F2 / FIA FMA
Inventory Control
Chapter 5
4 The EOQ formula

A more accurate and time-saving way to find the EOQ is to use the formula that is provided for
you in the exam.
The formula is:
EOQ =
2C o D
CH
Where Co = fixed costs per order

D = annual demand
CH = the inventory holding cost per unit per annum

(Note:
you are not required to be able to prove this formula)
E xample 2
For the information given in Example 1,
(a)
(b)
use the EOQ formula to calculate the Economic Order Quantity.

calculate the total inventory costs for this order quantity.
25
26
ACCA F2 / FIA FMA
Inventory Control
Chapter 5
5 Quantity discounts
Often, discounts will be offered for ordering in large quantities. The problem may be solved using
the following steps:
(1) Calculate EOQ ignoring discounts
(2) If it is below the quantity which must be ordered to obtain discounts, calculate total annual
inventory costs.
(3) Recalculate total annual inventory costs using the order size required to just obtain the discount
(4) Compare the cost of step 2 and 3 with the saving from the discount and select the minimum cost
alternative.
(5) Repeat for all discount levels
E xample 3
For the information given in Example 1 the supplier now offers us discounts on purchase price as follows:
Order quantity
0 to < 5,000
5,000 to < 10,000
10,000 or over
discount
0%
1%
1.5 %
Calculate the Economic Order Quantity.
ACCA F2 / FIA FMA
Inventory Control
Chapter 5
6 The Economic Batch Quantity

In the earlier examples, we assumed that we purchased goods from a supplier who delivered the
entire order immediately.
Suppose instead that we have our own factory. The factory can produce many different products
(using the same machines). Whenever we order a batch of one particular product then the factory
will set-up the machines for the product and start producing and delivering to the warehouse
immediately.
However it will take them a few days to produce the batch and during that time the warehouse is
delivering to customers.
As a result the maximum inventory level in the warehouse never quite reaches the order quantity,
and the formula needs changing slightly.
EBQ =
2C o D
D
C H (1 )
R
where:
CO
= fixed costs per batch (or set-up costs)
= annual demand
CH
= inventory holding cost per unit per annum
= rate of production per annum
It is also worth learning that the average inventory level in this situation will be:
Average inventory =
EBQ
2
(1
D
R
(Note that this formula will not be given to you in the exam)
E xample 4
A company has demand for 50,000 units p.a.
They produce their own units at a cost of $30 per unit, and are capable of producing at rate of 500,000 units
p.a.
Machine set-up costs are $200 for each batch.
Inventory holding costs are 10% p.a. of inventory value.
Calculate the Economic Batch Quantity, and the costs involved p.a. for that quantity.
27
28
ACCA F2 / FIA FMA
Inventory Control
Chapter 5
7 Re-order level and safety inventories

In the previous paragraphs we have considered the re-order quantities for inventory - that is the
quantity that we should order each time.
However, in real life, it is unlikely that the supplier will deliver our order instantly - for example,
it might take a week for the delivery to arrive - and therefore we need to place an order when we
still have some units left. If we do not have sufficient units in inventory to last us until the delivery
arrives, then we will run out of inventory and have to turn customers away.
The time between the placing of an order and the delivery arriving is known as the lead time.
The level of inventory at which time we should place a new order is known as the re-order level.
E xample 5
A company has a demand from customers of 100 units per week.
The time between placing an order and receiving the goods (the lead time) is 5 weeks.
What should the re-order level be? (i.e. how many units should we still have in inventory when we
place an order).
In practice, the demand per day and the lead time are unlikely to be certain.
What therefore we might do is re-order when we have more than 500 units in inventory, just to be
safe in case the demand over the lead time is more than 500 units. Any extra held in inventory for
this reason is known as safety inventory, or buffer inventory.
E xample 6
A company has a demand from customers of 100 units per week.
The time between placing an order and receiving the goods (the lead time) is 5 weeks.
The company has a policy of holding safety inventory of 100 units.
What should the re-order level be?
Inventory Control
ACCA F2 / FIA FMA
Chapter 5
Alternatively, if we do know the maximum demand over the lead time and want to be certain of
not running out of inventory then the re-order level needs to be equal to the maximum possible
demand over the lead time.
E xample 7
Demand from customers is uncertain and is between 70 and 120 units per week.
The lead time is also uncertain and is between 3 and 4 weeks.
What should the re-order level be if we are to never run out of inventory?
Although our answer to example 7 (a re-order level of 480 units) will mean that if the very worst
should happen then we will still have enough units to fulfil demand, much of the time the demand
will be lower than the maximum and/or the lead time will be shorter than the maximum.
If the demand over the lead time is less than the re-order level then it will mean we still have some
units in inventory when the new delivery arrives.
It therefore means that the maximum inventory level will be the maximum number left in
inventory, plus the number of units delivered.
The maximum number left in inventory is the re-order level less the minimum demand over the
lead time.
E xample 8
Demand from customers is uncertain and is between 70 and 120 units per week.
The lead time is also uncertain and is between 3 and 4 weeks.
We have a re-order quantity of 1,000 units each time.
What is the maximum inventory level?
29
30
ACCA F2 / FIA FMA
Inventory Control
Chapter 5
Test
Q uestion 1
The purchase price of an inventory item is $25 per unit. In each three month period the usage of the item is
20,000 units.
The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an
order for the item is $20.
What is the Economic Order Quantity (EOQ) for the inventory item to the nearest whole unit?
A
730
B 894
C 1,461
D 1,633
Q uestion 2
A company always determines its order quantity for a raw material by using the Economic Order Quantity
(EOQ) model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of
ordering a batch of raw material?
A
B
C
D
EOQ
Higher
Higher
Lower
Lower
Annual holding cost

Lower
Higher
Higher
Lower
Q uestion 3
Sky Limited wishes to minimise its inventory costs. At the moment its reorder quantity is 1,000 units. Order
costs are $10 per order and holding costs are $0.10 per unit per month. Sky Limited estimates annual demand
to be 15,000 units.
What is the optimal reorder quantity (to the nearest 100 units)?
A
500 units
1,000 units
1,200 units
1,700 units
Q uestion 4
A company uses 9,000 units of a component per annum. The component has a purchase price of $40 per
unit and the cost of placing an order is $160. The annual holding cost of one component is equal to 8% of its
purchase price.
What is the Economic Order Quantity (to the nearest unit) of the component?
A 530
B
671
949
1,342
ACCA F2 / FIA FMA
Inventory Control
Chapter 5
Q uestion 5
A company determines its order quantity for a component using the Economic Order Quantity (EOQ)
model.
What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual
cost of holding one unit of the component in inventory?

EOQ
Total annual ordering cost
Lower
Higher
Higher
Lower
Lower
No effect
Higher
No effect
Q uestion 6
The demand for a product is 12,500 units for a three month period. Each unit of product has a purchase
price of $15 and ordering costs are $20 per order placed.
The annual holding cost of one unit of product is 10% of its purchase price.
What is the Economic Order Quantity (to the nearest unit)?
A 577
B 1,816
C 1,866
D 1,155
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ACCA F2 / FIA FMA
Chapter 5
Chapter 6
ACCA F2 / FIA FMA
ACCOUNTING FOR LABOUR
1 Introduction
This chapter details various methods by which labour may be paid (remuneration methods), and
also looks at various ratios which can be useful in relation to labour.
2 Remuneration methods
There are three basic remuneration methods time work, piecework, and bonus schemes.
Time work
Wages are paid on the basis of hours worked.
For example, if an employee is paid at the rate of $5 per hour and works for 8 hours a day, the total
pay will be $40 for that day.
Employees paid on an hourly basis are often paid extra for working overtime.
For example, an employee is paid a normal rate of $5 per hour and works 4 hours overtime for
which he is paid at time-and-a half.
The amount paid for the overtime will be 4 x 1.5 x $5 = $30.
Piecework
Wages are paid on the basis of units produced.
For example an employee is paid $0.20 for every unit produced, with a guaranteed minimum wage
of $750 per week.
In week 1, they produce 5,000 units and so the pay will be 5,000 x $0.20 = $1,000 for the week.
In week 2, they only produce 3,000 units, for which the pay would be 3,000 x $0.20 = $600. However,
since this is below the guaranteed minimum the employee will receive $750 for the week.
Bonus (or incentive) schemes

There are many different ways in which a bonus scheme can operate, but essentially in all cases the
employee is paid a standard wage but in addition receives a bonus if certain targets are achieved,
Bonus schemes will be revisited later in these course notes.
3 Labour ratios
There are various ratios that can be useful for management when managing labour. You should be
aware of the following:
Idle time ratio

Idle time is time for which the employee is being paid but during which they are not actually
working (e.g. because the machine on which they work had broken down).
Idle time ratio =
Idle hours
100%
Total hours
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ACCA F2 / FIA FMA
Chapter 6
Labour turnover ratio:

This measures the rate at which employees are leaving the company.
Labour turnover rate =
Replacements
Average number of employees
100%
Labour efficiency ratio:

This measures whether we are working faster or slower than expected.
Efficiency ratio =
expected (or standard) hours to make output

actual hours taken
100%
Labour capacity ratio:

This measures whether we were able to obtain more or less working hours than we originally
budgeted on being available.
Capacity ratio =
actual hours worked

budgeted hours
100%
Labour production volume ratio:

This measures whether we were able to produce more or less than we expected to produce based
on the budgeted hours available.
Production volume ratio =
expected (or standard) hours to make output

budgeted hours
100%
ACCA F2 / FIA FMA
Chapter 6
TEST
Q uestion 1
An employee is paid on a piecework basis as follows:
1 to 500 units
501 to 1000 units
1001 to 1500 units
$0.50 per unit

$0.75 per unit
$1.00 per unit
Only the additional units qualify for the higher rates, and rejected units do not qualify for payment.
During one day an employee produced 1200 units of which 32 were rejected.
How much did the employee earn for the day?
A
$825
B $1200
C
$793
D $1168
Q uestion 2
A company had 80 direct production workers at the beginning of last year and 60 direct production workers
at the end of last year. During the year a total of 45 employees had left the company.
The labour turnover rate for last year was:
A 21.4%
B 35.7%
C 64.3%
D 75.0%
Q uestion 3
Which of the following types of workers would be classified as indirect labour?
A
Painters in a decorating company
Machine repairers in a factory making desks by machine
Machine operators in a factory making desks by machine
Assembly workers in a factory making calculators
35
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ACCA F2 / FIA FMA

T he
following information relates to questions
Chapter 6
4
and
A company budgeted on producing 20,000 units and taking 8,000 hours.

They actually produced 25,000 units and took 11,000 hours.
Q uestion 4
What was the capacity ratio?
A 110.0%
B
72.7%
90.9%
D 137.5%
Q uestion 5
What was the efficiency ratio?
A 110.0%
B
72.7%
90.9%
D 137.5%
Chapter 7
ACCA F2 / FIA FMA
ACCOUNTING FOR OVERHEADS
1 Introduction
A business needs to know the cost per unit of goods or services that they produce for many
reasons.
E.g. to value stock

to fix a selling price
to analyse profitability
In principle, the unit cost of materials and of labour should not be a problem, because they can be
measured. It is the overheads that present the real difficulty in particular the fixed overheads.
E.g. if the factory costs $100,000 p.a. to rent, then how much should be included in the cost of
each unit?
2 Absorption of overheads
To show our approach to solving the problem referred to above, consider the following example:
E xample 1
X plc produces desks.
Each desk uses 3 kg of wood at a cost of $4 per kg, and takes 4 hours to produce.
Labour is paid at the rate of $2 per hour.
Fixed costs of production are estimated to be $700,000 p.a..
The company expects to produce 50,000 desks p.a..
Calculate the cost per desk.
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ACCA F2 / FIA FMA
Chapter 7
This method of arriving at an overhead cost p.u. (dividing total overheads by total production) is
known as the absorbing of overheads.
(Note that because we need the cost p.u. for things like fixing a selling price, we will usually absorb
the overheads based on estimated total cost and estimated production. This can lead to problems
later because obviously our estimates may not be correct. We will deal with this problem in the
next chapter.)
Although the basic approach to absorbing overheads is not difficult, there are two extra problems
that can occur and that you can be asked to deal with.
We will consider each of these problems in turn, and then look at a full example.
3 F
irst problem more than one product produced in the same
factory
In this situation we have to decide on a basis for absorption first.
There are many bases for absorption that could be used (e.g. per unit, per labour hour, per machine
hour etc.)
E xample 2
X plc produces desks and chairs in the same factory.
Each desk uses 3 kg of wood at a cost of $4 per kg, and takes 4 hours to produce.
Each chair uses 2 kg of wood at a cost of $4 per kg., and takes 1 hour to produce.
Labour is paid at the rate of $2 per hour.
Fixed costs of production are estimated to be $700,000 p.a..
The company expect to produce 30,000 desks and 20,000 chairs p.a.
(Overheads are to be absorbed on a labour hour basis)
Calculate the cost per unit for desks and chairs
ACCA F2 / FIA FMA
Chapter 7
In practice it would be up to the Management Accountant to decide on the most appropriate basis.
In examinations it will be made obvious to you which basis to use, but read the question carefully.
4 Second problem more than one department in the factory.

In this situation we need first to allocate and apportion the overheads between each department.
We can then absorb the overheads in each department separately in the same way as before.
E xample 3
X plc produces desks and chairs in the same factory. The factory has two departments, assembly and finishing.
Each desk uses 3 kg of wood at a cost of $4 per kg., and takes 4 hours to produce 3 hours in assembly and
1 hour in finishing.
Each chair uses 2 kg of wood at a cost of $4 per kg, and takes 1 hour to produce hour in assembly and
hour in finishing.
All labour is paid at the rate of $2 per hour.
Fixed costs of production are estimated to be $700,000 p.a.. Of this total, $100,000 is the salary of the
supervisors $60,000 to Assembly supervisor, and $40,000 to Finishing supervisor.
The remaining overheads are to be split 40% to Assembly and 60% to Finishing.
The company expects to produce 30,000 desks and 20,000 chairs.
(Overheads to be absorbed on a labour hour basis)
Calculate the cost per unit for desks and for chairs
39
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ACCA F2 / FIA FMA
Chapter 7
The charging of supervisors salaries to the relevant department is known as allocation of

overheads.
The splitting or sharing of overheads between departments (as in the remaining $600,000 in our
example) is known as the apportionment of overheads.
A fuller example of allocating and apportioning overheads:
E xample 4
Production overhead costs for the period
Factory rent
Factory heat
Processing Dept supervisor
Packing Dept supervisor
Depreciation of equipment
Factory canteen expenses
Welfare costs of factory employees
$
20,000
5,000
15,000
10,000
7,000
18,000
5,000
80,000
Processing Dept
Packing Dept
Canteen
Cubic space
50,000 m
25,000 m
5,000 m3
NBV equipment
$300,000
$300,000
$100,000
No. of employees
50
40
10
Allocate and apportion production overhead costs amongst the three departments using a suitable
basis.
ACCA F2 / FIA FMA
Chapter 7
5 Reapportionment of service cost centre overheads

Factory cost centres can be broken down into two types:
PRODUCTION COST CENTRES - these make the cost units.
SERVICE COST CENTRES
- these do work for the production cost centres and one

another.
We therefore need to transfer all service cost centre overheads to the production centres so that
all production overheads for the period are shared between the production cost centres alone - as
it is through these cost centres that cost units flow.
No Inter Service Work Done

If there is just one service department, or if there is more than one service department but there
is no work done by one service department for another, then reapportionment is done using a
suitable basis (e.g. canteen costs by the number of employees).
E xample 5
Reapportion the canteen costs in Example 4 to the production cost centres.
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ACCA F2 / FIA FMA
Chapter 7
Inter-Service Work Done

The problem is a little more complicated if there is more than one service cost centre and where
they do work for one another. The way to deal with this is the reciprocal method.
The reciprocal method can be carried out in one of two ways:
either the continuous or repeated distribution (tabular) method; or

the algebraic method.
E xample 6
Allocated and apportioned overheads

Estimated work done by the service centres for
other departments:
Stores
Maintenance
Production Depts
X
Y
$
$
70,000 30,000
50%
45%
30%
40%
Service Centres
Stores
Maintenance
$
$
20,000
15,000
15%
20%
-
Reapportion service department costs to departments using:

(a) repeated distribution method; and
(b) algebraic method.
ACCA F2 / FIA FMA
Chapter 7
Test
Q uestion 1
A factory consists of two production cost centres (A and B) and two service cost centres (X and Y). The total
allocated and apportioned overhead for each is as follows:
A
B
X
Y
$95,000
$82,000
$46,000
$30,000
It has been estimated that each service cost centre does work for other cost centres in the following proportions:
A
B
X
Y
Percentage of service cost centre X to
50
50
Percentage of service cost centre Y to

30
60
10
The reapportionment of service cost centre costs to other cost centres fully reflects the above proportions.
After the reapportionment of service cost centre costs has been carried out, what is the total overhead for production cost centre A?
A
$124,500
B $126,100
C $127,000
D $128,500
Q uestion 2
The process of cost apportionment is carried out so that
A costs may be controlled
B cost units gather overheads as they pass through cost centres
C whole items of cost can be charged to cost centres
D common costs are shared among cost centres
Q uestion 3
A cost centre is
A A unit of product or service in relation to which costs are ascertained
B An amount of expenditure attributable to an activity
C A production or service location, function, activity or item of equipment for which costs are accumulated
D A centre for which an individual budget is drawn up
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ACCA F2 / FIA FMA
Chapter 7
Q uestion 4
A company manufactures two products L and M in a factory divided into two cost centres, X and Y. The following budgeted data are available:
Cost centre
X
Y
Allocated and apportioned fixed
overhead costs
$88,000 $96,000
Direct labour hours per unit:
Product L
30
10
Product M
25
20
Budgeted output is 8,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour
basis.
What is the budgeted fixed overhead cost per unit for Product M?
A
$10
B
$11
C
$12
D
$13
Q uestion 5
A company operates a job costing system. Job number 1203 requires $300 of direct materials and $400 of
direct labour. Direct labour is paid at the rate of $8 per hour. Production overheads are absorbed at a rate of
$26 per direct labour hour and non-production overheads are absorbed at a rate of 120% of prime cost.
What is the total cost of job number 1203?
A
$2,000
B
$2,400
C
$2,840
D
$4,400
Q uestion 6
The management accountant of Warsaw Limited has already allocated and apportioned the fixed overheads
for the period although she has yet to reapportion the service centre costs. Information for the period is as
follows:
Production departService departments
Total
ments
1
2
Stores
Maintenance
Allocated and apportioned
$17,500 $32,750 $6,300
$8,450
$65,000
Work done by:
Stores
60%
30%
10%
Maintenance
75%
20%
5%
What are the total overheads included in production department 1 if the reciprocal method is used to
reapportion service centre costs?
A $27,618
B $28,171
C $28,398
D $28,453
Chapter 8
ACCA F2 / FIA FMA
THE MANAGEMENT ACCOUNTANTS PROFIT

STATEMENT ABSORPTION COSTING
1 Introduction
In the previous chapter we stated that the cost per unit is normally calculated in advance using
estimated or budgeted figures. This is for several reasons. For instance, we need an estimate of the
cost before we can fix a selling price. In addition, the estimated cost per unit provides a benchmark
for control purposes. The Management Accountant can check regularly whether or not units are
costing more or less than estimated and attempt to take corrective action if necessary.
As a result, the Management Accountants Profit Statement (or Operating Statement) takes a
different form than that of the Financial Accountants Income Statement
The statement is usually prepared monthly, and its objective is to show whether the profit is higher
or lower than that expected, and to list the reasons for any differences.
The statement starts with the profit that should have been made if all the costs had been the same
as on the standard cost card.
It then lists all the reasons for any differences in profit (or variances) to end with the actual profit.
However, in calculating the budgeted profit for individual months, absorption costing causes a
problem when the expected production in a month differs from that used to absorb fixed overheads
for the cost card.
This problem is illustrated in the following example
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ACCA F2 / FIA FMA
Chapter 8
2 Illustration
E xample 1
X plc produces one product desks.
Each desk is budgeted to require 4 kg of wood at $3 per kg, 4 hours of labour at $2 per hour, and variable
production overheads of $5 per unit.
Fixed production overheads are budgeted at $20,000 per month and average production is estimated to be
10,000 units per month.
The selling price is fixed at $35 per unit.
There is also a variable selling cost of $1 per unit and fixed selling cost of $2,000 per month.
During the first two months X plc expects the following levels of activity:
January
February
Production
11,000 units
9,500 units
Sales
9,000 units
11,500 units
(a)
(b)
Prepare a cost card using absorption costing

Set out budget Profit Statements for the months of January and February.
ACCA F2 / FIA FMA
Chapter 8
3 Hourly absorption rates

The previous example assumed that fixed overheads were absorbed on a unit basis. A popular
question in the exam is to be asked to calculate the amount of any over or under - absorption when
fixed overheads are absorbed on an hourly basis
E xample 2
Y plc budgets on working 80,000 hours per month and having fixed overheads of $320,000. During April, the
actual hours worked are 78,000 and the actual fixed overheads are $315,500.
Calculate:
(a) the overhead absorption rate per hour.
(b) the amount of any over or under-absorption of fixed overheads in April
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ACCA F2 / FIA FMA
Chapter 8
Chapter 9
ACCA F2 / FIA FMA
THE MANAGEMENT ACCOUNTANTS PROFIT

STATEMENT MARGINAL COSTING
1 O verview
Some businesses only want to know the variable cost of the units they make, regarding fixed
costs as period costs. The variable cost is the extra cost each time a unit is made, fixed costs being
effectively incurred before any production is started.
The variable production cost of a unit is made up of:
Direct materials
Direct labour
Variable production overheads
Marginal cost of a unit
$
X
X
X
X
Marginal costing
Variable production costs are included in cost per unit (i.e. treated as a product cost).
Fixed costs are deducted as a period cost in the profit statement.
2 Contribution
Contribution is an important concept in marginal costing. Contribution is an abbreviation of
contribution towards fixed costs and profit.
It is the difference between selling price and all variable costs (including non-production variable
costs), usually expressed on a per unit basis.
Selling price:
Less: Variable production costs
Variable non-production costs
Contribution
$
X
X
$
X
(X)
X
Note: Contribution takes account of all variable costs. Marginal cost takes account of variable
production costs only and inventory is valued at marginal cost.
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ACCA F2 / FIA FMA
Chapter 9
E xample 1
X plc produces one product desks.
Each desk is budgeted to require 4 kg of wood at $3 per kg, 4 hours of labour at $2 per hour, and variable
production overheads of $5 per unit.
Fixed production overheads are budgeted at $20,000 per month and average production is estimated to be
10,000 units per month.
The selling price is fixed at $35 per unit.
There is also a variable selling cost of $1 per unit and fixed selling cost of $2,000 per month.
During the first two months, X plc expects the following levels of activity:
Production
Sales
January
11,000 units
9,000 units
February
9,500 units
11,500 units
All other results were as budgeted.

(a) Prepare a cost card using marginal costing
(b) Set out Profit Statements for the months of January and February.
ACCA F2 / FIA FMA
Chapter 9
E xample 2
Prepare a reconciliation of absorption and marginal costing profits
January
Absorption costing
Marginal costing
Difference
February
$
The difference in profit arises from the different inventory valuations which are the result of the
difference in treatment of the fixed production overheads.
Effects
The delay in charging some production overheads under absorption costing leads to the following
situations.
E xample 3
Required
Compare profits under marginal and absorption costing for the following situations
(a) Production > Sales
(b) Production < Sales
(c) Production = Sales
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ACCA F2 / FIA FMA
Chapter 9
Test
Q uestion 1
A company manufactures and sells a single product. In two consecutive months the following levels of
production and sales (in units) occurred:
Month 1
Month 2
Sales
3,800
4,400
Production
3,900
4,200
The opening inventory for Month 1 was 400 units. Profits or losses have been calculated for each month using
both absorption and marginal costing principles.
Which of the following combination of profits and losses for the two months is consistent with the
above data?
A
B
C
D
Absorption costing profit/(loss)

Month 1
Month 2
$
$
200
4,400
(400)
4,400
200
3,200
(400)
3,200
Marginal costing profit/(loss)

Month 1
Month 2
$
$
(400)
3,200
200
3,200
(400)
4,400
200
4,400
Q uestion 2
The following budgeted information relates to a manufacturing company for next period:
Units
$
Production
14,000
Fixed production costs
63,000
Sales
12,000
Fixed selling costs
12,000
The normal level of activity is 14,000 units per period.
Using absorption costing the profit for next period has been calculated as $36,000.
What would the profit for next period be using marginal costing?
A
$25,000
B $27,000
C $45,000
D $47,000
Q uestion 3
A company uses an overhead absorption rate of $3.50 per machine hour, based on 32,000 budgeted machine
hours for the period. During the same period the actual total overhead expenditure amounted to $108,875
and 30,000 machine hours were recorded on actual production.
By how much was the total overhead under or over absorbed for the period?
A
Under absorbed by $3,875
Under absorbed by $7,000
Over absorbed by $3,875
Over absorbed by $7,000
ACCA F2 / FIA FMA
Chapter 9
Q uestion 4
Glossop Limited reported an annual profit of $47,500 for the year ended 31 March 2000. The company uses
absorption costing. One product is manufactured, the Rover, which has the following standard cost per unit.
$
Direct material (2 kg at $5/kg)
10
Direct labour (4 hours at $6.50/hour)
26
Variable overheads (4 hours at $l /hour)
4
12
Fixed overheads (4 hours at $3/hour)
52
The normal level of activity is 10,000 units although actual production was 11,500 units. Fixed costs were as
budgeted.
Inventory levels at 1 April 1999 were 400 units and at the end of the year were 600 units.
What would be the profit under marginal costing?
A $44,300
B $45,100
C $49,900
D $50,700
Q uestion 5
A company absorbs overheads on machine hours which were budgeted at 11,250 with overheads of $258,750.
Actual results were 10,980 hours with overheads of $254,692.
Overheads were
A under absorbed by $2,152
B
over absorbed by $4,058
under absorbed by $4,058
over absorbed by $2,152
Q uestion 6
The production overhead of department P is absorbed using a machine hour rate. Budgeted production
overheads for the department were $280,000 and the actual machine hours were 70,000. Production overheads
were under absorbed by $9,400.
If actual production overheads were $295,000 what was the overhead absorption rate per machine
hour?
A $4.00
B $4.08
C $4.21
D $4.35
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ACCA F2 / FIA FMA
Chapter 9
Q uestion 7
Tesla has the following data relating to overheads.
Budget
Actual
Fixed overheads
$15,000
$14,000
Units of production
10,000
10,100
Direct labour hours
20,000
19,500
Overheads are absorbed on the basis of labour hours.
Which of the following statements is true?
A Overheads will be under absorbed by $1,000 due to the lower than expected expenditure.
B
Overheads will be over absorbed by $1,150 due to the unexpected increase in production.
C Overheads will be under absorbed by $625 due to lower than expected expenditure and lower
than expected labour hours.
D Overheads will be over absorbed by $625 due to lower than expected expenditure and lower than
expected labour hours.
Q uestion 8
Grove Limited reported an annual profit of $47,500 for the year ended 31 March 2000. The company uses
absorption costing. One product is manufactured, the Rover, which has the following standard cost per unit.
Direct material (2 kg at $5/kg)
Direct labour (4 hours at $6.50/hour)
Variable overheads (4 hours at $1/hour)
Fixed overheads (4 hours at $3/hour)
10
26
4
12
52
The normal level of activity is 10,000 units although actual production was 11,500 units. Fixed costs were as
budgeted. Inventory levels at 1 April 1999 were 400 units and at the end of the year were 600 units.
What were the budgeted fixed overheads for the year ended 31 March 2000 and the actual under or
over absorption?
A
B
C
D
Budgeted Overheads
$120,000
$120,000
$138,000
$138,000
Under/over absorbed
$18,000 over absorbed
$18,000 under absorbed
$18,000 over absorbed
$18,000 under absorbed
ACCA F2 / FIA FMA
Chapter 9
Q uestion 9
A company produces a single product for which cost and selling price details are as follows.
$ per unit
$ per unit
Selling price
28
Direct material
10
Direct labour
4
Variable overhead
2
5
Fixed overhead
21
Profit per unit
7
Last period, 8,000 units were produced and 8,500 units were sold. The opening inventory was 3,000 units
and profits reported using marginal costing were $60,000. The profits reported using an absorption costing
system would be
A $47,500
B $57,500
C $59,500
D $62,500
Q uestion 10
A company made 17,500 units at a total cost of $16 each. Three quarters of the costs were variable and one
quarter fixed. 15,000 units were sold at $25 each. There were no opening inventories.
By how much will the profit calculated using absorption costing principles differ from the profit if
marginal costing principles had been used?
A
The absorption costing profit would be $10,000 less
The absorption costing profit would be $10,000 greater
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ACCA F2 / FIA FMA
Chapter 9
Chapter 10
ACCA F2 / FIA FMA
PROCESS COSTING INTRODUCTION
1 Introduction
Process costing is a method of applying costing systems to goods or services that are produced in a
series of processes. Every unit is assumed to have involved the same amount of work and therefore
the costs for a period are charged to processes or operations, and unit costs are calculated by
dividing process costs by the quantity of units produced.
2 Calculation of cost per unit
Calculate the total of all costs incurred in the process during a period.
xx
If using absorption costing then include all overheads.
xx
If using marginal costing then only include variable overheads.
Divide the total cost by the number of units produced to arrive at a cost per unit.
E xample 1
During February the following costs were incurred in a process:
Materials
$20,000
Labour
$10,000
Overheads
$8,000
2,000 units were produced.
Calculate the cost per unit.
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ACCA F2 / FIA FMA
Chapter 10
3 Process T-Accounts
If a T-account is shown in the examination, then the entries are as follows:

Debit the Process Account with each cost incurred
Credit the Process Account with the unit cost previously calculated.
It is normal and useful to have 2 columns in the Process Account one for units and one for $s
E xample 2
Prepare a Process Account for the information in example 1.
units
Process Account
$
units
ACCA F2 / FIA FMA
Chapter 10
4 Problem areas
There are three problem areas that can occur in the examinations
Losses
Work-in-progress
Joint Products
Some of the units started in a process may not end up as finished output due to loss or damage
At the start and end of a period there may be some units in the process that are only partly finished
and which need more work in the next process
More than one product may be produced in the same process.
These problems will be covered in the following chapters.
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Chapter 10
ACCA F2 / FIA FMA
Chapter 11
PROCESS COSTING LOSSES
1 Introduction
In many processes it is unlikely that the output units will equal the input units. For example, in the
manufacture of beer it is very unlikely that the litres produced will equal the number of litres that
were input, due to evaporation.
We need to deal with any losses in our costings.
2 Normal loss
Normal loss is the amount of loss that is expected from the process, based on past experience. It
is also known as the expected loss.
In our costings, we spread the process costs over the number of units that we expect to produce.
E xample 1
During March the following costs were incurred in a process:
Materials (1,000 kg)
Labour
Overheads
$12,000
$7,000
$8,000
A normal loss of 10% was expected. The actual output was 900 kg.
Calculate the cost per kg, and prepare a Process Account.
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Chapter 11
3 Normal loss with a scrap value

The word loss, when used in process costing, does not just mean units that are lost but also units
that were damaged. Any damaged units may be saleable as scrap.
If there are any expected scrap proceeds from damaged units, then these scrap proceeds are
subtracted from the total costs of the process before spreading over the units we expect to produce.
E xample 2
During April, the following costs were incurred in a process:
Labour
Overheads
$30,000
$12,000
$10,800
A normal loss of 10% was expected. The actual output was 2,700 kg.
Losses have a scrap value of $5 per unit.
Calculate the cost per kg and prepare a Process Account and a Loss Account.
ACCA F2 / FIA FMA
Chapter 11
4 Abnormal losses
Even though we may expect a normal loss of (for example) 10% to occur each month, it is unlikely
that we will actually lose exactly 10% each month. Some months we will probably lose more than
10%, and some months less than 10%.
Any excess loss in any month is known as an abnormal (or unexpected) loss.
We prepare costings as normal, taking into account any normal loss, and spreading the total cost
over the units that we expect to produce.
Any abnormal losses are charged separately at the full cost per unit.
(Note: we always assume that any abnormal losses are sold for scrap at the same price as normal
losses).
E xample 3
During May, the following costs were incurred in a process:
Labour
Overheads
$9,000
$18,000
$13,500
A normal loss of 10% of input was expected.

Actual output was 850 kg.
Losses are sold as scrap for $9 per kg.
Calculate the cost per kg and prepare a Process Account and a Loss Account.
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5 Abnormal Gains
In the same way that the actual output may be less than that expected, in some months it may be
more than expected.
If this happens, then we say that we have an abnormal gain.
The treatment of abnormal gains is exactly the same as for abnormal losses.
E xample 4
During June the following costs were incurred in a process:
Labour
Overheads
$18,000
$36,000
$27,000
A normal loss of 10% of input was expected.

Actual output was 1,840 kg.
Losses are sold as scrap for $9 per kg.
Calculate the cost per kg, and prepare a Process Account and a Loss Account.
ACCA F2 / FIA FMA
Chapter 12
PROCESS COSTING
WORK-IN-PROGRESS
1 Introduction
At the end of a process there may be some units that have been started but not completed. These
are known as closing work-in-progress. They are still there at the start of the next period, waiting
to be finished. They are therefore opening work-in-progress of the next period.
2 Equivalent units
In our costings we still wish to calculate the cost of a finished unit. For costing purposes we
assume the work done on 100 units that are only half finished is equivalent to 50 fully finished
units. Therefore, 100 units each 50% finished is regarded as 50 equivalent complete units.
3 Closing Work-in-Progress (no opening Work-In-Progress)

When we have closing work-in-progress, we calculate a cost per unit for each category of cost,
using equivalent units. The total cost per unit is the sum of these separate costs.
E xample 1
During January the following costs were incurred in a process:
Materials (1,000 units)
Labour
Overheads
$5,000
$2,760
$3,440
During the month, 800 units were finished and transferred to the next process.
The remaining 200 units were WIP and were complete as follows:
Materials
Labour
Overheads
(a)
(b)
(c)
100%
60%
30%
calculate the cost per unit;

value the finished output and the WIP;
prepare Process Account.
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Chapter 12
ACCA F2 / FIA FMA
Chapter 12
4 Opening and Closing W-I-P.

When there is opening W-I-P, there are two alternative approaches to the costings.
First-in-first-out (FIFO)
Weighted Average
Under this approach it is assumed that the opening W-I-P is the first to be finished. All the costs
brought forward for the W-I-P are treated as costs of these specific units, and the current periods
expenditure is allocated over the work done in the current period.
Under this approach, all the costs related to current periods output (including the value of the
W-I-P brought forward) are allocated over all the units of the current period.
5 FIFO
E xample 2
During July, the following costs were incurred
$24,900
Labour and overheads
$20,075
At the beginning of July, there were 15,000 units of work in progress valued as follows:
Materials (100% complete)
$9,000
Labour and overheads (40% complete)
$1,250
At the end of July, there were 5,000 units of work-in-progress. They were 100% complete for materials and
50% complete for labour and overheads.
(a)
(b)
(c)
(d)
calculate how many units were completed during July

calculate the cost per unit
value the finished items and the closing work-in-progress
prepare a Process Account.
(Note: use the FIFO approach and assume no losses)
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Chapter 12
6 Weighted average
One problem with the FIFO approach is that completed units are valued at two different costs
depending on whether or not they were opening work-in-progress.
The weighted average approach values all finished units at an average cost.
E xample 3
During July, the following costs were incurred
$24,900
$20,075
At the beginning of July, there were 15,000 units of work in progress valued as follows:
Materials (100% complete)
$9,000
Labour and overheads (40% complete)
$1,250
At the end of July, there were 5,000 units of work-in-progress. They were 100% complete for materials and
50% complete for labour and overheads.
(a)
(b)
(c)
(d)
calculate how many units were completed during July

calculate the cost per unit
value the finished items and the closing work-in-progress
prepare a Process Account.
(Note: use the weighted average approach and assume no losses)
ACCA F2 / FIA FMA
Chapter 12
Test
Q uestion 1
Information relating to two processes (X and Y) was as follows:
Process Normal loss
Input
Output
as % of input
litres
litres
X
8
65,000
58,900
Y
5
37,500
35,700
For each process, was there an abnormal loss or an abnormal gain?
A
B
Process X
Abnormal gain
Abnormal gain
Abnormal loss
Abnormal loss
Process Y
Abnormal gain
Abnormal loss
Abnormal gain
Abnormal loss
Q uestion 2
A company manufactures and sells one product which requires 8 kg of raw material in its manufacture. The
budgeted data relating to the next period are as follows:
Units
Sales
19,000
Opening inventory of finished goods
4,000
Closing inventory of finished goods
3,000
Kg
Opening inventory of raw materials
50,000
Closing inventory of raw materials
53,000
What is the budgeted raw material purchases for next period (in kg)?
A
141,000
B 147,000
C 157,000
D 163,000
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Chapter 12
Q uestion 3
A company operates a process in which no losses are incurred. The process account for last month, when
there was no opening work-in-progress, was as follows:
Process Account
$
$
Costs arising
624,000
Finished output (10,000 units)
480,000
Closing work-in progress (4,000 units)
144,000
624,000
624,000
The closing work-in-progress was complete to the same degree for all elements of cost.
What was the percentage degree of completion of the closing work-in-progress?
A
12%
B 30%
C 40%
D 75%
Q uestion 4
A company which operates a process costing system had work-in-progress at the start of last month of 300
units (valued at $1,710) which were 60% complete in respect of all costs. Last month a total of 2,000 units
were completed and transferred to the finished goods warehouse. The cost per equivalent unit for costs
arising last month was $10.
The company uses the FIFO method of cost allocation.
What was the total value of the 2,000 units transferred to the finished goods warehouse last month?
A
$19,910
B $20,000
C $20,510
D $21,710
Q uestion 5
In process costing, if an abnormal loss arises, the process account is generally
A
debited with the scrap value of the abnormal loss units
debited with the full production cost of the abnormal loss units
credited with the scrap value of the abnormal loss units
credited with the full production cost of the abnormal loss units
ACCA F2 / FIA FMA
Chapter 12
Q uestion 6
Burgess operates a continuous process into which 3,000 units of material costing $9,000 was input in a period.
Conversion costs for this period were $11,970 and losses, which have a scrap value of $1.50, are expected at
a rate of 10% of input. There were no opening or closing stocks and output for the period was 2,900 units.
What was the output valuation?
A $20,271
B $20,520
C $20,970
D $22,040
Q uestion 7
Process B had no opening stock. 13,500 units of raw material were transferred in at $4.50 per unit. Additional
material at $1.25 per unit was added in process. Labour and overheads were $6.25 per completed unit and
$2.50 per unit incomplete.
If 11,750 completed units were transferred out, what was the closing stock in Process B?
A $6,562.50
B $12,250.00
C $14,437.50
D $25,375.00
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T he
Chapter 12
8
and
9:
A company operates a process costing system using the first-in-first-out (FIFO) method of valuation. No
losses occur in the process. All materials are input at the commencement of the process. Conversion costs
are incurred evenly through the process.
The following data relate to last period:
Opening work in progress
Total number of units completed
Closing work in progress
Costs arising:
Materials
Conversion
Units
2,000
14,000
3,000
Degree of completion
60%
30%
51,000
193,170
Q uestion 8
What was the total number of units input during last period?
A
12,000
B
13,000
C
15,000
D
17,000
Q uestion 9
What was the value of the closing work in progress for last period?
A
$21,330
B
$21,690
C
$22,530
D
$22,890
Chapter 13
ACCA F2 / FIA FMA
PROCESS COSTING JOINT PRODUCTS
1 Introduction
Sometimes, one process may produce several products. In this case we need to decide on a cost
per unit for each of the products. These products, produced in the same process, are known as
joint products.
Joint products refer to our main products with full sales value. However, there may be an additional
product (or products) which is produced incidentally and has a relatively low sales value (effectively
a waste product). This is known as a by-product.
2 Accounting treatment
Any sale proceeds of a by-product are subtracted from the joint costs of the process.
The net total cost of the process is then split between the joint products.
For the examination, there are two ways of splitting the joint costs:
xx
The physical units basis
xx
The market value at the point of separation basis.
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Chapter 13
3 Physical units basis

Under this method, the same cost per unit is applied to all the joint products
E xample 1
During August, the following costs were incurred in a process:
$5,000
$2,300
The production from the process was as follows:
kg
Product A
1,000
selling price $5 per kg
Product B
2,000
by-product X
500
scrap value $0.20 per kg
Calculate a cost per kg and profit per kg for A and B using the physical units basis.
ACCA F2 / FIA FMA
Chapter 13
4 Market value basis

Under this method the costs per unit are calculated so as to be in the same proportions as the
market values of each product
E xample 2
During August, the following costs were incurred in a process:
$5,000
$2,300

Product A
Product B
by-product X
kg
1,000
2,000
500

Sales during the period were 800 kg of A and 1,500 kg of B.

Calculate a cost per kg and profit per kg for A and B using the market value basis;
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Chapter 13
5 Net-realisable value approach

The market value approach is not always possible. This is because the products will often require
further work (and therefore costs) after leaving the process. We have to use the net realisable value
at a point of separation as an approximation to the market value.
The net realisable value is the final market value less costs incurred after leaving the joint process.
E xample 3
During September the following costs were incurred in a process:
$5,000
$2,300
kg
Product A
1,000
selling price $8.40 per kg
Product B
2,000
selling price $4.50 per kg
by-product X
500
All the output of A and B incurred further processing at a cost of $4.80 per kg for A and $2.20 per kg for B.
Calculate a cost per kg for A and B using the net realisable value approach.
ACCA F2 / FIA FMA
Chapter 13
TEST
Q uestion 1
Two products P and Q are created from a joint process. P can be sold immediately after split-off. Q requires
further processing into product X before it is in a saleable condition. There are no opening inventories and no
work in progress of products P, Q or X. The following data are available for last period:
$
Total joint production costs
350,000
Further processing costs of product Q
66,000
Product
Production
Closing
units
inventory units
P
420,000
20,000
X
330,000
30,000
Using the physical unit method for apportioning joint production costs, what was the cost value of
the closing inventory of product X for last period?
A
$16,640
B $18,625
C $20,000
D $21,600
Q uestion 2
What is a by-product?
A
A product produced at the same time as other products which has no value
A product produced at the same time as other products which requires further processing to put
it in a saleable state
A product produced at the same time as other products which has a relatively low volume
compared with the other products
A product produced at the same time as other products which has a relatively low value compared
with the other products
Q uestion 3
In process costing, a joint product is
A
a product which is later divided into many parts
a product which is produced simultaneously with other products and is of similar value to at least
one of the other products
a product which is produced simultaneously with other products but which is of a greater value
than any of the other products
a product produced jointly with another organisation
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Chapter 13
Q uestion 4
Heath Ltd manufactures three joint products, W, X and Y in a common process. The cost and production
data for March is as follows.
$
Opening stock
40,000
Direct materials input
80,000
Conversion costs
100,000
Closing stock
20,000
Output and sales were as follows.
Production
Sales price
Sales units
Units
$ per unit
W
20,000
15,000
4
X
20,000
15,000
6
Z
40,000
50,000
3
If costs are apportioned between joint products on a market value basis, what was the cost per unit of
product X in March?
A $3.00
B $3.38
C $3.75
D $4.62
Chapter 14
ACCA F2 / FIA FMA
ALTERNATIVE COST ACCOUNTING
1 Introduction
This chapter briefly explains four more recent developments in costing which are improvements
on the traditional techniques that we have been dealing with in the previous chapters.
You will not be required to perform any calculations they will come in a later examination but
you are required to be aware of the ideas.
2 Activity based costing (ABC)

ABC deals with the way we charge overheads to the different products that we make.
You will remember from an earlier chapter that the traditional way is to take the total overheads
and calculate an absorption rate often a rate per labour hour and then to charge this to the
individual products on the basis of the number of hours each product takes to make.
With ABC, we identify the area where overheads are being incurred and then decide what it the
reason or cause for these overheads. For example, one area where overheads may be incurred is
in the department that receives the raw materials for production. We may decide that the reason
we are incurring these overheads is the number of deliveries received (we call this the cost driver).
We then charge the different products with this part of the overheads on the basis of the number
of deliveries received for each of the products we are making.
Not only does this result in more accurate costings but more importantly we can then investigate
whether it is possible to have fewer deliveries received (by ordering more raw materials each time)
and therefore potentially reduce the total overhead and save costs.
3 Target costing
Target costing is particularly useful when a new product is being launched.
There are basically 4 steps involved:
First, we decide on a realistic selling price for the new product. We do this by looking at the prices
competitors charge or maybe by using market research.
Secondly, we decide on our objective. For example, maybe we require all our products to generate
a profit of 40% of the selling price.
Thirdly, we put the two together and calculate the maximum cost that we can allow in order to
achieve our objective this is the target cost.
For example, suppose we identify that a realistic selling price for our new product is $100, and we
require a profit of 40% on selling prices. This would result in a target cost of $60.
Fourthly, we estimate the actual cost of production, and if this is above the target cost we look for
ways of reducing the cost to the target cost.
The most important way of achieving this is by examining the design of the product and looking
to see if we can change the design in ways that will reduce the costs without needing a reduction
in the selling price.
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Chapter 14
4 Life-cycle costing
Traditional costing tends to budget costs over just the short term usually over the coming year.
However this can create problems. Many new products will have low sales initially, but sales will
rise as the products become popular. If sales are low in the early years, then overheads per unit
are likely to be high, giving high unit costs. Whereas in later years, when sales are higher, the
overheads per unit are likely to be lower, giving lower unit costs.
Life-cycle costing tries to take account of all costs and all production over the entire life of the
product which can lead to much more sensible decisions regarding, for example, the pricing policy.
5 Total quality management

Poor quality costs a company money. This can be for two reasons firstly, if the workers are not
performing well there is high wastage and excess labour costs if they work slowly. Secondly, if
poor quality goods are delivered to customers then there is the cost of replacing faulty goods, or
guarantee work, and of lost goodwill.
There is a much greater focus these days on improving quality and reducing the costs associated
with poor quality. This can involve such things as employing better skilled workers, training
employees better, and also the cost of greater quality control procedures to try and avoid delivering
poor quality goods to the customers.
Total quality management involves getting the entire workforce motivated to improve quality, and
assessing the costs and benefits involved in improving quality.
Chapter 15
ACCA F2 / FIA FMA
BUDGETING
1 Introduction
Budgeting is an essential tool for management accounting for both planning and controlling
future activity. In this chapter we will discuss the benefits of budgeting, the types of budget, and
the preparation of budgets.
2 What is budgeting
Most companies prepare budgets generally once a year they budget for the coming year.
Although this usually includes a forecast Income Statement for the year, the budget is actually a
set of plans.
For example, a manufacturing company needs to plan their material and labour requirements for
the coming year. In order to do this they will generally have to forecast their expected sales units
for the year i.e. a sales budget. Then they will be in position to budget their production units for
the year i.e. a production budget. Once they have budgeted how many units to produce they are in
a position to estimate how much material and how much labour they will require i.e. a materials
usage budget and a labour budget.
None of the budgets so far mentioned will be in money terms they will be expressed in units
of production, or kg of material, or hours of labour but they each represent a plan for the year.
When all the individual budgets (or functional budgets) have been prepared, then it will be
possible to cost them out in money terms and prepare a forecast Income Statement.
3 Benefits of budgeting
Planning
Controlling
Co-ordination
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Chapter 15
Authorising and delegating
Evaluation of performance
Communicating and motivating
4 Principal budget factor

As previously discussed, the budget needs to be prepared in stages for example we normally will
need to know the budget production (in units) before we can budget how much material will be
needed (in kg).
The first thing that the person in charge of the budget process must do is decide where to start!
For most companies the starting point will be a sales budget. Once it has been decided how many
units the company expects to sell it is then possible to produce a production budget and so on.
However, this will not always be the starting point. Suppose, for example, that the company is a
manufacturer of desks for which wood is the main material. Suppose also that during the coming
year there is expected to be only a limited supply of wood available. In this situation the starting
point will be to budget the amount of wood available, then budget how many units the company
is capable of producing (a production budget) and then how many they expect to sell (a sales
budget).
In general terms, the first budget to be prepared should be whatever factor it is that limits the
growth of the company it may be the level of demand (so a sales budget will be prepared first)
or, as for the example in the previous paragraph, it may be the availability of raw material (so a
material budget will be prepared first).
The factor that limits the company is known as the principal budget factor. The management
accountant needs to identify the principal budget factor and it is this factor that will be budgeted
first.
ACCA F2 / FIA FMA
Budgeting
Chapter 15
5 The preparation of budgets

E xample 1
The XYZ company produces three products, X, Y, and Z. For the coming accounting period budgets are to be
prepared using the following information:
Budgeted sales

Product X
Product Y
Product Z
2,000 units at $100 each

Standard usage of raw material

Wood
Product X
Product Y
Product Z
Standard cost of raw material
Inventories of finished goods
Opening
Closing
Inventories of raw materials
Opening
Closing
(kg per unit)

5
3
2
$8
500u
600u
Y
800u
1,000u
Varnish
(litres per unit)
2
2
1
$4
Z
700u
800u
Wood
Varnish
(litres)
10,000
9,000
(kg)
21,000
18,000
Labour
Standard hours per unit
Labour is paid at the rate of $3 per hour
X
4
Y
6
Z
8
Prepare the following budgets:

(a)
Sales budget (quantity and value)
(b)
Production budget (units)
(c)
Material usage budget (quantities)
(d)
Material purchases budget (quantities and value)
(e)
Labour budget (hours and value)
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Budgeting
Chapter 15
6 Type of budgets
Fixed budget
Flexed budget
Flexible budget
E xample 2
A company has prepared the following fixed budget for the coming year.
Sales
Production
Direct materials
Direct labour
Variable overheads
Fixed overheads
10,000 units
10,000 units
$
50,000
25,000
12,500
10,000
$97,500
Budgeted selling price $10 per unit.

At the end of the year, the following costs had been incurred for the actual production of 12,000 units.
Direct materials
Direct labour
Variable overheads
Fixed overheads
$
60,000
28,500
15,000
11,000
$114,500
The actual sales were 12,000 units for $122,000

(a) Prepare a flexed budget for the actual activity for the year
(b) Calculate the variances between actual and flexed budget, and summarise in a form suitable for
management.

(Use a marginal costing approach)
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Chapter 15
Budgeting
ACCA F2 / FIA FMA
Chapter 15
TEST
Q uestion 1
Which of the following best describes a flexible budget?
A
A budget which shows variable production costs only.
A monthly budget which is changed to reflect the number of days in the month.
A budget which shows sales revenue and costs at different levels of activity.
A budget that is updated halfway through the year to incorporate the actual results for the first
half of the year.
Q uestion 2
The following statements relate to aspects of budget administration:
Statement (1): An important task of a budget committee is to ensure that budgets are properly coordinated.
Statement (2): A budget manual is the document produced at the end of the budget setting process.
Which of the following is true?
A
Only statement (1) is correct.
Only statement (2) is correct.
Both statements are correct.
Q uestion 3
The following statements refer to spreadsheets:
(i) A spreadsheet is the most suitable software for the storage of large volumes of data.
(ii) A spreadsheet could be used to produce a flexible budget.
(iii) Most spreadsheets contain a facility to display the data in a graphical form.
Which of these statements are correct?
A
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
Q uestion 4
Which of the following best describes a principal budget factor?
A
A factor that affects all budget centres.
A factor that is controllable by a budget centre manager.
A factor which limits the activities of an organisation.
A factor that the management accountant builds into all budgets.
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Chapter 16
ACCA F2 / FIA FMA
BEHAVIOURAL ASPECTS OF BUDGETING
1 Introduction
In the previous chapter we looked at how budgets are prepared. In this chapter we will consider
how the budget can affect the behaviour of managers.
2 Motivation
An important use of budgets is for them to become the targets for managers. This will only work
if our managers are motivated to attempt to achieve (or to perform better than) the targets that
have been set.
It is therefore important that consideration is given as to how best to motivate the managers.
3 Factors that influence motivation

The main factors influencing how well the managers will be motivated are:
(a) to what extent they were involved in preparing the budgets and therefore in setting the targets
(b) how easy or difficult will it be for the managers to achieve the targets
(c) how the managers will be rewarded for achieving their targets (or punished for not achieving
them!)
We will consider each of these factors briefly in the following paragraphs.
4 Participation in the preparation of budgets

There are two basic approaches to the way budgets are prepared:
(a) one approach is for top management to prepare the budgets and then to impose them on their
managers. This is known as top-down budgeting
(b) the alternative approach is to get the managers to prepare their own budgets and for top
management to then approve them (after obviously due discussion). This is known as bottomup budgeting.
The second approach bottom-up budgeting is a participative approach and is regarded as
being more motivational for the managers because they were involved in setting their own targets.
The danger is that they deliberately budget targets that are easy for them to achieve it is up to top
management to be aware of this and to question the managers well before approving the budgets.
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Chapter 16
5 The impact of targets

It is important that the targets are demanding of the managers the purpose of them is to help
improve the performance of the business but at the same time they need to be achievable by the
managers. If the manager feels that it is simply not possible to achieve his or her target, then there
is the danger that they just stop trying completely.
6 Incentive schemes
The most common way of motivating managers to improve is to reward them - the level of the
reward being dependent on the degree to which they achieve, or better, their targets.
The reward can be given in several ways, such as the following:
(a) the promise of promotion
(b) an increase in salary
(c) a cash bonus
(d) a bonus given in shares in the company
Chapter 17
ACCA F2 / FIA FMA
SEMI-VARIABLE COSTS
1 Introduction
The chapter relates to semi-variable costs i.e. part fixed and part variable. It may be necessary
for you in the examination to identify the fixed and variable elements and in this chapter we will
revise the high-low method and also explain Regression Analysis.
2 High-Low Method
This is a quick and easy approach that estimates fixed and variable costs by comparing the highest
and lowest activity levels.
E xample 1
Electricity costs for the first 6 months of the year are as follows:
January
February
March
April
May
June
Units produced
340
300
380
420
400
360
Cost ($)
2,260
2,160
2,320
2,400
2,300
2,266
Calculate the fixed and variable costs using the high-low method.
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Chapter 17
3 Problems with the high-low approach
ACCA F2 / FIA FMA
Semi-Variable Costs
Chapter 17
4 Regression
If there is a reasonable degree of linear correlation between two variables, we can use regression
analysis to calculate the equation of the best fit for the data.
This is known as least squares linear regression.
If the equation relating two variables, and y, is
y = a + bx
then the values of a and b may be calculated using the following formulae (which are given in the
examination)
xy x y
n x ( x )
y b x
a=
b=
E xample 2
The following table shows the number of units produced each month and the total cost incurred:
Units
January
February
March
April
May
June
July
100
400
200
700
600
500
300
Cost
($ 000)
40
65
45
80
70
70
50
Calculate the regression line, y = a + bx
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Chapter 17
5 Problems with regression analysis
ACCA F2 / FIA FMA
Semi-Variable Costs
Chapter 17
6 The correlation coefficient

Pearsons correlation coefficient is a measure of how linear the relationship between variables is.
A correlation coefficient of +1 indicates perfect positive linear correlation, whereas -1 indicates
perfect negative linear correlation.
The further away from + or 1, the less linear correlation exists.
The correlation coefficient may be calculated using the following formula (which is given to you
in the examination)
r=
n xy x y
(n x ( x) )(n y ( y) )
2
E xample 3
Using the data in example 2, calculate the correlation coefficient
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Chapter 17
7 Coefficient of determination
The coefficient of determination is the square of the coefficient of correlation (r2).
It is a measure of how much of the variation in the dependent variable is explained by the variation
of the independent variable.
Semi-Variable Costs
ACCA F2 / FIA FMA
Chapter 17
TEST
Q uestion 1
Regression analysis is being used to find the line of best fit (y = a + bx) from eleven pairs of data. The calculations
have produced the following information:
x = 440, y = 330, x2 = 17,986, y2 = 10,366, xy = 13,467 and b = 0.69171
What is the value of a in the equation for the line of best fit (to 2 decimal places)?
A
0.63
B 0.69
C 2.33
D 5.33
Q uestion 2
Which of the following is NOT a feasible value for the correlation coefficient?
A
+1.4
B +0.7
C 0
D 0.7
Q uestion 3
The correlation coefficient between advertising expenditure and sales revenue is calculated to be 0.85.
Which of the following statements is true?
A
There is a weak relationship between advertising expenditure and sales revenue
85% of the variation in sales revenue can be explained by the corresponding variation in advertising
expenditure
72% of the variation in sales revenue can be explained by the corresponding variation in advertising
expenditure
Sales revenue will increase by 85% more than advertising expenditure will increase
Q uestion 4
X Ltd has recorded the following data for two recent periods.
Transport costs
Deliveries made
$
9,680
840
9,860
930
The transport costs for a particular period could be represented by:
A
$10.60 number of deliveries
$11.52 number of deliveries
$8,000 ($2 number of deliveries)
$8,000 + ($2 number of deliveries)
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Chapter 17
Q uestion 5
Berry has recorded the following costs over the last six months:
Month
Total cost
Units produced
000
000
1
74
3
2
72.75
1.75
3
73.25
2
4
75
2.5
5
69.5
1.5
6
72.75
2
Using the high - low method what would be the total cost equation?
A
Total cost = 61,250 + 5.5 Quantity
Total cost = 65,000 + 3 Quantity
Total cost = 70,250 + 1.25 Quantity
Total cost = 71,000 + 1 Quantity
ACCA F2 / FIA FMA
Chapter 18
TIME SERIES ANALYSIS
1 Introduction
Managers often wish to look at the trend of costs or sales over time as a basis for forecasting the
future. It is unlikely in practice that past results will follow a smooth pattern for various reasons.
Of particular interest to us in this chapter are seasonal variations which we can attempt to identify.
2 Definitions
Time series:
a set of observations taken at equal intervals of time e.g. monthly
Variations in observations:
Trend:
the underlying pattern of a time series when the
short term fluctuations have been smoothed out.
Cyclical Variations: the wave-like appearance of a number of time series
graph when taken over a number of years. Generally
this corresponds to the influence of booms and
slumps in the industry.
Seasonal variations: the regular rise and fall over shorter periods of time.
For example, umbrella sales are likely to be higher
than average every winter and lower than average
every summer.
Random (residual) variations:
these are other, unpredictable variations.
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Chapter 18
3 Moving averages
In order to estimate the trend and the seasonal variations, we use the method of moving averages.
E xample 1
Set out below are the sales per quarter (in 000s of units) of a company over the last 3 years.
2000
2001
2002
1
80
90
105
Quarter
2
3
87
82
95
93
112
103
4
90
102
116
Identify the trend and calculate the average seasonal variation.
ACCA F2 / FIA FMA
Chapter 18
4 The multiplicative model

In the previous example we calculated the seasonal variations in terms of units.
However, if the trend is increasing it would perhaps be more sensible to accept an increasing
seasonal variation.
The multiplicative model deals with this by measuring the actual seasonal variation as a
percentage of trend.
E xample 2
Using the data from example 1 together with the trend already calculated, calculate the average seasonal variation using the multiplicative model.
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Chapter 18
Chapter 19
ACCA F2 / FIA FMA
INDEX NUMBERS
1 Introduction
The purpose of index numbers is to show the rate of change of a variable from one specified time
to another. The most common use is as a way of measuring the effect of inflation on prices.
2 Simple index numbers

Simple index numbers are based on a single item. There are two types: price relative and quantity
relative.
A price relative index number shows changes in the price of an item over time.
A quantity relative index number shows changes in quantity over time.
Simple price index =
Simple quantity index =
P1
100
P0
q1
100
q0
E xample 1
The price of coffee was $2.40 in 2006, $2.50 in 2007, and $2.60 in 2008
Calculate the price index for 2007 and 2008 using 2006 as base year.
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Index Numbers
Chapter 19
E xample 2
Sales of tea were 8,200 packets in 2008, 9,000 packets in 2009 and 9,400 packets in 2010.
Calculate the quantity index for 2009 and 2010 using 2008 as a base year.
3 Laspeyre and Paasche index numbers

In order, for example, to measure the overall effect of inflation, it is more sensible to consider the
change in price of a typical shopping basket of goods rather than looking at just one item.
To make sure that we are only measuring the effect of price inflation, it is important to compare
the same shopping basket in terms of quantities.
The Laspeyre price index uses base period quantities, whereas the Paasche price index uses
current period quantities.
Laspeyreprice index =
Paasche priceindex =
(p q ) 100
(p q )
1
(p q ) 100
(p q )
1
ACCA F2 / FIA FMA
Index Numbers
Chapter 19
E xample 3
Below are stated the quantities and unit prices for a typical shopping basket in each of the year 2008, 2009,
and 2010.
Coffee
Sugar
Bread
2008
quantity price p.u.
20
$4.00
15
$0.60
30
$0.80
2009
quantity price p.u.
15
$4.50
18
$0.70
35
$1.00
2010
quantity price p.u.
15
$4.80
20
$1.00
40
$1.10
Calculate price index numbers for 2009 and 2010, with 2008 as a base year, using:
(a) Laspeyre
(b) Paasche
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Chapter 19
4 Advantages and disadvantages

Laspeyre price index
Paasche price index
ACCA F2 / FIA FMA
Index Numbers
Chapter 19
TEST
Q uestion 1
In a time series analysis, the additive model is used to forecast sales and the following seasonal variations
apply:
Quarter
Seasonal variation
1
+5.8
2
-8.4
3
+10.2
4
?
The seasonal variation for quarter 4 is:

A +7.6
B -8.1
C -7.6
D +8.1
Q uestion 2
5 years ago an item was costing $10.
The relevant index number 5 years ago was 125.
The same index now stands at 220.
What is the current cost of the item?
A $5.68
B $17.60
C $22.00
D $12.50
Q uestion 3
In 2008 a company purchased 10,000 kg of material for a total cost of $25,000.
In 2011 they purchased 12,000 kg of the same material and paid a total of $38,000.
What is the 2011 price index for this material (with 2008 as base year)?
A 120
B 152
C 127
D 118
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Chapter 19
Q uestion 4
In 2009 a company purchased 20,000 kg of material at a total cost of $32,000.
The relevant index number in 2009 was 185.
In 2011 the index number was 220 and the company purchased 13,000 kg of material.
What is the total cost of the material purchased in 2011 (to the nearest $00)?
A $38,100
B $17,500
C $24,700
D $20,800
Chapter 20
ACCA F2 / FIA FMA
INTEREST
1 Introduction
The purpose of this chapter and the next chapter is to consider a key area for management
accountants the appraisal of capital investments.
In this chapter we will look at interest on capital and continue in the next chapter with the use of
these techniques in investment appraisal.
2 Simple interest
A sum of money invested or borrowed is known as the principal.
When money is invested it earns interest; similarly when money is borrowed, interest is payable.
With simple interest, the interest is receivable or payable each year, but is not added to the
principal.
E xample 1
A man invests $200 on 1 January each year. On 31 December each year simple interest is credited at 15% but
this interest is put in a separate account and does not itself earn interest.
Find the total amount standing to his credit on 31 December following his fourth payment of $200.
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Chapter 20
3 Compound interest
With compound interest the interest is added each year to the principal and in the following year
the interest is calculated on the total.
E xample 2
A man invests $500 now for 3 years with interest at 10% p.a.
How much will be in his account after 3 years?
The amount (A) at the end of the nth year is given by:
A = P(1+r)n
This is also known as the future value (or terminal value)
E xample 3
A man invests $800 at 6%p.a. for 5 years.
How much will be in his account at the end of 5 years?
Interest
ACCA F2 / FIA FMA
Chapter 20
4 Effective Rate
For simplicity, the previous compound interest examples have assumed that interest is calculated
only once a year.
However in practice interest may be calculated on a monthly or even daily basis. The same formula
can still be used, but we need to distinguish between the nominal and annual percentage rates.
There are usually two rates quoted by financial institutions. The first is the nominal rate and the
other, the rate actually earned, is known as the effective or the annual percentage rate (APR).
E xample 4
A credit card company charges a nominal rate of 2% per month.
If a customer has purchased $100 worth of goods on his credit, calculate the amount she will owe after
one year, and also the annual percentage rate (APR)
5 Discounting
In the previous example we calculated the future value of cash flows by adding on (or compounding)
the interest.
We can do the same exercise in reverse to calculate the amount now that is equivalent to future
flows, by removing interest.
This exercise is known as discounting and the equivalent amount is known as the present value.
E xample 5
What amount now is equivalent to $800 in 4 years time, with interest at 10% p.a.?
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Interest
Chapter 20
The formula for this is

P=
A
(1+r)n
1
However tables are provided in the examination which give the discount factors
at
n
(1+r)
different rates of interest for different numbers of years.
E xample 6
What is the present value of $2,500 receivable in 12 years time, with interest at 13% p.a.?
6 Annuities
An annuity is regular payment of the same amount each year.
The present value of an annuity is given by the formula:
1
A 1
(1+r)n
P=
r
but again, tables are provided for this in the examination.
E xample 7
Interest rate is 12% p.a.
What is the present value of $500 receivable in 1 years time and thereafter every year for a total of 8
receipts?
ACCA F2 / FIA FMA
Interest
Chapter 20
E xample 8
A man expects to receive $1,000 in each of 9 years, with the first receipt being in 4 years time.
What is the present value of the receipts if interest is 8% p.a.?
7 Perpetuities
Perpetuity is an annuity that is expected to continue for an indefinitely long period of time.
The present value of a perpetuity is given by the formula:
P=
A
r
E xample 9
Interest rate is 12% p.a.
What is the present value of $5,000 receivable in 1 years time and thereafter in perpetuity?
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Chapter 20
TEST
Q uestion 1
A man invests $600 for a period of 8 years.
Interest is compounded at the rate of 5% per annum for the first 3 years, and 6% per annum for the remaining
5 years.
How much will he have at the end of 8 years (to the nearest $)?
A $956
B $870
C $912
D $929
Q uestion 2
A credit card company charges interest at the rate of 1.5% per month.
What is the effective annual rate of interest (or APR)?
A 17.80%
B 18.00%
C 19.56%
D 21.36%
Q uestion 3
What is the present value of $3,000 receivable in 15 years time, with interest at 8% per annum?
A $825
B $1,040
C $945
D $2,760
Q uestion 4
What is the present value of $2,000 per annum, first receivable in 3 years time and thereafter each
year for a total of 8 years, with interest at 5% per annum (to the nearest $00?
A $11,700
B $10,000
C $12,900
D $11,200
Q uestion 5
What is the present value of $6,000 per annum first receivable immediately, and thereafter in
perpetuity, with interest at 9.5% per annum?
A $63,158
B $66,000
C $69,158
D $60,000
Chapter 21
ACCA F2 / FIA FMA
INVESTMENT APPRAISAL
1 Introduction
In this chapter we will apply the discounting techniques covered in the previous chapter to the
appraisal of capital investments.
2 Net Present Value

Under this approach to investment appraisal we look at all the expected cash flows that will arise
from an investment.
If overall the investment generates a cash surplus then we will accept and invest; if however there
is an overall cash deficit then we will reject the investment.
However, we also need to take into account interest on the investment in the project. This is either
because we have needed to borrow money and therefore be paying interest, or because we are
using money that could otherwise have been invested and be earning interest.
In either case, we account for the interest by discounting the future cash flows to get the present
value. The overall surplus or deficit is known as the Net Present Value.
E xample 1
A new project will cost $80,000 and is expected to last 4 years. At the end of 4 years it is expected to have a
scrap value of $10,000.
The project is expected to generate operating cash flows each year as follows:
Year 1
Year 2
Year 3
Year 4
20,000
30,000
40,000
10,000
Assume that all operating cash flows occur at the ends of years.
If interest is 10% p.a., calculate the Net Present Value of the project and state your decision as to
whether or not we should invest.
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Chapter 21
3 Internal Rate of Return

One problem in practice with basing our decision on the Net Present Value is that it will usually be
impossible for a company to determine their cost of capital (or interest cost) accurately.
In these circumstances, it is therefore often useful to calculate a breakeven interest rate of the
project.
This is known as the Internal Rate of Return (IRR) and is the rate of interest at which the project
gives a NPV of zero.
E xample 2
For the project detailed in Example 1.
Calculate the net present value at interest of 15% and hence estimate the Internal Rate of Return of
the project.
ACCA F2 / FIA FMA
Chapter 21
4 Payback Period
One problem with basing decision on the net present value of a project is that the cash flows are
only estimates, and if the estimate are wrong then the decision could be wrong.
It is likely to be the earlier cash flows that are the most certain whereas the further into the future
that we are estimating the more uncertain the cash flows are likely to be.
The payback period is the number of years it takes to get back the original investment in cash
terms. The shorter the payback period, the more certain we are that the project will actually pay
for itself.
The discounted payback period is exactly the same except that it takes into account the time
value of money by measuring how many years it takes to get back the original investment looking
at the discounted cash flow each year.
E xample 3
A new project will cost $100,000 and will last for 5 years with no scrap value.
The project is expected to generate operating cash flows each year as follows:
Year 1 20,000
Year 2 30,000
Year 3 40,000
Year 4 50,000
Year 5 30,000
The cost of capital is 10%
(a) Calculate the payback period
(b) Calculate the discounted payback period
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Chapter 21
ACCA F2 / FIA FMA
Chapter 21
TEST
T he
to
A company is considering investing in a new machine that will cost $270,000 and will last for 4 years with a
scrap value at the end of 4 years of $20,000.
It is expected to generate operating cash inflows each year as follows:
Year 1:
Year 2:
Year 3:
Year 4
$50,000
$180,000
$100,000
$50,000
The cost of capital is 12% per annum.

Q uestion 1
What is the net present value of the machine (to the nearest $000)?
A $21,110
B $31,640
C $32,450
D $33,830
Q uestion 2
What is the Internal Rate of Return of the machine (to the nearest %)?
A 16%
B 17%
C 18%
D 19%
Q uestion 3
What is the payback period for the machine?
A
Within 1 year
Within 2 years
Within 3 years
Within 4 years
Q uestion 4
What is the discounted payback period for the machine?
A
Within 1 year
Within 2 years
Within 3 years
Within 4 years
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Chapter 21
Chapter 22
ACCA F2 / FIA FMA
VARIANCE ANALYSIS
1 Introduction
In earlier chapters we looked at the layout of the management accountants profit statements.
Unlike the financial accountant, the purpose for the management accountant is to explain (usually
monthly) why the actual profit is different from the budgeted profit.
If the reasons for the difference can be identified, the information can be used for control purposes
e.g. an overspend in one month can be investigated and attempts made to correct any problem for
future months.
2 Total variances
E xample 1
A company has prepared the following standard cost card:
$ per unit
Materials (4 kg at $4.50 per kg)
18
Labour (5 hrs at $5 per hr)
25
Variable overheads (5 hrs at $2 per hr)
10
15
Fixed overheads (5 hrs at $3 per hr)
$68
Budgeted selling price $75 per unit.
Budgeted production
Budgeted sales
There is no opening inventory
8,700 units
8,000 units
The actual results are as follows:

Sales:
8,400 units for $613,200
Production:
8,900 units with the following costs:
Labour (Paid 45,400hrs; worked 44,100 hrs)
Variable overheads
Fixed overheads
163,455
224,515
87,348
134,074
Prepare a flexed budget and calculate the total variances
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Chapter 22
Variance Analysis
ACCA F2 / FIA FMA
Chapter 22
3 Analysis of cost variances

The total variance that we have calculated for materials indicates that the actual expenditure on
materials was not $18 per unit. However, this could be either because we used the wrong amount
of materials (which should have been 4 kg per unit) or that we paid the wrong price (which should
have been $4.50 per kg). More likely of course, it would be a combination of the two.
We will therefore analyse this and the other variances in as much detail as possible.
E xample 2
Using the data from example 1, analyse each of the cost variances.
Materials
Labour
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Chapter 22
Variable Overheads
Fixed Overheads
Variance Analysis
ACCA F2 / FIA FMA
Chapter 22
4 Sales Variances
Although we have already calculated the sales variances in example 1, you may be asked to calculate
them independently.
E xample 3
Using data from example 1, calculate the Sales price variance and the Sales volume variance
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Chapter 22
5 Marginal costing
In the previous examples, the company had been using absorption costing. They could alternatively
have been using marginal costing. The variances are all calculated exactly as before, with the
exception of the sales volume variance, and the fixed overhead variance.
E xample 4
Using data from example 1, calculate the sales volume variance and the fixed overhead variance, on the
assumption that the company is using marginal costing.
Variance Analysis
6 Interpretation of variances
E xample 5
In the previous example there was a materials price variance.
Suggest possible reasons for its occurrence.
ACCA F2 / FIA FMA
Chapter 22
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Variance Analysis
Chapter 22
Test
Q uestion 1
A companys budgeted sales for last month were 10,000 units with a standard selling price of $20 per unit and
a standard contribution of $8 per unit. Last month actual sales of 10,500 units at an average selling price of
$19.50 per unit were achieved.
What were the sales price and sales volume contribution variances for last month?
A
B
C
D
Sales price variance ($)

5,250 Adverse
5,250 Adverse
5,000 Adverse
5,000 Adverse
Sales volume contribution variance ($)

4,000 Favourable
4,000 Adverse
4,000 Favourable
4,000 Adverse
THE FOLLOWING INFORMATION RELATES TO QUESTIONS 2 AND 3:
A company uses standard costing and the standard variable overhead cost for a product is:
6 direct labour hours @ $10 per hour.
Last month when 3,900 units of the product were manufactured, the actual expenditure on variable overheads
was $235,000 and 24,000 hours were actually worked.
Q uestion 2
What was the variable overhead expenditure variance for last month?
A
$5,000 Adverse
$5,000 Favourable
$6,000 Adverse
$6,000 Favourable
Q uestion 3
What was the variable overhead efficiency variance for last month?
A
$5,000 Adverse
$5,000 Favourable
$6,000 Adverse
$6,000 Favourable
Q uestion 4
When a manufacturing company operates a standard marginal costing system there are no fixed production
overhead variances.
A
True
B False
ACCA F2 / FIA FMA
Variance Analysis
Chapter 22
Q uestion 5
A company operates a standard costing system. The variance analysis for last month shows a favourable
materials price variance and an adverse labour efficiency variance.
The following four statements, which make comparisons with the standards, have been made:
(1) Inferior quality materials were purchased and used.
(2) Superior quality materials were purchased and used.
(3) Lower graded workers were used on production.
(4) Higher graded workers were used on production.
Which statements are consistent with the variance analysis?
A
(1) and (3)
(1) and (4)
(2) and (3)
(2) and (4)
Q uestion 6
A company operates a standard absorption costing system. The standard fixed production overhead rate is
$15 per hour.
The following data relate to last month:
Actual hours worked
5,500
Budgeted hours
5,000
Standard hours for actual production
4,800
What was the fixed production overhead capacity variance?
A
$7,500 Adverse
$7,500 Favourable
$10,500 Adverse
$10,500 Favourable
Q uestion 7
A company uses standard absorption costing. The following data relate to last month:
Budget
Actual
Sales and production (units)
1,000
900
Standard
Actual
$
$
Selling price per unit
50
52
Total production cost per unit
39
40
What was the adverse sales volume profit variance last month?
A
$1,000
$1,100
$1,200
$1,300
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Chapter 22
Q uestion 8
A company operates a standard marginal costing system. Last month actual fixed overhead expenditure was
2% below budget and the fixed overhead expenditure variance was $1,250.
What was the actual fixed overhead expenditure for last month?
A
$61,250
$62,475
$62,500
$63,750
Q uestion 9
Last month 27,000 direct labour hours were worked at an actual cost of $236,385 and the standard direct
labour hours of production were 29,880. The standard direct labour cost per hour was $850.
What was the labour efficiency variance?
A
$17,595 Adverse
$17,595 Favourable
$24,480 Adverse
$24,480 Favourable
Chapter 23
ACCA F2 / FIA FMA
PERFORMANCE MEASUREMENT OVERVIEW
1 Introduction
This chapter introduces the idea of performance measurement and its importance for the
management accountant.
2 The Mission Statement

This statement expresses the overall purpose of the organisation.
It will generally contain four elements:
a purpose
why the company exists
a strategy the range of activities in which the business intends to compete, and
how it intends to compete
policies and standards
guidelines which help staff decide what to do to carry out the strategy
values the beliefs and moral principles which lie behind the firms culture
Here is an example of an actual mission statement:

McDonalds vision is to be the worlds best quick service restaurant experience. Being the
best means providing outstanding quality, service, cleanliness, and value, so that we make
every customer in every restaurant smile
3 Goals and Objectives

Having decided on the companys mission, it is then necessary to have goals and objectives.
Goals are statements of general intentions, whereas objectives are more specific.
An example of a goal is:
to improve profits
An example of an objective is:
to increase the profit by 20% within 2 years.
4 Critical Success Factors and Key Performance Indicators

Having decided on the objectives of the business, it is important that we measure how well they
are achieving these objectives.
There are two parts to this. First they must decide what are the critical success factors (CSFs)
the performance requirements that are most fundamental to being successful.
For example, two of McDonalds CSFs could be quality, and speed of service.
Secondly, they must then decide how they are going to measure their performance in these areas.
For this they need key performance indicators (KPIs) aspects to which they can actually put
numbers to, that indicate whether they are doing better or worse.
For example, McDonalds might decide to measure quality by asking customers to complete a
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Paper F5
Chapter 23
form scoring the quality between 1 to 5, and then recording the average score. They could decide
to measure speed of service by keeping records of the time taken to serve each customer and
recording the average service time in minutes.
As you will see in later chapters, it is important that a company has a range of KPIs both financial
(measuring, for example, profitability) and non-financial (measuring, for example, quality).
Chapter 24
ACCA F2 / FIA FMA
FINANCIAL PERFORMANCE MEASUREMENT
1 Introduction
Financial statements are prepared to assist users in making decisions. They therefore need
interpreting, and the calculation of various ratios makes it easier to compare the state of a company
with previous years and with other companies.
In this chapter we will look at the various ratios that you should learn for the examination.
2 The main areas

When attempting to analyse the financial statements of a company, there are several main areas
that should be looked at:
Profitability
Liquidity
Gearing
We will work through an example to illustrate the various ratios that you should learn under each
heading.
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ACCA F2 / FIA FMA
Chapter 24
3 Worked example
example
Statements of Financial Position as at 31 December

2007
$
ASSETS
Non-current assets
Current assets
Inventory
Receivables
Cash
1,006
948
360
EQUITY AND LIABILITIES

Share capital and reserves
Non-current liabilities
Current liabilities
2006
$
1,341
2,314
3,655
826
871
708
100
1,679
2,505
2,190
1,401
500
400
965
3,655
704
2,505
Income statement for the year ended 31 December

2007
2006
$
$
Revenue
7,180
5,435
Cost of sales
5,385
4,212
Gross profit
1,795
1,223
Distribution costs
335
254
Administrative expenses
670
507
Profit from operations
790
462
Finance costs
50
52
Profit before taxation
740
410
Company tax expense
262
144
Profit after taxation
478
266
You are required to calculate the profitability, liquidity and gearing ratios.
Profitability
Return on capital employed
Profit before interest and tax

Total long term capital
(= capital + reserves + long-term liabilities)
ACCA F2 / FIA FMA

Net profit margin
Asset turnover
Chapter 24
Profit before interest and tax
Revenue
Revenue
Total long term capital
NB: ROCE = asset turnover net profit margin
Gross profit margin
Gross profit
Revenue
Liquidity
Current ratio
Quick ratio (or acid test)
Current assets
Current liabilities
Current assets Inventory

Current liabilities
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ACCA F2 / FIA FMA
Chapter 24
Inventory
Cost of sales
365 days
Inventory days
Average collection period

(receivables days)
Average payment period

(payables days)
Trade payables
Purchases
Non-current liabilities
Share capital and reserves
Trade receivables
365 days
Revenue
365 days
Gearing
Gearing
4 Limitations of ratio analysis

You must learn the various ratios, however, it is important that you are able to discuss briefly the
relevance of the various ratios, and also their limitations.
Very few of the ratios mean much on their own most are only useful when compared with the
ratios for previous years or for similar companies.
Many of the ratios use figures from the Statement of Financial Position. These only represent the
position at one point in time, which could be misleading. For example, the level of receivables
could be unusually high at the year end, simply because a lot of invoicing was done just before
the year end. Perhaps more sensible in that sort of case would be to use the average for the year.
Normally in the examination you will be expected simply to use Statement of Financial Position
figures at the end of the year, but do be prepared to state the problem if relevant.
ACCA F2 / FIA FMA
Chapter 24
TEST
T he
to
5.
The accounts of Lola plc for year ended 31 December 2010 include the following information:
Revenue 7,200
Gross profit
2,376
Net profit
1,080
Inventory
300
Trade receivables
624
Cash 1,608
Trade payables
1,890
Q uestion 1
Calculate the net profit percentage.
A 33%
B 66%
C 15%
D 85%
Q uestion 2
Calculate the gross profit percentage.
A 33%
B 66%
C 15%
D 85%
Q uestion 3
Calculate the receivables payment period (all sales are on credit).
A
211 days
95 days
49 days
32 days
Q uestion 4
Calculate the current ratio.
A 1.18
B 1.34
C 0.49
D 0.75
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ACCA F2 / FIA FMA
Chapter 24
Q uestion 4
Calculate the quick ratio.
A 1.18
B 1.34
C 0.49
D 0.75
Chapter 25
ACCA F2 / FIA FMA
NON-FINANCIAL PERFORMANCE
MEASUREMENT
1 Introduction
In the previous chapter we looked at various measures of financial performance. However it is
important to have a range of performance measures considering non-financial and well as financial
matters. This is particularly important in the case of service businesses where such things as
quality are of vital importance if the business is to grow in the long-term.
In this chapter we will consider the various areas where performance measures are likely to be
needed.
Various authors have summarised the areas in different ways two well-known ones are Fitzgerald
and Moons Building Blocks, and Kaplan and Nortons Balance Scorecard. You will not be tested
specifically on Fitzgerald and Moon, or on Kaplan and Norton, but you should be aware of the
areas that they consider important and be able to suggest performance indicators under the
various headings.
2 Fitzgerald and Moon

Fitzgerald and Moon focussed on performance measures for service businesses and suggested the
following areas as needing performance indicators:
Financial performance
Competitive performance
Quality
Flexibility
Resource utilisation
Innovation
139
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ACCA F2 / FIA FMA
Chapter 25
3 Kaplan and Nortons Balance Scorecard

Kaplan and Norton also stated the importance of having a range of perfomance measures and
forming a balance between them. They grouped them under the following headings, which they
called perspectives:
Customer satisfaction perspective
Process efficiency (or internal business) perspective
Growth (or innovation and learning) perspective
Financial perspective
4 Value for money

Of importance to all businesses, but especially for state organisations such as health care, is the
concept of getting value for money.
To achieve value for money, three areas should be considered:
Economy
Effectiveness
Efficiency
Paying a fair price for resources
Being successful at what we are trying to achieve
Using resources well getting as much out as possible for what goes in
ACCA F2 / FIA FMA
Chapter 25
TEST
Q uestion 1
Which of the following is not one of the dimensions of performance measurement included in
Fitzgerald and Moons building blocks?
A
Competitive performance
B Innovation
C Learning
D Quality
Q uestion 2
Which of the following key performance indicators would not be an indicator of quality for a railway
company?
A
The percentage of trains arriving at their destination within 15 minutes of the scheduled arrival
time.
The number of accidents per 1,000 journeys.
A survey of customer satisfaction.
The number of complaints received per 1,000 passengers.
Q uestion 3
As one of its key performance indicators, a restaurant measures the amount of food that is wasted.
Under which perspective would this appear on a balanced scorecard?
A
Financial Success
Customer Satisfaction
Process Efficiency
D Growth
Q uestion 4
Which of the following is not a perspective associated with the balanced scorecard?
A
Financial success
B Quality
C Growth
D
Process Efficiency
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ACCA F2 / FIA FMA
Chapter 25
Chapter 26
ACCA F2 / FIA FMA
DIVISIONAL PERFORMANCE MEASUREMENT
1 Introduction
The previous chapters have concentrated on ways of measuring the performance of a business.
Many businesses are divisionalised in that there are separate managers responsible for separate
parts (or divisions) of the business, and it is important to be able to measure the performance of
individual divisions and of their managers.
Non-financial measures are just as important as for the whole business, but it is with regard
to the financial performance that we need to give a little more thought. It would be misleading
to compare divisions simply on their final profits in that larger divisions would be expected to
report higher profits without necessarily being managed better. It is therefore important that the
profitability is related to the size of the division.
You should be aware of two ways of measuring the profitability of a division the return on
investment (ROI) and the residual income (RI) and these will be explained in the following
paragraphs.
2 Return on Investment (ROI)

Perhaps the most obvious way of measuring the profitability of a division is to express the profit as
a percentage of the amount invested in the division.
Return on Investment =
profit
100%
net assets
E xample 1
A division reports a profit of $50,000 on net assets in their Statement of Financial Position of $400,000.
Calculate the Return on Investment for the division
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ACCA F2 / FIA FMA
Chapter 26
3 Residual Income (RI)

This measure is a little less obvious.
We take the profit of the division, and subtract from it notional (or pretend) interest of a target
rate applied to the net assets from the Statement of Financial Position.
E xample 2
A division reports a profit of $50,000 on net assets in their Statement of Financial Position of $400,000.
The company has a target rate of return of 10%.
Calculate the Residual Income of the division.
4 Advantages and limitations of ROI and RI
ACCA F2 / FIA FMA
Chapter 26
TEST
Q uestion 1
Which of the following is not a feature of the Return on Investment performance measure?
A
It motivates the division manager to try to better the companys target rate of return.
In enables the comparison of the performance of divisions of different sizes.
It motivates the manager to improve the return of the division.
It is an accounts based measure of performance
Q uestion 2
Which of the following items should not be included in the calculation of the controllable profit of a
profit centre?
(i)
(ii)
(iii)
(iv)
The revenue of the division

An allocation of head office expenses
Depreciation on machines
Wages of employees in the division
(i), (ii) and (iii)
(ii), (iii) and (iv)
(ii) and (iii)
(i) and (iv)
T he
and
An investment division currently has net assets of $500,000 and is earning profits of $70,000 per annum.
The divisional manager is considering a new investment which will cost $20,000 and will generate additional
profits of $2,200 per annum.
The company has a cost of finance of 10%.
Q uestion 3
If the performance of the divisional manager is measured on the basis of Return on Investment, will
he:
A
invest in the new machine
not invest in the new machine
Q uestion 4
If the performance of the divisional manager is measured on the basis of Residual Income, will he:
A
invest in the new machine
not invest in the new machine
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ACCA F2 / FIA FMA
Chapter 26
ACCA F2 / FIA FMA
Paper F2
ANSWERS TO EXAMPLES
Chapter 1
No Examples
Chapter 2
No Examples
Chapter 3
No Examples
Chapter 4
Example 6
units
1,000
200
800
High
Low
Difference
Therefore, variable cost =

Using in high,
cost
110,000
30,000
80,000
80,000
= $100 per unit
800
total cost
variable cost
(1,000 $100)
fixed cost
y = 100x +10,000
Therefore,
Therefore,
$110,000
$100,000
$10,000
Chapter 5
Example 1
Order
quantity
Number of
order
500
750
1000
1250
80
53.33
40
32
($20 per order)

Reorder
cost p.a.
(a)
1,600
1,067
800
640
Average
inventory
250
375
500
625
(10%$25=$2.50 p.u.)
Stockholding
Total incost p.a.
ventory
(b)
(a + b)
625
2225
938
2005 *
1250
2050
1563
2203
Example 2
EOQ =
2C o D
CH
Reorder cost:
2 20 40, 000
2.50
= 800 units
40,000
=
800
$
= 50 $20 =
1,000
147
148
ACCA F2 / FIA FMA
Answers To Examples
800
2
= 400 $2.50 =
1,000
Total inventory costs $2,000p.a.
Example 3
Order quantity = EOQ = 800 units:
$
1,000,000
2,000
$1,002,000
Purchase cost: 40,000 $25

Inventory costs
p.a.
Order quantity = 5,000 units

Purchase cost:
Inventory costs:
$
990,000
40,000 99% $25

40,000
5,000
5,000
2
Reorder:
Inventory holding:
= 8 $20 =
160
6,188
= 2,500 99% $2.50 =
$996,348p.a.
Order quantity = 10,000 units

Purchase cost:
Inventory costs:
40,000 98.5% $25
985,000
40,000
= 4 $20 =
10,000
10,000
= 5,000 98.5% $2.50 =
2
Reorder:
Inventory holding:
Order quantity of 5,000 units is the best option.
80
12,313
$997,393p.a.
Example 4
EBQ =
2C o D
=
D
C H (1 )
R
2 200 50, 000

= 2, 722 units
50, 000
)
3 (1
500, 000
Reorder costs:
50, 000
2, 722
2,722
2
200 =
1
3,674
50, 000
$3 = 3,675
500, 000
Total inventory costs $7,349p.a.
Example 5
Re-order level = demand over the lead time = 5 100 = 500 units
Example 6
Demand of the lead time =
500 units (see answer 5)
Safety inventory
100 units
Re-order level
600 units
Example 7
Re-order level = maximum lead time x maximum demand = 4 120 = 480 units
ACCA F2 / FIA FMA
Answers To Examples
Example 8
Re-order level = 480 units (see answer 7)

Minimum demand over lead time = minimum lead time x minimum demand per week = 3 x 70 = 210 units
Therefore, maximum inventory left when the new order arrives = 480 - 210 = 270 units
The new delivery will be of 1,000 units, therefore the maximum inventory = 270 + 1,000 = 1,270 units
Chapter 6
No Answers
Chapter 7
Example 1
Material (3kg $4)
Labour (4hrs $2)
Overheads ($700,000 50,000)
$ p.u.
12
8
14
$34
Example 2
Total overheads
Total labour hours
Desks (30,000 4hr)
Chairs (20,000 1 hr)
Overhead absorption rate:
$700,000
120,000
20,000
140,000hrs
$700,000
140,000 hr
= $5 per hour
Costs cards:
Materials (3kg $4)
Labour (4hrs $2)
Overheads (4kg $5)
Desks
12
8
20
$40
Chairs
(2kg $4)
8
(1hr $2)
2
5
(1hr $5)
$15
149
150
ACCA F2 / FIA FMA
Answers To Examples
Example 3
Total
Assembly Finishing
100,000
60,000
40,000
600,000
240,000
360,000
Total overheads:
Supervisors
Other
(40:60)
$700,000
$300,000
Total hours:
Desks (30,000 3 hr; 30,000 1 hr)
Chairs (20,000 hr; 20,000 hr)
$400,000
90,000
30,000
10,000
10,000
100,000 hrs
40,000 hrs
$3 per hr
$10 per hr
O.A.R
Cost cards:
Materials
Labour
Overheads:
desk
12
8
Assembly
Finishing
Example 4
Factory rent
(cubic space)
Factory Heat
(cubic space)
Supervisors
Depreciation
(NBV equipment)
Canteen
Welfare
(No of employees)
Example 5
Already apportioned
Recharge canteen
(no. of employees)
9
10
chair
1.50
5.00
19
$39
Total
Processing
20,000
12,500
8
2
6.50
$16.50
Packing Canteen
6,250
1,250
5,000
3,125
1,563
312
25,000
7,000
15,000
3,000
10,000
3,000
1,000
18,000
5,000
2,500
2,000
18,000
500
$80,000
$36,125
$22,813
$21,062
Processing
36,125
11,701
$47,826
Packing Canteen
22,813
21,062
9,361 (21,062)
$32,174
ACCA F2 / FIA FMA
Answers To Examples
Example 6
Repeated distribution method
Already allocated
Recharge stores
Stores
20,000
(20,000)
2,850
70,000
10,000
30,000
6,000
Recharge maintenance
8,550
7,600
Recharge stores
1,425
855
257
228
43
25
(85)
1
$90,284
1
$44,716
(2)
Recharge stores
Recharge stores
(2,850)
85
Maintenance
15,000
4,000
19,000
(19,000)
570
(570)
17
(17)
Algebraic method
Stores:
S = 20,000 + 0.15M
(1)
Maintenance
M = 15,000 + 0.20S
(2)
Replace M in (1): S = 20,000 + 2,250 + 0.03S

0.97S = 22,250
S = 22,250/0.97 = $22,938
Replace S in (2): M = 15,000 + 0.20 22,938

M = $19,588
Already allocated
Recharge stores:
($22,938)
Recharge maintenance:
($19,588)
70,000
30,000
Stores
20,000
Maintenance
15,000
11,469
6,881
(22,938)
4,588
8,815
$90,284
7,835
$44,716
2,938
(19,588)
Chapter 8
Example 1
(a)
Cost cards:
Materials (4kg $3)
Labour (4hrs $2)
Var. overheads
Fixed overheads
($20,000/10,000)
Selling price
Standard profit
$ p.u
12
8
5
2
$27p.u
$35p.u
$8p.u
151
ACCA F2 / FIA FMA
Answers To Examples
(b)
Income Statements
Sales
Cost of sales:
Opening inventory
Materials
Labour
Variable o/h
Fixed o/h
(9,000 $35)
(11,000 $12)
(11,000 $8)
(11,000 $5)
(11,000 $2)
Less: Closing inventory

Standard Gross Profit
Adjustment for over/(under)
absorption of fixed overheads
Actual fixed o/hs: 20,000
Absorbed: 22,000
Actual Gross Profit
(9,000 $8)
Less: selling costs

Variable
Fixed
Actual Net Profit
Example 2
74,000
(9,000 $1)
320, 000
(9,000)
(2,000)
$63,000
(2,000 $27)
(9,500 $12)
(9,500 $8)
(9,500 $5)
(9,500 $2)
(11,500 $8)
54,000
114,000
76,000
47,500
19,000
310,500
310,500
92,000
(1,000)
Actual: 20,000
Absorbed: 19,000
(11,500 $1)
91,000
(11,500)
(2,000)
$77,500
=$4 per hour
(a)
Overhead absorption rate =
(b)

Amount absorbed =78,000 $4 = $312,000

Actual overheads = $315,500
Amount under absorbed = 315,500 312,000 = $3,500
80, 000
February
402,500
(11,500 $35)
132,000
88,000
55,000
22,000
297,000
(54,000)
243,000
72,000
2,000
(2,000 $27)
January
315,000
152
Chapter 9
Example 1
(a)
Cost card
Materials (4kg $3)
Labour (4hrs $2)
Var. overheads
Marginal cost
$ p.u
12
8
5
$25 p.u
Selling price
Marginal cost
Variable selling cost
Standard profit
$35 p.u
(25)
(1)
$9 p.u
ACCA F2 / FIA FMA
Answers To Examples
(b)
Income Statements
Sales
Less: Cost of sales:
Opening inventory
Materials
Labour
Variable o/h
(11,000 $12)
(11,000 $8)
(11,000 $5)
Less: Closing inventory
(2,000 $25)
Less: Variable selling costs

Contribution
Less: Fixed costs
Production
Selling
(9,000 $35)
(9,000 $1)
Actual Net Profit
Example 2
January
63,000
59,000
4,000
Absorption costing
Marginal costing
Difference
January
315,000
132,000
88,000
55,000
275,000
(50,000)
225,000
90,000
(9,000)
81,000
(11,500 $35)
(2,000 $25)
(9,500 $12)
(9,500 $8)
(9,500 $5)
(11,500 $1)
February
402,500
50,000
114,000
76,000
47,500
287,500
287,500
115,000
(11,500)
103,500
(20,000)
(2,000)
(20,000)
(2,000)
$59,000
$81,500
February
77,500
81,500
(4,000)
Fixed overheads in inventory value:

Opening inventory (2,000 $2)
Closing inventory (2,000 $2)
4,000
4,000
(4,000)
(4,000)
Chapter 10
Example 1
Materials
Labour
Overheads
Cost per unit
20,000
10,000
8,000
$38,000
$38,000
= $19
2,000 u
Example 2
Materials
Labour
Overheads
Units
2,000
2,000
Process Account
$
20,000
Transfer out
10,000
(2,000 u $19)
8,000
38,000
Units
2,000
$
38,000
2,000
38,000
153
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ACCA F2 / FIA FMA
Answers To Examples
Chapter 11
Example 1
kg
1,000
Materials
Labour
Overheads
1,000
(100)
900
Normal loss (10%)
Cost per kg
Materials
Labour
Overheads
$27,000
900 kg
$
12,000
7,000
8,000
27,000
$27,000
= $30
kg
1,000
1,000
Process Account
$
12,000
Normal loss
7,000
Transfer out
8,000
(at $30)
kg
100
900
27,000
27,000
1,000
27,000
kg
300
$
1,500
2,700
51,300
3,000
52,800
kg
300
$
1,500
3,000
1,500
Example 2
Materials
Labour
Overheads
Normal loss (10%)
Cost per kg
Materials
Labour
Overheads
kg
3,000
$
30,000
12,000
10,800
3,000
52,800
(300) $5 (1,500)
2,700
$51,300
$51,300
= $19
2,700 kg
kg
3,000
3,000
Normal loss
Process Account
$
30,000
Normal loss
12,000
(at $5)
10,800
Transfer out
(at $19)
52,800
Loss Account
kg
300
$
1,500
3,000
1,500
Cash
ACCA F2 / FIA FMA
Answers To Examples
Example 3
Materials
Labour
Overheads
Normal loss (10%)
Cost per kg
Materials
Labour
Overheads
kg
1,000
1,000
(100)
900
$39,600
= $44
900 kg
kg
1,000
1,000
Normal loss
Abnormal loss
$
9,000
18,000
13,500
40,500
(900)
$39,600
Process Account
$
9,000
Normal loss
18,000
Transfer out
13,500
40,500
$
Abnormal loss
(at $44)
Loss Account
kg
100
50
900
2,200
150
3,100
kg
2,000
$
18,000
36,000
27,000
81,000
(1,800)
$79,200
Cash
I/S a/c
kg
100
850
900
37,400
50
2,200
1,000
40,500
kg
150
$
1,350
1,750
150
3,100
Example 4
Materials
Labour
Overheads
Normal loss (10%)
Cost per kg
2,000
(200)
1,800
$79,200
1,800 kg = $44
Process Account
$
kg
Materials
Labour
Overheads
Abnormal Gain
2,000
18,000
36,000
27,000
40
1,760
2,040
82,760
Normal loss
Transfer out
kg
200
1,840
1,800
80,960
2,040
82,760
155
156
ACCA F2 / FIA FMA
Answers To Examples
kg
Normal loss
I.S.
Loss Account
200
1,800
1,400
200
3,200
kg
Abnormal Gain
Cash
40
160
1,760
1,440
200
3,200
Chapter 12
Example 1
(a)
Cost
Equivalent costs:
Finished
W.I.P.
Cost per unit
Materials
$5,000
Labour
$2,760
Overheads
$3,440
800
200
1,000
800
120
920
800
60
860
(100%)
5,000
1,000
Total cost per unit = 5 + 3 + 4 = $12
(b)
Finished output: 800 $12 = $9,600
(c)
2,760
920
= $5
W.I.P.:
Materials:
Labour:
Overheads:
200 u 100% $5
200 u 60% $3
200 u 30% $4
1,000
5,000
2,760
3,440
1,000
11,200
(30%)
3,440
860
= $3
= $4
= 1,000
= 360
= 240
$1,600
Process Account
$
u
Materials
Labour
Overheads
(60%)
Finished
WIP c/f
$
800
200
9,600
1,600
1,000
11,200
Example 2
(a)
W.I.P. b/f
Started
u
15,000
30,000
Units
Finished
(balancing figure)
WIP c/f
45,000
(b)

u
40,000
5,000
45,000
Units started and finished in July

= units finished W.I.P b/f
= 40,000 15,000 = 25,000 units
ACCA F2 / FIA FMA
Answers To Examples
Materials
$24,900
Cost in July
Equivalent units:
Finished W.I.P b/f (15,000u)
Started and finished (25,000u)
Start W.I.P. c/f (5,000u)
(0%)
(100%)
24,900
30,000
Cost per unit

Total cost p.u. = $0.83 + $0.55 = $1.38
(c)
Finished units (40,000)

W.I.P b/f (15,000 units)
Cost b/f (9,000 + 1,250)
Cost of finishing:
Labour & o/h (15,000 60% $0.55)
W.I.P c/f (5,000 units)

Materials (5,000 100% $0.83)
Labour o/h (5,000 50% $0.55)
W.I.P. b/f
Materials
Labour & o/h
= $0.83
(60%)
(50%)
20,075
36,500
9,000
25,000
2,500
36,500
= $0.55
10,250
Started and finished in July (25,000 $ 1.38)
(d)
25,000
5,000
30,000
Lab & o/hs

$20,075
4,950
15,200
34,500
$49,700
4,150
1,375
$5,525
u
15,000
30,000
Process Account
$
10,250
Transferred out
24,900
WIP c/f
20,075
u
40,000
5,000
$
49,700
5,525
45,000
55,225
45,000
55,225
Example 3
(a)
W.I.P. b/f
Started
(b)
Units
u
15,000 Finished
30,000 WIP c/f
u
40,000
5,000
45,000
45,000
Costs
W.I.P b/f
In July
Equivalent units:
W.I.P b/f (15,000u)
Started & finished (25,000u)
Finished in July
Start W.I.P. c/f (5,000u)
(100%)
Materials
Lab & o/hs
9,000
24,900
$33,900
1,250
20,075
$21,325
15,000
25,000
40,000
5,000
45,000
15,000
25,000
40,000
2,500
42,500
(50%)
157
158
ACCA F2 / FIA FMA
Answers To Examples
33,900
= $0.75
45,000
Cost per unit

Total cost p.u. = $0.75 + $0.50 = $1.25
(c)
Finished units (40,000 $1.25 )
W.I.P. b/f
Materials
Labour & o/h
= $0.50
$50,000
W.I.P c/f (5,000 units)

Materials (5,000 100% $0.75)
Labour o/h (5,000 50% $0.50)
(d)
21,325
42,500
3,750
1,250
$5,000
u
15,000
30,000
Process Account
$
10,250
Transferred out
24,900
WIP c/f
20,075
u
40,000
5,000
$
50,000
5,000
45,000
55,225
45,000
55,000
(Note: The difference of $225 is due to rounding the costs p.u. to 2 decimal places)
Chapter 13
Example 1
Total joint costs:

Materials
Labour & o/h
5,000
2,300
7,300
Less: proceeds of by-product

(500 kg $0.20)
Started & finished (25,000 u)
Production of joint products:
A
B
Cost per kg
(for A and B)
7,200
3,000
(100)
$7,200
kg
1,000
2,000
3,000 kg
= $2.40
Example 2
Total joint costs:
Materials
Labour o/h
Less: Proceeds of by-product
(500 kg $0.20)
5,000
2,300
7,300
(100)
$7,200
ACCA F2 / FIA FMA
Answers To Examples
Sales value of production of joint products:
A (1,000kg $5)
B (2,000kg $2)
5,000
4,000
$9,000
Allocation of joint costs to production:

$
5,000
7,200
9,000
4,000 for 1,000 kg
4,000
7,200
9,000
3,200 for 2,000 kg
Cost per kg:

A
B
4,000
= $4.00 per kg
1,000
3,200
= $1.60 per kg
2,000
Example 3
Total joint costs:
Materials
Labour o/h
$
5,000
2,300
7,300
Less: Proceeds of by-product

(500 kg $0.20)
(100)
$7,200
Net realisable value of production
A 1,000 kg ($8.40 $4.80) =
3,600
B 2,000 kg ($4.50 $2.20) =
4,600
$8,200
Allocation of joint costs to production:
A
B
3,600
8,200
4,600
8,200
7,200
3,161
7,200
4,039
$7,200
Cost per kg:

A
B
3,161
1,000
4,039
2,000
= $3.16 per kg
= $2.02 per kg
159
160
ACCA F2 / FIA FMA
Answers To Examples
Chapter 14
No Answers
Chapter 15
No Answers
Chapter 16
No Answers
Chapter 17
Example 1
units
420
300
120
High
Low
Difference
$
2,400
2,160
$240
$240
120
Variable cost =
= $2 per unit
In high
$
2,400
840
$1,560
Total cost
Variable cost (420u $2)
Fixed cost
y = 1,560 + 2x
Examples 2 & 3
y
40
65
45
80
70
70
50
420
1
4
2
7
6
5
3
28
b=
a=
xy
40
260
90
560
420
350
150
1,870
nxy xy
nx ( x )
y
420
bx
n
1
16
4
49
36
25
9
140
(7 140 ) ( 28 28)
6.7857 28
y = 32.86 + 6.79x
or:
y = 32,857 + 67.9x
y2
1,600
4,225
2,025
6,400
4,900
4,900
2,500
26,550
(7 1, 870 ) ( 28 420 )
x2
1, 330
196
= 6.7857
= 60 27.1428 = 32.8572
(if and y are actual units and $s)
Coefficient of correlation:
ACCA F2 / FIA FMA
Answers To Examples
r=
nxy xy
(nx
( x ) ) (ny ( y ) )
2
+1330
7 1, 870 28 420
(7 140 28 2 )(7 26, 550 420 2 )
= +0
0.98
196 9, 450
Chapter 18
Example 1
Actual sales
2000
2001
2002
80
87
82
90
90
95
93
102
105
112
103
116
1
2000
2001
2002
0.63
+0.75
+0.12
+0.06
average
TREND
(centered average)
4 average
84.75
87.25
89.25
92.00
95.00
98.75
103.00
105.50
109.00
2
+1.50
+4.75
+6.25
+3.13
Actual sales
2000
86.00
4.00
88.25
+1.75
90.63
0.63
93.50
+1.50
96.88
3.88
100.88
+1.12
104.25
+0.75
107.25
+4.75
4.00
3.88
+1.75
+1.12
7.88
3.94
+2.87
+1.44
Example 2
Seasonal variation
Seasonal variation
TREND
80
87
82
86.00
95.3%
90
88.25
102.0%
161
162
ACCA F2 / FIA FMA
Answers To Examples
2001
2002
90
90.63
99.3%
95
93.50
101.6%
93
96.88
96.0%
102
100.88
101.1%
105
104.25
100.7%
112
107.25
104.4%
103
116
1
2000
2001
2002
99.3
100.7
101.6
104.4
average
100%
103%
95.3
96.0
102.0
101.1
95.7%
101.6%
Chapter 19
Example 1
2007:
2.50
2.40
100 = 104.2
2008:
2.60
2.40
100 = 108.3
2009:
9,000
8,200
100 = 109.8
2010:
9,400
8,200
100 = 114.6
Example 2
(a) Laspeyre

2009 index
Coffee
Sugar
Bread
2009 index =
q0
20
15
30
130.50
113.00
p0
$4.00
$0.60
$0.80
p1
$4.50
$0.70
$1.00
p0q0
80.00
9.00
24.00
113.00
p1q0
90.00
10.50
30.00
130.50
100 = 115.5
ACCA F2 / FIA FMA
Answers To Examples

2010 index
q0
20
15
30
Coffee
Sugar
Bread
2010 index =
144.00
113.00
p0
$4.00
$0.60
$0.80
p1
$4.80
$1.00
$1.10
p0q0
80.00
9.00
24.00
113.00
p1q0
96.00
15.00
33.00
144.00
p0q1
60.00
10.80
28.00
98.80
p1q1
67.50
12.60
35.00
115.10
p0q1
60.00
12.00
32.00
104.00
p1q1
72.00
20.00
44.00
136.00
100 = 127.4
(b) Paasche

2009 index
q1
15
18
35
Coffee
Sugar
Bread
2009 index =

115.00
98.80
p0
$4.00
$0.60
$0.80
p1
$4.50
$0.70
$1.00
100 = 116.5
2010 index
q1
15
20
40
Coffee
Sugar
Bread
2010 index =
136.00
104.00
p0
$4.00
$0.60
$0.80
p1
$4.80
$1.00
$1.10
100 = 130.8
Chapter 20
Example 1
Payment
Interest
Payment
1 Jan year 1
31 Dec year 1
1 Jan year 2
Interest
Payment
31 Dec year 2
1 Jan year 3
Interest
Payment
31 Dec year 3
1 Jan year 4
Interest
31 Dec year 4
Capital
Account
200
Interest
Account
200
400
200
600
200
800
800
30
60
90
120
300
Total $1,100
163
164
ACCA F2 / FIA FMA
Answers To Examples
Example 2
$
Now payment
Year 1 interest
500
50
550
55
605
60.5
$665.50
Year 2 interest
Year 3 interest
(or $500 (1.1)3 =$665.50)
Example 3
A
= P (1 + r)n
= 800 (1.06)5
= $1070.58
Example 4
Amount owed after 12 months
= P (1 + r)n
= 100 (1.02)12
= $126.82
APR
= actual interest over the year =
26.82 10%
100
100% = 26.82%
Example 5
$x now will become $x(1.10)4 in 4 years

4
Therefore x(1.10) = 800
800
(1.10)4
= 546.41
x=
Example 6
P.V. = 2,500
1
= 577
(1.13)12
or using tables,
P.V. = 2,500 0.231 = $577
Example 7
Present value = 500 4968 = $2,484
Example 8
1-12
less: 1-3
4-12
Discount factor at 8%
7536
(2577)
4959
Present value = 1,000 4959 = $4,959
ACCA F2 / FIA FMA
Answers To Examples
Example 9
A
r
5, 000
=
0.12
= $41, 667
Present value =
Chapter 21
Example 1
0
1
2
3
4
(80,000)
20,000
30,000
40,000
20,000
d.f. @ 10%
1.000
0.909
0.826
0.751
0.683
P.V.
(80,000)
18,180
24,780
30,040
13,660
N.P.V. 6,660
The net present value is positive and therefore we should invest in the project.
Example 2
0
1
2
3
4
d.f. @ 15%
1.000
0.870
0.756
0.658
0.572
(80,000)
20,000
30,000
40,000
20,000
I.R.R. = 10% +
P.V.
(80,000)
17,400
22,680
26,320
11,440
N.P.V. (2,160)
6,660
6,660 + 2,160
5% = 13.78%
Example 3
Cash inflow
1
2
3
4
5
20,000
30,000
40,000
20,000
30,000
Payback period = 3 +
Cumulative
Cash inflow
20,000
50,000
90,000
140,000
170,000
10,000
= 3.2 years
50,000
Discounted payback period = 3 +
Discounted
cash inflow
18,180
24,780
30,040
34,150
18,630
Cumulative
discounted cash
inflow
18,180
42,960
73,000
107,150
125,780
(or within 4)
27,000
= 3.79 years (or within 4)
34,150
165
166
ACCA F2 / FIA FMA
Answers To Examples
Chapter 22
Example 1
Sales (units)
Production (units)
Original Fixed
Budget
$
8,000
8,700
600,000
156,000
217,500
87,000
130,500
591,600
(47,600)
544,000
$56,000
Sales
Materials
Labour
Variable o/h
Fixed o/h
Closing inventory
Profit
Example 2
Materials
Flexed
Budget
$
8,400
8,900
Actual
Variances
8,400
8,900
630,000
160,200
222,500
89,000
133,500
605,200
(34,000)
571,200
$58,800
613,200
163,455
224,515
87,348
134,074
609,392
(34,000)
575,392
$37,808
16,800
3,255
2,015
1,652
574
(A)
(A)
(A)
(F)
(A)
20,992
(A)
Expense variance
Actual purchases
at actual cost
35,464kg
at standard cost
($4.50)
Usage variance
Actual usage
Standard usage for actual production
(8,900 u 4kg)
163,455
159,588
$3,867 (A)
kg
35,464
35,600
136kg

at a standard cost ($4.50) = $612 (F)
Labour Rate of Pay variance
Actual hours paid at actual cost
45,400 hours at standard cost ($5)

Idle Time Variance

Actual hours paid
Actual hours worked

Efficiency variance
224,515
227,000
$2,485
(F)
45,400
44,100
1,300 hrs
at a standard cost ($5) = $6,500 (A)
Actual hours worked

(8,900 u 5hrs)
44,100
44,500
400 hrs
at a standard cost ($5) = $2,000 (F)
ACCA F2 / FIA FMA
Answers To Examples
Variable overheads
Expenditure variance
Actual hours worked

44,100
at actual cost
at standard cost
Efficiency variance
Actual hours worked
(8,900u 5hrs)
Fixed overheads
44,100
44,500
400 hrs
at a standard cost ($2) = $800 (F)
Actual total
Original budget total

87,348
88,200
$852 (F)
134,074
130,500
$3,574 (A)
Capacity variance
Actual hours worked
Budget hours (8,700u 5hrs)
44,100
43,500
600 hrs

Efficiency variance
Actual hours worked
(8,900u 5hrs)

44,100
44,500
400 hrs
Example 3
Sales price variance

Actual sales at actual selling price
Actual sales at standard selling price (8,400u $75)
Sales volume variance
actual sales
budgeted sales
Profit
$
613,200
630,000
$16,800 (A)
units
8,400
8,000
400 u $7
(Standard profit per unit)
= $2,800 (F)
Example 4
Sales volume variance

actual sales
budgeted sales
Profit
units
8,400
8,000
400 u $22
= $8,800(F)
(Standard contribution per unit)
167
168
ACCA F2 / FIA FMA
Answers To Examples
Fixed overhead expenditure variance
$
134,074
130,500
$3,574 (A)
Actual total fixed overheads

Budgeted total fixed overheads (8,700u $15)
(This is the only fixed overhead variance if marginal costing is being used)
Chapter 23
No Examples
Chapter 24
Example 1
2007
2006
11%
8.5%
Net profit margin
790
(
)
7, 180
Gross profit margin
1, 795
)
7, 180
25%
22.5%
Return on capital
790
)
2, 690
29.4%
25.7%
Asset turnover
7, 180
)
2, 690
2.67
3.02
Current ratio
2, 314
)
965
2.4
2.4
Quick ratio (or acid test)
1, 308
)
965
1.36
1.15
Inventory days
1, 006
365)
5, 385
68.2 days
75.5 days
Receivables days
948
365)
7, 180
48.2 days
47.5 days
Payables days
965
365)
5, 385
65.4 days
61.0 days
Gearing ratio
500
)
2, 190
22.8%
28.6%
ACCA F2 / FIA FMA
Answers To Examples
Chapter 25
No Examples
Chapter 26
Example 1
ROI =
50,000
11% = 12.5%
400,000
Example 2
Profit
Less: Notional interest (10% $400,000)
R.I.
50,000
(40,000)
$10,000
169
170
ACCA F2 / FIA FMA
Answers To Examples
Paper F2
ACCA F2 / FIA FMA
ANSWERS TO MULTIPLE CHOICE TESTS

Answers to test in chapter 1
1

1
2
3
C
B
C

No Test

1
C
Variable cost per unit: [(170,000 5,000) 135,000] (22,000 16,000) = $5
Total fixed cost (below 17,500 units): [135,000 (16,000 5)] = $55,000
Total cost for 20,000 units: 55,000 + 5,000 + (20,000 5) = $160,000
B
Cost per cake would be very small and therefore not an appropriate cost unit. The most appropriate cost
unit would be cost per batch.
B
6
7
B
D
200 units (3 60) 18 = $180
B
False, this is a stepped fixed cost
A
Depreciation is an indirect cost because it does not relate directly to the number of units produced.
Items (ii) and (iii) can be traced directly to specific cost units therefore they are direct expenses.
A
The depicted cost has a basic fixed element which is payable even at zero activity. A variable element is then
added at a constant rate as activity increases. Therefore the correct answer is A.
A
Option A is a part of the cost of direct materials.
Options B and D are production overheads. Option C is a selling and distribution expense.
10
11
171
172
ACCA F2 / FIA FMA

1
{[ 2 20 (4 20,000) ] [0.06 25]} 0.5 = 1,461 units

2
3
D
A
The formula for the economic order quantity (EOQ) is
EOQ =
with
2C o D
CH
C o = 10
D = 15, 000 12 = 1, 250
CH = 0.10
EOQ =
4
5
6
2 10 1, 250
0.10
250, 000 = 500 units
C
A
D

1
1200 32 = 1168 units will be paid for.
They will be paid as follows:
500 at $0.50
=
250
500 at $0.75
=
375
168 at $1.00
=
168
1168 units
$793
B
During the year the number of employees fell by 80 60 = 20.
45 employees had left, and so 45 20 = 25 were replaced.
The average number of employees was (80 + 60) / 2 = 70.
The labour turnover rate = 25/70 = 35.7%
3 B
4
actual hours worked = 11000
budgeted hours = 8000
Capacity ratio = 11000 / 8000 = 137.5%
actual hours worked = 11000
standard hours for the actual production = 25000 / 20000 8000
= 10000

Efficiency ratio = 10000 / 11000 = 90.9%

1
Total overhead to cost centre A:

Direct
Proportion of cost centre X [46,000 + (0.10 30,000)] 0.50
Proportion of cost centre Y [30,000 0.3]
2
$
95,000
24,500
9,000
128,500
D
Costs are controlled using budgets and other management information, therefore option A is not correct.
ACCA F2 / FIA FMA

Option B describes overhead cost absorption and option C describes cost allocation.
3
C
Option A is the definition of a cost unit.
Option B describes the cost of an activity or cost centre.
Option D describes a budget centre. Although a budget centre may also be a cost centre at times, this is not
always the case.
4
5
6
D
C
C

No Test

1
Month 1: Production > Sales; Absorption costing profit > Marginal costing profit
Month 2: Sales > Production; Marginal costing profit > absorption costing profit
A and C satisfy Month 1, C and D satisfy Month 2. Therefore C satisfies both.
B
Production > Sales; Absorption costing profit > Marginal costing profit
Marginal costing profit: {36,000 [2,000 (63,000 14,000)]} = $27,000
A
Actual cost
Absorbed cost (30,000 3.50)
Under absorption
$108,875
$105,000
$ 3,875
B
Absorption costing profit
Add: fixed overhead included in opening inventory ($12 400)
Less: fixed overhead included in closing inventory ($12 600)
Marginal costing profit
$
47,500
4,800
(7,200)
45,100
Remember that if closing inventory is greater than opening inventory then absorption costing will give the
higher profit figure and the value of the additional fixed overhead included in inventory should be deducted
from the absorption costing profit in order to obtain the marginal costing profit.
If you selected option C, you deducted the fixed overhead included in opening inventory and added the
fixed overhead included in closing inventory instead of the other way round.
5
A
Budgeted overhead absorption rate =
Overhead absorbed = $23 10,980 hours

Overhead incurred
Under-absorbed overhead
$258,750
= $23 per machine hour
11,250
252,540
254,692
2,152
If you selected option B or C you calculated the difference between the budgeted and actual overheads and
interpreted the result as an under or over absorption.
If you selected option D your calculations were correct but you misinterpreted the result as over absorbed.
173
174
ACCA F2 / FIA FMA

6
$
295,000
9,400
Actual overheads
Under-absorbed overheads
Overheads absorbed for 70,000 hours
at budgeted absorption rate ()
285,600
70,000

= $285,600

= $285,600/70,000
= $4.08
Option A is incorrect because it is based on the budgeted overhead and the actual machine hours. Option
C is incorrect because it is the actual overhead rate per machine hour.
If you selected option D you added the under-absorbed overhead by mistake, at the beginning of the
calculation.
7
Overhead absorbed
$15,000
19,500
20,000
$
14,625
14,000
Overhead incurred
Over-absorbed overhead
625
Statement A is untrue because lower expenditure is more likely to lead to over absorption, unless there is a
corresponding reduction in the actual labour hours.
Statement B is incorrect because the absorption is based on labour hours, which were lower than budgeted
despite the increase in production units.
If you selected statement C you performed the calculations correctly but misinterpreted the result
as an under absorption.
A
Budgeted production = 10,000 units
Budgeted fixed overheads per unit = $12
Budgeted fixed overheads = 10,000 $12 = $120,000
It is therefore possible to eliminate options C and D at this stage.
Actual fixed overheads = budgeted fixed overheads
Absorbed overheads (11,500 $12)
Over-absorbed overheads
120,000
(138,000)
18,000
The correct answer is therefore A since absorbed overheads are greater than actual overheads which leads
to an over absorption of fixed overheads.
9
B
Sales volume exceeded production volume by 500 units, therefore inventories reduced. The absorption
costing profit will be lower than the marginal costing profit because fixed overheads were released from
inventory.
Profit difference
= inventory reduction in units fixed overhead per unit
= 500 $5 = $2,500
Absorption costing profit
= $60,000 $2,500 = $57,500
If you selected option A you based your calculation of the profit difference on the closing inventory of 2,500
units. Option C is calculated as $7 profit per unit 8,500 units sold, however, this takes no account of the
actual level of fixed overhead cost.
If you selected option D you calculated the correct profit difference but you added it to the marginal costing
profit instead of subtracting it.
10
B
Fixed costs per unit
= $16 / 4 = $4
Units in closing inventory
= 17,500 - 15,000 = 2,500 units
Profit difference
= inventory increase in units fixed overhead per unit
= 2,500 $4 = $10,000
Inventories increased, therefore fixed overhead would have been carried forward in inventory using
absorption costing and the profit would be higher than with marginal costing.
ACCA F2 / FIA FMA

If you selected option A you calculated the correct profit difference, but misinterpreted the direction of the
difference.
If you selected option C or D you evaluated the inventory difference at variable cost and full cost respectively.

No Test

No Test

1
Process X
Process Y
2
Normal loss
litres
5,200
1,875
Actual loss
litres
6,100
1,800
B
Budgeted production: (19,000 + 3,000 4,000)
= 18,000 units
Raw materials required for budgeted production: (18,000 8)
= 144,000 kg
Budgeted raw material purchases: (144,000 + 53,000 50,000)
= 147,000 kg
D
Cost per equivalent unit: (480,000 10,000)
= $48
Closing work in progress valuation: (4,000 Degree of completion 48) = 144,000
Degree of completion = (144,000 4,000 48) = 0.75
= 75%
A
Value of 2,000 units transferred:
1,700 units 10
300 units 0.40 10
Opening work in progress value
Abnormal loss Abnormal gain

litres
litres
900
75
$
17,000
1,200
1,710
19,910
D
The abnormal loss units are valued at their full production cost and credited to the process account, so
that their occurrence does not affect the cost of good production. Therefore the correct answer is D.
Options A and C are incorrect because the scrap value of the abnormal loss is debited to the scrap account
and credited to the abnormal loss account, it has no impact on the process account.
D
Material
Conversion costs
Less: scrap value of normal loss (300 $1.50)
Cost of process
Expected output
=
=
Costs per unit
Costs of output
9,000
11,970
(450)
20,520
3,000 (10% 3,000)

3,000 300 = 2,700 units
Input costs scrap value of normal loss
$20,520
=
Expected output
2,700
= $7.60
2,900 $7.60 = $22,040
If you selected option B, you calculated the input costs less the scrap value of normal loss. You forgot to
calculate a cost per unit and then to multiply this by the actual output. If you selected option C, you simply
calculated the input costs. You need to take account of scrap proceeds and to calculate a cost per unit also.
7
C
Cost per unit in closing inventory
= $(4.50 + 1.25 + 2.50) = $8.25
175
176
ACCA F2 / FIA FMA

Number of units in closing inventory
= 13,500 -11,750 = 1,750 units
.. Value of closing inventory
= 1,750 units $8.25 = $14,437.50
Option A applies a unit rate of $3.75, ie omitting the cost of the raw material transferred into the process.
Option B applies a unit rate of $7, omitting the additional material added. Option D applies a unit rate of
$14.50, ie all of the unit rates supplied in the question. The work in progress should be valued at the rate per
incomplete unit in respect of labour and overheads.
8
9
C
D

1
C
Joint costs apportioned to Q: [330,000 (420,000 + 330,000)] 350,000 = $154,000
Closing inventory valuation (X):
(30,000 330,000) (154,000 + 66,000) = $20,000
D
A by-product is output of some value produced when manufacturing something else (the main product).
Option A is incorrect because a by-product has some value.
Option B is incorrect because this description could also apply to a joint product.
Option C is incorrect because the value of the product described could be relatively high, even though the
output volume is relatively low.
B
Joint products are two or more products produced by the same process and separated in processing; each
product has a sufficiently high saleable value to merit recognition as a main product.
A joint product may be subject to further processing, as implied in option A, but this is not the case for all
joint products.
C
Determine total production cost
Opening inventory
Direct materials
Conversion costs
Less closing inventory
Total production cost
$000
40
80
100
220
20
200
Production costs are apportioned based on the sales value of units produced.
Production units
W
X
Y
20,000 ( $4)
20,000 ( $6)
40,000 ( $3)
Sales value
$000
80
120
120
320
($200,000 (80/320))
($200,000 (120/320))
($200,000 (120/320))
Apportioned cost
$000
50
75
75
200
Product X cost per unit = $75,000/20,000 = $3.75

If you selected option A you apportioned costs on the basis of units sold. Option B makes no adjustment for
inventories and option D apportions costs on the basis of unit selling price, rather than sales value of output.

No Test

1
2
ACCA F2 / FIA FMA

3
4
C
C

No Test

1
2
3
C
a

A
= (y n) [(bx) n] = (330 11) [(0.69171 440) 11]

= (30 27.6684)
= 2.3316 (2.33 to 2 decimal places)
C
Correlation coefficient, r = 0.85
Coefficient of determination, r2 = 0.852 = 0.72
The coefficient of determination tells us that 72% of the variation in sales revenue can be explained by the
corresponding variation in advertising expenditure.
D
Deliveries
$
High activity
930
9,860
840
9,680
Low activity
Variable cost of
90
180
Variable cost per delivery $180/90 = $2 per delivery
Fixed costs = $9,860 - ($2 930) = $8,000
Total costs = fixed costs + (variable cost per delivery number of deliveries)
= $8,000 + ($2 number of deliveries)
Therefore the correct answer is D.
If you selected options A or B you simply calculated the average cost at either of the two activity levels - but
the fixed cost remains constant for each activity level.
If you selected option C you did the calculations correctly but forgot that variable costs must be added to
fixed costs to derive the total cost.
B
Highest production month 1
Lowest production month 5
Variable cost per unit =
Units
3,000
1,500
1,500
$
74,000
69,500
4,500
4,500
=$3 per unit
1,500
It is possible at this stage to eliminate options A, C and D since option B is the only one with a variable cost
per unit of $3. The fixed costs of $65,000 can be proven as follows.
In month 1, total costs =
Variable costs ($3 3,000) =
Fixed costs =
74,000
9,000
65,000

No Test

1
The total of the seasonal variations should be zero.
$10 / 125 x 220 = $17.60
In 2008, the cost per kg was $2.50.
177
178
ACCA F2 / FIA FMA

In 2009, the cost per kg was $3.17
The index for 2011 is 3.17 / 2.5 100 = 127
In 2009, the cost per kg was $32,000/20,000 = $1.60
The cost per kg in 2011 is 1.60 220 / 185 = $1.90
The total cost is 13,000 $1.90 = $24,700

1
600 x (1.05)3 x (1.06)5 = $929
(1 + 0.015)12 1 = 0.1956
3,000 x 0.315 = $945
The first receipt is in 3 years time and the last receipt is in 10 years time.
The 10 year annuity discount factor at 5% = 7.722
The 2 year annuity discount factor at 5% = 1.859
So the total factor for 3 to 10 is 7.722 1.859 = 5.863
$2,000 5.863 = $11,726

5 C $6,000 1/0.095 = $63,158 + $6,000 = $69,158

1 D
0
1
2
3
4
4
2
C
0
1
2
3
4
(270,000)
1
50,000
0.893
180,000
0.797
100,000
0.712
50,000
0.636
20,000
0.636
Net present value
Discounting at 20%:
(270,000)
50,000
180,000
100,000
70,000
Net present value
I.R.R.
3 C
4 D
(270,000)
44,650
143,460
71,200
31,800
12,720
33,830
1
0.833
0.694
0.579
0.482
(270,000)
41,650
124,920
57,900
33,740
(11,790)
= 12% + 8% x 33830 / (33830 + 11790) = 17.93%

1
2
A
Price variance: (0.50 10,500) = $5,250
Volume variance: (500 8) = $4,000
B
Actual expenditure
Actual hours standard rate (24,000 10)
Adverse
Favourable
235,000
240,000
5,000
Favourable
ACCA F2 / FIA FMA

Actual hours standard rate
Standard cost of actual production (3,900 6 10)
Efficiency variance
4
5
6
8
9
Adverse
B
A
B
Budgeted hours
Actual hours worked
Capacity variance
240,000
234,000
6,000
5,000
5,500
500hours 15 = $7,500 Favourable
B
A
D

No Test

1
2
3
4
5
1080/7200 x 100% = 15%
2376/7200 x 100% = 33%
624/7200 x 365 = 32 days
(300 + 624 + 1608) / 1890 = 1.34
(624 + 1608 ) / 1890 = 1.18

1
2
4
C
B

1
2
3
A
C
Current ROI = 70,000/500,000 = 14%

With the new machine, the ROI would fall to:
(70,000 + 2,200) / (500,000 + 20,000) = 13.9%
Current RI = 70,000 (10% x 500,000) = $20,000

With the new machine, the RI would increase to:
72,200 (10% x 520,000) = $20,200
179
180
ACCA F2 / FIA FMA

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ACCOUNTING FOR MANAGEMENT

2 Data and information

3 What makes good information?

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4 The main managerial processes

5 The different levels of planning

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Accounting for Management

6 Comparison of management accounting with financial accounting

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Accounting for Management

Statements (i) and (ii) are both correct.

Only statement (i) is correct.

Only statement (ii) is correct.

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2 Primary and secondary sources of data

3 Internal and external sources data

Every item in the population has an equal chance of being selected

Select (for example) every 10th item in the population

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ACCA F2 / FIA FMA

The sample will not be representative

Knowledge is needed of each item in the population

The sample is chosen entirely at random

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June 2015 Examinations

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Accounting for Management

6 Comparison of management accounting with financial accounting

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Accounting for Management

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