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ISBN and Copyright statement For the ladies only Why study from a computer screen? Memorising: Tips and techniques Writing or saying things over and over again . Vocalising Initial letters and making phrases The use of mnemonics The use of jingles Word association Visualising Link/story technique Do I need to memorise all your mnemonics? Disguise your use of mnemonics in the exam Charts Colour codes Electronic links within the database
Syllabus
The structure of the syllabus Intellectual levels Learning hours Guide to exam structure Guide to examination assessment Aim Main capabilities Relational diagram of main capabilities Rationale Detailed syllabus Approach to examining the syllabus
Study Guide
A B C D E Specialist cost and management accounting techniques Decision-making techniques Budgeting Standard costing and variance analysis Performance measurement and control
Sections
Combined Charts and Mnemonics. Click below. Specialist cost and management accounting techniques Decision-making techniques Budgeting Standard costing and variance analysis Performance measurement and control Contents page Questions and Answers Formulae sheet
Where shall I begin, please your majesty? he asked. Begin at the beginning, the king said gravely, and go on till you come to the end: then stop. Lewis Carroll Through the Looking-Glass
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'Modern industry' and 'world class manufacturing' are convenient labels given to a series of fundamental changes introduced by many manufacturing (and service-providing) companies over the last few decades. It is beneficial for our study of management accounting and performance management, to consider the concepts of modern industry before looking further at the work of modern management accounting and performance reporting.
During your studies of Paper F5 bear in mind the role of a management accountant. A management accountant supports managers, by way of information and advice, and managers themselves make decisions and take control actions in an extremely tough and demanding modern industry. These facts set the scene for what you study, how you study and the way you answer exam questions.
Difficult business environments Most organisations now face very competitive business environments. Furthermore, customer empowerment and fragmented (and yet further fragmenting) markets require companies to be competent in: flexibility (quick response to change), versatility (multi-need capacity), quality and innovation. These needs have resulted in the development and use of advanced manufacturing technologies (AMT), which place particular demands on management information systems.
Please go to the next screen
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(d)
It is difficult to exactly define the term Modern industry. Some commentators suggest that it started in the early 1980s with the introduction of Intels 8088 microprocssor. Moore's law describes a long-term trend in the history of computing hardware. Since the invention of the integrated circuit, the number of transistors that can be placed inexpensively on an integrated circuit has increased exponentially, doubling approximately every two years. This has had an enormous impact on industry and society in general. Management accounting methods and techniques have developed to meet the exacting demand of modern industry For our purposes we can assume that traditional industry started in the 1920s with the beginnings of what are now huge corporate concerns. Traditional management accounting techniques were developed or refined from this time. Some of these techniques are still used by organisations. The Intel 8088 microprocessor was a variant of the Intel 8086 and was introduced on July 1, 1979. It had an 8-bit external data bus instead of the 16-bit bus of the 8086. The 16-bit registers and the one megabyte address range were unchanged, however. The original IBM PC was based on the 8088.
Practice question which makes reference to modern industry: Linacra Co Page 138.
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CHANGES
Competitive (hostile) Fragmented markets Dynamic change Environmental complexity Environmental uncertainty Customer empowerment
A HOSTILE BUSINESS WORLD - Emphasis on world class manufacturing - Use of advanced manufacturing technologies (AMT) - JIT orientation/systems - Focus on quality (TQM) - Systems that are flexible and versatile - Small production runs - Increase in production overhead costs (engineering support, set-ups, first-piece inspection etc.)
Important objectives of modern management: competitiveness quality flexibility innovation resource utilisation Impact on Business Practice
Design and use of Executive Support Systems (ESS), Expert systems, Decision Support Systems (DSS), Data warehousing and data mining systems Competitive analysis and appraisal Environmental scanning and analysis Strategic benchmarking Non-financial key performance indicators, linked to critical success factors*
(Knowledge of information technology (IT) systems not specifically covered on the Paper F5 syllabus but the role of IT in modern management accounting should always be considered.)
- Quality management and performance measurement - Just-in-Time (JIT): cost tracking and performance measurement - Target costing (use of drifting instead of standard costs)* - Activity-based Costing* - Feed forward cybernetic control systems (as well as the use of sophisticated feedback systems) - Customer profitability Analysis (CPA) as well as Product Profitability Analysis (PPA)* - Activity-based budgeting - Balanced scorecard performance indicators* - Back-flush accounting systems* - Throughput accounting* - Life-cycle costing* * covered by the ACCA Paper F5 syllabus
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Modern industry
The characteristics of modern industry that would influence and affect the work of a strategic management accountant are:
H O S T I L E W O
R
Hostile (in other words, very competitive) business environments. Overhead costs are now very significant, particularly fixed overhead costs. Splintered, or fragmented markets with small but varied market segmentation. Technological sophistication (for even small companies) including the uses of Advanced Manufacturing Technologies (AMT). Impact of information technology (IT) in all areas communication, product/service design/production, marketing, etc. is pervasive. Legal complexity and rapid change, including the impact of international conflicts of legislation. Empowered customers with resultant rapid change of needs and market competitiveness. World-wide competition leading to global and international strategy. Organisational delayering and decentralisation of decision making. Rapid change in market structures for instance the recent growth in the economies of Brazil, China and India. Large company growth acquisitions creating large corporate bodies. Dynamic (change which causes more change) business environments generally.
L D
HOSTILE WORLD.
If two line on a graph cross, it must be important. Ernest F.Cooke University of Baltimore Remark to a student, February 1985
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Activity-based management. Many organisations are now restructuring around activities (Activity Based Management (AMB)) which is often linked to re-engineering activities on the value chain.
M O D
Matrix-based teamwork. Matrix-based organisations are the use of multi-disciplinary teams involved in creativity, innovation, project development, market creation, etc. Outsourcing. The employment of external organisations to take over functions which they can perform more effectively than the organisation outsourcing the work, or which releases assets and resources the organisation can use more effectively. Delayering. This results from a reduction in the number of levels in the management hierarchy, usually by removing middle level (mid-line) management. One reason, is that the development of modern information technology (IT) has given senior managers direct lines of communication and control with work at the operating level, thus making much of the role of middle-level managers superfluous. Employment of core-based management teams. A modern approach is to build a small core of specialist competent full-time and permanent staff alongside a periphery of temporary part-timers or contract workers. This provides the organisation with ability to be versatile, flexible and responsive to short-term events. Reconstructing as small within big. Another way of attempting to achieve versatility, flexibility and responsiveness is to re-structure the organisation on the basis of small strategic business units which will be flat, and organic but at the same centralising strategic services (to achieve big-spend economies).
Networking. Networking involves franchising, other forms of collaborative ventures, product-market partnerships and other forms of strategic alliances.
Memory jog: in an attempt to deal with dynamic, hostile and complex business environments, and to meet world-class standards,
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WHY?
CUSTOMER EMPOWERMENT
MARKET FRAGMENTATION
IMPLICATIONS Wide range of materials required (inventory problems). Need for product flexibility and versatility and the development of Advanced Manufacturing Technology (AMT). Increase in production services. Complexity of production scheduling, control and logistics. Need for product-market synchronisation. Need for multi-skilled and empowered labour. Increase in use of general purpose technology and engineering set ups.
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The diagram on the next screen helps us distinguish the role of management accountancy from the role of financial accountancy. Consider also the table below.
Has more emphasis on future events and decisions Focuses on parts (such as individual contracts) as well as the whole of a business Draws heavily from other disciplines such as finance, economics and operational research Is a means to an end
8 Is an end in itself
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Management Accounting Information System/ Strategic Management Accounting System Incorporates FAIS and also encompasses: - External data - Predictions - Non-financial data - Segmental reporting
Performance analysis in terms of: - Competitiveness - Quality - Flexibility - Innovation - Resource utilisation
- Based on Accounting and Financial Standards (GAAP) - Designed for external users: - Shareholders: - existing - potential investors - The loan group: - bankers - creditors - suppliers - Business advisors (those people advising others on how to invest) - Employees: - present - potential recruits - past (if receiving a pension from the company) - Government agencies, such as - the Inland Revenue - the Customers and Excise (re VAT) - Other interested parties
FINANCIAL ACCOUNTING INFORMATION SYSTEM (FAIS) Main focus: - Historical (results) - Financial values - Internal - Mainly holistic
Is of limited use for managers MAIS/SMAIS
Information designed for: - Strategic management - Tactical (executive) management - Operational (action) management
Operates within modern industry * Note: SMAIS is Strategic Management Accounting Information System Use of modern MAIS and SMAIS* techniques and practices Designed to produce management information and support
Fully supported by information systems and information technology and purpose designed systems
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Orthodox (traditional or conventional) MAIS have failed to remain relevant in the face of changing business environments and management needs. Weaknesses include the following:
D A T A
Delays in the production of reports. The system is based on periodical (e.g. monthly) or batch reports. Aggregated information is reported, i.e. totals. This can be misleading for managers. What is the difference, say, between a $5,000(A) variance in one month and a $5,200 (A) in the next month, as far as the manager is concerned? Timeframe of reports is mainly historical (results based). Not much business intelligence gathering is facilitated. Attention is placed on What? and much less focus placed on the important questions of How? and Why?.
F A I L U R E
Financial orientation. The translation of events into money surrogates causes delays, inaccuracies and misinterpretation. Attention placed on feedback control (reactive management) little focus is placed on feedforward needs (proactive management). Inflexibility systems relate to programmed decisions and the production of structured/routine reports. Lack of attention is placed on what causes overhead costs thus resulting in the reporting of misleading information concerning this significant (and rising) cost. Unhelpful variances reported in cybernetic control systems, e.g. traditional standard costing variances which are inappropriate. Reports and information are mainly designed for operational managers little attention is placed on the needs of strategic management. External (environmental) factors, such as customers [market] and competitors are given low priority. The main concentration is on internal performance reports based on internal data sources.
Memory jog: Remember the problem with using traditional management accounting systems and techniques is that they often result in a
DATA
FAILURE.
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OPERATIONS DIRECTOR
DIRECTOR OF FINANCE
MARKETING DIRECTOR
FINANCIAL CONTROLLER
FINANCIAL ACCOUNTING
TREASURER
FINANCIAL PLANNING AND FUND-RAISING MANAGER
MANAGEMENT ACCOUNTING
CASH MANAGER
INFORMATION PROCESSING
CREDIT MANAGER
PORTFOLIO MANAGER
TAX MANAGER
Notice the two main divisions within the finance department of a large organisation. Management accountants normally report to the Financial Controller of the department.
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External data Performance appraisal Costing methods Costing techniques Business environment Main responsibilities of management accountants Internal audit
COST ACCOUNTING SYSTEM Source Documents Cost Often maintained as a integral apart of the Financial Accounting System data
MANAGEMENT
Work-inprogress account
Wages account
Overhead account
Management accountants usually maintain their own accounts within a computer-based accounting system that also contains the necessary financial accounts. Traditionally, this was referred to as Cost accounting
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JOB COSTING
BATCH PRODUCTION
BATCH COSTING
jobs, batches, etc. identified internally (usually products made for finished goods inventory)
CONTRACT PRODUCTION
NONMANUFACTURING CONCERN
NONMANUFACTURING COSTING
CONTROL The aim is to identify the average cost of a series of similar cost objects (units) over a period of time of
- Continuous nature of the production process oil refining, manufacture of soap, paper, foods, drinks, chemicals, etc.
PROCESS PRODUCTION
PROCESS COSTING
- Two or more products output from the same processing operation which are indistinguishable up to their point of separation.
Note that a type of costing system is contingent on the method or mode of production.
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Managers will try to motivate individuals to work hard towards achieving their personal objectives and work assignments motivate groups/teams of people
Organising
Managers: need to plan their objectives and decide the work required to achieve them decide what decisions will need to be taken in the work need to break the work into manageable tasks link people with tasks, which might require recruitment issue Terms of Reference (job descriptions, procedure instructions, etc). train the people involved, as required plan to coordinate the different activities
Controlling
Strategic management Tactical (executive) management Operational management Levels of decision making
Controls are based on plans/decisions Results are monitored (recorded) Periodically, often monthly, results are compared with the objectives of the plans/decisions Variances (the difference between the objectives and results) are calculated The variances are investigated for cause, significance, future consequence and to identify potential remedy Corrective (control) action is planned: - to change the plan or objective, or - bring the activity into line with the plan/objective
Paper 5 is concerned with management accounting so we ought to remember the responsibilities of the managers who are supported by the management accountants!
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FINANCIAL MANAGEMENT
Corporate strategy concerns: Decisions made by senior management. Product-market portfolio Major tactical manoeuvres, such as green field, acquisition, forming business alliances. Major marketing decisions.
ORGANISATION Strategic investment decisions (SIDs) Capital structure Dividend policy Long-term financing Portfolio management Risk reduction
CORPORATE STRATEGY
One member of the Board is usually the Finance Director. - Medium- and short-term financing - Short-term financial decision making, including - budgetary control - project planning and control - Foreign exchange management
Tactical decisions are the responsibility of different functional (departmental) executives aimed at achieving the intended business strategies. One such functional area is the Finance Department and the Treasury Manager would be an example of an executive working in the Finance Department.
TACTICAL PLANS
OPERATIONAL PLANS
Financing working capital investment Budgetary control, standard costing and variance analysis Cash management Working capital management
Operational decisions regulate day-to-day activities designed to implement corporate policy and tactical plans. In the Finance Department, operational decisions are concerned with ledger accounting, payroll, credit control, cash management and the like.
DECISION FRAMEWORK
It is useful to see how financial strategy, tactics and day-to-day operations link to management decision-making.
Eureaka! (Ive got it!) Archimedes 287 212 B.C. Vitruvius Pollio, De Architectura, ix. 215
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S T A M P
Strategic decisions. Timely and external data. Appropriate internal performance measures. Monitoring systems. Prediction systems.
O F
Objectives based on broad goals. Feedback and feed-forward based on internal performances and external events.
Memory jog: an effective SMAIS will put a STAMP OF value on the information provided to senior (strategic) management.
Far too many managers have lost sight of the basics, in our opinion: quick action, service to customers, practical innovation, and the fact that you cant get any of these without virtually everyones commitment.
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Direct costs
For control purposes variable production overhead costs can be regarded as TOTAL PRODUCTION COSTS 1. variable with time (such as extra lighting costs caused by overtime) so ultimately it varies with the level of production (the overtime is used to produce products) variable with output of cost objects (e.g. products) such as oil used in multi-functional equipment
2.
Absorption costing
Fixed production overhead costs are absorbed into cost objects (e.g. products), and thus inventory. Adjustment is made for over- or underabsorption (recovery)
Fixed production overhead Fixed in the period concerned. (All fixed costs are period costs: rent, rates, insurance, depreciation, etc.) Remember, there are TWO main ways of accounting for fixed overheads: (i) absorption costing, and (ii) marginal costing. There are two main types of absorption costing: (i) traditional absorption (ii) activity based costing (ABC) Marginal costing Fixed production overhead costs are treated as a period costs. Costs are NOT absorbed into cost objects (e.g. products) but instead the FULL fixed production overhead costs are charged to the periods costing profit and loss account
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1. 2.
3. 4.
5.
6.
7.
8.
Identify the area of work from which costs need to be absorbed. Identify each of the separate activities on which the overhead costs are incurred. Each activity is termed a Cost Pool. Trace the costs of overheads to the activities. (Because it is the activities which cause the costs, such costs should be direct with the minimum of apportionment being necessary). For each activity it is necessary to identify one cost driver. (The cost driver is what causes the overhead cost to increase or reduce, and there should only be one cost driver per activity). Determine the number of cost driver transactions for the period under review, either on a historic basis (unusual) or on a budget (future plan) basis (common). Calculate the cost per cost driver (by dividing the result of Stage 4 by the results of Stage 6). Absorb overhead costs into the jobs/ products on the basis of the use of the cost driver transactions of each.
ACTIVITY ANALYSIS
Cost control focus 1. 2. 3. Establish size and growth of the cost. Consider the competitiveness of methods (for which cost is attributed). Analyse cost behaviour in respect of: - costs drivers - economies or diseconomies - learning (or spillover) from one industry to another) - the pattern of capacity utilisation as it affects fixed costs.
Types of activity 1. 2. 3. CORE or PRIMARY ACTIVITY is one that adds value to a product/service. SECONDARY ACTIVITY is one that supports a core activity. DIVERSIONARY ACTIVITIES do not add failure and are symptoms of failure within the organisation.
Remember the significance of overhead in modern industry so frequent questions on ABC can be expected.
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Step 1
Identify the major activities in the organisation. Examples include machine-related activities (such as machining cost centres), direct labour-related activities (like assembly departments) and various support activities such as ordering, receiving, materials handling, parts administration, production scheduling, packing and dispatching.
Step 2
Identify factors which influence the cost of a particular activity. The term 'cost driver' is used to describe the events or forces that are the significant determinants of the cost of the activities. For example, if a production scheduling cost is caused by the number of production runs each product generates, the number of set-ups would represent the cost driver for production scheduling. (i) Cost behaviour must be understood ABC recognises that cost behaviour is dictated by cost drivers and therefore the tracing of overhead costs to products requires that cost behaviour must be understood to identify appropriate cost drivers. Examples of some of the cost drivers used by ABC systems include: the number of receiving orders for the receiving department, the number of production runs undertaken for scheduling and set-up costs, the number of purchase orders for the cost of operating the purchasing department, and the number of dispatch orders for the dispatch department. Volume related cost drivers are appropriate in some cases For those costs which are purely variable with output in the short term, ABC systems use volume-related cost drivers such as direct labour hours or machine hours. An example is power costs charged to products using machine hours as the cost driver; it is the machine hours that drive the consumption of power. If production volume increased by 10%, the consumption cost and the number of machine hours would also increase by 10%.
(ii)
Step 3
A cost pool is created for each activity, e.g. total cost of all set ups might constitute one cost pool for all costs related to the set-ups.
Step 4
The cost of each activity is traced to products according to the product's usage of these activities during the production process (using cost drivers as a measure of demand). This is measured by the number of cost-driver transactions which the product uses. Definitions
Activity cost pool. A grouping of all cost elements associated with an activity. Activity driver. A measure of the frequency and intensity of the demands placed on activities by cost objects. For example, the number of customer orders measures the consumption of order entry activities by each customer. Activity driver analysis. The identification and evaluation of the activity drivers used to trace the cost of activities to cost objects. It may also involve selecting activity drivers with potential to contribute to the management accounting function with particular reference to cost reduction. Cost driver. Any factor which causes a change in the cost of an activity, e.g. the quality of parts received by an activity is a determining factor in the work required by that activity and therefore affects the resources required. An activity may have multiple cost drivers associated with it.
End of Definitions
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Q U E
Quality management is aided. One important aspect of quality is to remove waste (non-valueadding activity) from processes. With ABC, waste, such as idle time can be identified as an activity, highlighted, costed and efforts be made to reduce it. Understanding of cost by managers is improved. By using ABC managers are made aware of how the overhead is spent. Questions are prompted: How can this cost be reduced? What has been the growth of this costs and why? And so on. Efficient cost control. The essence of effective control rests on controllability. The concept of overhead cost drivers more precisely defines a managers authority and thus responsibility for the cost. (With orthodox systems fixed overhead is regarded as being uncontrollable by individual managers.) Support activities (which comprise a significant part of fixed overhead cost) are identified and better controlled. Takes account of fixed overhead costs into the calculation of profitability (the cost-volumeprofit algorithm). Traditionally profitability has been measured by contribution and fixed costs (which can represent 80% - 90% of the total cost) has been ignored (as not relevant).
S T
M A D E
Make or buy decisions rest on a comparison of relevant costs. With ABC it is argued that fixed overhead costs are relevant because the decision may cause a change in the overhead cost, certainly in the medium term. Accountability of managers becomes defined. When managers make decisions that affect the use of cost drivers they become responsible for their actions and can thus be held accountable. Design of products/services can be done in ways that design out the higher costs caused by the use of cost drivers. Effective product pricing, when price is set on the basis of full cost plus mark-up. It is argued, that by burdening the product with fixed cost on the basis of cost-diver usage, the ABC system more accurately traces fixed costs to products.
Memory jog: Remember by using ABC a QUEST is to improve decisions and reduce and control costs.
Practice question on ABC related topics: Spring Company Page 313.
MADE
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M A
Many overheads are not suitable for ABC. Some people have questioned the fundamental assumption that activity causes cost, suggesting that it could be argued that decisions cause cost, or the passage of time causes cost, or that there may be no one clear cause of cost. Arbitrary cost apportionment may still be necessary. Even in activity-based costing, some overhead costs are difficult to assign to products and customers, for example the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed. Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realise that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner. No one clear cause of cost can be identified. Many overheads relate neither to volume or to complexity and diversity. The ability of a single cost driver to fully explain the cost behaviour of all items in its associated pool is questionable. Information required. One of the principal problems of ABC is that it may be difficult to collect the information required to enable ABC to be introduced. The various activities within the organisation need to be established (possibly by using observation and employee interviews) and cost drivers identified. A database of activities, their occurrence, their cost and cost drivers needs to be set up. This is a huge wealth of information which may not have been recorded before. Information collection and retrieval systems may therefore need to be expanded and improved. Costs involved. Although developments in information technology and software allow for more sophisticated information systems, the cost of the required changes and improvements may outweigh the anticipated benefits of ABC and make its introduction unsuitable. ABC has been found to be a very high-cost accounting technology. Installing an ABC system is technically complex, requiring talented personnel and a considerable amount of time and money , and whether it is good value is questioned. Lean accounting methods have been developed in recent years to provide relevant and thorough accounting, control, and measurement systems without the complex and highly wasteful methods of ABC. Lean Accounting takes an opposite direction from ABC by working to eliminate cost allocations rather than find complicated methods of allocation. While lean accounting is primarily used within lean manufacturing, the approach has proven useful in many other areas including healthcare, construction, financial services, government, and other industries.
N I
Memory jog: companies should not be too MANIC in their enthusiasm to introduce an ABC system
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Activity-based costing could provide more meaningful information about product costs and profits when:
C O S T S
Complex products or services are involved. Overhead costs are related to products/customers, not volume; Some products or services are sold in large numbers but others are sold in small numbers. Tailored made products. Where products or services are tailored to product/service specifications, as in the case of job costing. Significant service overhead costs exist which are not easily assigned to individual products.
In such cases, ABC will usually result in significantly different product or service overhead charges, compared with traditional absorption costing.
COSTS
How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth. Sherlock Holmes Arthur Conan Doyle, 1859 - 1930
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Lean Accounting is not specifically mentioned in the syllabus although the presence of back-flush accounting, life-cycle accounting and throughput accounting infer that it is being questioned. Anyway, it is not a bad idea to mention it in the exam simply to communicate to the examiner that you are interested in the subject and are up-to-date with your knowledge.
What is Lean Accounting? Lean accounting is accounting for the lean enterprise. It seeks to move from traditional cost accounting to a system that measures and motivates good business practices in the lean enterprise. Why is Lean Accounting Needed? Everybody working seriously on the lean transformation of their company eventually bumps up against their accounting systems. It soon becomes clear that traditional accounting systems are actively antilean: They are large, complex, and wasteful processes requiring huge amounts of non-value work. They provide measurements and reports like labour efficiency and overhead absorption that motivate large batch production and high inventory levels; the opposite of lean-goals. The traditional accounting systems have no good way to identify the financial impact of the lean improvements taking place throughout the company. On the contrary, the financial reports will often show that bad things are happening when very good lean change is being made . Very few people in the company understand the reports that emanate from the accounting systems, and yet they are used to make important and far-reaching decisions. They use standard product costs which are misleading when making decisions related to quoting, profitability, make/buy, sourcing, product rationalisation, and so forth.
The Vision for Lean Accounting 1. Provide accurate, timely and understandable information to motivate the lean transformation throughout the organization, and for decision-making leading to increased customer value, growth, profitability, and cash flow. Use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control. Fully comply with generally accepted accounting principles (GAAP), external reporting regulations, and internal reporting requirements. Support the lean culture by motivating investment in people, providing information that is relevant and actionable, and empowers continuous improvement at every level of the organisation.
2. 3. 4.
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Duration drivers. In this case, the cost of the activity is not so much affected by the number of times the action is undertaken as by the length of time that it takes to perform the action, e.g. setup costs may not be related to the number of set-ups so much as to the set-up time, because some products involve more complicated and time consuming set-ups than others. Transaction drivers. Here, the cost of an activity is affected by the number of times a particular action is undertaken. Examples would include the number of set-ups, number of power drill operations, number of batches of material received, number of purchase orders, etc. Intensity drivers. In this case, efforts would be directed at determining what resources were used in the making of a product or service, e.g. rather than charging all purchase orders with the same cost per order, we might determine that overseas orders involve more work than home orders and apply a weighting to the overseas orders to reflect the extra work.
I T
Memory jog: DIT is not a difficult word to remember it is almost poetical! (One meaning of DIT is a poem, or words of a song Chambers 20th
Century Dictionary.)
Be proud of everything that is unique about you. Remember . Every bees honey is sweet. French proverb
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General fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are expected to be $900,000 and these overheads are absorbed on a direct labour hour basis. Total direct labour hours for next year are expected to be 300,000 hours. Linacre Co expects orders for Product ZT3 next year to be 100 orders of 60 units per order and 60 orders of 50 units per order. The company holds no inventories of Product ZT3 and will need to produce the order requirement in production runs of 900 units. One order for components is placed prior to each production run. Four tests are made during each production run to ensure that quality standards are maintained. The following additional cost and profit information relates to product ZT3: Component cost: Direct labour: Profit mark up: Required: (a) Calculate the activity-based recovery rates for each cost pool. (b) Calculate the total unit cost and selling price of Product ZT3. (3 marks) (8 marks) $100 per unit 10 minutes per unit at $780 per hour 40% of total unit cost
A A A
(c) Discuss the reasons why activity-based costing may be preferred to traditional absorption costing in the modern manufacturing environment. (9 marks) (20 marks)
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(b) Production of product ZT3 = (100 x 60) + (60 x 50) = Number of production runs = number of set-ups = 9,000/900 = Number of product tests = 10 x 4 = Number of component orders = number of production runs = Number of customer orders = 100 + 60 = General overheads absorption rate = 900,000/300,000 =
Annual direct labour hours for Product ZT3 = 9,000 x 10/60 = Activity Setting up Product testing Component supply Customer supply ABC recovery rate $35000 per set-up $20000 per test $5000 per order $11250 per order Number of Drivers 10 set-ups 40 tests 10 orders 160 orders
General overheads = 1,500 x $300 per hour = Total annual overhead cost Total unit cost Components Direct labour = 780 x 10/60 = Overheads = 34,500/9,000 = Profit mark up Selling price $ 100 130 383 613 245 858
(c) Traditional absorption costing allocates a proportion of fixed overheads (indirect costs) to product cost through an overhead absorption rate, usually based on labour hours, machine hours, or some other volume-related measure of activity. These overhead absorption rates may be factory-wide absorption rates (blanket rates) or, for increased accuracy in determining product cost, departmental absorption rates. In the traditional manufacturing environment, indirect costs constituted a relatively small proportion of total product cost compared to direct costs such as direct material cost, direct labour cost and direct expenses (collectively referred to as prime cost).
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CONTENTS SHEET 1 OF 7
Title SPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES
Only the hyperlinks shaded in pink are active for this sample download Chart Chart Mnemonic Mnemonic Chart Chart Chart Mnemonic Chart Chart Chart Chart Mnemonic Chart Chart Chart Mnemonic Mnemonic Mnemonic Chart Mnemonic Chart Chart Mnemonic Chart Chart Chart Mnemonic Mnemonic Chart Chart Chart Mnemonic Chart Chart Chart Chart Chart Modern industry Traditional versus modern Industry Modern industry Modern organisation structures Modern industry: some effects of market fragmentation Management accounting versus financial accounting Modern Management Accounting Information Systems (MAIS) Weaknesses of traditional MAISs Finance function within a large company/group Management Accounting Information System (MAIS) Modes of production and associated methods of management accounting Main roles of the manager The role of Strategic Management Accounting Accounting for fixed production overhead costs Activity based techniques The Activity Based Costing (ABC) system Overview Benefits of using activity based costing (ABC) Criticisms of introducing an ABC system When is activity based costing relevant? Lean Accounting Cost drivers used in activity based costing Target costing Overview Traditional cost management versus target cost management The underlying philosophy of target costing Case study: Target costing Target costing new product New-product target costing The cost reduction management approach Cost reduction techniques Life Cycle Costing (LCC) Overview Life-Cycle Costing (LCC) Costs and expenditures of the product-life cycle Benefits of using Life Cycle Costing (LCC) Throughput Accounting (TA): Overview The concepts of throughput accounting Throughput accounting: A summary Example of a bottleneck constraint in a factory Theory Of Constraints (TOC) and the use of the Five Focusing Steps
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Only the hyperlinks shaded in pink are active for this sample download
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CONTENTS SHEET 2 OF 7
Title SPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES
Mnemonc Mnemonic Chart Mnemonic Mnemonic Chart Chart Mnemonic Mnemonic Mnemonic Mnemonic Chart Mnemonic Mnemonic Mnemonics Chart Mnemonic Chart Chart Mnemonic Mnemonic Chart Chart Chart Mnemonic Chart Chart Mnemonic Chart Chart Chart Chart Chart Chart Chart Mnemonic Mnemonic Mnemonic Constraints on throughput Assessment of throughput accounting (TA) Distinctions between throughput costing and orthodox cost accounting Environmental accounting: Direct and indirect costs Environmental accounting: Contingent or intangible environment costs Environmental accounting: Environmental accounting procedures Environmental reports and communications- the two main roles Environmental accounting: Environmental reports and communications Environmental accounting: Objectives of environmental accounting
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DECISION-MAKING TECHNIQUES
Benefits of identifying and understanding costs Classification of costs Function of costs Factors that influence cost behaviour Assumptions underlying breakeven calculations Applications of break-even charts Rules for short-term cost-based decision making Limitations of the linear programming model Pricing strategy: Overview Examples of pricing objectives Factors that influence a companys pricing strategy Determinants of price elasticity of demand Price elasticity of demand Linear approximation of a curvilinear function Marginal revenue and marginal costs Analysing competitors costs, prices and offers Cost-based pricing strategies Cost-based pricing strategies Cost-based pricing strategies: cost variables Demand-based pricing strategies Demand-based pricing strategies Differential calculus The decision cycle Appropriateness of Relevant Costing Relevant costs Relevant costs The qualitative (non-financial) issues surrounding make versus buy decisions The financial issues surrounding make versus but decisions The qualitative (non-financial) issues surrounding the stay open or close decision
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CONTENTS SHEET 3 OF 7
Title SPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES
Mnemonic Chart Chart Mnemonic Chart Mnemonic Mnemonic Chart Chart Chart Chart Chart Mnemonic Chart Chart Chart Mnemonic Mnemonic Mnemonic Mnemonic Chart Chart Mnemonic Chart Mnemonic Chart Chart Chart Chart Mnemonic Mnemonic Chart Chart Mnemonic The financial (monetary) issues surrounding the stay open or close decision Maximax, maximin and minimax regret techniques Probability and expected values Problems of using expected values in budgeting Using decision tree analysis Benefits of using decision tree analysis Limitations of using decision tree analysis
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BUDGETING
Budgetary control The main areas of study Budgets and budgetary control Role of the Budget Officer Budgetary control procedures Budgetary control feedback loop Principles of responsibility accounting A structure for Responsibility Accounting Terms used in Responsibility Accounting and the role of the management accountant Examples of cost responsibilities Benefits of Responsibility Accounting Problems associated with Responsibility Accounting Advantages of budgetary control Stages involved in a budgetary control system Cybernetic control systems Cybernetic control: Feedback Problems when using a closed feedback control loop Cybernetic control: feed-forward Feed-forward control Top-down and Bottom-up budgeting Bottom-up planning: a caution Example of a bottom-up budgetary control system in a manufacturing concern Example of an incremental budget plan as part of an incremental budgeting system Justification for using the incremental (periodic) budgeting approach Disadvantages of using the incremental (periodic) budgeting approach Zero-based budgeting (ZBB) Example of a Mutually-exclusive decision package as part of a zero-based budgeting system Justification for using the zero-based budgeting (ZBB) approach
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CONTENTS SHEET 4 OF 7
Title BUDGETING
Mnemonic Disadvantages associated with the zero-based budgeting (ZBB) approach Chart Activity-based budgeting (ABB) Chart Example of an activity cost matrix for a sales order department as part of an activity-based budgeting (ABB) system Mnemonic Justification for using the activity-based budgeting (ABB) approach Chart Rolling budgets Mnemonic Justification for using the rolling budgeting approach Mnemonic Disadvantages associated with rolling budgets Chart Overviews of incremental budgeting and zero-based budgeting Chart Overviews of activity-based budgeting and rolling budgets Mnemonic Ways of implementing a change to a companys budgeting system Mnemonic Mnemonic Chart Mnemonic Chart Chart Chart Chart Chart Chart Chart Chart Chart Chart Chart Chart Mnemonic Chart Chart Mnemonic Chart Mnemonic Chart Chart Chart Chart Chart Difficulties of changing a budget system Constraints and limiting factors in budget planning Chilgrove Co: Opening Financial Position (Balance Sheet) Factors considered in preparing the Sales Budget Chilgrove Co: Sales Budget Production Budget (including Chilgrove Co.) Direct Materials Cost Budget (including Chilgrove Co.) Direct Labour Cost Budget (including Chilgrove Co.) Plant Utilisation Budget Production Overhead Budget (including Chilgrove Co.) Selling and Administration Budget (including Chilgrove Co.) Research and Development Budget Master Budget Cash Budget (including Chilgrove Co.) Budgeted Income Statement (including Chilgrove Co.) Budgeted Financial Position (Balance Sheet) (including Chilgrove) Reasons for having a budgeted financial position (balance sheet) - for closing date - as part of the Master budget) Problems with budgetary control Quantitative ways of separating fixed and variable costs Problems with using the high-low method of cost estimation Scattergraph: example Flexing a budget Correlation analysis Time-series analysis Forecasting seasons: additive method Forecasting seasons: proportional method The distinction between additive and proportional models
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CONTENTS SHEET 5 OF 7
Title BUDGETING
Chart Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Learning curve Uses for the learning curve Potential problems associated with the learning curve Difficulties of budget forecasting Assumptions made in the budget planning stage Aides to budget forecasting Factors which affect the degree of forecasting success Evaluation of forecasting techniques Sources and causes of forecasting errors Ways of reducing forecasting errors Behavioural problems of using participation in budgetary control system Pre-requisites for a successful participatory budgetary control system
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Mnemonic Resolution of budget conflict Mnemonic Reasons why budget-holders set difficult to achieve budgets Mnemonic Reasons why budget-holders set easy to achieve budgets Mnemonic Ways that budget-centre managers use to hide slack in budgets Mnemonic Reasons why budget slack should be accepted Mnemonic Problems with accepting budget slack Mnemonic Technical problems with budgetary control Mnemonic Difficulties of budget forecasting Mnemonic Benefits of using spreadsheets in budgeting Mnemonic Dangers inherent in using spreadsheets in budgeting
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CONTENTS SHEET 6 OF 7
Title STANDARD COSTING AND VARIANCE ANALSYSIS
Chart Chart Mnemonic Chart Mnemonic Chart Chart Chart Chart Mnemonic Mnemonic Chart Chart Chart Chart Chart Chart Chart Chart Chart Chart Chart Mnemonic Chart Chart Chart Mnemonic Chart Chart Mnemonic Mnemonic Chart Chart Mnemonic Possible causes of sales and cost variance Possible interrelationships between variances General causes of variances Investigation of variances Policy for investigation of variances Policy for investigation of variances Control chart based on materiality of deviation = 10% of standard Control chart based on materiality of deviation = 10% of standard Control chart based on statistical significance of 95% Ways of improving manufacturing labour efficiency (productivity) Causes for idle time in a manufacturing system Planning and operating variances: Market size and market share variances Steps for producing a performance report using planning and operational variances Example of an operating report (planning/operational variances)
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CONTENTS SHEET 7 OF 7
Title PERFORMANCE MEASUREMENT AND CONTROL Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Chart Chart Mnemonic Mnemonic Mnemonic Chart Chart Chart Chart Chart
Criteria used for measuring management performance Problems in trying to achieve goal congruence Performance indicators commonly used for measuring the performance of divisional management Advantages of the ROI performance measure Limitations of the ROI performance measure Management aspects over which management claim they lack controllability Putting divisional managers back in control Bases used for comparing performances Critical success factors for achieving customer satisfaction Success factors for a strategic management information system (SMAIS) The critical success factors for just-in-time (JIT) management The aims of transfer pricing between divisions Main problems with transfer pricing Types of cost-based transfer price Transfer price based on a variable (marginal) cost Problems with market-based transfer prices Problems with selling to the intermediate market Factors related to negotiated transfer prices The basis for negotiating a transfer price Dual transfer pricing Dual transfer pricing: A numerical example The framework for deciding a transfer price The rules of transfer pricing
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Title
Question Spring Company A question covering activity based costing and the use of performance measures Answer Spring company Question Linacre Company A question covering activity based costing. Answer Linacre Company Question Edward Limited A question covering Target Costing Answer Edward Limited Question HYC A question covering throughput accounting. Answer HYC Question Yam Co A question covering throughput costing. Answer Yam Co Question Wargrin A question covering life-cycle costing. Answer Wargrin Question JD Company A question covering limiting factor analysis and the make or buy decision. Answer JD Company Question A divisional decision A question concerning a close down or stay open decision. Answer A divisional decision Question A company manufacturing agricultural machinery A question covering product mix decision and make or buy. Answer A company manufacturing agricultural machinery Question A four-product company A question covering Graphical Linear Programming. Answer A four-product company Question Small service company A question covering simulation modelling. Answer Small service company Question Union Cars Company A question covering a decision concerning uncertain outcomes. Answer Union Cars Company Question Knight Rider Manufacturing Company Decision concerning uncertain outcomes. Answer Knight Rider Manufacturing Company
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Page 311 (Note: These Questions and Answers are also hyper-linked from appropriate teaching screens.)
Question Responsibility accounting A question covering budgetary control and performance analysis. Answer Responsibility accounting Question Sine Company A question covering the planning of a budget Answer Sine Company Question Spike Company A question covering budget revisions. Answer Spike Company Question Budgeting systems A question covering budget theory. Answer Budgeting systems Question Wisko A question covering flexible budgeting. Answer Wisko Question Mermus Company A question covering flexible budgeting and budget variances. Answer Mermus Company Question Additiv Company A question covering moving averages and the Additive and Proportional methods of seasonal adjustment. Answer Additiv Company Question Seabrook Company A question covering the use of the learning curve to set standard costs Answer Seabrook Company Question Different types of standard A question covering the theory of standard costing Answer Different types of standard Question Ash Company A question covering standard costing variances Answer Ash Company Question Vogum Company A question covering basic variance analysis including mix and yield, which requires operating reports using both absorption and marginal costing Answer Vogum Company Question Alk Company A question covering planning and operating variance analysis Answer Alk Company
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Title
Question Lympne Conglomerates A question covering market volume and market share variances Answer Lympne Conglomerates Question Woodside Charity A question covering budget variances for a non-profit making organisation Answer Woodside Charity Question CAS Company A question covering return on investment (ROI) and residual income (RI) measures Answer CAS Company Question Bridgewater Co Divisional performance measurement Answer Bridgewater Co Question Ties Only Company Small company performance measurement Answer Ties Only Company Question MAS Company A question covering transfer pricing Answer MAS Company
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Formulae Sheet
Learning curve
Y = axb Where Y a x b LR = = = = = cumulative average time per unit to produce x units the time taken for the first unit of output the cumulative number of units the index of learning (log LR/log 2) the learning rate as a decimal
Regression analysis
y = a + bx b = nxy xy n x 2 - ( x ) 2 y b x n n nxy xy
2
a =
r =
(nx
- (x) 2 ny 2 - (y)2
)(
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