ACCA P5 Solution

ACCA P5 Advanced Performance Management
Tuition Note
For exams in June 2015
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ACCA P5 Advanced Performance Management www.globalapc.com
Lesco Group Limited, April 2016

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retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without the prior written
permission of Lesco Group Limited.
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Content
Chapter1: Help company success............................................................................. 5
Session 1.1: Avoid corporate failure ............................................................................................................................6
General indicators ............................................................................................................................................6
Corporate failure prediction.............................................................................................................................7
Chapter 2: Management Accountant Traditional role ............................................. 11
Session 2.1 Traditional Role: ..................................................................................................................................... 12
Session 2.2 Gap analysis ............................................................................................................................................ 13
Session 2.3 Strategy .................................................................................................................................................. 15
1, definition of strategy ................................................................................................................................. 15
2, Johnson and Scholes has classified strategy into 3 levels(types): ............................................................. 15
Session 2.4 Costing .................................................................................................................................................... 31
Session2.4.1 JIT [just-in-time] system ........................................................................................................... 32
Session2.4.2 Total quality management ....................................................................................................... 34
Session2.4.3 Absorption costing VS Activity based costing .......................................................................... 36
Session2.4.4 Job costing ................................................................................................................................ 41
Session2.4.5 Batch costing ............................................................................................................................ 43
Session2.4.6 Target costing ........................................................................................................................... 44
Session2.4.7 Lifecycle costing ....................................................................................................................... 47
Session2.4.8 Environmental management accounting: ................................................................................ 48
Session2.4.9 Benchmarking........................................................................................................................... 57
Session2.4.10 Standard costing:.................................................................................................................... 65
Session2.4.11 Kaizen costing: ....................................................................................................................... 78
Session 2.5 Budgeting ............................................................................................................................................... 83
Session 2.5.1 Basic knowledge about budgeting .......................................................................................... 83
Session2.5.2 Budgeting Types ....................................................................................................................... 92
Session2.5.3 Beyond budgeting .................................................................................................................... 95
Session2.5.4 Budgeting in pubic sector ......................................................................................................... 98
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Session 2.6 Pricing ..................................................................................................................................................... 99

Session2.7 Decision making .................................................................................................................................... 105
Session 2.8 Performance Measurement ................................................................................................................. 113
Session 2.8.1 financial and non financial measurement ............................................................................. 114
Session2.8.1.2 Human Resource Management .......................................................................................... 138
Session2.8.1.3 Balanced scorecard: ............................................................................................................ 141
Session2.8.1.4Performance pyramid .......................................................................................................... 143
Session2.8.1.5 Performance prism .............................................................................................................. 148
Session2.8.1.6 Building blocks model: used in service industry ................................................................. 154
Session2.8.1.7 Six Sigma.............................................................................................................................. 160
Session 2.8.2 behavior aspects.................................................................................................................... 165
Session2.8.3 Divisions performance measurement .................................................................................... 165
Chapter3 Current issues ...................................................................................... 184
Session3.1 Management Accountant Changing role: ................................................................................. 184
Sessoin3.2 Manage information system (MIS):........................................................................................... 187
Session3.3 Business process change ........................................................................................................... 191
Session3.4 Organizational change ............................................................................................................... 194
Session3.5 Integrated report....................................................................................................................... 194
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Chapter1: Help company success
5
Session 1.1: Avoid corporate failure
General indicators
Operational issues
-loss of key staff
-Poor internal control system
-lack of production/service introduction
Financing issues
-profitability problem
-liquidity problem
-gearing problems
Compliance issues
6
Corporate failure prediction

Quantitative measure: Altman Z score
Z = 12X1 + 14X2 + 33X3 + 06X4 + X5
Where:
X1 is working capital/total assets (WC/TA);
X2 is retained earnings reserve/total assets (RE/TA);
X3 is Profit before interest and tax/total assets (PBIT/TA);
X4 is market value of equity/total long-term debt (Mve/total long-term debt);
X5 is Revenue/total assets (Revenue/TA).
Key to remember:
If the score is 3 or above they are financially sound
Between 1.81 and 2.99 they need further investigation [grey area]
Below 1.81 they are in danger of bankruptcy
What to do to prevent failure?
See the signs and take action.
Seek external advice.
Management accept there is a problem.
Make strategic changes as necessary.
Put in more controls and management systems.
Qualitative measure: Argenti A score

Qualitative models such as Argenti use a variety of qualitative and some non-accounting factors such
as management experience, dependence on one or a few customers or suppliers, a history of qualified
audit opinions and the business environment including the industry and economic situation.
Argenti developed a model, which is intended to predict the likelihood of company failure based on
three connecting areas that indicate likely failure:
defects,
mistakes
symptoms of failure
Which are all awarded a specific score.
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Sources
of
problems
A
Variable
Score
Management defects
Chief Executive is an autocrat
Chief Executive also holds position of Chairman
Passive Board of Directors
Unbalanced Board of Directors, not representing all business

functions or overweight in one discipline
Weak Finance Director

Poor management in team
2
1
Accounting defects
No budgets or budgetary controls
No cash flow forecasts, or not up to date
3
3
No costing system: costs and contribution of each product or

service are not known
15
Poor response to change: old-fashioned product or service, obsolete
production facilities, out-of-date marketing methods; old directors
43
B
Management mistakes(as a result from the above defects)

High gearing
15
Overtrading
15
Failure of a big project
15
45
Symptoms of trouble(as a result from the above defects and

mistakes)
Financial indicators forecasting poor results[poor Z-score]
Creative Accounting
Non-financial signs (eg high staff turnover).
4
12
8
Score
Maximum permitted
10
15
0
25
If any score which are more than 25 then it will need immediate action to avoid company insolvency.
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Strengths and weaknesses of quantitative and qualitative models for predicting

corporate failure
Quantitative models:
Advantages:
Quantitative models such as the Altman Z-score use publicly available financial information
about a firm in order to predict whether it is likely to fail within the two-year period.
The advantages of such methods are that they are simple to calculate and provide an objective
measure of failure.
Disadvantages:
However, they only give guidance below the danger level of 18 and there is potential for a
large grey area [1.81-2.99] in which no clear prediction can be made.
Additionally, the prediction of failure of those companies below 18 is only a probabilistic one,
not a guarantee. This means not every company with Z score under 1.8 will go bankruptcy.
These models are open to manipulation through creative accounting which can be a feature of
companies in trouble.
Qualitative models:
Advantages:
The advantage of the method is the ability to use non-financial as well as financial measures
and the judgment of the investigator
Disadvantages:
But this is subjective and will vary from different investigators.
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Chapter 2: Management Accountant Traditional role
Management accounting is to provide information relating to planning, decision making and controlling.
Planning:
Gap analysis - Strategy
Costs
Budgets
Pricing decision
Decision making
Risks and uncertainties decision rules
Controlling
Performance measurement
Different ratios
Divisions measurement
Transfer pricing
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Session 2.1 Traditional Role
Traditionally, it was thought that management accountants needed to be independent from

operational managers in order to allow management accountants to objectively judge and report their
accounting information to senior management.
What management accountant does is to:
1. Compiling information: collect costs relating to each material, labor, overhead etc. focusing on
internal and external information such as existing financial information/ company resources staff
/government report such as inflation rate, predicted exchange rate, consumer expenditure
etc/industry report.[using different costing systems]
2. Analyzing those costs: making sure costs are accurate (how they come with the costs); favorable or
adverse (variance); etc.
3. Preparing budgets using best estimates, ie, sales budget, cash budget etc.
And management accountant would help senior management in the following management
activities:
Planning: [what to do, like strategy]

Plan future activities, budget
Decision making: [do it]

Whether to set up company and what further investment that company may try to make
Control: [if plan is not correct we can correct it later on again]

Variance-Compare results of operation with expected (meet sales/ cost target?)
Performance measurement
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Session 2.2 Gap analysis
This is a difference between current position and the ideal position.

Current position: if you continue to offer ACCA products, you can have $100 return.
Ideal position: shareholders actually want $1,000 of return rather than $100.
And hence $900 is a gap.
But the future forecasts may not be appropriate because its subject to uncertainty.
Our aim is to close/minimize that gap.
Ultimate objective
GAP
$ Revenue
Future
project
s
Current
operatio
ns
Years
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But how?
The way we are going to close the gap is to set appropriate/additional strategies, ie, developing new
products which may give us a better return.
Ansoff growth vector matrix:
A market penetration strategy aims to increase sales within existing markets.
A market development strategy aims to find additional markets for existing products.
A product development strategy aims to find additional products for an organizations

existing customers.
A diversification strategy aims to reduce the risks of a business or to increase its growth
prospects by entering new industries.
Other strategies:
Efficiency strategies which are designed to increase profits (or throughput) by making
better use of resources in order to reduce costs.
Also it is possible to reduce a planning gap that is measured in terms of profit by divesting
of loss-making business units.
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Session 2.3 Strategy
Definition of strategy
Pathways that company uses in order to arrive at vision
Johnson and Scholes has classified strategy into 3 levels (types):

Corporate, business and operational strategy
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Corporate strategy
Within corporate strategy there are 4things:
1. Vision, mission and values

Vision: final destination of company, ie, be a leader in the industry.
Mission: how to do that? Ie, provide high quality services.
Values: core characteristics, ie, fair.
The mission would usually be documented with a mission statement:

A mission statement will commonly contain the following:
- Purpose of the organization.
- Overall strategy of the organization.
- The core values of the organization.
In order to realize the mission, company would usually set lots of objectives to ensure it can meet
with the mission. Objectives are more specific and seek to translate the mission into a series of
mileposts for the organization to follow. So company should firstly identify what are the most
important things for company to succeed (CSF) before setting any specific objectives(KPIs).
Critical success factor (CSF):

Critical success factors are those elements that an organization must perform properly in order to
succeed. These often link with competences. For example, punctuality for train. Customer satisfaction.
We often use balanced scorecard to help us generate into ideas of what CSFs that company should
maintain:
Financial
Non-financial
Customers
Internal
Innovation and learning
Key Performance Indicator (KPI)

KPIs are set to measure the CSR.
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Objective [KPI] setting criteria:

(SMARTIE)
Specific clear statement, easy to understand;
Measurable to enable control and communication down the organization;
Attainable It is pointless setting unachievable objectives;
Relevant appropriate to the mission and stakeholders;
Timed have a time period for achievement.
Innovative come up with new ideas
Environmentally friendly
2. Which industry should company go into or leave
3. Portfolio of company
Parental company [step by step teaching sub; allow sub to use parents resources]
Synergy creator
Portfolio manager [hands off approach]
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4. Possible strategies
Hold
Build up
Harvest
Divest
But the above strategies are based on 2 theories:

1. Lifecycle theory
2. BCG matrix
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Business strategy
Three Steps:
This means how company would compete with different competitors.
There are three steps for this:

Step1: review your current strategic position
We are focusing on SWOT of the company.
Internal: resources and competences; value chain
External: PESTEL/Porters five forces.
International business: Porters diamond
Stakeholders analysis using Mendlows mapping.
Step2: make strategic choices

Generic strategic options
Ansoffs growth vector matrix
Ways to grow business
Step3: evaluate those choices

SFA test.
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Step1: Review your current strategic position

We are going to use SWOT analysis to summarize strength, weaknesses, opportunities and threats of
the company.
[Internal] strengths and weaknesses (SW)
Resources and competences

The resources and competences would stand for the strengths and weaknesses that company has and
this is also referred to as strategic capability defined by Johnson and Scholes.
But what is the difference between resource and competence?

Resource is something that company has and competence is things the company does.
So we can identify different resources and competences that company has such as following:
Machinery
Money
Materials
Men and Women
Makeup (culture)
Markets (products)
Management information
Management
Methods (processes).
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Porters value chain analysis
The five primary activities are:

Inbound logistics: buying raw materials and storage.
Operations: work in progress
Outbound logistics: distribution of product/service
Marketing& Sales: marketing campaign and face to face selling to customers
After sale service: customer service: deal with compliant/maintenance
The four secondary (support) activities are:

Firm infrastructure: organizational structure
Human Resource Management: how to recruit, retain and manage people
Technology Development: research and development
Procurement: getting materials for the company not the individual products, like electricity.
Porter suggests that for each cost in the business which is either value adding or non value adding.
Value-adding: extra benefit > extra cost
Non value-adding: extra benefit < extra cost. Porter suggests than non value-adding activities could
be outsourced.
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[External] opportunities and threats [OT]
*Identify opportunity that company has: (model: PESTEL)

Political includes government policies on education and infrastructure.
Economic includes the state of the economy, interest rates and tax levels.
Social includes attitudes, demographics and household structure.
Technological includes new technologies making current products obsolete.
Environmental includes the move towards environmentally cleaner products.
Legal includes changes in law making it e.g. harder / more expensive to operate.
*Identify threats that company is facing: (model: porters 5 forces)
New Competitors [threat of new entrants]

New entrants always drive down profit margins (as companies have to spend more on marketing or
lower prices to keep customers). New competitors are only kept out by barriers to entry. These
barriers include: High fixed costs, High capital requirements.
Existing Competitors [current rivalry]

If there is a lot of rivalry in an industry then profit margins will be lower as companies constantly fight
to retain their customers.
There will tend to be higher rivalry (and lower profits) when A Market growth is slow.
Customers [power of customers]

Powerful customers prevent companies from putting prices up or implementing other changes.
Customers will be powerful if there is standardization within the industry (making it easier to switch to
another supplier).
Suppliers [power of suppliers]
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Powerful suppliers might put their prices up or impose other changes on the company.
Suppliers will be powerful if there are high switching costs or there are a limited number of suppliers.
Substitutes
If there are many substitutes for a product then it becomes harder to raise prices.
There are three main kinds of substitute:
Direct substitute: where the customer buys the same product from a different manufacturer
Indirect substitute: where the customer buys a product from a different industry to meet the same
need
Monetary substitute: where different industries are competing for the same part of a customers
income.
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Step2: Make strategic choices

*Generic strategic options
Michael Porter comes up with three generic strategic options that company may use, they are:
Option1: to be a cost leader
Option2: to be a product differentiator
Option3: to focus on a particular group of customers (niche strategy)
*Ansoffs growth vector matrix

Another way of coming up with strategic choices would be to use Ansoffs growth vector matrix.
Each option would be detailed below:
1, Market penetration:
Increasing market share in existing markets utilizing existing products.

The main aim is to increase market share using existing products within existing markets.
Data and information should already have been captured making this the least risky option.
Couple this with the experience of the markets and products and knowledge should be present.
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Approach:
First, attempt to stimulate usage by existing customers
New uses advertising / promotions / sponsorships / quantity discounts
Then attempt to attract non-users and competitor customers via

Pricing / Promotion and advertising / Process redesign e.g. Internet/E- commerce
2, Market development:
Entering new markets and segments using existing products.

This aims to increase sales by taking the present product to new markets (or new segments).
Entering new markets or segments may require the development of new competencies which
serve the particular needs of customers in those segments.
E.g. cultural awareness / linguistic skills.

Movement into overseas markets often quoted as good example as the organization will need to build
new competencies when entering international markets.
Approaches:
Direct exporting selling directly to overseas customers.
- Advantages the company gets to know the needs of the final customer
- Disadvantages it may be costly to build up customer awareness.
Indirect exporting selling to intermediaries such as retailers who then sell to final consumer.
- Advantages the company gets access to the local companys knowledge
- Disadvantages the company will not see all of the profits.
Overseas production the company manufactures and sells the products in the target country.
- Advantages distribution costs will be reduced
- Disadvantages may require a large capital investment.
Contract manufacture (licensing) the product is made abroad by another company.
- Advantages lower risk since no need to build manufacturing plant
- Disadvantages may lose control over areas such as quality.
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Joint ventures the company goes into partnership with a local company.
- Advantages lower risk since local knowledge gained and costs shared
- Disadvantages lower returns since profits shared.
3, Product development:
Developing new products to serve existing markets.
This focuses on the development of new products for existing markets.
It offers the advantage of dealing with known customer/consumer bases.
Company needs to be innovative and strong in the area of R&D and have an established,
reliable marketing database.
Constant innovation allows for the developing sophistication of consumers and customers and
ensures that any product-related competitive advantage is maintained.
Products of the company can be balanced by classifying each products based on their market
share and market growth. So here introduces the model of BCG matrix (Boston consulting
group matrix)
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BCG matrix uses two criteria:

1, Relative market share
This seeks to relate the market share of our SBU in relation to the market share of our largest rival.
This will be expressed as a multiple.
BCG suggests that market share gives a company cost advantages from economies of scale and
learning effects. Thus market share is seen as a strategic asset of sorts.
The dividing line is set at 1 - A figure of 4 suggests that SBU share is four times greater than the
nearest rival. 0.1 suggests that the SBU is 10% of the sector leader.
This is something that can be improved upon by management action and strategy and can be used as
a performance measure.
2, Market growth rate

This represents the growth rate of the market sector concerned. Management often have to react to
this as it is difficult to influence
High growth industries offer a more favorable competitive environment and better long term prospects
than slow-growth industries.
The dividing line is set at 10% though this is often modified to high growth and low growth
For different products:

1, Cash cows are in the mature or decline stage of the life cycle:
The threat of new competitors is low and the high market share makes the threats from substitutes
and existing competitors low as well.
This product should be earning reasonable profits.
The product cannot grow any further (since the market is already mature).
2, Stars also have a high market share:

The market is growing (introduction or growth stage of the life-cycle) so new competitors will be
attracted into the market
Prices may need to be kept low to maintain market share
Marketing costs might also need to be high to keep sales up
Profits may not be high.
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3, Question marks (problem child) have a lot of potential due to the high growth. Decision is whether
to:
Spend money to build up market share
Spend money to hold market share
Leave market.
4, Dogs have low market share and low growth. They should be closed unless needed by one of the
other products.
Could be niched small segment but focused product ensures success
Over time a resurgence possible and new life cycle started
May require investment just to keep product in portfolio, especially if the company is offering a one
stop shop or is using the product as a loss leader.
4, Diversification
This involves taking new products to new markets the riskiest option?
Critics argue that it is madness to take resources away from known markets and products only to
allocate them to businesses that the company essentially knows nothing about. This risk has to be
compensated for by higher reward which may or may not exist.
Brand stretching ability is often seen as being the critical success factor for successful diversification.
The new business and its strategy may well have teething problems with its implementation and this
may damage brand reputation. Thus there is significant risk.
Reasons suggested for diversification:
Objectives can no longer be met in known markets possibly due to a change in the external
environment restricting the business in some way.
Company has excess cash and powerful shareholders.
Possible to brand stretch and benefit from past advertising and promotion in other SBUs;
Diversification promises greater returns and can spread risk by removing the dependency on
one product.
Power base increases as presence in more markets - buying power.
Efficiency gains spreading costs.
Greater use of distribution systems and corporate resources such as research and development,
market research, finance and HR leading to synergies. Referred to as stretching corporate
parenting capabilities.
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Synergy the idea that value can be added by combination of units. The value of the whole being
greater than the value of the individual parts
Diversification can take two main forms:

1. Related diversification (concentric diversification)
Growth into similar industries where there is some linkage ie, selling clothes + shoes.
Vertical Integration
Backward secure materials supply, ie, a manufacturing company acquires a company supplying
raw materials.
Forward-secure the sale of product by acquiring a shop.
Horizontal Integration
In order to sell similar products, ie, sell ACCA courses as well as CIMA courses; selling shoes as well
as glasses.
2. Unrelated diversification (conglomerate diversification)

Completely new areas with which the business shares no common ground and so seen as the last of
the growth strategies, ie, selling shoes + selling ACCA courses.
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Step3: Strategic evaluation
After considering all of the potential strategic choices that we are going to choose, the next thing we
can do is to evaluate these choices to see if choices are reasonable.
So we can use a test called SFA test derived by Johnson and Scholes.
*Suitability-fit in to strategy?
Will it meet organizational objectives? Financial & non-financial
Will it take advantage of opportunities?
Will it build on our strengths?
*Feasibility will it work?

Enough resources including capital and other recourses such as human resources.
*Acceptability-will it be accepted by stakeholders?

Risks and rewards.
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Session 2.4 Costing
Absorption costing VS Activity based costing
Job costing
Batch costing
Quality focused management accounting techniques:

(i) Kaizen costing
(ii) Target costing
(iii) Just-in-time
(iv) Total quality management
Environmental accounting
Lifecycle costing
Standard costing
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Session2.4.1 JIT [just-in-time] system
This means to get the right quantity of goods at the right place and at the right time.
This can be split into two parts:

1. purchasing
2. production
Key elements: [mnemonics: PRAISE]

P: Pull approach(demand driven) rather than push approach.
R: match payables to suppliers with receivables from customers.
Order goods from supplier on 1/Jan/2014 and settle the invoice on 6/Jan/2014.
Deliver to customers on 3/Jan/2014 and expect customers to pay on 7/Jan/2014.
So here matching payables with receivables[in this example, only 1 day to finance inventory]
A: any non-value adding activities should be eliminiated so for example, set up time; inspection time;
move time; queue time; storage time etc.
S:Good relationship with suppliers and suppliers should not be too far away from your courenty.
E:There should be easy products, ie, small products lines like only 5 products within your company
rather than hunders of them.
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Comment:
Advantages:
lower working capital requirements;
factory floor space savings;
increased flexibility in meeting the customers individual needs (faster response times to
product specification changes) because this is a pull approach[demand approach].
Disadvantges:
There will be an increased reliance on suppliers and hence increase their power.
For company there could be difficulty in finding local suppliers who are capable of meeting the
required component and delivery standards needed in order to run such a system.
Quality costs will increase as we emphasize on product quality.
If there is any delay in materials delivery then this will result in stock out and hence company
would lose sales revenue.
Multi skills workers would be needed because we need to best utilise resources within company
and maybe its hard to train those multi skill workers and also there would be costs associated
with them.
Also company needs to use appropriate measures to measure bottlenecks in production in

order to increase its efficiency like using throughput accounting and if this is not the case then
JIT system will not be successfully implemented.
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Session2.4.2 Total quality management
Basic principles:
1. Getting things right first time,
On the basis that the cost of correcting mistakes is greater than the cost of preventing them from
happening in the first place.
2. Continuous improvement,
Which is the belief that it is always possible to improve, no matter how high quality may be already.
How to apply?
1. in relation to design.
Products and processes should be designed with quality in mind (so that faults are not incorporated
from the outset). For example, COMPANY would need to ensure that specifications for product were
100% correct.
2. In relation to product production.

The quality of output depends on the quality of input materials and so TQM would require procedures
for acceptance and inspection of goods inwards and measurement of rejects. Inspection of output
could take place at various key stages of the production process to provide a continual check that the
production process is under control.
Machines should be maintained so that quality production occurs.
3. In relation to sales.
Some sub-standard output will inevitably be produced.
Customer complaints should be monitored in the form of letters of complaint, returned goods, penalty
discounts and so on.
4. In relation to suppliers.
Supplier quality assurance schemes could be established so that suppliers would guarantee the quality
of goods supplied. The onus would then be on the supplier to carry out the necessary quality checks or
face cancellation of the contract.
5. In relation to employees.
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Quality should be the primary concern of every employee at every stage of production. Workers must
therefore be empowered and take responsibility for the quality of COMPANY's products, stopping the
production line if necessary. Quality circles might be set up, perhaps with responsibility for
implementing improvements identified by the circle members.
6. In relation to the information system.

The information system should be designed to get the required information to the right person at the
right time.
Costs of non-conformance:
Quality costs
Cost of products that do not meet the prescribed quality standards.
1. Costs of internal failure are money spent repairing a product BEFORE a customer
receives a product that has been found to be faulty.
Examples relevant to the business of COMPANY could include the cost of products scrapped
due to inefficiencies in goods inwards procedures, the cost of products lost in process and the
cost of products rejected during any inspection process.
2. Costs of external failure are money spent repairing a product AFTER the customer has
received a faulty product. Examples include meeting warranty costs.
Costs of conformance:
Ensuring that products are at the acceptable quality standard.
3. Costs of prevention represent the money spent BEFORE products are made to prevent
problems occurring.
Examples include staff training, design and process engineering and machine maintenance.
4. Costs of appraisal are the costs of assessing the level of quality achieved.
This means money spent AFTER products are made to check quality is acceptable.
Examples applicable to COMPANY could be the cost of any goods inwards checks and the
costs of any supplier vetting.
Reduction of non-conformance costs requires an increase in conformance costs in order to
prevent product failures
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Session2.4.3 Absorption costing VS Activity based costing

The aim of these methods is to set up full cost/unit.
How: Link direct and indirect cost (production overhead) to one unit.
AC:
OAR = budgeted overhead
Budgeted level of activities
Use OAR X activities (such as machine hours) to calculate overhead for each product.
ABC:
Steps:
Steps1: cost/driver
Step2: total overhead consumed by each products.
Comment about AC:

Advantage:
Can only work in single product and simple manufacturing environments
Disadvantage:
Inappropriate bases to link overheads to products
Comment about ABC:

Advantages:
1. More accurate product costing.
2. is flexible enough to analyze costs by activity providing more useful costing data.
Disadvantages:
1. Cost vs benefit.
2. ABC information is historic and internally.
3. Difficult to apply in practice.
4. Focuses on the allocation of cost rather than minimizing the cost incurred
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Q: Universal Motors [AC VS ABC]

Universal Motors wants to establish the cost of its products and find when using different costing
method which will lead to different result and detailed information has been given below:
Direct labor costs $6 per hour and production overheads are absorbed on a machine hour basis if
absorption costing approach is used.
Total production overheads are $654,500 and further analysis shows that the total production
overheads can be divided as follows:
%
Costs relating to set-ups
35
Costs relating to machinery
20
Costs relating to materials handling
15
Costs relating to inspection
30
100
Hours per unit
Materials
Production units
Cost per unit ($)

Labour
hours
Machine
hours
Eco
0.5
1.5
20
750
Eco Plus
1.5
12
1,250
Eco Lite
25
7,000
Figure 2: Information relevant to the cost of each types of car

The following total activity volumes are associated with each product line for the period as a whole:
Number of set ups
Number of material
movements
Number of
inspections
Eco
75
12
150
Eco Plus
115
21
180
Eco Lite
480
87
670
670
120
1,000
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Required:
1. Compare full costs per unit using absorption costing and activity based costing(show
your calculation in an appendix) (11marks)
2. Briefly describe advantages and disadvantages of activity based costing (2marks)
Answer to Q: Universal Motors:

(ii)
Using absorption costing:
Full cost/unit
Eco
Eco Plus
Eco Lite
Direct material
20
12
25
Direct labour
42
28
84
65
49
115
0.5hrs X$6/hr
1.5hrs X$6/hr
1hrs
X$6/hr
Overhead
1.5hrs X$28/hr
1hr
X$28/hr
3hrs
X$28/hr
Full cost/unit
Overhead absorption rate=budgeted total overhead

Level of activities
=
$654,500
1.5hrsX750units+1hrX1, 250units +3hrsX7, 000units (23375hrs)
= $28/hr
38
Using activity based costing:

Eco
Direct material
Eco Plus
Eco Lite
20
12
25
Overhead (W)
95
79
69
Full cost/unit
118
100
99
Direct labour
0.5hrs X$6/hr
1.5hrs X$6/hr
1hrs
X$6/hr
W: Steps1: cost/driver
Activities
Cost%
Cost pool
Cost driver
No of drivers
Cost/driver
Set up
35
229,075
No of set up
670
342
Machine hrs
20
130,950
No of hrs
23,375
Materials
15
98,175
No of
handling
120
818
inspection
30
196,350
No of
inspection
1,000
196
100%
$654,500
39
Step2: total overhead consumed by each products.

Eco
Set up
machine hrs
Eco Plus
Eco Lite
Activities
Costs
Activities
Costs
Activities
costs
75
25,643
115
39,319
480
164,113
1,125
6,300
1,250
7,000
21,000
117,600
12
9,817
21
17,181
87
71,137
150
29,453
180
35,343
670
131,554
1.5X750
1X1250
3X7,000
Materials handling
Inspection
71,213
98,843
484,444
750
1,250
7,000
$95/unit
$79/unit
$69/unit
Units produced
Overhead/unit
Advantages:
1. More accurate product costing.
2. Is flexible enough to analyze costs by activity providing more useful costing data.
Disadvantages:
1. Cost vs benefit.
2. ABC information is historic and internally.
3. Difficult to apply in practice.
4. Focuses on the allocation of cost rather than minimizing the cost incurred
40
Session2.4.4 Job costing

Used in environment where each job is unique to customer specifications
Job card:
$
Direct material
Direct labour
Prime cost
Production overhead
Total production cost
Non production overhead(% of prime
cost/production overhead)
X
X
X
X
Total cost
Markup/margin
Selling price
41
Q kitty Ltd
Kitty Ltd is a local jobbing company has just completed a one-off job which involved making a
specialist iron frame. The item was given the job number 505.
Materials issued were as follows:

Steel grade A: 400 metres at a cost of $5.00 per metre
Steel grade B: 800 metres at $6.00 per metre
Note 60 metres of grade B steel were unused and were returned to store.
The iron frame involved two production departments:

Welding: 220 normal hours, 100 overtime hours
Finishing: 100 normal hours, 100 overtime hours
Hourly rate
Welding: $4.00 per normal hour, $1.00 overtime premium
Finishing: $5.00 per normal hour, $1.50 overtime premium
Production overheads are absorbed at the rate of $3.00 per direct labour hour in each department.
Note the company uses cost plus pricing of work and adds 40% to the cost of a job to determine price.
The company is very busy and would not normally work overtime on a job of this nature
Required:
Calculate the cost for Job 505.
42
Session2.4.5 Batch costing
Very same as job costing.

But instead completing each job card
Here we are going to complete many units within the batch.
Q Story Ltd
Story Ltd operates a batch costing system. For a particular order, 8units are produced in a batch.
The following costs were incurred producing the batch:

Direct materials 230
Direct labour 180
Direct labour is paid at 7.50 per hour.
Production overheads are absorbed at a rate of 12 per direct labour hour and nonproduction
overheads are absorbed at a rate of 30% of total production cost.
Required:
Calculate the cost/unit in the batch.
43
Session2.4.6 Target costing

Traditionally:
Cost/unit
$10
Mark-up 40%
Selling price
$4
$14
Now:
Start with selling price:
Target price =
$8
Profit margin =
$1.6
(20%of price)
Target cost/unit $6.4
Actual cost/unit $10
Cost gap
$3.6 (so we need to close the cost gap)

Make process more efficient
Comment about target costing:

Key advantages:
1, Cost reduction and control
Possible elimination of non value added elements and activities in production process.
2, Market based costing

Selling price considers what customer might want to pay for the product.
3, Customers
Customer requirements for quality, cost, and time are incorporated into product and process
decisions. The value of product features to the customers must be greater than the cost of
providing them.
4, Design
Cost control is emphasized at the design stage so any engineering changes must happen before
production starts.
44
Q: june2010 Q5 (target costing)

The Better Electricals Group (BEG) which commenced trading during 2002 manufactures a range of
high quality electrical appliances such as kettles, toasters and steam irons for domestic use which it
sells to electrical stores in Voltland.
The directors consider that the existing product range could be extended to include industrial sized
products such as high volume water boilers, high volume toasters and large steam irons for the hotel
and catering industry. They recently commissioned a highly reputable market research organization to
undertake a market analysis which identified a number of significant competitors within the hotel and
catering industry.
At a recent meeting of the board of directors, the marketing director proposed that BEG should make
an application to gain platinum status quality certification in respect of their industrial products from
the Hotel and Catering Institute of Voltland in order to gain a strong competitive position. He then
stressed the need to focus on increasing the effectiveness of all operations from product design to the
provision of after sales services.
An analysis of financial and non-financial data relating to the application for platinum status for each
of the years 2011, 2012 and 2013 is contained in the appendix.
The managing director of BEG recently returned from a seminar, the subject of which was The Use of
Cost Targets. She then requested the management accountant of BEG to prepare a statement of total
costs for the application for platinum status for each of years 2011, 2012 and 2013. She further asked
that the statement detailed manufacturing cost targets and the costs of quality.
The management accountant produced the following statement of manufacturing cost targets and the
costs of quality:
Required:
(a)Explain how the use of cost targets could be of assistance to BEG with regard to their application
for platinum status. Your answer must include commentary on the items contained in the statement of
manufacturing cost targets and the costs of quality prepared by the management accountant.
(8 marks)
45
Answer to june2010 Q5:

Variable costs and fixed costs
Both variable costs and fixed costs are expected to increase which may be indicative of an
increase in the level of activity.
Quality costs:
Internal failure costs

Internal failure costs are money spent repairing a product BEFORE a customer receives a
product that has been found to be faulty. Eg, the cost of products lost in process and the cost
of products rejected during any inspection process.
External failure costs

External failure costs are money spent repairing a product AFTER the customer has received
a faulty product. Examples include warranty costs.
Prevention costs
Prevention costs represent the money spent BEFORE products are made to prevent problems
occurring, Eg, staff training costs.
Appraisal costs
This means money spent AFTER products are made to check quality is acceptable, eg,
inspection costs.
Trend:
Internal failure costs are expected to fall from 21.9% (2,500/ (8,400 + 3,000))of the cost
target to 7.5%(1,200/(12,600+3,400)) from 2011 to 2013.
External failure costs are expected to decline from 27.2% (3,100/(8,400 + 3,000)) of cost
target to 6.1% from 2011 to 2013.
Prevention costs are expected to fall from $42m in 2011 to $132m in 2013.
Appraisal costs are expected to decrease by $100,000 to $07m in 2012 and to remain at that
level during 2013.
Implication:
In a traditional manufacturing approach to quality, management spend more on conformance

costs(prevention and appraisal) to reduce non-conformance costs(failure costs) but as costs of
conformance are high, especially to secure zero defects, there is an acceptable level of defects.
However in a TQM system, management would aim for zero defects and spend on conformance
costs to reduce total quality costs over time. The emphasis is on getting things right first time
and designing in quality.
BEG is projecting a decrease in all categories of quality cost over the three years which
suggests a TQM approach is being taken.
It would be useful for BEG to obtain some data on costs of quality from the competition in the
hotel and catering industry to get a benchmark for what reasonable costs of quality are since
projections seem a little ambitious.
46
Session2.4.7 Lifecycle costing

Not focusing on accounting period
Lifecycle cost/unit = total lifecycle costs/expected life cycle volumes
Comment:
1, better understand overall costs relating to short life products.
2, avoids products having changing product costs during the life of the product.
Q life ltd
Life ltd wants to produce a brand new pad. The following information is available:
R&D: $100,000
Budgeted total sales/year =10,000 units
Production costs/ year = $150,000
Life of product = 2years
Required:
Calculate the life cost/unit for the pad.
47
Session2.4.8 Environmental management accounting:
Nowadays, business needs to take into account the environmental impact that it has during its
operation of business.
The question is why care?

From a financial perspective:
Raw material
Transport and travel
Water consumption
Energy costs
Clean up costs
Taxations
From a non-financial perspective:

Reputation
Ethics
Stakeholders needs
Pressure on resources
48
Possible strategies:
1, end of pipe strategy-just pay after the pollution
2, process improvement strategy-improve process to decrease pollution
3, prevention strategy-prevent pollution happening by further improving your process
Environmental costs categories:

1, Conventional costs
Such as raw material costs and energy costs which should also include the cost of waste
through inefficiency.
These and other conventional costs (such as regulatory fines) are often hidden within
overheads and therefore will not be a high priority for management control unless they are
separately reported.
2, Contingent costs
Such as the cost of cleaning industrial sites when these are decommissioned.
These are often large sums that can have significant impact on the shareholder value
generated by a project. As these costs often occur at the end of the project life, they can be
given low priority by a management that is driven by short-term financial measures (e.g.
annual profit) and make large cash demands that must be planned at the outset of the project.
3, Relational costs
There are relational costs such as the production of environmental information for public
reporting.
This reporting will be used by environmental pressure groups and the regulator and it will
demonstrate to the public at large the importance that PLX attaches to environmental issues.
4, Reputational costs
If the company is failing to address environmental issues and if this is made public then it
would impair companys reputation and hence company would lose sales revenue.
49
How to account for it?

1, input/output analysis:
100%
Input
80%finish
ed goods
10%scrap
value
10%
waste
Analyze costs throughout the process and minimize the cost.
2, flow cost accounting:

The aim of flow cost accounting is to reduce the quantities of material which should be beneficial to
the environment and saving costs for the organizations.
It uses material flows and organizational structures to make material flows more transparent and it
divides the material flows into:
material-these are costs and values of materials involved in the production processes.
c system-these are costs and values of internal handling of materials, eg, personal costs
delivery and disposal-these are costs of material flows leaving the company, eg, transport costs or
waste disposal
3, activity based costing

There are:
environmentally related costs which can be specifically attributed to an environmental cost center,
eg, sewerage plants.
environmentally driven costs which do not relate to a specific cost center but relate to environmental
drivers, eg, higher staff costs due to more toxic emission during the production process.
In order to allocate the environmentally driven costs to cost centers its important to find adequate
costs drivers such as volumes of water and toxicity of emissions.
50
4, lifecycle costing
It considers costs and revenue throughout the life of a product from initial design stage to the end of
its life to be removed from market.
This allows an early focus which can help decision making such as pricing and the design of the
product taking into account of future environmental costs such as cleanup costs.
Q Pilot paper Q4 [lifecycle costing + environmental management accounting]
Refinery Co is a large oil refinery business in Kayland. Kayland is a developing country with a large
and growing oil exploration and production business which supplies PLX with crude oil. Currently, the
refinery has the capacity to process 200,000 barrels of crude oil per day and makes profits of $146m
per year. It employs about 2,000 staff and contractors. The staff are paid $60,000 each per year on
average (about twice the national average in Kayland).
The government of Kayland has been focused on delivering rapid economic growth over the last 15
years. However, there are increasing signs that the environment is paying a large price for this growth
with public health suffering. There is now a growing environmental pressure group, Green Kayland
(GK), which is organizing protests against the companies that they see as being the major polluters.
Kaylands government wishes to react to the concerns of the public and the pressure groups. It has
requested that companies involved in heavy industry contribute to a general improvement in the
treatment of the environment in Kayland.
As a major participant in the oil industry with ties to the nationalized oil exploration company (Kayex),
PLX believes it will be strategically important to be at the forefront of the environmental developments.
It is working with other companies in the oil industry to improve environmental reporting since there
is a belief that this will lead to improved public perception and economic efficiency of the industry. PLX
has had a fairly good compliance record in Kayland with only two major fines being levied in the last
eight years for safety breaches and river pollution ($1m each).
The existing information systems within PLX focus on financial performance. They support financial
reporting obligations and allow monitoring of key performance metrics such as earnings per share and
operating margins. Recent publications on environmental accounting have suggested there are a
number of techniques (such as input/ output analysis, activity-based costing (ABC) and a lifecycle
view) that may be relevant in implementing improvements to these systems.
PLX is considering a major capital expenditure program to enhance capacity, safety and efficiency at
the refinery. This will involve demolishing certain older sections of the refinery and building on newly
acquired land adjacent to the site. Overall, the refinery will increase its land area by 20%.
Part of the refinery extension will also manufacture a new plastic, Kayplas. Kayplas is expected to
have a limited market life of five years when it will be replaced by Kayplas2. The refinery accounting
team have forecast the following data associated with this product and calculated PLXs traditional
performance measure of product profit for the new product:
51
All figures are

$ms
2012
25.0
2013
27.5
2014
30.1
2015
33.2
2016
33.6
13.8
15.1
16.6
18.3
18.5
Marketing costs
Development costs
5.0
5.6
4.0
3.0
3.0
0.0
3.0
0.0
2.0
0.0
Product profit
0.6
5.4
10.5
11.9
13.1
Revenue generated
Costs
Production costs
Subsequently, the following environmental costs have been identified from PLXs general overheads as
associated with Kayplas production.
2012
2013
2014
2015
2016
Waste filtration
1.2
1.4
1.5
1.9
2.1
Carbon dioxide exhaust extraction
0.8
0.9
0.9
1.2
1.5
Additionally, other costs associated with closing down and recycling the equipment in Kayplas
production are estimated at $18m in 2016.
The board wishes to consider how it can contribute to the oil industrys performance in environmental
accounting, how it can implement the changes that this might require and how these changes can
benefit the company.
Required:
(a) Discuss and illustrate four different cost categories that would aid transparency in environmental
reporting both internally and externally at PLX.
(6 marks)
(b) Explain and evaluate how the three management accounting techniques mentioned can assist in
managing the environmental and strategic performance of PLX. (9 marks)
(c) Assess the impact of implementing an input/output analysis on the information systems used in
PLX.
(3 marks)
(d) Evaluate the costing approach used for Kayplass performance compared to a lifecycle costing
approach, performing appropriate calculations.
(7 marks)
(25marks)
52
Answer to pilot paper Q4:

(a)
Conventional costs
Such as raw material costs and energy costs which should also include the cost of waste
through inefficiency.
These and other conventional costs (such as regulatory fines) are often hidden within
overheads and therefore will not be a high priority for management control unless they are
separately reported.
Contingent costs
Such as the cost of cleaning industrial sites when these are decommissioned.
These are often large sums that can have significant impact on the shareholder value
generated by a project. As these costs often occur at the end of the project life, they can be
given low priority by a management that is driven by short-term financial measures (e.g.
annual profit) and make large cash demands that must be planned at the outset of the project.
Relational costs
There are relational costs such as the production of environmental information for public
reporting.
This reporting will be used by environmental pressure groups and the regulator and it will
demonstrate to the public at large the importance that PLX attaches to environmental issues.
Reputational costs
If the company is failing to address environmental issues and if this is made public then it
would impair companys reputation and hence company would lose sales revenue.
53
(b)
Lifecycle costing
It considers costs and revenue throughout the life of a product from initial design stage to the
end of its life to be removed from market.
This allows an early focus which can help decision making such as pricing and the design of the
product taking into account of future environmental costs such as cleanup costs.
Activity based costing

There are:
1, environmentally related costs which can be specifically attributed to an environmental cost center,
eg, sewerage plants.
2, environmentally driven costs which do not relate to a specific cost center but relate to
environmental drivers, eg, higher staff costs due to more toxic emission during the production process.
In order to allocate the environmentally driven costs to cost centers its important to find adequate
costs drivers such as volumes of water and toxicity of emissions
Input/output analysis:
Input/output analysis (sometimes called mass balance) considers the physical quantities input
into a business process and compares these with the output quantities with the difference
being identified as either stored or wasted in the process.
These physical quantities can be translated into monetary quantities at the end of the tracking
process.
Flow cost accounting:
The aim of flow cost accounting is to reduce the quantities of material which should be
beneficial to the environment and saving costs for the organzations.
It uses material flows and organizational structures to make material flows more transparent
and it divides the material flows into:
1, material-these are costs and values of materials involved in the production processes.
2, system-these are costs and values of internal handling of materials, eg, personal costs.
3, delivery and disposal-these are costs of material flows leaving the company, eg, transport
costs or waste disposal.
54
Comment about methods:
However, cost/benefit analysis will need to be undertaken for each of the systems.
This will be difficult, as benefit estimates will prove vague given the unknown nature of the
possible improvements that may accrue from using the techniques.
ABC and input/output analysis will require significant increases in the information that the
management accounting systems collect and so incur increased costs
Input/output analysis will require the information systems to collect not just monetary but also
physical measurements of the materials being processed through the refinery.
This may require additional records and costly changes to companys existing database
structures.
Systems will have to be put in place to monitor physical volumes of raw materials, waste and
recycled material within the refinerys processes.
(c)
(d)
Traditional costing:
This ignores capital costs, environmental costs and the cost of decommissioning.
Revenue
149.4
Production, marketing and development costs [use 149.4-41.5]
107.9
Product profit(over 5 years)
41.5
Profit margin
27.8%
Lifecycle costing:
A lifecycle analysis aims to capture the costs over the whole lifecycle of the product:
Revenue
149.4
Production, marketing and development costs[use 149.4-41.5]
107.9
Waste filtration
8.1
Carbon dioxide exhaust extraction
5.3
Decommissioning costs
18
revised product profit
10.1
Profit margin
6.8%
55
Comment:
When the environmental costs are all included, the forecast profit margin on the Kayplas
project is reduced from 27.8% to 6.8%, which makes it a much less attractive investment.
If the actual costs of decommissioning in five years time are higher than the forecast for
example, due to changes in environmental legislation in the next five years - then the profit
margin will be reduced even further.
Lifecycle costing makes the post-production costs such as decommissioning costs visible at the
start of the project and in the design stage of the product and this should help PLX to minimize
those.
Eg, they could investigate whether they could design any of the equipment to be used to
produce Kayplas in such a way that it could also be used to produce Kayplas2.
56
Session2.4.9 Benchmarking
The idea of comparing performance is called benchmarking.

Benchmarking is the process of identifying best practice in relation to both products (including) and
the processes by which those products are created and delivered. The search for best practice can
take place both inside a particular industry, and also in other industries.
Benchmarking is the establishment, through data gathering, of targets and comparators, through
whose use relative levels of performance can be identified.
By adoption of identified best practices it is hoped that performance will improve
Process:
1, Decide the areas to benchmark. I.e. improve efficiency.
2, Identify key performance drivers and indicators
The performance drivers have been provided and the indicators are based on the activity per driver.
3, Select organizations for benchmarking comparison
4, Measure performance of all organizations involved in benchmarking
This step would normally be more complex in a private sector situation as commercial secrecy would
hinder the sharing of information.
5, Compare performances
6, Specify improvement projects
7, Implement and monitor improvements
57
Types:
Functional benchmarking
This is where a function of the business is compared to a similar function of another business.
The two businesses do not necessarily have to be competitors.
This sort of benchmarking can lead to innovation and dramatic improvements.
Competitive or performance benchmarking
Businesses consider their position in relation to performance of the best in the sector.
Competitors are unlikely to provide willingly any information for comparison so this type of
analysis is often undertaken through trade associations or third parties to protect
confidentiality.
Internal benchmarking
This involves comparing businesses or operations from within the same organisation (eg
business units in different countries).
Strategic benchmarking
This is a form of competitive benchmarking where businesses need to improve overall

performance by examining the long-term strategies and general approaches that have enabled
competitors to succeed to succeed.
It involves considering high level aspects such as core competencies and developing new
products.
Changes resulting from this type of benchmarking may be difficult to implement.
Again, the above can only be done if the company has adopted appropriate performance
measures.
58
Advantages and disadvantages:

Advantages:
Highlighting which processes need improvement.
Focusing managers on the need for change.
Helping with efficiency and effectiveness.
Helping to prevent failing to meet threshold competences.
Helping to identify that distinctive competences are in advance of rivals.
Disadvantages:
Implying that there is a single best way to do things which must be copied by all.
It is not appropriate if the industry is changing radically.
It can mean the company is always behind its rivals.
The wrong activities might be examined.
It depends on accurate measurements.
59
You are also required to calculate the following ratios:

1. Profitability
Return on Capital Employed.
Gross Profit Margin.
Asset Turnover.
2. Liquidity
Current ratio.
Acid ratio.
Inventory days.
Receivables days.
Payables days.
3. Gearing
Debt / Equity ratio.
60
Q June2012 Q4 [Benchmarking]
Ganymede University (GU) is one of the three largest universities in Teeland, which has eight
universities in total. All of the universities are in the public sector. GU obtains the vast majority of its
revenue through government contracts for academic research and payments per head for teaching
students. The economy of Teeland has been in recession in the last year and this has caused the
government to cut funding for all the universities in the country.
In order to try to improve efficiency, the chancellor of the university, who leads its executive board,
has asked the head administrator to undertake an exercise to benchmark GUs administration
departments against the other two large universities in the country, AU and BU. The government
education ministry has supported this initiative and has required all three universities to cooperate by
supplying information.
The following information has been collected regarding administrative costs for the most recent
academic year:
The key drivers of costs and revenues have been assumed to be research contract values supported,
student numbers and total staff numbers. The head administrator wants you to complete the
benchmarking and make some preliminary comment on your results.
Required:
(a) Assess the progress of the benchmarking exercise to date, explaining the actions that have been
undertaken and those that are still required.
(8 marks)
(b) Evaluate, as far as possible, Ganymede Universitys benchmarked position.
(9 marks)
(17 marks)
61
Answer to june2012 Q4:

(a)
1. Decide the areas to benchmark. I.e. improve efficiency.
GU is trying to improve efficiency and is benchmarking all of its administration operations relating to teaching and
research.
2. Identify key performance drivers and indicators
The performance drivers have been provided and the indicators are based on the activity per driver. The drivers might
be improved by distinguishing between teaching staff and administrative staff.
3. Select organizations for benchmarking comparison
The government selected the three largest universities for benchmarking which excludes five other smaller universities.
4. Measure performance of all organizations involved in benchmarking
The basic data has been gathered as required by government. This step would normally be more complex in a private
sector situation as commercial secrecy would hinder the sharing of information.
5. Compare performances with other universities.
6. Specify improvement projects
The results of the comparison should lead to identification of areas for improvement. If GU is not demonstrating leading
performance then it should send staff to the top performer to identify their best practice processes and devise projects to
implement these at GU.
7. Implement and monitor improvements
Management should perform a post-project review in order to identify if the improvement has achieved or exceeded its
goals and consider lessons that have been learned from the project.
62
(b)
GU ($)
AU($)
BU($)
78
87
97
226
257
281
951
1,197
920
71
89
73
Teachers support services
506
532
544
Accounting
204
204
197
Human resources
156
156
191
IT management
817
803
737
General services
2,153
2,088
2,286
Research [research/contract value]

Contract management
Lab
Teaching facilities management[exp/students]
Student support services[exp/students]
Other support services[exp/staff]
Research
GU has the lowest costs relative to the value of the research contracts supported, and it has also
earned the highest value contracts.
This may suggest that GU continues to maintain its good practice in cost controls.
Teaching facilities management & Student support services

AU spends significantly more per student on its teaching facilities and student support than the other
two universities but with fewer students.
The lower student numbers at AU may also reflect that it only wants to accommodate a smaller
number of students and therefore sets harder entry requirements than the other two.
So we can compare factors such as student drop out rates, pass rates, and students success rates in
gaining employment after they graduate.
Other support services
Teachers support services
Costs of BU is higher than the other two and it is with the highest amount of students and hence it
may suggest that students are interested in teachers support services.
Human Resources
BUs human resource costs per staff member are 22% higher than the other two universities although
its with more staff than GU and it may suggest that GU is more efficient.
63
IT management
GU spends more (around 11%) on IT management than BU. However, this may be due to the subjects
being taught.
E.g. if GU offers more science and technology-based subjects this is likely to mean it will need greater
computing resources than if it offers more arts subjects.
Further investigation:
We need to obtain further information:
1. subjects being taught to determine the costs relating to IT management;
2. locations of universities to determine the staff costs levels.
64
Session2.4.10 Standard costing:

Standard cost card
$
Direct material(3kg/unitX$4kg)
12
Direct labor(2hrs/unitX$6/hr)
12
Variable overhead(2hrs/unitX$4/hr)
Standard variable cost
32
Fixed overhead(2hrs/unitX$8/hr)
16
Standard cost
48
Standard profit(50%mark up)
24
Standard selling price
72
The standard set by the company would be:

1, ideal standard:
Base on perfect standard-no efficiency in the process but demotivation
2, attainable standard:
Improves on current standard but still allows for small inefficiency in the process, e.g. want to improve
last years result and admit this is not perfect due to some factors.
3, current standard:
Standard an organisation is currently achieving. It does not provide inspiration for improvement but it
does provide a benchmark against which to measure day-to-day activity.
4, basic or historic standard:
This is a standard (e.g. cost/unit) that was set some time ago and has not been updated. It allows a
company to measure its progress over time.
But in the real life that the standard cost would be always different from the actual cost.
And we need to investigate reasons why there would be difference between the two (variance analysis)
65
Basic variance analysis:

Variance analysis
Sales
variance
Material
variance
Labour
variance
Fixed
overhead
variance
Variable
overhead
variance
Variance can be favorable or adverse.

1, FAVOURABLE VARIANCES occur when actual results are better than expected, producing higher
than expected profits.
2, ADVERSE VARIANCES occur when actual results are worse than expected, producing lower than
expected profits.
Cost variance:
1, Materials:
Standard cost: 3kg/unit X$4/kg
$12
Actual:
Output
1,400units
Material used: 3,000kg
$15,000
Required:
Calculate usage and price variance for materials.
66
Possible reasons for material variance:

Piece variance
Usage variance
1, budget is wrong
1, budget is wrong
2, material quality changes
2, theft
3, purchasing issues (discount?)
3, material quality changes
4, external factors(inflation)
4, labour quality changes
2, Labor
Standard cost: 2hrs/unit X$6/hr
=$12
Actual:
Output
1,400units
Labor: 3,000hrs
20,000
Required:
Calculate efficiency and rate variance.
Possible reasons for labour variance:

Efficiency
Rate
Budget
Labour quality
Labour quality
Inflation
Motivation
Unplanned changes/bonus
Idle time?
67
3, Variable overhead variance

Standard: 2hrs/unit X $4/hr
=$8/hr
Actual:
Output
1,400units
Actual variable overhead
3,000hrs
$11,000
Required:
Calculate variable overhead variance.
Possible reasons:
Efficiency
Expenditure
Same as labour efficiency
Need to breakdown and investigate
4, Fixed overhead variance:
Budget
Actual
Units
1,000
1,100
Hours
2,000
2,300
Fixed overhead Costs
$10,000
$11,000
Required:
Calculate variances for fixed overheads
68
Possible reasons:
Efficiency
Capacity
Volume
Expenditure
Labour worked
overtime?
Labour worked
overtime?
Need to breakdown
and investigate
Motivation?
Motivation?
Eg, saving in costs?
Labour shortages?
Labour shortages?
Machine
breakdown?
Machine
breakdown?
Efficient labour?
5, Revenue Variance:
Q Tony
Output:
Budgeted 1,000units
Actual
1,400units
Standard variable cost $32/unit

Standard full cost $48/unit
Standard selling price $70/unit
Actual selling price $$65/unit
Required:
Calculate the following variances for Tony:
1, sales volume variance
2, sales price variance
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Advanced variance analysis
1, Planning and operational variance

Planning variance is due to planning error and uncontrollable items by management so management
should not be measured based on planning variance.
E.g. if the standardized purchase price for the material is $50/kg and the actual is $60/kg then it may
suggest management has spent more to purchase the raw material then it should be of $10/kg. But if
Im going to give you further information that theres an inflation in the prices of 10% which means
10%X$50/kg=$5.kg is not controllable by the management and this is the planning variance. Theres
only $5/kg which is controllable by the management then this is operational variance.
70
Planning variance
Operational variance
(replace actual with revised

standard)
(replace standard with revised

standard)
SQSP
RSQRSP
RSQSP
AQRSP
RSQRSP
AQAP
SQSP
Usage
AQSP
Price
AQAP
Q POPO
POPO involves in selling bottles and it incurred the following information when making a bottle.
Standards:
3kg/unit for $5/kg
Actual:
Output: 12,500units
Usage of material: 38,000kg
Costs: $195,500
Required:
Calculate the basic usage and price variance suggesting whether production and purchase
manager have done a good job.
Calculate the planning and operational variance if further investigation has suggested that due
to the poor harvest that POPO used poorer quality of material and increases the usage to
3.1kg/unit and due to inflation that purchase cost has increased to $5.15/kg.
71
2, Mix and yield variance

Mix variance is saying a change in the material mix will have a higher or lower cost than standard
input cost.
Yield variance is saying a change in the material mix will have an impact on the output valued a
standard costs.
This is the sub analysis for the material usage variance.
Mix and yield variance applied where:

1, A mix-2 or more materials in making a product
2, material inputs are inter-changeable.
SQSP
Yield variance
AQ(SM)SP
Mix variance
AQSP
Price variance
AQAP
72
MM Ltd
MM ltd manufactures a special wine where three components apply:
Standard proportions
Standard cost/tonne
70
20
20
30
10
50
A production loss of 10% happened.
In May, 855 tonnes of wine were produced and inputs were as follows:
actual inputs (tonnes)
Actual prices/tonnes
Actual cost
660
21
13,860
210
32
6,720
130
47
6,110
1,000
Required:
Calculate the material price, mix and yield variances
73
26,690
3, Sales volume variance break down:
From our early study, we notice:

Volume variance= (AS-BS)SCM
= AS SCM BS SCM
When a company has two or more products (products mix) we might need to analyze which product
we can sell more and which product we can sell less.
So breaking it down further:
AS SCM
Sales mix variance
AS(SM) SCM
Sales quantity variance
BS SCM
Q KITTY
Kitty has two products to sell: Gitty and Bitty
Standards (budget):
units
Standard
price
Standard
cost
Gitty
1,500units
$50
$40
Bitty
2,500units
$80
$60
Sales
74
Actual results:
units
Standard
price
Gitty
2,000units
$55
Bitty
2,250units
$83
Sales
Required:
Calculate the sales mix and quantity variances.
*Market size and market share variances

Sales quantity variances we analyzed above simply saying whether the number of goods sold is
greater or less than expected.
This can be due to:
1, market size: the wider economic growth which leads to more demand in the goods and this is not
controllable by the management which is a planning variance.
2, market share: the profit we retained in the market so this is controllable and this is determined by
management action.
AS SCM
Market size variance
RS(actual market size) SCM
Market share variance
BS SCM
Q MZ ltd
MZ ltd has incurred the following information:
Budgeted (standard) sales volume=250,000units
75
Actual sales volume=240,000units

Standard contribution margin=$6/unit
The total market volume shows a slump of 10%.
Required:
Calculate market size and market share variance.
4, idle time variances

This is the difference between hours paid and worked maybe theres a material stock out or machine
breakdown or you retained some of the staff within your company in case you need them even though
theres little work to do.
SH SR
Efficiency
AHW SR
Idle time
AHP SR
rate
AH AR
If budgeted idle time is incorporated:
SH SRW
Efficiency
AHW SRW
Idle time
AHP SRP
rate
AH ARP
76
Q Jean Ltd
Labour situation within Jean Ltd is as follows:
Standard:
$6/hr X3hr/unit =$18/unit
Actual results:
Output: 1,200units
Hours worked: 4,200hours
Hours paid: 5,500hours
Labour cost: 432,000
(i) Calculate the labour efficiency variance, labour idle time variance and labour rate variance.
(ii) Calculate the labour efficiency variance, labour idle time variance and labour rate variance if we
expect to lose 20% of labour hours due to idle time.
77
Session2.4.11 Kaizen costing: -Kai; -Zen
Kaizen can be translated as continuous improvement.

Kaizen costing applies functional analysis in the design phase to create a target cost for each
production function.
These are totalled to give a product target cost which, after the first year of production, is used as the
baseline for further on-going reductions. These reductions in turn reduce the baseline cost and so on
as the production process improves
The management attitude to employees is different in the standard costing system and Kaizen costing
system, as in continuous improvement systems they are the source of the improvement solutions
while in standard costing systems with its analysis of variances of labour rates and efficiencies, the
employees are often seen as the source of problems.
In the Kaizen system, the employees often work in teams and are empowered to make changes to
production that would have to be cleared through a management hierarchy in a more static standard
costing system. Changing the costing system would be likely to represent a major cultural change at
Tench with its history of bureaucratic control.
78
Q: DEC2011 Q5 [Kaizen costing & JIT]

Tench Cars (Tench) is large national car manufacturing business. It is based in Essland, a country that
has recently turned from state communism to democratic capitalism. The car industry had been
heavily supported and controlled by the bureaucracy of the old regime. The government had stipulated
production and employment targets for the business but had ignored profit as a performance measure.
Tench is now run by a new generation of capitalist business people intent on rejuvenating the
companys fortunes.
The company has a strong position within Essland, which has a population of 200 million and forms
the majority of Tenchs market. However, the company has also traditionally achieved a good market
share in six neighbouring countries due to historic links and shared culture between them and Essland.
All of these markets are experiencing growing car ownership as political and market reforms lead to
greater wealth in a large proportion of the population. Additionally, the new government in Essland is
deregulating markets and opening the country to imports of foreign vehicles.
Tenchs management recognizes that it needs to make fundamental changes to its production
approach in order to combat increased competition from foreign manufacturers. Tenchs cars are now
being seen as ugly, pollutive and with poor safety features in comparison to the foreign competition.
Management plans to address this by improving the quality of its cars through the use of quality
management techniques. It plans to improve financial performance through the use of Kaizen costing
and just-in-time purchasing and production. Tenchs existing performance reporting system uses
standard costing and budgetary variance analysis in order to monitor and control production activities.
The Chief Financial Officer (CFO) of Tench has commented that he is confused by the terminology
associated with quality management and needs a clearer understanding of the different costs
associated with quality management. The CFO also wants to know the impact of including quality costs
and using the Kaizen costing approach on the traditional standard costing approach at Tench.
Required:
Write to the CFO to:
(a) Discuss the impact of collection and use of quality costs on the current costing systems at Tench.
(6marks)
(b) Discuss and evaluate the impact of the Kaizen costing approach on the costing systems and
employee management at Tench.
(8 marks)
(c) Briefly evaluate the effect of moving to just-in-time purchasing and production, noting the impact
on performance measures at Tench.
(6 marks)
(20 marks)
79
Answer to DEC2011 Q5:

(a)
The costs of quality will probably be hidden in overheads in the standard costing system at Tench.
The existing system will need to be modified to separate these costs.
Quality costs:
Internal failure costs

Internal failure costs are money spent repairing a product BEFORE a customer receives a
product that has been found to be faulty. Eg,the cost of products lost in process and the
cost of products rejected during any inspection process.
External failure costs

External failure costs are money spent repairing a product AFTER the customer has
received a faulty product. Examples include warranty costs.
Prevention costs
Prevention costs represent the money spent BEFORE products are made to prevent
problems occurring, E.g. staff training costs.
Appraisal costs
This means money spent AFTER products are made to check quality is acceptable, eg, inspection
costs.
The identification and collection of these costs will help Tench to raise the quality of its products
in order to compete more effectively with the new imports.
Reduction of non-conformance costs (failure costs) requires an increase in conformance costs
(prevention and appraisal costs) in order to prevent product failures
80
(b)
Kaizen costing
The Kaizen costing process focuses on producing constant, small, incremental cost
reductions throughout the production process during the products life.
Kaizen can be translated as continuous improvement. Kaizen costing applies functional

analysis in the design phase to create a target cost for each production function.
These are totalled to give a product target cost which, after the first year of production, is
used as the baseline for further on-going reductions.
These reductions in turn reduce the baseline cost and so on as the production process
improves.
Change
For standard costs which are fixed over the relevant period but as process is continually
improving and hence standard costs have much less value.
And hence Kaizen costing can respond more easily to a dynamic business environment.
Control VS Reduction
Standard costing is used to control costs while Kaizen costing focuses on cost reduction.
In the standard costing system, employees are seen as cost burden.
In the Kaizen system, the employees often work in teams and encouraged to make
changes to production in order to make it more efficient.
And hence the change in the costing system would require a change in the corporate
culture, ie, from workers are getting command to workers are actively looking for problems.
Benefits of Kaizen costing:
It would allow company to address quickly the changing nature of Tenchs competitive
environment.
It will increase staff motivation because staff are involved in making decisions of how to
improve company efficiency.
81
(c)
JIT
This means to get the right quantity of goods at the right place and at the right time.
This can be split into two parts: 1. Purchasing; 2. production
Key elements:
P: Pull approach(demand driven) rather than push approach.
R: match payables to suppliers with receivables from customers.
Order goods from supplier on 1/Jan/2014 and settle the invoice on 6/Jan/2014.
Deliver to customers on 3/Jan/2014 and expect customers to pay on 7/Jan/2014.
So here matching payables with receivables[in this example, only 1 day to finance inventory]
A: any non-value adding activities should be eliminiated so for example, set up time; inspection
time; move time; queue time; storage time etc.
S:Good relationship with suppliers and suppliers should not be too far away from your courenty.
E:There should be easy products, ie, small products lines like only 5 products within your
company rather than hunders of them.
Impact on Tench:
Advantages:
lower working capital requirements;
factory floor space savings;
increased flexibility in meeting the customers individual needs (faster response times to
product specification changes) because this is a pull approach[demand approach].
Disadvantges:
There will be an increased reliance on suppliers and hence increase their power.
For company there could be difficulty in finding local suppliers who are capable of meeting
the required component and delivery standards needed in order to run such a system.
Quality costs will increase as we emphasize on product quality.
If there is any delay in materials delivery then this will result in stock out and hence
company would lose sales revenue.
Multi skills workers would be needed because we need to best utilise resources within
company and maybe its hard to train those multi skill workers and also there would be
costs associated with them.
Also company needs to use appropriate measures to measure bottlenecks in production in

order to increase its efficiency like using throughput accounting and if this is not the case
then JIT system will not be successfully implemented.
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ACCA P5 Advanced Performance Management

For exams in June 2015

Lesco Group Limited, April 2016

Session 2.6 Pricing ..................................................................................................................................................... 99

Chapter1: Help company success

Session 1.1: Avoid corporate failure

Corporate failure prediction

If the score is 3 or above they are financially sound

Below 1.81 they are in danger of bankruptcy

What to do to prevent failure?

See the signs and take action.

Seek external advice.

Management accept there is a problem.

Make strategic changes as necessary.

Put in more controls and management systems.

Qualitative measure: Argenti A score

Which are all awarded a specific score.

Chief Executive is an autocrat

Chief Executive also holds position of Chairman

Passive Board of Directors

Unbalanced Board of Directors, not representing all business

Weak Finance Director

No cash flow forecasts, or not up to date

No costing system: costs and contribution of each product or

Management mistakes(as a result from the above defects)

Failure of a big project

Symptoms of trouble(as a result from the above defects and

Non-financial signs (eg high staff turnover).

Strengths and weaknesses of quantitative and qualitative models for predicting

But this is subjective and will vary from different investigators.

Chapter 2: Management Accountant Traditional role

Session 2.1 Traditional Role

Traditionally, it was thought that management accountants needed to be independent from

Planning: [what to do, like strategy]

Decision making: [do it]

Control: [if plan is not correct we can correct it later on again]

Session 2.2 Gap analysis

This is a difference between current position and the ideal position.

A market penetration strategy aims to increase sales within existing markets.

A product development strategy aims to find additional products for an organizations

Session 2.3 Strategy

Johnson and Scholes has classified strategy into 3 levels (types):

1. Vision, mission and values

The mission would usually be documented with a mission statement:

Critical success factor (CSF):

Key Performance Indicator (KPI)

Objective [KPI] setting criteria:

2. Which industry should company go into or leave

But the above strategies are based on 2 theories:

There are three steps for this:

Step2: make strategic choices

Step3: evaluate those choices

Step1: Review your current strategic position

[Internal] strengths and weaknesses (SW)

Resources and competences

But what is the difference between resource and competence?

Porters value chain analysis

The five primary activities are:

The four secondary (support) activities are:

[External] opportunities and threats [OT]

*Identify opportunity that company has: (model: PESTEL)

*Identify threats that company is facing: (model: porters 5 forces)

New Competitors [threat of new entrants]

Existing Competitors [current rivalry]