ACCA Paper F5

1 PERFORMANCE MANAGEMENTP aper F5 OpenTuition Course Notes can be downloaded FREE from belongs to - please do not support piracy by downloading from other for the latest updates, watch free video lectures and get free tutor support on the forumsACCA COURSE NOTESDECEMBER 2014 EXAMINATIONSP lease spread the word about OpenTuition, so that all acca students can with your support can the site exist and continue to provide free study materials!THE BEST THINGS IN LIFE ARE FREEFREE acca RESOURCES BY Paper (free course notes / lectures / revision lectures / tests / flashcards and more - on line on )F1 Accountant in Business / FAB Foundations in Accountancy F2 Management Accounting / FMA Foundations in AccountancyF3 Financial Accounting / FFA Foundations in AccountancyF4 Corporate & Business Law (English & global )F5 Performance ManagementF6 Taxation (UK)

2 F7 Financial ReportingF8 Audit and AssuranceF9 Financial ManagementP1 Governance, Risk & EthicsP2 Corporate ReportingP3 Business AnalysisP4 Advanced Financial ManagementP5 Advanced Performance ManagementP7 Advanced Audit & Assuranceand CAT/FIA Course Notes are also available on the siteTo fully benefit from these notesplease watch the free acca Lectures on the OpenTuition websiteFree acca course notes Free acca lectures Free tests Free tutor support StudyBuddy Largest acca forums Paper F5 CONTENTSF ormulae i1 Activity based costing 12 Target costing 53 Life-cycle costing 94 Environmental Management Accounting 135 Throughput accounting 156 Limiting

3 Factors 197 Pricing 238 Cost Volume Profit Analysis 339 Short-term decision making 3910 Risk and Uncertainty 4511 Budgeting 5112 Quantitative analysis in budgeting 5913 Standard Costing and Basic Variance Analysis 6914 More variance analysis 7715 Financial Performance Measurement 8716 Non-financial performance measurement 9117 Divisional performance measurement 9318 Transfer Pricing 9919 Performance in the not-for-profit sector 10520 Performance Management Information Systems 10721 Performance Management Systems, Measurement and Control 109 Answers to Examples 113 Practice Questions 139 Practice Answers 151 OpenTuition Course Notes can be downloaded FREE from belongs to - please do not support piracy by downloading from other for the latest updates, watch free video lectures and get free tutors support on the forumsDecember 2014 Examinations Paper F5 Spread the word about that all acca Students can benefit from free acca resourcesPrint and share our posterFREE acca !

4 Course NotesFREE acca !Lectures & TestsFind! acca !StudyBuddyACCA !Tutors on the ForumsFree resources for accountancy studentsFree resources for acca students100% Free300,000 members can t be wrongFree course notes, Free lecturesFree Tests and FlashcardsFree Forums with tutor supportStudyBuddy FinderChat and Study Groupsand much moreFree acca course notes Free acca lectures Free tests Free tutor support StudyBuddy Largest acca forums December 2014 Examinations Paper F5 Free acca course notes Free acca lectures Free tests Free tutor support StudyBuddy Largest acca forums FORMULAE8 Formulae SheetLearning curveY = axbDemand

5 CurveWhereY=cumulativeaveragetimeperunit toproducexunitsa=thetimetakenforthefirst unitofoutputx=thecumulativenumberofunits producedb=theindexoflearning(logLR/log2) LR=thelearningrateasadecimalP=a bQb=changeinpricechangeinquantitya=price whenQ=0MR=a 2bQEnd of Question PaperDecember 2014 Examinations Paper F5 Free acca course notes Free acca lectures Free tests Free tutor support StudyBuddy Largest acca forums December 2014 Examinations Paper F5 FormulaE iiFree acca course notes Free acca lectures Free tests Free tutor support StudyBuddy Largest acca forums Chapter 1 ACTIVITY BASED COSTING1 IntroductionThe traditional method of dealing with overheads is to split them between variable overheads and fixed

6 Overheads. If we are using absorption costing we then decide on a suitable basis for absorption ( labour hours) and absorb the overheads on that Based Costing (ABC) attempts to absorb overheads in a more accurate (and therefore more useful) The steps to be followed are as follows: identify the major activities that give rise to overheads ( machining; despatching of orders) determine what causes the cost of each activity the cost driver ( machine hours; number of despatch orders) calculate the total cost for each activity the cost pool ( total machining costs.)

7 Total costs of despatch department) calculate an absorption rate for each cost driver calculate the total overhead cost for each product manufactured calculate the overhead cost per unit for each product1 December 2014 Examinations Paper F5 Free F5 lectures are available on acca course notes Free acca lectures Free tests Free tutor support StudyBuddy Largest acca forums ExamplE 1 Una manufactures three products: A, B, and for the period just ended is as follows:ABCP roduction (units)20,00025,0002,000 Sales price ( per unit)$20$20$20 Material cost (per unit)$5$10$10 Labour hours (per unit)2 hours1 hour1 hour(Labour is paid at the rate of $5 per hour)Overheads for the period were as follows:Set-up costs90,000 Receiving30,000 Despatch15,000 Machining55,000$190,000 Cost driver data:ABCM achine hours per unit222 Number of set-ups10132 Number of deliveries received10102 Number of orders despatched202020(a) Calculate the cost (and hence profit) per unit, absorbing all the overheads on the basis of labour hours.

8 (b) Calculate the cost (and hence profit) per unit absorbing the overheads using an Activity Based Costing 2014 Examinations Paper F5 Activity bAsED costing chapter 1 2 Free acca course notes Free acca lectures Free tests Free tutor support StudyBuddy Largest acca forums 3 December 2014 Examinations Paper F5 Activity bAsED costing chapter 1 Free acca course notes Free acca lectures Free tests Free tutor support StudyBuddy Largest acca forums 3 Advantages of, and problems with, activity based costing. December 2014 Examinations Paper F5 Activity bAsED costing chapter 1 4 Free acca course notes Free acca lectures Free tests Free tutor support StudyBuddy Largest acca forums Chapter 2 TARGET COSTING1 IntroductionAn important reason for calculating the cost of the product or service is in order to decide on a selling price.

9 There is a chapter later in these notes that covers pricing decisions in detail, but traditionally a very common approach to determining a selling price has been to take the cost and then add on a profit problem with this approach is that it can clearly result in a price that is unacceptable to customers and at the same time provides no direct incentive to cut costing is a more modern and more market driven Target The steps involved are: From research of the market determine a selling price at which the company expects to achieve the desired market share (the target selling price) Determine the profit required ( a required profit margin, or a required return on investment) Calculate the maximum cost in order to achieve the required profit (the target cost) Compare the estimated actual costs with the target cost.

10 If the actual cost is higher than the target cost then look for ways of reducing costs. If no way can be found of meeting the target cost then the product should not be 1 Packard plc are considering whether or not to launch a new product. The sales department have determined that a realistic selling price will be $20 per have a requirement that all products generate a gross profit of 40% of selling the target 2014 Examinations Paper F5 Free F5 lectures are available on acca course notes Free acca lectures Free tests Free tutor support StudyBuddy Largest acca forums ExamplE 2 Hewlett plc is about to launch a new product on which it requires a pre-tax ROI of 30% and equipment needed for production will cost $5,000, expected sales are 40.