PPuubblliisshhiinngg F2 Study Text Management Accounting ACCA PPuubblliisshhiinngg ACCA Distance Learning Courses Learn quickly and efficiently Using a blended learning approach, our distance learning package will steer you towards exam success. Our aim is to teach you all you need to know and give you plenty of practice, without bombarding you with excessive detail. We therefore offer you the following tailored package: (cid:129) Access to our dedicated distance learning website– where you’ll find a regular blog from the distance learning department – reminders, hints and tips, study advice and other ideas from tutors, writers and markers – as well as access to your course material (cid:129) Tutor support– by phone or by email, answered within 48 hours (cid:129) The handbook– outlining distance learning with us and helping you understand the ACCA course Study phase Revision phase (cid:129) The key study text – covering the (cid:129) An exam kit– essential for exam syllabus without excessive detail and preparation and packed with exam- containing a bank of practice questions standard practice questions for plenty of reinforcement of key topics (cid:129) (cid:129) 2 tutor-marked mock examsto be sat A key study guide – guiding you through during your studies the study text and helping you revise (cid:129) An online question bank for additional (cid:129) Key notes -highlighting the key reinforcement of knowledge topics in an easy-to-use format Total price: £160.95 Visit us at www.emilewoolfpublishing.com [email protected] tel: +44(0) 1483 225746 ACCA Paper A C F2 C A Management Accounting Welcome to Emile Woolf‘s study text for Paper F2 Management Accounting which is: (cid:132) Written by tutors (cid:132) Comprehensive but concise (cid:132) In simple English (cid:132) Used around the world by Emile Woolf Colleges including China, Russia and the UK PPuubblliisshhiinngg Second edition published by   Emile Woolf Publishing Limited  Crowthorne Enterprise Centre, Crowthorne Business Estate, Old Wokingham Road,   Crowthorne, Berkshire   RG45 6AW  Email: [email protected]  www.emilewoolfpublishing.com       © Emile Woolf Publishing Limited, September 2010    All rights reserved. No part of this publication may be reproduced, stored in a retrieval  system, or transmitted, in any form or by any means, electronic, mechanical, photocopying,  recording, scanning or otherwise, without the prior permission in writing of Emile Woolf  Publishing Limited, or as expressly permitted by law, or under the terms agreed with the  appropriate reprographics rights organisation.    You must not circulate this book in any other binding or cover and you must impose  the same condition on any acquirer.      Notice  Emile Woolf Publishing Limited has made every effort to ensure that at the time of  writing the contents of this study text are accurate, but neither Emile Woolf Publishing  Limited nor its directors or employees shall be under any liability whatsoever for any  inaccurate or misleading information this work could contain.      British Library Cataloguing in Publications Data  A catalogue record for this book is available from the British Library.      ISBN: 978‐1‐84843‐004‐4      Printed and bound in Great Britain.        Acknowledgements  The syllabus and study guide are reproduced by kind permission of the Association of  Chartered Certified Accountants.          ii Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Paper F2 Management Accounting C Contents Page Syllabus and study guide 1 Formulae 9 Chapter 1: The nature and purpose of cost and management accounting 11 Chapter 2: Cost classification 25 Chapter 3: Cost behaviour and cost estimation 41 Chapter 4: Business mathematics and computer spreadsheets 61 Chapter 5: Accounting for materials and labour 87 Chapter 6: Accounting for overheads 125 Chapter 7: Accounting for costs: ledger entries 161 Chapter 8: Marginal costing and absorption costing 177 Chapter 9: Job costing, batch costing and service costing 193 Chapter 10: Process costing 203 Chapter 11: Budgeting 239 Chapter 12: Standard costing and variance analysis 257 Chapter 13: Cost-volume-profit (CVP) analysis 305 Chapter 14: Relevant costs 321 Chapter 15: Limiting factors and linear programming 339 Appendix: Spreadsheets 361 Answers to exercises and practice multiple choice questions 371 Practice questions 401 Answers to practice questions 423 Index 451 © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides iii Note about the F2 examination paper and practice questions in this study text The F2 examination paper consists of 50 multiple choice questions (or ‘objective testing’ questions). It is therefore important that you should test your ability in answering multiple choice questions (MCQs) when you study this subject. Some MCQs are included at the end of each chapter in this text as practice questions. If you want more practice, there are many more MCQs in the Examination Kit produced by Emile Woolf Publishing Limited (EWP) for the F2 examination and also in EWP’s distance learning materials for F2. We take the view, however, that MCQs on their own are insufficient for practising and testing your ability. In order to understand management accounting properly, it is important to have an appreciation of the ‘bigger picture’ and to see ‘techniques’ or ‘methods’ of management accounting in their entirety. We have therefore included a number of longer practice questions at the end of this study text that deal with syllabus topics in a unified way. These questions deal with each topic at a suitable level for the F2 examination, even though they are too long for the examination itself. iv Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Paper F2 Management accounting S       Syllabus and study guide Aim To develop knowledge and understanding of how to prepare and process basic cost and quantitative information to support management in planning and decision- making in a variety of business contexts. Main capabilities On successful completion of this paper, you should be able to: A Explain the nature and purpose of cost and management accounting B Describe costs by classification, behaviour and purpose C Apply essential business mathematics and use computer spreadsheets D Explain and apply cost accounting techniques E Prepare and coordinate budgets and standard costing for planning, feedback and control F Using management accounting techniques to make and support decision- making © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 1 Paper F2: Management accounting Rationale The syllabus for Paper F2, Management Accounting, introduces candidates to costing  principles and techniques, and elements of management accounting which are used  to make and support decision‐making.     The  syllabus  starts  by  introducing  the  nature  and  purpose  of  cost  accounting,  distinguishing  it  clearly  from  financial  accounting.  The  next  section  is  cost  classification  and  behaviour.  This  is  followed  immediately  by  applied  business  mathematics  and  the  use  of  computer  spreadsheets,  which  are  essential  for  candidates to understand the measurement and behaviour of business costs and to be  able to classify them accordingly.     The next area of the syllabus represents a central part of this paper and it introduces  candidates to a variety of costing techniques used in business. It is followed by the  preparation and use of budgeting and standard costing as essential tools for planning  and controlling business costs. The syllabus finishes with an introduction to the use  of management accounting in supporting decision‐making.   Syllabus content A The nature and purpose of cost and management accounting 1 Accounting for management 2 Cost and management accounting versus financial accounting B Cost classification, behaviour and purpose 1 Production and non-production costs 2 Direct and indirect costs 3 Fixed and variable costs C Business mathematics and computer spreadsheets 1 Dealing with uncertainty 2 Statistics for business 3 Use of computer spreadsheets D Cost accounting techniques 1 Accounting for materials 2 Accounting for labour 3 Accounting for overheads 4 Marginal and absorption costing 5 Job and batch costing 6 Process costing 7 Service/operation costing 2 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP Syllabus and study guide E Budgeting and standard costing 1 Nature and purpose of budgeting 2 Functional budgets 3 Flexible budgets and standard costing 4 Basic variance analysis under absorption and marginal costing 5 Reconciliation of budgeted profit to actual profit F Short-term decision-making techniques 1 Cost-volume-profit analysis 2 Relevant costing 3 Limiting factors Approach to examining the syllabus The syllabus is assessed by a two hour paper-based or computer-based examination. Questions will assess all parts of the syllabus and will include both computational and non computational elements. The examination will consist of 40 two-mark questions, and 10 one-mark questions. © EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 3 Paper F2: Management accounting Study guide This study guide provides more detailed guidance on the syllabus. You should use  this as the basis of your studies.  A The nature and purpose of cost and management accounting 1 Accounting for management (a) Distinguish between data and information. (b) Identify and explain the attributes of good information. (c) Outline the managerial processes of planning, decision making and control. (d) Explain the difference between strategic, tactical and operational planning. (e) Distinguish between cost, profit, investment and revenue centres. (f) Describe the differing needs for information of cost, profit, investment and revenue centre managers. 2 Cost and management accounting versus financial accounting (a) Describe the purpose and role of cost and management accounting within an organisation’s management information system. (b) Compare and contrast financial accounting with cost and management accounting. B Cost classification, behaviour and purpose 1 Production and non-production costs (a) Explain and illustrate production and non-production costs. (b) Describe the different elements of production cost - materials, labour and overheads. (c) Describe the different elements of non-production cost – administrative, selling, distribution and finance. (d) Explain the importance of the distinction between production and non-production costs when valuing output and inventories. 2 Direct and indirect costs (a) Distinguish between direct and indirect costs in manufacturing and non-manufacturing organisations. (b) Identify examples of direct and indirect costs in manufacturing and non-manufacturing organisations. (c) Explain and illustrate the concepts of cost objects, cost units and cost centres. 3 Fixed and variable costs (a) Describe and illustrate, graphically, different types of cost behaviour. (b) Explain and provide examples of costs that fall into the categories of fixed, stepped fixed and variable costs. (c) Use high/low analysis to separate the fixed and variable elements of total costs including situations involving stepped fixed costs and changes in the variable cost per unit. 4 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP