PAGE 3 AIM To develop knowledge and understanding of the application of management accounting techniques to support the management processes of planning, control and decision making. OBJECTIVES On completion of this paper candidates should be able to: • explain the role of management accounting within an organisation and the requirement for management information • describe costs by classification and purpose • identify appropriate material, labour and expense costs • understand the principles of costing and apply them in straightforward scenarios • understand and demonstrate the cost factors affecting production and pricing decisions • understand the basic principles of performance management • demonstrate the skills expected in Part 1. POSITION OF THE PAPER IN THE OVERALL SYLLABUS No prior knowledge is required before commencing study for Paper 1.2. Some understanding of the accounting principles and practices from Paper 1.1 Preparing Financial Statements and a basic competence in numeracy are assumed. This paper provides the basic techniques required to enable the candidate to develop the various methods into more complex problems at later parts. Candidates will, therefore, need a sound understanding of the methods and techniques encountered in this paper to ensure that they can take them further in subsequent papers. The methods introduced in this paper are revisited and extended in Paper 2.4 Financial Management and Control and taken yet further in Papers 3.3 Performance Management and 3.7 Strategic Financial Management. SYLLABUS CONTENT 1 Accounting for management (a) The nature, purpose, scope and interrelations of functions carried out by management in relation to resources, costs, operations, performance (i) setting objectives (long and short- term, strategic and operational, corporate and personal) (ii) planning to meet objectives (iii) implementing objectives (iv)monitoring and controlling against objectives and plans (b) Nature of internal reporting (i) financial and non-financial information for managers (ii) cost centres, revenue centres, profit centres and investment centres and the impact of these on management information. (c) Management information requirements (i) importance and definition of good information (ii) presentation of information (iii) role of accountants and accounting information (iv)role of IT. (d) Maintaining and improving an appropriate system (i) cost units (ii) cost/profit/responsibility centres Financial Information for Management Paper 1.2 3.3 Performance Management 3.7 Strategic Financial Management 2.4 Financial Management and Control 1.2 Financial Information for Management PAGE 4 Paper 1.2: Financial Information for Management (Continued) (iii) methods for recording relevant information (iv)sources of information and recording/processing information (v) computer based information, storage and processing (vi)analysis of output information and its dissemination to relevant individuals/departments. 2 Cost accounting (a) Cost accounting versus management accounting (i) purposes of cost and management accounting and financial accounting (ii) role of cost accounting in a management information system (iii) non-financial information. (b) Nature and purpose of cost classification and definitions. 3 Elements of cost (a) Materials (i) standard and actual costs for materials including the use of FIFO, LIFO and weighted average for material valuation and the pricing of material issues (ii) optimal purchase quantities to include discounts (iii) optimal batch quantities (iv)reorder levels (v) material losses. (b) Labour (i) direct and indirect labour (ii) different remuneration methods (iii) labour efficiency (iv)labour turnover. (c) Overheads (i) direct and indirect expenses (ii) principles and processes of overhead cost analysis (iii) allocation and apportionment of overhead costs including reciprocal service centre situations (iv)absorption rates (v) under- and over -absorption (vi)fixed overhead expenditure and volume variances (vii) fixed overhead efficiency and capacity variances where appropriate (viii) changes in the cost structure of a business over time. 4 Costing systems (a) Job, batch and process costing (i) characteristics (ii) direct and indirect costs (including waste, scrap and rectification costs) (iii) valuation of process transfers and work-in-progress using equivalent units of production and based on FIFO and weighted average pricing methods (iv) process costing normal losses, abnormal losses and gains (v) joint and by-products in process costing (b) Operation/service costing (i) scope of operation/service costing (ii) appropriate cost units (iii) collection, classification and ascertainment of costs. 5 Costing methods and techniques (a) Standard costing (i) establishment of standard costs (ii) variance analysis (iii) explanations of variances and control (iv) implications for management (v) operating statements. (b) Marginal and absorption costing (i) marginal and absorption costing profit and loss accounts (ii) reconciliation of the profits under the two methods (iii) contrast of absorption and marginal costing 6 Short-term decision making (a) Cost behaviour (i) fixed, variable and semi-variable costs (ii) cost behaviour using an appropriate graph (iii) high-low method (iv) regression analysis. (b) CVP analysis (i) break-even point and revenue (ii) margin of safety (iii) target profit (iv) contribution to sales ratio (v) break-even chart and profit/ volume graph. (c) Limiting factors Financial Information for Management (Continued) PAGE 5 (i) optimal production plan given a scarce resource (ii) linear programming techniques (iii) other methods for more than two variable problems. (d) Preparation of cost estimates for decision making (i) relevant costing techniques to include opportunity/sunk, avoidable/unavoidable, fixed/ variable applied to such situations as make or buy, shut down and one-off contracts. (e) Pricing of goods and services (i) price/demand relationships (ii) full cost plus pricing (iii) marginal costing. (f) Price skimming, penetration pricing, premium pricing and price discrimination. EXCLUDED TOPICS The syllabus content outlines the areas for assessment. No areas of knowledge are specifically excluded from the syllabus. KEY AREAS OF THE SYLLABUS The key topic areas are: • cost classification and behaviour • material, labour and overhead costs • absorption and marginal costing • process costing • standard costing • CVP analysis • pricing methods. APPROACH TO EXAMINING THE SYLLABUS The examination is a three hour paper constructed in two sections. Both sections will draw from all parts of the syllabus and will contain both computational and discursive elements. Number of Marks Section A: 25 compulsory multiple choice questions (2 marks each) 50 Section B: 5 compulsory short form questions (8-12 marks each) 50 100 Paper 1.2 can also be taken as a three hour computer based examination. ADDITIONAL INFORMATION Formulae as required are included in the formulae sheet given in the exam. RELEVANT TEXTS There are a number of sources from which you can obtain a series of materials written for the ACCA examinations. These are listed below: Foulks Lynch – ACCA's official publisher Contact number: +44 (0)20 8831 9990. Website: www.foulkslynch.com Accountancy Tuition Centre (ATC) International Contact number: +44 (0)141 880 6469. Website: www.ptc-global.com BPP Contact number: +44 (0)20 8740 2211. Website: www.bpp.com The Financial Training Company Contact number: +44 (0)174 785 4302. Website: www.financial-training.com The following texts are also recommended as study material for this paper: G Bancroft, G O’Sullivan Quantitative Methods for Accounting and Business Studies (3rd Edition) McGraw Hill ISBN 0077077318 C Drury Management and Cost Accounting (5th Edition) International Thomson Business Press ISBN 1861525362. Wider reading is also desirable, especially regular study of relevant articles in ACCA's student accountant. Financial Information for Management (Continued) PAGE 6 Financial Information for Management (Continued) STUDY SESSIONS 1 Information for Management (a) Distinguish between ‘data’ and ‘information’ (b) Describe the sources of information (c) Identify and explain the attributes of good information (d) Describe the methods of recording and processing information (e) Describe the ways in which data could be presented to management. 2 Management Information Systems (a) Explain what is meant by a management information system (b) Explain the role of accountants and accounting information within a management information system (c) Describe the purpose and role of cost and management accounting within a management information system (d) Compare and contrast financial and cost and management accounting (e) Outline the managerial processes of planning, decision-making and control (f) Discuss the management of both financial and non-financial information requirements (g) Describe the various types of responsibility centres and the impact of these on management information. 3 Objectives, Strategy and Planning (a) Define the terms ‘objectives’ and ‘strategy’ (b) Describe the different objectives for different types of organisations (c) Illustrate the links between strategy and organisational structure (d) Explain how the objectives and strategy of an organisation impact upon its plans (e) Describe the planning process (f) Describe the main techniques used in the planning and decision making process for various types of organisation (g) Explain the difference between strategic, tactical and operational planning (h) Describe the basic elements of and purpose of a management control system (i) Illustrate the need for monitoring and evaluation (j) Describe methods for monitoring and controlling against objectives and plans. 4 The Role of Information Technology in Management Information (a) Identify the characteristics and different types of computer hardware and software (b) Evaluate the potential value of computer systems in handling and processing business data (c) Describe methods of capturing and processing data by computer (d) Describe how data is grouped, tabulated, stored and output (e) Explain the role and features of spreadsheet systems (f) Describe how output could be analysed and used within an organisation. 5 Cost Classification (a) Explain and illustrate classifications used in the analysis of product/ service costs including by function, direct and indirect, product and period, fixed and variable, avoidable and unavoidable, controllable and uncontrollable (b) Explain and illustrate the concept of cost objects, cost units, cost centres, revenue centres, profit centres and investment centres (c) Describe briefly the process of accounting for input costs and relating them to work done (d) Describe briefly the different methods of costing final outputs and their appropriateness to different types of business organisation/ situation (e) Describe the nature of control achieved through the comparison of actual costs against plan. 6 Cost Behaviour - 1 (a) Explain the importance of cost behaviour in relation to business decision-making PAGE 7 Financial Information for Management (Continued) (b) Describe factors which influence cost behaviour (c) Explain how the terms linear, curvi- linear and step functions apply to costs (d) Identify, describe and illustrate graphically different types of cost behaviour (e) Explain the structure of linear functions and equations (f) Provide examples of costs which contain both fixed and variable elements (g) Use high/low analysis to separate the fixed and variable elements of such costs 7 Cost behaviour - 2 (a) Construct a scatter graph to establish whether a linear function would be appropriate (b) Establish a linear function using regression analysis and interpret the results (c) Calculate and explain the concepts of correlation and coefficient of determination. 8 Material Costs – 1 (a) Describe the different procedures and documents necessary for ordering, receiving and issuing materials from stock (b) Describe the control procedures used to monitor physical and ‘book’ stock and to minimise discrepancies and losses (c) Calculate, explain and evaluate the value of closing stock and material issues using LIFO, FIFO and average methods (weighted and periodic) (d) Calculate the standard cost of stocks from given information (e) Prepare ledger entries to record material cost inputs and outputs (f) Interpret the entries and balances in the material stock account. 9 Material Costs – 2 (a) Explain the reasons for holding stock (b) Identify and explain the costs of having stock (c) Calculate and interpret optimal reorder quantities (d) Calculate and interpret optimal reorder quantities when discounts apply (e) Produce and interpret calculations to minimise stock costs when stock is gradually replenished (f) Describe appropriate methods for establishing reorder levels. 10 Labour Costs (a) Explain the difference between, and calculate, direct and indirect labour costs (b) Explain the methods used to relate input labour costs to work done (c) Prepare journal and ledger entries to record labour cost inputs and outputs (d) Describe and illustrate different remuneration methods and incentive schemes (e) Calculate the level, and analyse the costs and causes of, labour turnover (f) Describe and illustrate measures of labour efficiency and utilisation (g) Interpret the entries and balances in the labour account. 11 Overheads – 1 (a) Explain the difference between the treatment of direct and indirect expenses (b) Describe and justify the process of apportioning manufacturing overhead costs incurred to production (c) Allocate and apportion factory overheads using an appropriate basis (d) Re-apportion service centre costs including the use of the reciprocal method (e) Comment on the use of blanket, department, cost driver, actual and pre-determined absorption rates (f) Identify, calculate and discuss the appropriate absorption rates using relevant bases. 12 Overheads –2 (a) Prepare journal and ledger entries for manufacturing overheads incurred and absorbed PAGE 8 Financial Information for Management (Continued) (b) Calculate, explain and account for under – and over – absorbed overheads (c) Calculate and explain fixed overhead expenditure, volume and, where appropriate, efficiency and capacity variances (d) Describe and evaluate methods of attributing non-manufacturing overhead costs to units of output (e) Perform process cost accounting transactions for selling, distribution and administration overhead in a given business context (f) Describe how the cost structure of a business has changed over time and the implication of this with regard to overhead analysis. 13 Revise all work to date 14 Marginal and Absorption Costing (a) Explain the concept of contribution (b) Demonstrate and discuss the impact of absorption and marginal costing on stock valuation and profit measurement (c) Establish the standard cost per unit from given data under absorption and marginal costing (d) Produce profit and loss accounts using absorption and marginal costing (e) Reconcile the profits reported under the two methods (f) Discuss the advantages and disadvantages of absorption and marginal costing. 15 Job and Batch Costing (a) Describe the characteristics of job and batch costing (b) Describe the situations where the use of job or batch costing would be appropriate (c) Discuss, and illustrate, the treatment of direct, indirect and abnormal costs (d) Complete cost records and accounts in job and batch cost accounting situations (e) Estimate job costs from given information. 16 Process Costing – 1 (a) Describe the characteristics of process costing (b) Describe situations where the use of process costing is appropriate (c) Describe the key areas of complexity in process costing (d) Define ‘normal’ losses and ‘abnormal’ gains and losses (e) State and justify the treatment of normal losses and abnormal gains and losses in process accounts (f) Account for process scrap (g) Calculate the cost per unit of process outputs, and prepare simple process accounts, in absorption and marginal costing systems. 17 Process Costing –2 (a) Calculate and explain the concept of equivalent units (b) Allocate process costs between work remaining in process and transfers out of a process using the weighted average cost and FIFO methods (c) Prepare process accounts in situations where work remains incomplete (d) Prepare process accounts in situations where losses and gains are identified at different stages of the process (e) Distinguish between by-products and joint products (f) Value by-products and joint products at the point of separation (g) Prepare process accounts in situations where by-products and/or joint products occur. 18 Operation/Service CostinG (a) Describe situations where the use of operation/service costing is appropriate (b) Illustrate suitable unit cost measures that may be used in a variety of different operations and services (c) Carry out service cost analysis in internal service situations (d) Carry out service cost analysis in service industry situations. 19 Cost-Volume-Profit (CVP) Analysis - 1 (a) Explain the objective of CVP analysis PAGE 9 Financial Information for Management (Continued) (b) Explain the concept of break-even (c) Calculate and explain the break-even point and revenue, target profit, contribution to sales ratio and margin of safety. 20 Cost-Volume-Profit (CVP) Analysis - 2 (a) Construct break-even, contribution, and profit/volume charts from given data (b) Apply the CVP model in multi- product situations. 21 Limiting Factors (a) Explain and recognise what causes optimisation problems (b) Identify, formulate and determine the optimal solution when there is a single limiting factor. 22 Linear programming (a) Formulate a linear programming problem involving two variables (b) Determine the optimal solution to a linear programming problem using a graph (c) Determine the optimal solution to a linear programming problem using equations (d) Explain the methods available for dealing with optimisation problems with more than two variables (e) Formulate, but do not solve, a linear programming problem involving more than two variables (f) Explain shadow prices (calculations not examinable). 23 Relevant Costing - 1 (a) Explain the concept of relevant costing (b) Explain the relevance of such terms as opportunity and sunk costs, avoidable and unavoidable costs, fixed and variable costs, historical and replacement costs, controllable and uncontrollable costs, to decision making 24 Relevant Costing - 2 (a) Calculate the relevant costs for materials and labour (b) Calculate and explain the deprival value of an asset (c) Construct a relevant cost statement and explain the results for such situations as make or buy decisions, shut down decisions and one-off contracts. 25 Pricing (a) Explain the factors that influence the price of a product (b) Establish the price/demand relationship of a product (c) Establish the optimum price/output level when considering profit maximisation and maximisation of revenue (d) Calculate prices using full cost and marginal cost as the pricing base (e) discuss the advantages and disadvantages of these pricing bases (f) Discuss pricing policy in the context of price skimming, penetration pricing, premium pricing and price discrimination. 26 Standard Costing - 1 (a) Explain the purpose of standard costing (b) Establish the standard cost per unit from given data under absorption and marginal costing (c) Explain the purpose of the following variances: (i) Materials price and usage (ii) Labour rate, idle time and efficiency (iii) Variable overhead expenditure and efficiency (iv) Fixed overhead expenditure, volume and, where appropriate, efficiency and capacity (v) Sales volume and price. 27 Standard costing - 2 (a) Calculate and interpret the above variances, using the appropriate costing method (b) Prepare operating statements to reconcile budgeted to actual profit (c) Discuss the implications of the results of variance analysis for management. 28 REVISE ALL WORK . Management 2.4 Financial Management and Control 1.2 Financial Information for Management PAGE 4 Paper 1.2: Financial Information for Management (Continued) (iii) methods for recording relevant information (iv)sources. articles in ACCA& apos;s student accountant. Financial Information for Management (Continued) PAGE 6 Financial Information for Management (Continued) STUDY SESSIONS 1 Information for Management (a). reporting (i) financial and non -financial information for managers (ii) cost centres, revenue centres, profit centres and investment centres and the impact of these on management information. (c) Management