Suggested Study Notes ACCA F2 Paper

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1 for F2 ACCA Examinations REVIEW OF SOME KEY FUNDALMENTALS 1 Know difference in type of accountant Management Accountant Planning Controlling Decision Making Internal Reporting Financial Accountant Accounts Preparation Reporting Statutory Reporting Internal & External Reporting 2 Understand RN Anthony view point Strategic Planning / Management control / Operational Control 3 Classification of costs for manufacturing companies/entities Production Costs Production Overheads Admin / Distribution Costs Marketing Direct materials (raw materials/packaging), direct wages, direct costs. Costs relating to production. E.g. plant repairs, plant rent, plant cleaning. Costs running the operation. Not directly relating to production. Selling and promotion costs. Typically period costs but can be related to sales volume. 4 Know formula for high-low method in working out variable cost of semi-variable costs. Ensure the step up cost is taken off in the formula NB: high low figures are based on volume, from there you take the respective costs. Page 1 of 11

2 5 y = a + bx Know terminology: a = fixed element or "intercept b = slop or multiple or gradient NB: to find a or b, make y = 1 eg. Find slope in 5y = x bring y=1, so divide by 5 on each side You get y = 5 + 2x..solution, slope = 2. 6 Know difference between interpolation and extrapolation. interpolation line within data range extrapolation continue drawing line outside data range. "making an assumption that trend will continue" 7 Unsure elements of EOQ and EBQ formula are known exactly. D = may be annual demand but figures presented may be monthly or quarterly figures. so therefore x 12 or x4 to bring to same base level. Ensure base is calculated correctly. This will be examined in the question. 8 Learn formula for volume ratios. You may be given information with one part missing. Ratio Ratio Ratio efficiency x capacity = production volume Expect hrs x Actual hrs expected hrs Actual hrs Budget hrs budget hrs when you multiply out, actual hrs cancel deriving production volume ratio 9 Learn formula for Labour Turnover rate No of replacements in staff x 100 Staff left is not the same as no. of replacements Average employees in period Divide by 2 if two data sets given Page 2 of 11

3 10 Overhead absorption rate Budgeted overheads Budgeted activity NB: Budget figures used. Remember: this is a prediction to work out the overheads in the future. When actual overheads are known, we have a difference (under or over absorbed) Over absorbed overheads means you allocated more costs to P&L, so the adjustment to bring back to actual is a gain or favourable variance. Under absorbed overheads means you allocated less costs to P&L, so the adjustment to bring back to actual is a loss or adverse variance. Typically overheads are expressed as rates$ per machine hour or per labour hour. 11 Marginal / Absorption Costing Know the make up and differences between margin and absorption costing. Important to be able to quantify the difference. Lots of flexibility for examiner to ask questions in this area. As the absorption method has more costs, the stock valuation will be higher. With this value higher, this gives you a higher profit. This point is nearly always tested. If there are no changes between opening and closing stocks, there is no difference in profit calculation. Diff in methods = change in inventory level x production o/h absorption rate Remember what a variance is, it brings you back to the actual results. Both methods do this in their respective variance calculations. Absorption costing brings in "fixed overheads" in the cost of production (or direct cost of product). Marginal costing treats fixed overheads as a period cost. It assumes no change with activity. 12 Know the Characteristics of services Learn SHIP Simultaneity Heterogeneity Intangibility Perishability Unable to be inspected in advance Service repeated, always different never the exact same Typically intangible, not a physical product Unable to store a service Page 3 of 11

4 13 Process costing Know elements of "T" account. Unsure physical units balance and respective values balance. Process Account units value$ units value$ Op balance 100 Tsf to next stage or finished units 1000 Inputs & 1500 process costs Normal loss 150 Abnormal loss 100 Cl balance value$ 1600 value$ For FIFO, crucial you breakup the finished units into "started and completed" to work out valuation. Not relevant for weighted average method. Ans: 1000 less 100 opening stock = 900 units started & completed in period. Golden rule: always cost for normal. If different you have either an abnormal loss or abnormal gain. No value is entered in for a normal loss as the units are expected. Only enter a value if there is a by-product involved and question provides information on the method used. Abnormal gains/losses must therefore be valued in the process account. As these are unexpected. Remember equivalent units are notional and only used as a method to apportion costs. They are not physical units and not shown on the face of the process account. FIFO valuation method, you need to split out opening and closing stocks for equivalent units. Weighted average method, you need to split out only closing stocks for equivalent units. Page 4 of 11

5 14 Process costing / Joint costs & By-products A by-product is not costed out separately in a process. While still an output of the process, it is incidental but we still need to account for it and yield "some" income if we can. Know the 4 ways to account for By-products: 1) Separate income line, 2) Just add to sales line when sold, 3) Sales proceeds reduces cost of production, 4) Deduct net realisable value (NRV) produced in period against the cost of production in that period. Remember, by-products are not valued or costed individually. They may be tracked and listed in a stock listing but not valued. Apportionment of joint costs is normally done by the apportionment of: units produced in period x sales value Apportionment by units produced can be used but better to use the above as it looks at the sales value element and the value the end product is worth in the market. Don't use sales volume x sales value (this is tested a lot in examinations) 15 Understand activity based costing as an alternative to traditional absorption costing. Typically ABC costing will be used against overheads that do not vary with production volume. Overheads that vary with production would use machine or direct labour hours. Questions asked may give two sets of overheads and testing students to select the correct overheads (that do not vary with production volume) to use against the cost driver. Overheads ABC formula = Cost Driver An alternative way to allocate costs to products ABC cost driver examples: no of setup runs, no of orders, no of despatches, no of calls. 16 Correlation coefficient "r" r can be Positive Negative The degree of linear correlation between two variables. = coefficient of determination Understand the meaning. It is the proportion of the total variation in value of one variable that can be explained by variations in the value of the other variable. Page 5 of 11

6 It follows the linear rule of y = a + xb. Example: 92% of variations in y can be explained by variations in x, where =.92. Therefore 8% of variations in y are due to other factors i.e. not x. 17 Statistics - trends Remember actual data includes seasonal factors. Removing the seasonal factor you get seasonally adjusted figures or deseasonalised figures or trend figures. Question: What is the trend figure if the actual data is 26 and the seasonal adjustment is -5? Ans: -5 is already included in 26, so you need to add, to remove it. Ans = 31. If the adjustment was +5, then the trend figure would be 21. Seasonal adjustments are not percentages but quantifiable adjustments. Additive model: seasonal adjustments add up to zero. This model calculates absolute seasonal variations that do not change. Multiplicative model: seasonal adjustments add up to 4. This model takes account of changing seasonal variations. 18 Statistics - Index numbers Price index Price for period x100 "fixed" Price for base period fixed base index, base index does not change. Price index Price for period x100 "chain" Price for prior period fixed base index, base index does not change. 19 A master budget typically includes: 1 Profit & Loss account 2 Balance Sheet 3 Cash Flow Forecast Page 6 of 11

7 20 Investment appraisal Only deals in cashflows so non cash items are irrelevant eg Depreciation. Know payback calculation Cashflows of project Memo Cumulative yr yr yr yr yr Payback happens between yr2 and yr3 Ans: Years 5000 = 2.6 years Know the internal rate of return of the project (IRR). IRR in a project is when NPV = 0 NPV = net present value Taking figures above, what is the IRR of the project? NB: only need to take to yr3 as this is when payback was delivered. Cashflows of project at 8% at 9% yr yr yr yr NPV is 0 between these values IRR is therefore 8% or 9% = 8.89% Page 7 of 11

8 21 Understand interest and value of money $1000 in a bank for 3 years at 10% pa interest. What is total in 3 years? 1000 x 1.1 x 1.1 x 1.1 = 1331 OR I will have $1,331 in 3 years time. At 10% pa interest rate what do I need to invest now? Or what is the present value of having $1,331 in 3 yrs at 10% interest rate? Use present value tables. 1,331 x.751 = $1,000 Annuities If I am offered $5,000 pa for 4 years or $17,000 now, which should I take? Assuming interest rate of 7% on savings. Ignoring other factors and just on a calculation, you need to find the present value of the annuity to compare with the $17,000 offer today. Use tables: 5,000 x = PV of the annuity Ans: you take the cash deal now of $17,000, this is higher. Work out annual interest rates 2% bi-monthly, simple = 2% x 6 = 12% (2% repeated 6 times in the year) 2% bi-monthly, compound = (1 + R) = (1+ ) n = R = (1+.02) R=effective rate p.a. R = % Getting 2% interest every 2 months, compounded you will get more than simple interest. Therefore the annual percentage rate (APR) will be greater. Hence the reason why all financial deals or products must contain the APR. Page 8 of 11

9 22 Standard costing Marginal costing: sales less variable costs = contribution less fixed costs = profit/(loss) Absorption costing: sales less variable costs less fixed prod o/h = contribution less other fixed costs = profit / (loss) Note: standard contribution between methods shows that absorption costing includes an element of fixed production overhead in the cost of the product. Direct contribution of the product will therefore be lower. The direct cost will be higher per product, hence a higher product cost/unit, leading to a higher stock valuation. The higher stock valuation will then lead to a higher profit than if marginal costing method was used. See point 11. Variance Analysis Types of variance Price Volume $ Sales 100 Price Volume contribution Direct costs Materials 30 Price Volume Labour 20 Rate Efficiency (& idle) Fixed Prod. o/h 5 Expenditure Volume (Efficiency& Capacity) Other variable costs 15 Expenditure Efficiency Fixed costs 0 Period cost (compare to budget) Costs 70 Standard Profit 30 per unit We have typically two types of variances of each revenue and cost category of the standard cost per product. There is a price and volume calculation. The terminology may change but in principal the theory is the same. Main rules: Price variance Compare budget price verses actual. Use actual volume produced or actual sold for the sales price. If actual price is greater than budget, it's adverse. Once the price variance is calculated all other variances are multiplied by the respective standard cost. Page 9 of 11

10 Volume variance In all cases compare actual production against what was used or consumed, then multiply by respective standard cost category. If actual usage is greater than expected then adverse variance (for costs). If you sell more than expected, than this is favourable (for revenue). Sometimes labour efficiency allows the calculation of idle time. This is the difference between productive hrs and hrs paid x std labour rate. Always adverse. Two exceptions: 1) The volume variance for sales is based on the contribution. Marginal costing: sales volume diff x $35 (excludes fixed prod o/h) Absorption costing: sales volume diff x $30 2) Fixed production volume variance and fixed production capacity variance. The reverse logic rule applies. The calculation of a greater cost volume than expected is favourable not adverse. If cost volume is less, this is adverse. This breaks the rule for all cost variances. E. & O. E. Page 10 of 11

11 The next course commences on Monday, 27 th August Lectures are delivered from our City Centre location (South Great George s Street, D2), Templeogue (Dublin 6W), and are streamed online live and are recored for online review. Exam question and solution bank Dedicated exam review and preview classes End of course tutorials, as well as memory and study technique classes City centre location in Dame Street, convenient for bus, LUAS, DART, etc. Southside Dublin location in Templeogue Study rooms and library in both locations Limited class size Live lectures which are also streamed live on Moodle, and are recorded for review DAY PAPER PAPER2 PAPER3 PAPER4 Monday F6 F9 P4 P7 Tuesday F2 F8 P3 F4 Wednesday F1 F5 P2 P5 Thursday F3 F7 P1 P6 Course Fees: Full course Revision F1 Accounting in Business Wednesday F2 Management Accounting Tuesday F3 Financial Accounting Thursday F4 Corporate & Business Law Tuesday F5 Performace Management Monday F6 Taxation Wednesday F7 Financial Reporting Thursday F8 Audit & Assurance Tuesday F9 Financial Management Tuesday P1 Governance, Risks & Ethics Thursday P2 Corporate Reporting Wednesday P3 Business Analysis Tuesday P4 Advanced Financial Management Monday P5 Advanced Performance Management Wednesday P6 Advanced Taxation Thursday P7 Advanced Audit & Assurance Monday The most up-to-date course materials are included in the course fee. Apply online at or call Dublin City Centre (Dublin 2), Templeogue (Dublin 6W) and Online Page 11 of 11

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