A batch is a cost unit where a quantity of identical items is manufactured. It consists of a separate, readily identifiable group of product units which maintains their separate identity throughout the production process. Batch costing is essentially a variation of job costing. Instead of a single job, a number of product units are manufactured as a batch. Batches may be made specifically to customer requirements or produced for holding in stock prior to sale.
The procedures for costing batches are very similar to job costing. Once the batch is completed, the cost per unit can be calculated. Such components will be made in batches. It is also called operation or function costing. Service organisations do not make or sell tangible goods. Profit seeking service organisations include accountancy firms, law firms, transport companies, hair salons, banks and hotels.
Non-profit organisations include hospitals, schools and libraries. Simultaneity: Service is performed and consumed simultaneously. Heterogeneity: Nature and output is never standardized as human input is a major element of a service 5. Cost nature: In a service industry sector a higher proportion of costs incurred are indirect as compared to direct 6. So purpose of service costing may not, necessarily, be establishing a profit or loss attributable to that service but rather to provide the management with costs associated and efficiency and effectiveness of service being provided.
Frequently, a composite cost unit may be deemed more appropriate. Hotels, for example, may use the 'occupied bed-night' as an appropriate unit for cost ascertainment and control. The purpose of process costing is a typical one for example stock valuation. It is also called continuous order costing. It should be treated in the calculation. Abnormal Gain must be treated in calculation.
Prepare a process account. Calculate equivalent units. Calculate the cost of an equivalent unit. Find the cost of finished goods. Concept of Equivalent Units: Equivalent unit refers to a notional quantity of completed units substituted for an actual quantity of incomplete physical units in progress.
A process is continuous in nature and at the end of a period there may be some units, which have been started but have not been completed. These partially completed units are known as work-in progress. The existence of work-in-progress gives a problem in computing the average cost per unit as production units will be at different degree of completions, therefore we cannot simply take total cost divided by total output. It becomes more complicated if the degree of completions varies for various cost elements.
For this problem, we need to calculate equivalent units. If normal loss has a scrap value, the value of this loss is set off against the cost of production usually material.
Abnormal Loss is the amount by which actual output from a process less than the expected output. Cost of one unit of abnormal loss is same as one unit of output. The cost of abnormal loss is charged to profit and loss account in the period in which it occurs. If abnormal loss has a scrap value, the amount of scrap value will be set off against the amount to be written off to profit and loss account and not in the process account.
In process account abnormal loss units are valued at average cost per unit. It is the amount by which actual loss is less than the expected loss.
So, Abnormal Gain is exactly opposite to Abnormal Loss. Cost of one unit of abnormal gain is same as one unit of output. Abnormal Gain is recorded in Process account and in Abnormal Gain account.
The Abnormal Gain is then taken to profit and loss account as an item of income. Losses with disposal cost Sometimes loss units have a disposal cost rather than some scrap value; for example, additional cost is incurred in disposing them off. There were no units of opening or closing inventory. Required: Prepare process account. To deal with this situation equivalent units are calculated. A value is then placed to closing work in progress. FIFO inventory valuation technique is normally used and should be used in examination unless specifically stated otherwise.
Example 2: BR Ltd makes a product requiring several successive processes. Required: Prepare the process account for august using: a Weighted average method. The joint cost of the joint products is distributed according to these methods: 1.
Sales value at point of separation 3. Income from by product added to sales of main product 2. Income from by product treated as a separate source of income 3. Sales income of by product deducted from the cost of production 4.
Objective: Measurable steps towards achieving the goals. Action plan: Detailed steps for achieving the objectives. Action plans are often express in money terms and usually called budget. Forecasts and budgets are not the same thing. Forecast is a prediction of what is likely to happen. A budget is a target, not a prediction, which has to be achieved.
Any difference between the planned results and the actual results are called variances. Department managers in a business are responsible for making decisions on daily basis that affect the profitability of the business.
In order to make effective decisions and coordinate the decisions and actions of the various departments, a business needs to have a plan for its operations. Planning the financial operations of a business is called budgeting. A budget is a written financial plan of a business for a specific period of time, expressed in currency and units. For example, a business might have a marketing budget, a production budget, a sales budget, a purchase budget, a research and development budget, and a cash budget.
Budgets are therefore set in consultation with all the stakeholders in order to ensure that budget setting objectives are achieved. Budget is always set taking account of organizational goals. Budgets are steps towards the achievement of long term goals of the organization and hence budgets ensure the progress towards the ultimate goal of the organization.
Administration of Budget: 1. Budget manual: It is a collection of instructions governing the responsibilities of persons. It is usually prepared by management accountant.
Budget period: Budget period is a time period to which budget relates. Responsibilities of preparing budgets: Managers responsible for preparing budgets ideally be the managers who are responsible for carrying out the budget. Budget committee: Budget committee is usually responsible for coordination and administration of budgets. Budget Preparation 1. Communicate budget details and guidelines to responsible person. Determine Principal Budget Factor. Prepare budget of principal budget factor.
Prepare functional budgets dependent upon Principal budget. Prepare Master Budget. Short run deficits and surpluses are identified to enable the appropriate action to be taken. Negotiate budgets with seniors for approval. Coordination of budgets because some budgets are out of balances with others and need modifications. Final acceptance of budgets. Budget reviews.
But if production capacity is principal budgeting factor then production budget factor is prepared first. A standard hour describes the amount of work that is achievable at standard efficiency level. This concept is particularly useful when dissimilar units are being produced in a factory and management is interested to determine the production level of each product. Fixed costs can be predicted in advance but the costs that incur subject to management decisions are harder to predict at the start of the period.
The master budgets will be drawn up after all the functional budgets have been approved. Cash budget is an important part of the budgeting process and an important working capital management tool. These, produced on a monthly basis, will allow a firm to identify when cash surpluses or deficits are likely to arise so that suitable steps investing or borrowing can be planned. Appropriate control action is then taken to control variances. For example if the essential staff is not hired the labour variance will be favourable but this may also mean that the production targets will not be met.
For example, if junior management believe that a budget imposed upon them is not attainable, their aim may well be to ensure that the budget is not achieved, thereby proving themselves to be correct. This needs to be avoided, and therefore an understanding of the behavioural aspects is necessary. Managers may be involved in setting budget targets or these may be imposed by senior management without consultation.
Whilst bottom-up is generally seen as preferable, there are situations where top-down is applicable. At the two extremes, budgets can be dictated from above or simply emerge from below but, in practice, different levels of management often agree budgets by a process of negotiation. In the imposed budget approach, operational managers will try to negotiate with senior managers the budget targets which they consider to be unreasonable or unrealistic. Likewise senior management usually reviews and revises budgets presented to them under a participative approach through a process of negotiation with lower level managers.
Final budgets are therefore most likely to lie between what top management would really like and what junior managers believe is feasible. The budgeting process is hence a bargaining process and it is this bargaining which is of vital importance, determining whether the budget is an effective management tool or simply a clerical device. Budgetary slacks also called budget padding : Budgetary slack is the difference between the minimum necessary costs and the costs built into the budget or actually incurred.
This encourages the manager to build slack into the budget to maximize personal gain. The information will only be valuable, however, if it is interpreted correctly and used purposefully by managers and employees. Their attitude to control information will colour their views on what they should do with it and a number of behavioral problems can arise.
A supervisor might get weekly control reports, and act on them; his superior might get monthly control reports, and decide to take different control action. Motivation: Motivation is what makes people behave in the way that they do. It comes from individual attitudes, or group attitudes.
Individuals will be motivated by personal desires and interests. It is therefore vital that the goals of management and the employees harmonise with the goals of the organization as a whole. This is known as goal congruence. The management accountant should therefore try to ensure that employees have positive attitudes towards setting budgets, implementing budgets.
If this desirable state of affairs does not exist the organization is at risk of under-performing as a result of dysfunctional decision-making. Managers and others take decisions that promote their self-interest at the expense of the interest of the organization.
Poor attitudes when setting budgets If managers are involved in preparing a budget, poor attitudes or hostile behaviour towards the budgetary control system can begin at the planning stage. Poor attitudes when putting plans into action Poor attitudes also arise when a budget is implemented.
Managers might take the view that they have more pressing jobs on hand than looking at routine control reports. This resentment is likely to be particularly strong when budgets or standards are imposed on managers without allowing them to participate in the budget-setting process.
A production manager might consider it more important to maintain quality standards regardless of cost. He would then dismiss adverse expenditure variances as inevitable and unavoidable. It is therefore obvious that accountants and senior management should try to implement systems that are acceptable to budget holders and which produce positive effects. Pay as a motivator Many researchers agree that pay can be an important motivator, when there is a formal link between higher pay and other rewards, such as promotion and achieving budget targets.
Individuals are likely to work harder to achieve budget if they know that they will be rewarded for their successful efforts. There are, however, problems with using pay as an incentive. Many investigations have noted the tendency of managers to pad their budgets either in anticipation of cuts by superiors or to make the subsequent variances more favourable.
And there are numerous examples of managers making decisions in response to performance indices, even though the decisions are contrary to the wider purposes of the organization. Pay can be a demotivator as well as a motivator! It also includes interest and dividend received from investment held by the business.
Relevant costing is used in long term decision making and investment decisions. These are irrelevant for decision making because we cannot change the past. Committed costs are irrelevant to decision. Mostly fixed costs are committed cost. For example absorbed overheads, fixed overheads. For example Notional rent, notional interest, depreciation, provisions. These are non-cash items and irrelevant for decision making. Opportunity costs only apply to the use of scarce resources. Where resources are not scarce, no sacrifice exists from using these resources.
Fixed cost may only be fixed in the short term. It is sometimes called an accounting rate of return. Payback period is the amount of time that is expected to take for the cash inflows from a capital investment project to equal the cash outflows. It is particularly useful if there are liquidity problems or if distant forecasts are very uncertain. A project that takes time to get off the ground but earns substantial profits once established might be rejected if the payback method is used, where as a smaller project, paying back more quickly, may be accepted.
Interest cost is always on outstanding balance. The two types of interest are. Future value is calculated by multiplying present value with a compound factor n F.
The present value of a future sum tells us what a future sum is worth today. Conversely, there is a time preference for paying the same sum of money later rather than sooner.
Simple payback period is always shorter than discounted payback period. It refers to the discount rate where net present value is zero. Constant cash inflows or outflows for a defined time period is called annuity. When a project has expected to earn equal amount of cash flows in equal interval of time but for unlimited time period is called perpetuity.
Nominal rate is used when interest is compounded only once in a period. Effective rate is use when interest is compounded more than once in a period. Interest may be compounded daily, weekly, monthly or quarterly. Effective rate is greater than nominal rate when compounding is done for less than one year.
Effective rate is equals to the nominal rate if compounding is done at the end of year. Standard costing: A system of accounting based on predetermined costs and revenue per unit, which are compared to actual performance to provide useful feedback information to management. The predetermined cost is known as standard cost and the difference between standard and actual cost is called variance. The process through which differences are analysed is known as variance analysis. Although standard costing can be used in manufacturing as well as service industries, its greatest benefits are realised where mass production and repetitive work is undertaken.
Performance Standards Performance standards are used to set efficiency targets. There are four types of standards: 1. For internal or external use. It involves estimating the quantity of the resource used and its associated costs. In addition a standard selling price is set. The same comparisons may be made for revenues. Variance analysis: The process by which the total difference between standard and actual results is analyzed is known as variance analysis.
Direct labour total variance can be subdivided into labour rate variance and labour efficiency variance. Idle time may be caused by machine breakdowns or not having worked to give to employees, perhaps because of limited resources or a shortage of orders from customers. When idle time occurs, the labour force is still paid wages for time at work, but no actual work is done.
Time paid for without any work being done is non-productive and therefore inefficient. In variance analysis, idle time is an adverse efficiency variance. It is difference between the standard labour hour that should have been worked for the actual number of units produced and the actual number of hours worked when the labour hours are valued at the standard variable production overhead rate.
The amount of overhead absorbed is calculated by using the overhead rate which, at the time of absorption, is based on budgeted figures. In absorption costing system under or over absorption of overheads is almost inevitable. If either of two changes, it will result in over or under absorption of overheads. To compute the volume variance difference between actual and budgeted activity level is multiplied by budgeted absorption rate per unit.
This figure is then multiplied by the overhead rate for an hour of labour. Sales variance arises from two reasons; either the sale price varies from planned or the volume of sales vary from budgeted.
Sales price variance is difference between what the revenue should have been from sale of actual quantity and what the actual revenue was. Volume variance calculates the difference between budgeted quantity and actual quantity sold, valued at standard profit per unit or standard contribution per unit. There can be no volume variances, as there is no attempt to absorb fixed overheads into production. This implies that students need to have thorough detailed knowledge of how to calculate variances.
Essentially the process involved is working backwards with the formula or statement to find missing figures. There is no set approach since questions will not be identical.
One variance might be interrelated with another and much of it might have occurred only because the other, interrelated, variance occurred too. This needs to be taken into account when deciding whether to investigate a variance or not. Two variance are interdependent one will usually be adverse and the other one favourable here are some examples.
If cheaper material is more difficult to handle, there might be an adverse labour efficiency variance too. If a decision is made to purchase more expensive material, the price variance will be adverse but the usage variance might be favourable as the material is easier to use or of a higher quality.
In contrast , a favourable rate variance might indicate a longer-than-expected proportion of inexperienced workers in the workforce , which could result in an adverse labour efficiency variance , and perhaps poor materials handling and high rates of rejects and hence an adverse materials usage variance. Selling price and sales The connection between selling price and sales volume is perhaps an volume obvious one. A reduction in the selling price might stimulate bigger sales demand, so that an adverse selling price variance might be counter balanced by a favourable sales volume variance.
Similarly, a price rise would give a favourable price variance, but possibly at the cost of a fall in demand and an adverse sales volume variance.
Variable and fixed Because the variable and fixed production overhead efficiency variances production overhead are the same , in hours , as the labour efficiency variance, any efficiency variances and interrelationship between other variances and the labour efficiency variance other variances apply equally to the variable and fixed production overhead efficiency variances.
So if there is an interrelationship between a favourable labour rate variance and an adverse labour efficiency variance, there will also be interrelationships between the favourable labour rate variance and adverse variable and fixed production overhead efficiency variances. Significant variances usually need investigating. If actual results are different from planned and consequently resulted in variances, management need to consider a number of factors in order to decide whether to investigate it or not.
Variances are inevitable in routine processes and therefore investigating each and every variance would not be worth-while. Controllability: Some investigations are not controllable by nature. An increase in price of material or shortage of material and skills are major examples as opposed to material usage variance which is controllable by management.
In case of uncontrollable variance, plan should be changed for the next period. For example if sub-standard material is purchased, it would result in favorable material price variance but at the same time would result in adverse material usage variance and adverse labour efficiency variance. So while investigating an adverse variance, all relevant factors should be taken into account. If a standard was set which was not suitable to working conditions, adverse variances are inevitable.
Forecast is based on some assumptions about the conditions that are expected to apply. Budget: A budget is a plan of what the organization is aiming to achieve and what it has set as a target.
Budgets are more realistic because management will try to establish some control over the conditions that will apply in the future. The intersection of the line of best fit on the vertical axis is the fixed cost and slope of the line represents variable costs. It is a method of visual judgments that is a disadvantage of this method. The data often conforms to a certain pattern over time. It is use to forecast sales.
This pattern can be extrapolated into the future and hence forecasts are possible. Time periods may be any measure of time including days, weeks, months and quarters. The horizontal axis is always chosen to represent time, and the vertical axis represents the values of the data recorded. It takes several years to complete. They are unpredictable. In examination problems there is generally insufficient data to evaluate the cyclical and random variations, hence, they are ignored.
Take moving averages which covers a cycle Moving averages of Time series of even numbers Time series of odd numbers Apply two times moving averages apply once moving averages Because trend value should relate to a specific period Remember that when finding the moving average of an even number of result, a second moving average has to be calculated so that values can relate to specific actual figures.
This method attempts to remove seasonal or cyclical variation from a time series by a process of averaging so as to leave a set of figures representing the trend. Affect seasonal businesses like ice-cream manufacturing Finding the seasonal variation: There are two models use to find out seasonal variations, additive model and multiplicative model.
An average of the seasonal variations for each time period within the cycle must be determined and then adjusted so that the total of the seasonal variations sums to zero. Q1 Q2 Q3 Q4 At the moment they do not. Therefore spread the total of the variations In this model, each actual figure is expressed as a proportion of the trend. In our example, we assume that random component is small and so ignore it.
It provides standard way of comparing the values. The purpose of correlation analysis is to measure and interpret the strength of linear relationship between two variables. Degrees of correlation: Two variables might be perfectly correlated, partly correlated or uncorrelated. Correlation can be positive or negative. The differing degrees of correlation can be illustrated bt scatter diagrams.
An exact linear relationship exists between the two variables 2. Partial correlation a b Y Y X X In a , although there is no exact relationship, low values of X tend to be associated with low values of Y, and high values of X with high values of Y. In b again, there is no exact relationship, but low values of X tend to be associated with high values of Y and vice versa.
No correlation c Y X The values of these two variables are not correlated to each other. Positive and negative correlation: Correlation can be positive or negative. Positive correlation means that the low values of one variable are associated with low values of other, and high values of one variable are associated with high values of other. Negative correlation means that the low values of one variable are associated with high values of other, and high values of one variable are associated with low values of other.
Two variables are perfectly or partially correlated and if they are partially correlated ,they there may be high or low degree of correlation.
If your calculation results in anything outside this range you must revise your calculations. Correlation in time series: The correlation coefficient is calculated with time as X variable, the independent variable and other variable as Y, the dependent variable. It is recommended that when analysing correlation in a time series it is more convenient to replace years time with digits, i. X variable having time values of year ,,, and so on should be replaced with 0, 1, 2, 3 and so on.
Note that first year is replaced with 0 not 1. You can use whatever figure for years but using 0, 1, 2, 3… is most simplified. In other words r expresses the proportion of total variance in the value of one variable that can be fully explained by the other variable. The coefficient of determination denotes the strength of linear association between X and y. It is one of the most commonly used business analysis tool and easy to use.
Line of best fit: Although correlation coefficient is used to trace out that whether there is any linear relationship between any two variables but correlation coefficient solely cannot be used to predict the value of dependent variable Y based on independent variable X. Once it is found that two variables are correlated we can use the line of best fit.
We can use this equation for forecasting; putting a value for variable X and deriving a forecast value for dependent variable Y. Independent variable is the explanatory variable used to predict dependent variable.
Regression line and time series analysis: Regression line can also be used in time series analysis. Time to be taken as independent variable and years to be replaced with 0,1,2,3 and so on correlation coefficient is calculated. The reliability of regression model in forecasting As is the case with any other model, results from regression analysis will not be accurate or reliable.
The model is only appropriate if there is a linear relationship between two variables. Value of one variable, the dependent variable Y, is predicted from value of one other variable, the independent variable X.
This is quite unrealistic as the value of Y might be affected by many other factors not considered at all. The model assumes that past movement pattern of two variables will continue in the future. Again, this is an unrealistic assumption. It cannot be used to predict any other sort of information. Prediction of a figure not that is all desired. Predicted results are not reliable if model is used for extrapolation.
Even if correlation is high between two variables and have less than ten pairs of data any forecast value should be regarded as somewhat unreliable. Coefficient of determination tells us that how much of the variation in cost can be explained by volume level. Higher the coefficient of determination the higher the reliance that could be placed on predicted result.
Forecasting problems: All forecasting methods are subject to have errors but it varies from case to case. The elimination of unnecessary duplication and concentration of resources is a form of rationalisation. This means the value of the product remains same with reduced cost. Value engineering: It is the application of similar technique on new products so that new products are designed and developed to a given value at minimum cost.
Values: There are four types of values: 1. Cost value: It is a cost of producing and selling an item 2. Exchange value: It is the market value of the product or service 3.
Use value: It is what the item does, what the purpose it fulfils 4. Esteem value: It is the prestige the customer attaches to the product. Control is to compare actual results with the plan. Strategic management must decide what they want the business to be and how to get there.
Mission Mission should identify the purpose of the business and what is it trying to achieve and just as importantly what the business does not do. The managers of the business will contribute their views of the desired position of the business in the future.
For this reason, the mission has also become known as the vision due to the requirement of being able to look into the future. It also defines its competence by which it hopes to prosper. Mission statement: A mission statement is a formal, short, written statement of the purpose of a company or organization.
The mission statement should guide the actions of the organization, spell out its overall goal, provide a sense of direction, and guide decision-making. There are two types of goals: Operational goals: Can be expressed as objectives. It can be measurable. Non-operational goals: Not all the goals can be measured. For example, a university goal might be to seek the truth, this goal cannot be measured.
Both should combine to ensure the achievement of the overall corporate objective. For example a company sets its Primary objective as to maximize profit, for this it has Secondary objectives like cost reduction, sales growth, customer satisfaction etc. Objectives may be long term and short term.
A company that suffering from losses in short term might continue to have a long term primary objective of achieving a growth in profits, but in short term its primary objective might be survival. Strategic, tactical and operational objectives: Objectives can also be classified as strategic, tactical or operational.
Trade-off between the objectives: When there is number of objective, some might be achieved on the expense of others. Short-termism is when there is a bias towards short-term rather than long-term performance. It is often due to the fact that managers' performance is measured on short-term results. Organizations often have to make a trade-off between short-term and long-term objectives. Decisions which involve the sacrifice of longer-term objectives include the following.
Managers may also manipulate results, especially if rewards are linked to performance. This can be achieved by changing the timing of capital purchases, building up inventories and speeding up or delaying payments and receipts. If budget targets are unrealistically tough, a manager will be forced to make trade-offs between the short and long term. Managers must be kept aware of long-term aims as well as shorter-term budget targets.
This may encourage goal congruence. Multiple targets can be used. The link between mission statements and key performance indicators Performance measure can be divided in two groups 1. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Management is always keen to measure its operating efficiency.
It excludes income from investment in other businesses. The ratio illustrates what proportion of sales revenue was retained in the form of profit before the deduction of interest and tax. The operating profit ratio measures the operating efficiency and pricing efficiency through cost control.
If profit margin unsatisfactory means excessive cost or low selling price. Higher percentage shows better control over the costs and reasonable profit on sales. If you go to the home page of this website you will find links to notes about the change of exam format for each of the papers which contain details of any syllabus changes.
They are, but our notes do not claim to cover every single topic in the syllabus. Our notes and lectures cover more than enough to pass the exam well. The discount tables are in the course notes!! Just after the contents page and the formula sheet. Yes — in the F2 course notes are the tables and the formula sheet that are given in the exam.
Happy new year to everyone… i have a simple question but i really need an answer, i wrote F2 since June of last year Paper Based and i failed, i want to write it back this June but i am unsure if to write it Paper Based or Computer Based this time , Also i want to know if i should take back classes for this paper , please advise me…i need some help. You must be logged in to post a comment. Click here to download. Log in to Reply. Hi there, Can you please upload the latest study materials for AFM, both the study text and exam practice kits.
Thanks with regard. Highly appreciated. They will go along way helping my studies, but if. Possible share the latest Bpp text. Thank you for your contribution..
Leave a Reply Cancel reply Comment. Enter your name or username to comment. Enter your email address to comment. Enter your website URL optional. Manoj 25 Oct Reply. LW 18 Jun Reply. Do you have the latest textbook for the subjects? Maybe ?
0コメント