ACCA F5 Performance Management Lecture slides

PERFORMANCE MANAGEMENT

Exam format

• Computer-based Examination

• Time:

- 10 minutes reading time

- 3 hours + 20 minutes

• Types of question

- Objective test questions: 15 questions x 2 mark

- Objective test case questions: 3 cases x 5 OT question x

2 mark

- Constructed response questions: 2 cases x 20 marks

(decision making, budgeting, performance

measurement)

PART A

SPECIALIST COST AND

MANAGEMENT ACCOUNTING

TECHNIQUES

ACTIVITY BASED COSTING

RECAP OF ABSORPTION COSTING

• Pre−determined OAR∗ =

Budgeted overhead

Budgeted activity level

• Possible bases of absorption:

• Percentage of direct material cost

• Percentage of direct labor cost

• Percentage of prime cost

• Rate per machine hour

• Rate per direct labor hour

• Rate per unit

• Percentage of a factory cost (for admin overhead)

• Percentage of sales (for sales overhead)

RECAP OF ABSORPTION COSTING

• A blanket OAR is an absorption rate used

throughout a factory and for all jobs and units

of output irrespective of the department in

which they were produced

• A departmental OAR is a separate absorption

rate for each department

RECAP OF ABSORPTION COSTING

RECAP OF ABSORPTION COSTING

Feature:

• Manufacture produced narrow range of

products

• Product: similar operations and similar

proportions of overheads

• Direct cost accounted for the largest

proportion of total costs (overhead costs

were only a small fraction of production

costs)

Activity based costing

Reasons for the development of ABC

• Information technology more developed

• Overheads become larger proportion of total

production cost

• Direct labor may account for small proportion of

production cost

• Wider range and more complex of products

• Many resources used in non-volume related support

activities due to advanced manufacturing technology

Activity based costing

Definition:

Method involves identifying the costs of the main support activities

and the factors that ‘drive’ the costs of each activity Support

overheads are charged to products by absorbing cost on basis of the

product’s usage of the factor driving the overheads

Major ideas:

• Activities cause costs

• Manufacturing products creates demand for the support activities

• Costs are assigned to a product on the basis of the product's

consumption (usage) of these activities

Activity based costing

Traditional absorption costing assigns a large share of overhead to large volume items

and small share to small volume items

In high-technology production and in service operations there are many “support”

activities that are not related to output

Activities cause costs

The costs of an activity are caused or driven by factors known as cost drivers

The costs of an activity are assigned to products on the basis of the number of cost

drivers

Activity based costing

Calculating product costing using ABC

• Step 1: Identify an organisation’s major activities (support

manufacture of products or provision of services)

• Step 2: Identify factor cause the cost of activities (cost drivers)

• Step 3: Collect cost of each activity in to cost pool

• Step 4: Charge support OH to products on the basic of their

usage of the activity.

ABC absorption rate = Cost pool/Total number of activity or cost

driver

Allocate overhead cost = ABC absorption rate x Activity consumed

Product’s usage of an activity is measured by the quantity of the

activity’s cost driver it generates

Activity based costing

• Activity is the series of tasks performed in

harmony for which customers are willing to

pay.

• Cost driver is the reason for performing an

activity and therefore, reason for cost

associated with activity.

• Cost pool is the group of all costs related to

particular activity.

Activity based costing

Production

set up costs

No. of production

set ups

OAR

Machine oil

& machine

repairs

No. of machine

hours OAR

Supervisor’s

Salary

No. of labour hours OAR

COST POOLS COST DRIVERS

Activity based costing

Suppose that Cooplan manufactures four products: W, X, Y and Z. Output and cost data

for the period just ended are as follows.

Direct labour cost per hour is $5. Overhead costs are as follows.

Required

Calculate product costs using the following approaches.

(a) Absorption costing

(b) ABC