Cima p1 2012 Notes

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CIMA Paper P1
Performance Operations
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CIMA P1 Performance Operations
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Contents
1. 2. 3. 4. 5.
About ExPress Notes
3
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Cost Accounting Systems
Forecasting and Budgeting Techniques Project Appraisal Dealing with Uncertainty in Analysis Managing Short Term Finance
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. .
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We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. Its a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the CIMA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the CIMA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials: The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the CIMA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.
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Your stage in study for each paper These ExPress notes ExP recommended course notes, or ExPedite notes Dont use yet ExP recommended exam kit Dont use yet CIMA online past exams Prior to study, e.g. deciding which optional papers to take Skim through the ExPress notes to get a feel for whats in the syllabus, the size of the paper and how much it appeals to you. Work through each chapter of the ExPress notes in detail before you then work through your course notes. Dont try to feel that you have to understand everything just get an idea for what you are about to study. Dont make any annotations on the ExPress notes at this stage. Have a quick look at the two most recent real CIMA exam papers to get a feel for examiners style. Dont use at this stage.
At the start of the learning phase
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Nobody passes an exam by what they have studied we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this. Try to do at least one past exam question on the learning phase for each major chapter.
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Practice phase Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident youll remember without reviewing them. Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand. This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it! Download the two most recent real exam questions and answers. Read through the technical articles written by the examiner. Read through the two most recent examiners reports in detail. Read through some other older ones. Try to see if there are any recurring criticism he/ she makes. You must avoid these! Do a final review of the two most recent examiners reports for the paper you will be taking tomorrow.
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ExPress Notes
Chapter 1
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Cost Accounting Systems SAMPLE PAGES
START The Big Picture

This section addresses the different main systems concerning production costs. The techniques mentioned are useful in assisting businesses in determining the: Cost of production (for both decision-making and reporting purposes); Valuation of inventories; Pricing of products
KEY KNOWLEDGE Absorption Costing

This is one method which seeks to make the link between overheads and (product) cost units. The focus is on production. Overhead costs that are not incurred at the time of production do not find their way into inventory. It is useful to think of production costs as being those that end up as part of the inventory (valuation) while other (non-production) costs are incurred outside, and normally after the product leaves inventory.
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KEY KNOWLEDGE Contribution
Contribution is defined as the difference between Sales revenue and the marginal cost of sales, or Contribution = Sales Variable costs (both production and non-production)
KEY KNOWLEDGE Marginal Costing

A marginal approach to costing focuses on the variable (marginal) costs generated in a business and considers fixed costs as period costs. This allows the company to be able to quantify the amount by which its costs rise, if it produces/sells an additional unit of output. Inventory is valued at the full production costs. Summary of Absorption costing and Marginal costing formats Absorption Costing Revenue Less: Cost of Sales Marginal Costing
Variable/Fixed production costs Gross profit Variable/Fixed non-production costs
Variable production/ non-production costs Contribution Fixed production/ non-production costs
Less: Expenses
Net Profit
KEY KNOWLEDGE Throughput accounting

This method is also consistent with a JIT environment and focuses on the bottlenecks in a production process; by eliminating these bottlenecks, it raises the amount of output that can flow through the process (assuming there is demand for the output the idea is not to produce for inventory!).
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ABC is a method that seeks to group overhead costs according to the activities causing those costs. The activities giving rise to the costs are called cost drivers. By linking costs to activities (cost drivers), it becomes possible to charge costs to the agents undertaking those activities.
The throughput accounting approach itself considers all costs (including direct labour) as fixed and treats only direct materials as being variable in the short term.
ABC -- EXAMPLE
A factory clinic with total annual costs of $500,000 serves two Workshops A and B. Workshop A has 200 employees and Workshop B has 300 employees. A conventional way of apportioning the cost would be on the basis of employees: Workshop A: (200/500) x 500,000 = 200,000 Workshop B: (300/500) x 500,000 = 300,000 500,000 An ABC approach might look at the number of visits to the clinic by the employees of A and B. Workshop A: 150 visits p.a. Workshop B: 70 visits p.a. In this case, the apportionment could be: Workshop A: (150/220) x 500,000 = 340,909 Workshop B: ( 70/220) x 500,000 = 159,091 500,000 The different levels of usage may reflect different degrees of occupational hazard present in the two workshops. ABC advantages: provides a more precise way to determine costs per unit of output, especially since not all overhead costs are driven by production volumes.
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ABC disadvantages: it can be complex and costly to implement. It is not a plug-in-and-go system! It is therefore imperative that management carefully weigh the costs against the (expected) benefits from ABC before deciding to implement it.
Budgetary planning, pricing decisions and managing performance are all facilitated by ABC.
Basic Variance Analysis -- Example
The following data is from a manufacturing company Budget Production: Sales: Sales Price: 1,100 units 1,000 units $120 / unit
Actual results Production: 1,000 units Sales: 950 units Materials: 4,900 kg, $45,025 Labour: 3,100 hrs, $19,050 Variable O/Hs: $9,250 Fixed O/Hs: $17,000 Sales price: $115 / unit Cost card (per unit) Materials (5kgs x $9 per kg) Labour (3hrs x $6 per hr) Variable O/Hs (3 hrs x $3 per hr) Fixed O/Hs (3 hrs x $5 per hr) 45 18 9 15 87
Variance calculations Sales volume variance (Absorption costing) Budgeted sales volume Actual sales volume Sales volume variance @ standard margin ($120-$87) 1,000 950 50 (A) $1,650 (A)
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Sales volume variance (Marginal costing) Budgeted sales volume Actual sales volume 1,000 950 Sales volume variance 50 (A) @ standard contribution ($120-$72) $2,400 (A) Sales price variance 950 units should have sold @$120 Actual revenues (950 units x $115) Sales price variance Material variances (i) Material price variance Materials used (4,900 kg) should have cost @ $9 Materials (4,900 kg) did cost Materials price variance (ii) Material usage variance 1,000 units should have used @ 5 kg 1,000 units did use Materials usage variance @ standard $9 Materials total variance: 5,000 kg 4,900 kg 100 kg (F) $900 (F) $ 25 (A) 44,100 45,025 $925 (A) 114,000 109,250 4,750 (A)
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(i) Labor rate variance Labor (3,100 hrs) should have cost @ $6 Labor (3,100 hrs) did cost 18,600 19,050 Labor rate variance $450 (A) (ii) Labor efficiency variance 1,000 units should have taken @ 3 hrs 1,000 units did take Labor efficiency variance @ standard $6 Labor total variance: Variable O/H variances (i) Variable O/H expenditure variance 3,100 hrs should have cost @ $3 3,100 hrs did cost Variable O/H expenditure variance (ii) Variable O/H efficiency variance 1,000 units should have taken @ 3 hrs 1,000 units did take Variable O/H efficiency variance @ standard $3 Variable O/H total variance: 3,000 hrs 3,100 hrs 100 hrs (A) $300 (A) $ 250 (A) 9,300 9,250 50 (F) 3,000 hrs 3,100 hrs 100 hrs (A) $600 (A) $ 1,050 (A)
Labor variances
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ExPress Notes
Fixed O/H total variance (Absorption costing)

Overhead actually incurred $17,000 $15,000 Overhead absorbed (1,000 units x $15) Fixed O/H total variance $ 2,000 (A) This can be broken down into two components: (i) Fixed O/H expenditure variance Budgeted O/H should have cost (1,100 units x $15) 16,500 Actual O/H cost Fixed O/H expenditure variance (ii) Fixed O/H volume variance (Absorption Costing) Budgeted production Actual production Fixed O/H volume variance @ standard $15 Interpreting variances Calculating variances is just the first step in analyzing their causes and taking remedial action steps to achieve improvements. 1,100 units 1,000 units 100 units (A) $1,500 (A) 17,000 $500 (A)
KEY KNOWLEDGE Mix and Yield Variance

When materials are combined in the production process in standard proportions, with the possibility of substituting one for the other, then the materials usage variance can be broken down into two further measures: Mix: This examines the (monetary) impact of altering the proportions of the two materials.
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The sum of the mix and yield variances is equal to the materials usage variance. Due to changing market and technical circumstances, standards may become outdated. In such cases, it may be necessary to alter a standard, even during a budget period already in progress. Planning and operational variances capture these changes in two steps: Planning variance: Compares results based on the revised standard compared to the initial standard. The result is usually considered to be outside the area of control of management. Operational variance: Compares actual results with the budget based on the revised standard. This is often considered to be within the control of management. The distinction above between controllable and uncontrollable factors is critical insofar as it relates to the idea of responsibility accounting, i.e. expecting people who have delegated authority to take responsibility for decisions within their area of control.
Yield: This focuses on the total amount of inputs to produce the output achieved.
KEY KNOWLEDGE McDonaldization

Efficiency: Achieving optimal outputs relative to inputs; Calculability: Emphasis on quantity (over quality); Control: Substitute automation wherever feasible; Predictability: Uniformity of service (no surprises)
KEY KNOWLEDGE Benchmarking

Systematic analysis of own performance against that of another organisation, with a view of improving own performance by learning from others experience
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External: o Competitive: against a best in class competitor o Functional: against best in class functions Internal (against a best in class similar business unit within the organisation)
Categories
KEY KNOWLEDGE Back-flush Accounting
This is a simplified costing method which can be used in conditions of short operational cycles and low inventories. Companies working on a Just-In-Time (JIT) basis may practise it, as it avoids the detailed tracking of costs during production; instead, it records costs when goods are completed. These costs are then back-flushed through the system based on standard costs.
KEY KNOWLEDGE Just-In-Time (JIT)

JIT is more than an inventory management model; it is a manufacturing philosophy which puts at its core minimization of inventories on the basis that most of inventoryrelated activities are non-value-added. JIT is a pull system (in the sense of output being pulled through production based on current demand) rather than a push system (in which output is pushed through production based on anticipated demand) JIT is a realistic approach if it goes along with implementation of TQM (zero defects, zero machine breakdowns); it necessitates o Factory re-organisation to permit lean production (machines that produce a given output are grouped in semicircles around a multi-skilled worker) Employee empowerment (employees should be empowered to stop or adjust the flow).
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About ExPress Notes

Cost Accounting Systems

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START About ExPress Notes

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At the start of the learning phase

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Your stage in study for each paper

These ExPress notes

ExP recommended course notes, or ExPedite notes

ExP recommended exam kit

CIMA online past exams

The night before the real exam

At the door of the exam room before you go in.

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START About The ExP Group

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Cost Accounting Systems SAMPLE PAGES

START The Big Picture

KEY KNOWLEDGE Absorption Costing

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KEY KNOWLEDGE Marginal Costing

Variable/Fixed production costs Gross profit Variable/Fixed non-production costs

Variable production/ non-production costs Contribution Fixed production/ non-production costs

KEY KNOWLEDGE Throughput accounting

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Basic Variance Analysis -- Example

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Fixed O/H total variance (Absorption costing)

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KEY KNOWLEDGE Mix and Yield Variance

KEY KNOWLEDGE McDonaldization

KEY KNOWLEDGE Benchmarking

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KEY KNOWLEDGE Back-flush Accounting

KEY KNOWLEDGE Just-In-Time (JIT)

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