AIMS
To
develop knowledge and understanding of how organisations
record, analyse and report current and future
costs and revenue data for use within the organisation.
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 behaviour
-
identify appropriate material, labour and
overhead costs
-
understand and be able to apply the principles
of marginal costing and absorption costing
-
understand and be able to calculate product
and service costs
-
understand and be able to apply methods of
estimating costs and revenues.
POSITION
OF THE PAPER IN THE OVERALL SYLLABUS
Knowledge
of Paper 2, Information for Management Control,
is required before commencing study for Paper
4.
This
paper provides the basic techniques required to
enable candidates to develop the various methods
for recording and evaluating costs into more complex
problems at the Advanced Level.
Candidates
will need a sound understanding of the methods
and techniques introduced 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 7, Planning,
Control and Performance Management.
SYLLABUS
CONTENT
1
Management information
(a)
Nature and purpose of internal reporting
(i)
financial and non-financial information for managers
(ii)
cost centres, profit centres and investment centres
and the impact of these on management information
and appraisal
(b)
Management information requirements
(i)
definition and importance of good information
(ii)
presentation of information
(iii)
role of accounting technicians and accounting
information
(iv)
role of information technology
(c)
Maintaining an appropriate cost accounting system
(i
) cost units and responsibility centres
(ii)
sources of relevant information
(iii)
methods for recording, processing and storing
relevant information
(iv)
analysis and dissemination of output information
2
Cost classification and cost behaviour
(a)
Cost classification
(i
) classifications used in cost accounting according
to purpose
(b)
Cost behaviour
(i)
cost behaviour patterns
(ii)
identification of fixed, variable and semi-variable
costs
(iii)
use of fixed, variable and semi-variable costs
in cost analysis
(iv)
analysis of the effect of changing activity levels
on unit costs
3
Elements of cost
(a)
Materials
(i
) direct and indirect material costs
(ii)
methods of stock control and valuation including
First In First Out, Last In First Out and weighted
average cost
(iii)
relationship between the materials costing system
and the stock control system
(b)
Labour
(i
) direct and indirect labour costs
(ii)
methods of payment for and calculation of payments
for labour
(iii)
relationship between the labour costing system
and the payroll accounting system
(c)
Overheads
(i
) direct and indirect expenses
(ii)
procedures and documentation relating to expenses
(iii)
relationship between the accounting system and
the expenses costing system
4
Marginal costing and absorption costing
(a)
Marginal costing
(b)
Absorption costing
(i)
bases of allocating and apportioning indirect
costs (overheads) to responsibility centres
(ii)
bases of absorption
(iii)
over and under absorption of overheads
(c)
Marginal versus absorption costing for costing
and reporting purposes
5
Product and service costs
(a)
Job and batch costing
(i)
characteristics
(ii)
direct and indirect costs
(b)
Process costing
(i)
characteristics
(ii)
normal losses and abnormal losses and gains
(iii)
accounting for scrap
(iv)
closing work in progress and equivalent units
(v)
joint products and by-products
(c)
Service costing
(i)
characteristics
(ii)
cost units
6
Estimating costs and revenues
(a)
CVP analysis
(i)
break-even analysis
(ii)
margin of safety
(iii)
target profit
(iv)
contribution / sales ratio
(v)
simple break-even chart and profit/volume graph
(b)
Decision-making
(i
) concept of relevant costs
(ii)
short-term decisions
(iii)
optimal production plan given a scarce resource
(c)
Discounted cash flow techniques
(i
) simple and compound interest
(ii)
nominal and effective interest
(iii)
discounted cash flow
(iv)
annuities and perpetuities
(v)
payback period.
EXCLUDED
TOPICS
The
following topics are specifically excluded from
Paper 4:
-
activity based costing
-
process costing – opening work in progress
-
process costing – losses and work in progress
in same process
-
multi-product cost / volume / profit analysis
-
linear programming.
KEY
AREAS OF THE SYLLABUS
All
areas of the syllabus are equally important.
APPROACH
TO EXAMINING THE SYLLABUS
Paper
4 is a two-hour paper. It can be taken as a written
paper or a computer based examination. The questions
in the computer based examination are objective
test questions – multiple choice, number entry
and multiple response. The written examination
consists of two sections, structured as follows:
No.
of marks
Section
A – 20 compulsory 40 - multiple choice questions
of two marks each
Section
B – four compulsory written 60 - questions of
between 10 and 20 marks each
Total
100
RELEVANT
TEXTS
There
are a number of sources from which you can obtain
a series of materials written for the ACCA CAT
examinations. These are listed below:
STUDY
SESSIONS
1
Management information
(a)
Discuss the purpose of management information:
planning, control and decision-making
(b)
Describe the features of useful management information
(c)
Discuss the nature, source and importance of both
financial
and non-financial information for managers
(d)
Describe management responsibilities (for cost,
profit and investment) and their effect on management
information and performance measurement
(e)
Discuss the role of information technology in
management information
(f)
Discuss the role of the accounting technician
(g)
Present management information in suitable formats
according to purpose
2
Maintaining an appropriate cost accounting system
(a)
Explain the relationship between the cost/management
accounting system and the financial accounting/
management information systems
(b)
Describe the process of accounting for input costs
and relating them to work done
(c)
Identify the documentation required, and the flow
of documentation, for different cost accounting
transactions
(d)
Explain the use of codes in categorising and processing
transactions, and the importance of correct coding
(e)
Explain and illustrate the concept of cost units
(f)
Describe the different methods of costing final
outputs and their appropriateness to different
types of business organisation
(g)
Describe methods of capturing, processing, storing
and outputting cost and management accounting
data by computer
3
Cost classification and cost behaviour
(a)
Describe the variety of cost classifications used
for different purposes in a cost accounting system,
including by responsibility, function, direct/indirect,
behaviour
(b)
Explain and illustrate the nature of variable,
fixed and mixed (semi-variable, stepped-fixed)
costs
(c)
Use the high-low method to separate semi-variable
costs
(d)
Use variable, fixed and semi-variable costs in
cost analysis
(e)
Analyse the effect of changing activity levels
on unit costs
4
Costing of materials
(a)
Describe the main types of material classification
(b)
Describe the procedures and documentation required
to ensure the correct authorisation, coding, analysis
and recording of direct and indirect material
costs
(c)
Explain, illustrate and evaluate the FIFO, LIFO
and weighted average methods used to price materials
issued from stock
(d)
Describe and illustrate the accounting for material
costs
(e)
Calculate material input requirements, and control
measures, where wastage occurs
5
Material stock control
(a)
Describe the procedures required to monitor stock
and to minimise stock discrepancies and losses
(b)
Explain and illustrate the costs of stockholding
and stockouts
(c)
Explain, illustrate and evaluate stock control
levels (minimum, maximum, re-order)
(d)
Calculate and interpret optimal order quantities
(e)
Discuss the relationship between the materials
costing system and the stock control system
6
Costing of labour
(a)
Explain, illustrate and evaluate labour remuneration
methods
(b)
Describe the operation of a payroll accounting
system
(c)
Distinguish between direct and indirect labour
costs
(d)
Describe the procedures and documentation required
to ensure the correct coding, analysis and recording
of direct and indirect labour
(e)
Describe and illustrate the accounting for labour
costs
(f)
Discuss the relationship between the labour costing
system and the payroll accounting system
(g)
Explain the causes and costs of, and calculate,
labour turnover
(h)
Describe and illustrate measures of labour efficiency
and utilisation
7
Costing of other expenses
(a)
Describe the nature of expenses by function
(b)
Describe the procedures and documentation required
to ensure the correct authorisation, coding, analysis
and recording of direct and indirect expenses
(c)
Describe capital and revenue expenditure and the
relevant accounting treatment
(d)
Calculate and explain depreciation charges using
straight-line, reducing balance and machine hour
methods
(e)
Discuss the relationship between the expenses
costing system and the expense accounting system
8
Overhead allocation and apportionment
(a)
Explain the rationale for absorption costing
(b)
Describe the nature of production and service
cost centres and their significance for production
overhead allocation, apportionment and absorption
(c)
Describe the process of allocating, apportioning
and absorbing production overheads to establish
product costs
(d)
Apportion overheads to cost centres using appropriate
bases
(e)
Re-apportion service cost centre overheads to
production cost centres using direct and step
down methods
9
Overhead absorption
(a)
Justify, calculate and apply production cost centre
overhead absorption rates using labour hour and
machine hour methods
(b)
Explain the relative merits of actual and pre-determined
absorption rates
(c)
Describe and illustrate the accounting for production
overhead costs, including the analysis and interpretation
of over/under absorption
(d)
Describe and apply methods of attributing non-production
overheads to cost units
(e)
Calculate product costs using the absorption costing
method
10
Absorption and marginal costing
(a)
Prepare profit statements using the absorption
costing method
(b)
Explain and illustrate the concept of contribution
(c)
Prepare profit statements using the marginal costing
method
(d)
Compare and contrast the use of absorption and
marginal costing for period profit reporting and
stock valuation
(e)
Reconcile the profits reported by absorption and
marginal costing
(f)
Discuss the usefulness of profit and contribution
information respectively
11
Job and batch costing
(a)
Describe the characteristics of job and batch
costing respectively
(b)
Identify situations where the use of job or batch
costing is appropriate
(c)
Calculate unit costs using job and batch costing
(d)
Discuss the control of costs in job and batch
costing
(e)
Apply cost plus pricing in job costing
12
Process costing - losses
(a)
Describe the characteristics of process costing
(b)
Identify situations where the use of process costing
is appropriate
(c)
Calculate unit costs and prepare process accounts
where losses occur in process
(d)
Explain and illustrate the nature of normal and
abnormal losses/gains
(e)
Calculate unit costs where losses are separated
into normal and abnormal
(f)
Prepare process accounts where losses are separated
into normal and abnormal
(g)
Account for scrap
13
Process costing - work-in-progress
(a)
Describe and illustrate the concept of equivalent
units
(b)
Calculate unit costs where there is closing work-in-progress
in a process
(c)
Allocate process costs between finished output
and work-in-progress
(d)
Prepare process accounts where there is closing
work-in-progress
14
Process costing - joint products and by-products
(a)
Distinguish between joint products and by-products
(b)
Explain the treatment of joint products and by-products
at the point of separation
(c)
Apportion joint process costs using net realisable
values and weight/volume of output respectively
(d)
Discuss the usefulness of product cost/profit
data from a joint process
(e)
Evaluate the benefit of further processing
15
Service costing
(a)
Describe the characteristics of service costing
(b)
Describe the practical problems relating to the
costing of services
(c)
Identify situations (cost centres and industries)
where the use of service costing is appropriate
(d)
Illustrate suitable cost units that may be used
for a variety of services
(e)
Calculate service unit costs in a variety of situations
16
Cost / volume / profit (CVP) analysis
(a)
Calculate contribution per unit and the contribution/sales
ratio
(b)
Explain the concept of break-even and margin of
safety
(c)
Use contribution per unit and contribution/sales
ratio to calculate break-even point and margin
of safety
(d)
Analyse the effect on break-even point and margin
of safety of changes in selling price and costs
(e)
Use contribution per unit and contribution/sales
ratio to calculate the sales required to achieve
a target profit
(f)
Construct break-even and profit/volume charts
for a single product or business
17
Decision-making
(a)
Explain the importance of the limiting factor
concept
(b)
Identify the limiting factor in given situations
(c)
Formulate and determine the optimal production
solution when there is a single resource constraint
(d)
Solve make/buy-in problems when there is a single
resource constraint
(e)
Explain the concept of relevant costs
(f)
Apply the concept of relevant costs in business
decisions
18
& 19 Discounted cash flow
(a)
Explain and illustrate the difference between
simple and compound interest, and between nominal
and effective interest rates
(b)
Explain and illustrate compounding and discounting
(c)
Explain the distinction between cash flow and
profit and the relevance of cash flow to capital
investment appraisal
(d)
Explain and illustrate the net present value (NPV)
and internal rate of return (IRR) methods of discounted
cash flow
(e)
Calculate present value using annuity and perpetuity
formulae
(f)
Calculate payback (discounted and non-discounted)
(g)
Interpret the results of NPV, IRR and payback
calculations of investment viability
20
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