AIMS
To
develop knowledge and understanding of the application
of management accounting techniques to support
the management processes of planning, decision-making,
control and performance measurement.
OBJECTIVES
On
completion of this paper, candidates should be
able to:
-
identify valid, relevant data from internal
and external sources
-
present cost information using appropriate methods
-
prepare forecasts of income and expenditure
-
monitor and analyse actual costs against forecasts
and trends
-
compare actual costs with standard costs and
analyse and explain any variances
-
prepare draft budget proposals
-
prepare and present reports comparing actual
performance with planned performance for the
organisation or for responsibility centres and
analyse any variances for management control
purposes
-
prepare and monitor relevant performance indicators,
interpret the results and recommend how to reduce
costs and enhance value
-
make short-term decisions to enhance business
performance.
POSITION
OF THE PAPER IN THE OVERALL SYLLABUS
A
thorough knowledge of the costing elements of
Paper 2,
Information
for Management Control, and all of Paper 4,
Accounting
for Costs, is required before commencing study
for Paper 7.
SYLLABUS
CONTENT
1
Principles of cost accounting
(a)
Absorption costing
(b)
Marginal costing
(c)
Activity based costing
2
Collection of information
(a)
Internal information
(i)
accounting information
(ii)
wage and salary information
(iii)
strategic plans
(b)
External information
(i
) on costs, prices, demand and availability of
resources (from suppliers, providers of services,
competitors, customers and markets), market research
(ii)
government statistics, trade associations, financial
press
(iii)
uses and limitations of published statistics
(iv)
impact of the general economic environment / general
economic information
(c)
Sampling techniques
(i
) random, systematic, stratified, multistage,
cluster, quota
(ii)
choice of appropriate method, advantages and disadvantages
3
Analysis of information
(a)
Methods of presenting information
(i)
written reports
(ii)
graphs
(iii)
diagrams
(iv)
tables
(b)
Index numbers to allow for price and volume changes
4
Forecasting
(a)
Cost forecasting
(i)
high-low method
(ii)
linear regression analysis
(b)
Time series analysis
(i
) moving averages to determine a trend
(ii)
linear regression analysis to determine a trend
(iii)
seasonal variations for both additive and multiplicative
models
(c)
Advantages and disadvantages of forecasting techniques
(d)
Impact of product lifecycle
(e)
Usefulness of computer packages and forecasting
5
Variance analysis
(a)
Standard costing systems
(b)
Calculation of variances
(i
) material price and usage
(ii)
labour rate and efficiency
(iii)
variable overhead expenditure and efficiency
(iv)
fixed overhead expenditure, volume, capacity and
efficiency
(v)
sales margin volume and sales price variances
(c)
Reconciliation between budgeted, standard and
actual costs and profits
(i)
absorption costing system
(ii)
marginal costing system
(d)
Analysis of variances
(i)
subdivision of variances
(ii)
factors to consider before investigation
(iii)
significance and identification of possible reasons
for
variances
(iv)
recommended control actions
6
Budgetary planning
(a)
Different types of budget
(i)
for demand
(ii)
for income
(iii)
for resource usage (materials, labour and overheads)
(iv)
for cost of resources usage
(v)
for capital
(b)
Functions of a system of budgetary planning and
control
(c)
Budget development and review process
(i
) link between planning cycles, budgets and forecasts
(ii)
principal budget factors (demand, capacity and
resource)
(iii)
order of budget preparation
(iv)
coordination of sub-budgets
(v)
revisions for limiting factors
(d)
Alternative approaches to budgeting
(i)
incremental
(ii)
zero based
(iii)
rolling
(e)
Usefulness of computer packages in budgeting
7
Budgetary control
(a)
Responsibility accounting
(i
) link between the design of cost collection and
reporting and the control structure of the organisation
(ii)
controllable and uncontrollable costs
(iii)
cost centres, revenue centres, profit centres,
investment centres
(b)
Flexible budgets
(i
) fixed versus flexible budgets
(ii)
preparation of flexible budgets
(iii)
impact of capacity variations
(iv)
calculation and analysis of variances
(v)
presentation of budgetary control reports for
management
(vi)
recommendation of appropriate control action
(vii)
use of relevant computer packages
(c)
Budgets and behaviour of managers and other employees
(i)
motivational factors
(ii)
participation in the budgetary process
(iii)
goal congruence and dysfunctional decision-making
8
Performance measurement
(a)
Use of performance indicators to measure:
(i
) perspectives of the balanced scorecard
(ii)
economy, effectiveness and efficiency
(iii)
unit costs
(iv)
resource utilisation
(v)
profitability
(vi)
quality of service
(b)
Control ratios
(i)
efficiency
(ii)
capacity
(iii)
activity
(c)
Scenario planning (‘what-if’ analysis)
(d)
Cost reduction and value enhancement recommendations
(i)
efficiencies
(ii)
modifications to work processes
(iii)
benchmarking
9
Decision-making
(a)
Cost behaviour and cost volume profit analysis
(b)
Break-even charts
(c)
Make or buy decisions
(d)
Opportunity costs and relevant costs
(e)
Pricing policies and procedures
10
Cost management
(a)
Life cycle costing
(b)
Target costing (including value engineering)
(c)
Activity based costing
(d)
Total Quality Management
(i)
basic principles
(ii)
costs of quality
EXCLUDED
TOPICS
The
following topics are specifically excluded from
Paper 7:
-
derivation of random samples
-
derivation of coefficients of linear regression
equation using formulae.
KEY
AREAS OF THE SYLLABUS
The
key topic areas are:
forecasting
budget preparation
flexible budgets
variance computation and interpretation
performance indicators
short-term decision-making
cost reduction and value enhancement.
APPROACH
TO EXAMINING THE SYLLABUS
The
examination is a three-hour written paper. The
paper consists of four compulsory questions.
Question
1 40 marks
Questions
2 to 4 (20 marks each) 60 marks
Total
100 marks
RECOMMENDED
TEXTS
There
are a number of sources from which you can obtain
a series of materials written for the ACCA CAT
examinations.
Candidates
may also find the following texts useful:
Weetman,
P. Management Accounting – An Introduction (Prentice
Hall)
Dodge,
R. Foundations
of Cost and Management Accounting (International
Thomson Business Press)
ISBN:
041258820X
Lucey,
T. Costing (DP Publications: 5th Edition) ISBN:
0826455107
Pizzey,
A. Cost and Management Accounting (Paul Chapman:
3rd Edition) ISBN: 1853960497
Wider
reading is also desirable, especially regular
study of relevant articles in ACCA’s student accountant
magazine.
STUDY
SESSIONS
1
Accounting for management
(a)
Describe the management function within an organisation
and how this may vary according to the nature
of the business
(b)
Describe the objectives of management accounting
information in relation to short-term and long-term
planning, control and performance measurement
(c)
Describe the role of the management accountant
in an organisation
(d)
Describe the features of useful management information
(e)
Explain the limitations of management information
in providing guidance for managerial decision-making
(f)
Explain how cost accounting systems can be maintained
and improved
2
Absorption costing
(a)
Demonstrate knowledge of the application of absorption
costing in an organisation
(b)
Apply absorption costing principles in a job,
contract, batch, service, or process costing context
(c)
Prepare management accounts and cost estimates
using absorption costing principles
(d)
Evaluate the usefulness of absorption costing
in specific situations
3
Marginal costing
(a)
Explain the use of marginal costing in an organisation
(b)
Apply marginal costing principles in a job, contract,
batch, service, or process costing context
(c)
Explain cost behaviour
(d)
Prepare management accounts and cost estimates
using marginal costing principles
(e)
Reconcile marginal costing and absorption costing
profits
(f)
Evaluate the use of marginal costing in specific
situations
(g)
Compare and contrast the use of absorption and
marginal costing
4
Activity based costing
(a)
Explain the reasons for the development of activity
based costing
(b)
Select appropriate cost pools and cost drivers
(c)
Calculate product costs using activity based costing
(d)
Apply activity based costing principles in a job,
contract, batch, service, or process costing context
(e)
Evaluate the use of activity based costing in
specific situations
(f)
Compare and contrast the use of absorption, marginal
and activity based costing
5
Collection of information
(a)
Describe sources of information from within and
outside the organisation
(i)
describe sources of information from suppliers
and customers
(ii)
describe sources of information from suppliers
and customers
(iii)
discuss sampling techniques (random, systematic,
stratified, multistage, cluster and quota)
(iv)
choose an appropriate sampling method in a specific
situation
(v)
describe sources of information from government,
trade associations and the financial press
(vi)
describe benchmarking
(vii)
discuss the advantages and disadvantages of benchmarking
(viii)
select appropriate benchmarks at strategic, tactical
and operational levels in a specific situation
(Note:
Derivation of random samples will not be examined)
6
Presentation of information and use of Indices
(a)
Presentation of information
(i
) Prepare written reports representing management
information in suitable formats according to purpose
(ii)
Present information using tables, charts and graphs
(bar charts, histograms, frequency polygons)
(iii)
Interpret information (including the above tables,
charts and graphs) presented in management
reports
(b)
Indices
(i
) Calculate price and quantity indices on Laspeyres'
and Paasche bases
(ii)
Discuss advantages and disadvantages of Laspeyres'
and Paasche indices
(iii)
Adjust raw data using appropriate indices
7
Forecasting
(a)
Use the high-low method to estimate the fixed
and variable elements of a cost
(b)
Explain the advantages and disadvantages of the
high-low method
(c)
Construct scatter diagrams and lines of best fit
(d)
Describe the use of linear regression analysis
in the analysis of cost data
(e)
Use linear regression coefficients to make forecasts
of costs and revenues
(f)
Adjust historical and forecast data for price
movements
(g)
Explain the advantages and disadvantages of linear
regression analysis
8
Time series analysis
(a)
Explain the principles of time series analysis
(trend, seasonal variation and random elements)
(b)
Calculate moving averages
(c)
Determination of trend, including the use of regression
analysis
(d)
Use trend and seasonal variation (additive and
multiplicative) to make budget forecasts
(e)
Explain the advantages and disadvantages of time
series analysis
(f)
Describe the concept of the product lifecycle
and its implications for sales forecasting
(Note:
Derivation of regression coefficients will not
be examined)
9
Budgetary planning
(a)
Link between planning cycles, budgets and forecasts
(i
) describe the planning and control cycle in an
organisation
(ii)
explain how the design of the planning and control
system will be affected by organisational structure,
business objectives, the organisation's administrative
procedures and the nature of the product/service
market
(iii)
compare short-term and long-term business plans
and explain how they are related
(b)
Principal budget factors (demand, capacity and
resource)
(i
) explain the importance of the principal budget
factor in constructing a budget
(ii)
describe principal budget factors (demand, capacity
and resource)
(iii)
identify the principal budget factor in a specific
situation
10
Budgetary planning - preparation, co-ordination
and revisions
(a)
Order of budget preparation
(i
) describe the order of budget construction relating
to a specific limiting factor
(ii)
prepare functional and departmental and master
budgets in an appropriate order in a given situation
(b)
Coordination of sub-budgets
(i
) explain the budget preparation timetable
(ii)
describe relevant documentation produced and the
management accountant’s role in its production
(iii)
describe the involvement of staff at all levels
in the organisation in the budget preparation
process and the effect on employee motivation
of the approach adopted
(iv)
describe the sources of information required for
budget preparation and their likely limitations
(c)
Revisions for limiting factors
(i
) use contribution per unit of the limiting factor
to allocate scarce resources
(ii)
explain how management might plan for variations
in capacity levels
(iii)
prepare budgets under varying capacity levels
11
Budgetary planning- different types of budgets
(a)
Prepare sales budgets
(b)
Prepare functional budgets (production, raw materials
usage and purchases, labour, fixed overheads)
(c)
Discuss the preparation of discretionary expense
budgets
(d)
Prepare capital budgets
(e)
Prepare cash budgets
(f)
Prepare master budgets (profit and loss account
and balance sheet)
12
Budgetary planning - alternative approaches and
computer based models
(a)
Alternative approaches to budgeting
(i
) describe the main features of zero-based budgeting
(ii)
explain the advantages and limitations of zero-based
budgets
(iii)
compare the use of incremental and zero-based
budgeting systems
(iv)
describe when zero-based budgets are commonly
used
(v)
describe the main features of a rolling budget
(b)
Use of computer based models
(i
) outline the role of spreadsheet models in budget
construction
(ii)
prepare simple spreadsheet formulae for budget
construction
(iii)
describe financial modelling software
(iv)
describe "what if" analysis and scenario
planning
13
Budgetary control - fixed and flexible budgets
(a)
Fixed versus flexible budgets
(i
) explain the importance of flexible budgets in
control
(ii)
explain the disadvantages of fixed budgets in
control
(iii)
identify situations where fixed or flexible budgetary
control would be appropriate
(b)
Preparation
(i
) flex a budget to a given level of volume
(ii)
prepare formulae appropriate for flexing a budget
(c)
Impact of capacity variations
(i
) prepare flexed budgets at various output levels
(ii)
estimate profit at various output levels
14
Budgetary control – calculation and analysis of
budget variances
(a)
Calculate simple variances between flexed budget,
fixed budgets and actual results for sales, costs
and profits
(i
) calculate sales price and sales margin volume
variances
(ii)
explain the meaning of budget variances
(iii)
analyse the potential causes of budget variances
15
Budgetary control – reports, recommendations and
relevant computer packages
(a)
Presentation of budgetary control reports for
management
(i
) prepare control reports suitable for presentation
to management
(ii)
discuss the relative significance of variances
(b)
Recommendation of appropriate control action
(i)
explain potential actions to eliminate variances
(ii)
discuss the advantages and disadvantages of particular
actions
(c)
Use of relevant computer packages
(i
) discuss the use of spreadsheets in flexing budgets
(ii)
prepare spreadsheet formulae for budget flexing
16
Budgetary control - responsibility accounting,
controllable and uncontrollable costs
(a)
Responsibility accounting
(i
) define the concept of responsibility accounting
(ii)
explain its significance in control
(iii)
evaluate the responsibility of managers in a given
situation
(iv)
explain the problem of joint responsibility
(v)
design reports appropriate to a given responsibility
structure
(vi)
identify costs to be collected for a given responsibility
structure
(b)
Controllable and uncontrollable costs
(i
) explain the concepts of controllable and uncontrollable
costs
(ii)
distinguish between controllable and uncontrollable
costs in a given situation
17
Budgetary control – cost centres, revenue centres,
profit centres and investment centres
(a)
Define cost centres, revenue centres, profit centres
and investment centres
(b)
Discuss performance measures appropriate to each
type of responsibility centre (budget variances,
contribution measures, controllable profit, traceable
profit, return on investment and residual income)
(c)
Calculate controllable profit, traceable profit,
return on investment and residual income in a
specific situation
(d)
Distinguish between managerial performance and
business unit performance
18
Budgetary control – budgets and the behaviour
of managers and other employees
(a)
Motivation
(i)
define motivation
(ii)
explain the importance of motivation in performance
management
(iii)
identify factors in a budgetary planning and control
system that influence motivation
(iv)
explain the impact of targets upon motivation
(v)
evaluate managerial incentive schemes
(b)
Participation
(i
) discuss the advantages and disadvantages of
a participative approach to budgeting
(ii)
explain top down, bottom up, and budget challenging
approaches to budgeting
(c)
Goal congruence and dysfunctional decision-making
(i)
define goal congruence and dysfunctional decision-making
(ii)
explain the importance of goal congruent behaviour
(iii)
discuss causes of dysfunctional decision-making
(iv)
identify dysfunctional behaviour in a specific
situation
(v)
amend budgeting procedures to encourage goal congruent
behaviour
19
Standard costing systems
(a)
Explain the operation of a standard costing system
(b)
Discuss the advantages of standard costing and
variance analysis
(c)
Evaluate the appropriateness of standard costing
in a specific situation
(d)
Discuss the value of standard costing in a modern
manufacturing and service environment
(e)
Define standard absorption and standard marginal
costing
(f)
Discuss the advantages and limitations of standard
marginal and standard absorption costing
(g)
Prepare standard cost cards (product specification)
for standard marginal and standard absorption
costing
20
Standard costing – calculation of variances
(a)
Calculate material price and usage variances (price
variances to be based upon usage or purchases)
(b)
Calculate labour rate and efficiency variances
(c)
Calculate fixed overhead expenditure, volume,
capacity and efficiency variances
(d)
Calculate variable overhead expenditure and efficiency
variances
(e)
Calculate sales margin volume and sales price
variances
(f)
Undertake entries in a standard cost bookkeeping
situation
21
Standard costing – reconciliation of standard
to actual cost
(a)
Prepare a reconciliation of standard to actual
cost for an absorption costing system
(b)
Prepare a reconciliation of standard to actual
cost for a marginal costing system
(c)
Prepare a reconciliation of budgeted to actual
profit for an absorption costing system
(d)
Prepare a reconciliation of budgeted to actual
profit for a marginal costing system
(e)
Prepare control reports suitable for presentation
to management
22
Standard costing – analysis of variances
(a)
Subdivide variances to reflect responsibility
structures
(b)
Calculate idle time variances
(c)
Analyse variances into controllable and non-controllable
elements
23
Standard costing – variance investigation
(a)
Significance and identification of possible reasons
for variances
(i
) discuss the causes of variances in general
(ii)
identify potential causes of variances in a specific
situation
(iii)
explain the potential interrelationships between
variances
(iv)
discuss the meaning and significance of variances
(b)
Factors to consider before investigation
(i
) explain the significance of cost of investigation,cost
of correction, benefit of correction, and probability
of successful correction in variance investigation
(ii)
calculate the expected benefit of variance investigation
(iii)
discuss the role of control charts in variance
investigation
(c)
Recommend control action
(i
) explain potential courses of action to correct
a variance
(ii)
evaluate courses of action to correct a variance
in specific circumstances
24
Performance measurement – overview
(a)
Performance hierarchy
(i
) discuss the purpose of mission statements and
their role in performance measurement
(ii)
discuss the purpose of strategic and operational
and tactical objectives and their role in
performance
measurement
(b)
External considerations
(i
) discuss the impact of economic and market conditions
on performance measurement
(c)
Discuss the impact of government regulation on
performance measurement
25
Performance Measurement – scope
(a)
Discuss and calculate measures of financial performance
–
profitability, liquidity, activity and gearing
(b)
Discuss the importance of non-financial performance
measures
(c)
Discuss the relationship between short-term and
long-term performance
(d)
Discuss the measurement of performance in service
industry situations
(e)
Discuss the measurement of performance in non-profit
seeking and public sector organisations
(f)
Discuss measures that may be used to assess managerial
performance and the practical problems involved
(g)
Discuss the role of benchmarking in performance
measurement
(h)
Produce reports highlighting key areas for management
attention
and recommendations for improvement
26
& 27 Performance measurement – applications
(a)
Perspectives of the balanced scorecard
(i
) discuss the advantages and limitations of the
balanced scorecard
(ii)
describe performance indicators for financial
success, customer satisfaction, process efficiency
and growth
(iii)
discuss critical success factors and key performance
indicators and their link to objectives and mission
statements
(iv)
establish critical success factors and key performance
indicators in a specific situation
(b)
Economy, efficiency and effectiveness
(i
) explain the concepts of productivity, efficiency
and effectiveness
(ii)
describe performance indicators for productivity,
efficiency and effectiveness
(iii)
establish performance indicators for productivity,
efficiency and effectiveness in a specific situation
(iv)
discuss the meaning of each of the efficiency,
capacity
and activity ratios
(v)
calculate the efficiency, capacity and activity
ratios in a specific situation
(c)
Unit costs
(i
) describe performance measures which would be
suitable in job, batch, contract and process costing
environments
(d)
Resource utilisation
(i)
describe measures of performance utilisation in
service
and manufacturing environments
(ii)
establish measures of resource utilisation in
a specific
situation
(e)
Profitability
(i
) calculate return on investment and residual
income
(ii)
explain the advantages and limitations of return
on investment and residual income
(f)
Quality of service
(i)
distinguish performance measurement issues in
service and manufacturing industries
(ii)
describe performance measures appropriate for
service industries
(g)
Establish performance measures for a service business
in a specific situation
(h)
Costs of quality
(i
) discuss the importance of quality in organisations
(ii)
establish measures of quality in a specific situation
28
Decision-making – cost behaviour and relevant
costs
(a)
Analyse total costs into their fixed and variable
elements using the high-low method
(b)
Describe the relationship between fixed and variable
costs and the time horizon under consideration
(c)
Explain the advantages and limitations of using
a marginal
costing approach for decision-making
(d)
Discuss the advantages and limitations of absorption
costing in decision-making
(e)
Describe the concept of relevant costs and its
importance for decision-making
(f)
Outline the advantages and limitations of using
an opportunity cost approach for management decision-making
29
Decision-making problems
(a)
Use an opportunity cost approach to solve short-term
decisions
(b)
Describe the qualitative factors which may influence
short-term decisions
(c)
Prepare reports making recommendations for management
action in connection with short-term decisions
30
Cost / volume / profit (CVP) relationships
(a)
Calculate and explain the break-even point
(b)
Analyse the effect on the break-even point of
changes in sales price and costs
(c)
Prepare and explain break-even charts and profit
volume charts
(d)
Describe the advantages and limitations of break-
even analysis for management decision-making
(Note:
break-even analysis will only be examined in the
context of single product situations)
31
Pricing and demand
(a)
Describe the factors which may influence an organisation’s
pricing policy
(b)
Prepare and justify cost based approaches to pricing
using absorption costing, marginal costing and
opportunity costing approaches
(c)
Discuss the merits and limitations of cost based
approaches to pricing
(d)
Describe the procedure for preparing cost estimates
for fixed price quotations and tenders
32
Cost management
(a)
Total Quality Management
(i
) explain in general terms the costs of quality
(prevention, appraisal, internal failure and external
failure)
(ii)
establish measures of the cost of quality in specific
situations
(iii)
calculation of the costs and benefits of quality
initiatives
(b)
Cost reduction and value enhancement recommendations
(i
) compare cost control and cost reduction
(ii)
describe and evaluate cost reduction methods
(iii)
describe and evaluate value analysis
(c)
Life cycle costing
(i
) describe life cycle costing
(ii)
discuss the benefits of life cycle costing in
a specific situation
(d)
Target costing
(i
) describe target costing
(ii)
discuss the link between target costing and pricing
(iii)
discuss the role of value engineering in target
costing
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