30/08/2024

KHOA KẾ TOÁN KIỂM TOÁN

F2- KẾ TOÁN QUẢN TRỊ (ACCA)-F2-

MANAGEMENT ACCOUNTING

Chapter 1
Accounting for materials

Prepared by Nhu Hoa – Faculty Accounting and Auditing

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• Total annual order cost (TCo)= Demand/ order quantity*Co=D/Q x Co

• Total annual holding cost(TCh)= Order quantity/2*Ch=Q/2 x Ch
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KHOA KẾ TOÁN KIỂM TOÁN

F2- KẾ TOÁN QUẢN TRỊ (ACCA)-F2-

MANAGEMENT ACCOUNTING

Chapter 2
Accounting for labour

Prepared by Nhu Hoa – Faculty Accounting and Auditing

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Question to consider

Barnes Co budgeted to make 13,000 standard units of output during a budgeted period
of 26,000 hours (each unit should take two hours).
During the period, the company actually made 14,000 units which took 35,000 hours.

Required
(a) What is the efficiency ratio?
(b) What is the capacity ratio?
(c) What is the production volume ratio?
Give your answers to one decimal place

Prepared by Nhu Hoa – Faculty Accounting and Auditing - 2021

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KHOA KẾ TOÁN KIỂM TOÁN

F2- KẾ TOÁN QUẢN TRỊ (ACCA)-F2-

MANAGEMENT ACCOUNTING

Chapter 3
Accounting for overhead

Prepared by Nhu Hoa – Faculty Accounting and Auditing

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For example, look at this list of costs (called a cost card) for the manufacture of
a door.

Here we have calculated the marginal cost of a door as $112.

The marginal cost is defined as the sum of the variable costs.
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Over and under absorption of overheads

• We looked at over-absorption which occurred because more units were produced than
budgeted.
• We looked at under-absorption which occurred because the actual overheads were more than
budgeted.
• Note also, over-absorption can occur when actual overheads are less than budgeted.
• Note also, under-absorption can occur when fewer units are produced than budgeted.

Prepared by Nhu Hoa – Faculty Accounting and Auditing - 2021

30/08/2024
 30/08/2024

KHOA KẾ TOÁN KIỂM TOÁN

F2- KẾ TOÁN QUẢN TRỊ (ACCA)-F2-

MANAGEMENT ACCOUNTING

Chapter 4
Absorption and marginal
costing

Prepared by Nhu Hoa – Faculty Accounting and Auditing

• Explain the importance of and apply the concept of

contribution.

Syllabus • Demonstrate and discuss the effect of absorption and

marginal costing on inventory valuation and profit
learning determination.
• Calculate profit or loss under absorption and marginal
outcomes costing.
• Reconcile the profits or losses calculated under
absorption and marginal costing.
• Describe the advantages and disadvantages of absorption
and marginal costing.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Overview
Marginal and
absorption costing

Cost card under

Cost card under AC
MC

Profit/loss under CONTRIBUTION

AC
Profit/Loss under
MC

Reconciliations

Advantages/disadvantages of
AC and MC

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Contribution = sales revenue

Marginal cost Marginal cost is the cost of – variable (marginal) cost of
sales
and marginal one unit of product which
would be avoided if that unit
costing 1 were not produced = variable
It is short for contribution
cost towards covering fixed
overheads and making a profit

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Marginal cost and marginal costing 2

• Remember the cost card from

Chapter 8 for the manufacture of a Cost card – Door
door.
• Here we calculated the marginal
$
cost of a door as $112. Material 20kg @ $4/kg 80
• If the selling price of the door was
$150 then the contribution would be Labour 4 hours @ $6/hour 24
$150 – $112 = $38
Machine 4 hours @ $2/hour 8
Marginal cost 112

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

The principles of marginal costing

• Marginal costing has the following attributes:

• Only variable costs charged as cost of sales.

• Closing inventories are valued at marginal cost.
• Fixed costs are treated as period costs.
• Period costs are charged in full to statement of profit or loss.
• If sales increase by one item, profit will increase by contribution for one item.
• Contribution per unit is constant at all levels of output and sales.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Calculating profit
Statement of profit or loss

$
Sales X
Less variable cost of sales (X)
Less variable selling, distribution and admin costs (X)
CONTRIBUTION X
Less fixed costs (X)
Net profit X

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Question to consider

Selling price $25.

Cost card per unit: $
Direct materials 7
Direct wages 8
Variable production overheads 5
20
There is a variable selling cost per unit of $0.50.
FOAR = $0.90

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Question to consider (cont'd)

Year 1 Year 2
Units Units
Normal/budgeted production 12,000 12,000
Actual production 14,000 11,500
Actual sales 13,000 12,500
Actual fixed production overheads $11,000 $11,000
Actual fixed selling costs $5,000 $5,000
There is no opening inventory. All variable costs were as per budget for the two years.
Set out a statement of profit or loss under marginal costing for both years 1 and 2.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Answer
Year 1 Year 1 Year 2 Year 2
$ $ $ $
Sales @ $25 325,000 312,500
Less: CoS
Opening inventory
(1,000  $20) – 20,000
Production costs
– variable
(14,000  $20) 280,000
(11,500  $20) 230,000
280,000 250,000
Less closing inventory
(1,000  $20) (20,000) –
(260,000) (250,000)
65,000 62,500
Less variable selling costs
(13,000  $0.50) (6,500)
(12,500  $0.50) (6,250)
Contribution 58,500 56,250
Less fixed costs
– Production 11,000 11,000
– Selling 5,000 5,000
(16,000) (16,000)
Net profit 42,500 40,250

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Question to consider

Year 1 Year 2
Units Units
Normal/budgeted production 12,000 12,000
Actual production 14,000 11,500
Actual sales 13,000 12,500
Actual fixed production overheads $11,000 $11,000
Actual fixed selling costs $5,000 $5,000
There is no opening inventory. All variable costs were as per budget for the two years.
(a) What are the total budgeted fixed production overhead?
(b) Set out a statement of profit or loss under absorption costing for years 1 and 2 using the
proforma given.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Answer

(a) FOAR = $0.90

Budgeted fixed production overheads
FOAR = Normal activity

Budgeted fixed production overheads

$0.90 =
12, 000

Budgeted fixed production overhead = 12,000 × $0.90 = $10,800

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Question to consider

Cost card per unit: $

Direct materials 7
Direct wages 8
Variable production overheads 5
20
Fixed production overheads (absorbed) 0,9
Absorption costing 20,9

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Answer (cont'd)
(b) Absorption profit and loss
Year 1 Year 1 Year 2 Year 2
$ $ $ $
Sales @ $25 325,000 312,500
Less: CoS
Opening inventory
(1,000  $20.90) – 20,900
Production costs
– variable
(14,000  $20) 280,000
(11,500  $20) 230,000
– fixed (absorbed)
(14,000  $0.90) 12,600
(11,500  $0.90) 10,350
292,600 261,250

Less closing inventory

(1,000  $20.90) (20,900) –
271,700 261,250
(Over)/under absorption (1,600) 650
(270,100) (261,900)
Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021
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Answer (cont'd)

Gross profit 54,900 50,600

Less selling costs

– variable
(13,000 × $0.50) (6,500)
(12,500 × $0.50) (6,250)
– fixed (5,000) (5,000)
Net profit 43,400 39,350

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Calculating profit

• Marginal costing and absorption costing give rise to different profit figures which can be reconciled.
• Under marginal costing closing inventories are valued at marginal production cost.
• Under absorption costing closing inventories are valued at full production cost (including production
overheads).
• The difference in profits is the difference between fixed production overhead included in the opening
and closing inventory valuations using absorption costing.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Reconciling profits
RECONCILIATION

Marginal costing profit X

Adjust for fixed overheads in inventory:
+ increase / – decrease X/(X)
Absorption costing profit X

If inventory levels are increasing then absorption profit will be

higher therefore add adjustment.

If inventory levels are falling then absorption profit will be lower

therefore deduct adjustment.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Reconciling profits

• To summarise these are the reasons for the difference in profits and the reconciliation:

• Increase in inventory in a period – opening inv < closing inv

• Absorption costing reports higher profit , because
• Fixed overheads included in opening inventory are lower than fixed overheads included in closing
inventory
• Therefore cost of sales lower
• Hence, profit higher

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Reconciling profits

• Decrease in inventory in a period -opening inv > closing inv

• Absorption costing reports lower profit, because

• Fixed overheads included in opening inventory are higher than fixed overheads included in closing
inventory
• Therefore cost of sales higher
• Hence, profit lower

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Question to consider
Year 1 Year 2 Total
$ $ $
Absorption costing 43,400 39,350 82,750
Marginal costing 42,500 40,250 82,750
900 (900) -

Reconcile the profit figures for each year.

Year 1 Year 2
$ $
Absorption costing profit
Add fixed overheads b/f in opening inventory

Less fixed overheads b/f in closing inventory

Marginal costing profit

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Answer

Reconciliation of absorption and marginal costing profits

Profit Reconciliation Statement
Year 1 Year 2
$ $
Absorption costing profit 43,400 39,350
Add fixed overheads b/f in opening inventory – 900
Less fixed overheads c/f in closing inventory (900) –

Marginal costing profit 42,500 40,250

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Reconciling profits
• Profits generated using AC and MC
can also be reconciled as follows:

• Difference in the profit = Change in

inventory in units  OAR per unit YEAR 1 YEAR 2

• Going back to the example above the

opening and closing inventories were as Opening inventory Zero 1,000
follows.
Closing inventory 1,000 Zero

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Reconciling profits
Difference in the profit = Change in inventory in units
 OAR per unit

Year 1 Year 2
Change in inventory +1,000 –1,000

OAR = $0.90
Year 1 Year 2
Marginal profit 42,500 40,250
Difference in profit (1,000  $0.90) 900 (900)
(Increase in inventory (Decrease in
so add difference) inventory so deduct
difference)
Absorption profit 43,400 39,350

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Marginal versus absorption costing 1

• There are certain advantages to using absorption costing which include the following:

• Fixed production costs are incurred making the output and so it is only 'fair' to charge all output with
a share of these costs.
• Closing inventory will be valued in accordance with IAS 2.
• Appraising products in terms of contribution gives no indication of whether fixed costs are being
covered.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Marginal versus absorption costing 2

• There are also certain advantages to using marginal costing which include the following:

• Absorption costing information is irrelevant when making short-run decisions – contribution is most
important.
• It is simple to operate.
• There are no arbitrary fixed cost apportionments.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Marginal versus absorption costing 3

• Fixed costs in a period will be the same regardless of the level of output and so they should be
charged as a period cost.
• It is realistic to value closing inventory items at the (directly attributable) cost to produce an extra
unit – marginal cost.
• Under/over absorption is avoided.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Marginal versus absorption costing 4

• Absorption costing may give managers the wrong signals.

• Goods may be produced, not to meet demand, but to absorb allocated overheads.
• Absorption costing profit can be increased merely by producing in excess of sales and therefore
increasing closing inventory.
• Production in excess of demand however increases the overheads (for example warehousing).

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Past exam question

• The following question is taken from the June 2012 exam paper:

A company uses standard absorption costing to value inventory. Its fixed overhead absorption rate is
$12 per labour hour and each unit of production should take four hours. In a recent period where there
was no opening inventory of finished goods, 20,000 units were produced using 100,000 labour hours.
18,000 units were sold. The actual profit was $464,000.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Past exam question (cont'd)

What profit would have been earned under a standard marginal costing system?

A $368,000
B $440,000
C $344,000
D $560,000
(2 marks)

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Answer to past exam question

• ACCA examiner's comments

• The correct answer is A.

• Standard absorption costing will include $96,000 of the period's overhead (2,000 units × 4 labour
hours × $12 per hour) in the valuation of closing inventory. Under standard marginal costing the
$96,000 would be charged against the period's profit resulting in a profit $96,000 lower than $464,000.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Discuss

Marginal costing and absorption costing are different techniques for assessing profit in a period. If there
are changes in inventory during a period, marginal costing and absorption costing give different results
for profit obtained.
Which of the following statements are true?
I. If inventory levels increase, marginal costing will report the higher profit.
II. If inventory levels decrease, marginal costing will report the lower profit.
III. If inventory levels decrease, marginal costing will report the higher profit.
IV. If the opening and closing inventory volumes are the same, marginal costing and absorption costing
will give the same profit figure.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Chapter summary 1

1. Overview
The marginal cost is the variable production cost of one unit.

2. Contribution
Contribution is the amount that a unit contributes towards fixed costs when it is sold. It is calculated as
selling price less all variable costs.

3. Calculating a profit or loss under marginal costing

In marginal costing fixed costs are treated as period costs.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Chapter summary 2

4. Calculating a profit or loss under absorption costing

In absorption costing fixed costs are absorbed into the units and carried forward with closing inventory.

5. Reconciliation of absorption and marginal costing profits

The different inventory valuations in AC and MC can lead to different profits being reported. The
difference can be reconciled by multiplying the change in the inventory by the OAR.

6. Absorption costing vs marginal costing

Each costing method has its own advantages and disadvantages.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

 30/08/2024

KHOA KẾ TOÁN KIỂM TOÁN

F2- KẾ TOÁN QUẢN TRỊ (ACCA)-F2-

MANAGEMENT ACCOUNTING

Chapter 5
Process costing, joint
products and by-products

Prepared by Nhu Hoa – Faculty Accounting and Auditing

Syllabus • Distinguish between by-products and joint products.

learning • Value by-products and joint products at the point of
separation.
outcomes • Prepare process accounts in situations where by-products
and/or joint products occur.
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Overview
Processing costing, joint
and by-products

Joint products By-products

Method of allocating costs

Accounting treatments

Relative sales
Physical units
value

Joint products and by-products

• Joint products are two or more products which are output from the same processing operation.
• They will be indistinguishable from each other up to their point of separation (split-off point).
• Costs incurred up to this point are called common costs or joint costs.
• They possess substantial sales value before or after further processing.
• Joint costs must be apportioned between the joint products.
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Joint products and by-products

• A by-product is a supplementary or secondary product (arising as the result of a process) whose

value is small relative to that of the principal product.
•
• What exactly separates a joint product from a by-product?

Joint products and by-products

• A joint product is regarded as an important saleable item, and so it should be separately costed.
• The profitability of each joint product should be assessed in the cost accounts.

• A by-product is not important as a saleable item, and whatever revenue it earns is a 'bonus' for the
organisation.
• Because of their relative insignificance, by-products are not separately costed.
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Question to consider

State three examples of joint products and by-products.

Answer

Joint products
• Oil refinery (diesel, petrol, paraffin)
• Chicken farm (legs, wings) Saw mill (timber)

By-product
• Saw mill (sawdust)
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Dealing with common costs

• The point at which joint products and by-products become separately identifiable is known as the
split-off point or separation point. Costs incurred up to this point are called common costs or joint
costs.
• Costs incurred prior to this point of separation are common or joint costs, and these need to be
allocated (apportioned) in some manner to each of the joint products.

Dealing with common costs

Split off point

Input
materials Joint product A
Process Joint product B
By-product X
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Dealing with common costs

Split off point

Input
materials Joint product A
Process Joint product B
By-product X

Common cost

Common cost must be apportioned between the joint products

Dealing with common costs

• There are two main methods of apportioning joint costs – physical measurement or sales value at
split-off point.

• Physical measurement method – costs apportioned on basis of proportion of output to the total
output
• Sales value method – costs apportioned in proportion of sales value of joint product to total sales
value of output
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Dealing with common costs

• Physical measurement method – costs apportioned on basis of proportion of output to the total
output
• This proportion can be based upon weight or volume.
• This method is unsuitable where products separate into different states during processing.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Dealing with common costs

Physical measurement method
Suppose that the joint costs of a process at split off point are $3,000 with 2 joint products:
Joint product 1 500 tonnes
Joint product 2 1,000 tonnes
1,500 tonnes
Apportioned costs
JP1 500 / 1,500  $3,000 = $1,000
JP2 1,000 / 1,500  $3,000 = $2,000

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Question to consider

• A process involves incorporating 2,000 units input of material costing $2,000 with labour costs of
$2,000 and overheads of $1,000.
• The output of the process is two joint products: 600 units P1, 1,200 units P2; and 200 units of by-
product. The by-product will be able to be sold for $50 in total.

Required
• Allocate the joint costs on a physical units basis.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Answer
P1: 600  (5,000  50)  $1,650
1,800

1,200
P2:  (5,000  50)  $3,300
1,800

Process Account
Units $ Units $
Material 2,000 2,000 Output P1 600 1,650
Labour 2,000 P2 1,200 3,300
Overheads 1,000 By-product 200 50
2,000 5,000 2,000 5,000

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Dealing with common costs

• The relative sales value method is the most widely used method of apportioning joint costs.

• This is because (ignoring the effect of further processing costs) it assumes that all products achieve
the same profit margin.
• The cost is allocated according to the product's ability to produce income.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Tackling the exam

Make sure you split the joint costs according to sales value of production rather than individual selling
prices or sales value of sales.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Question to consider

Two products (P and Q) are created from a joint process. Both products can be sold immediately after
split-off. There are no opening inventories or work in progress. The following information is available for
last period.
Total joint production costs $850,000

Product Production Sales units Selling price

per unit units
P 15,000 10,000 $15
Q 11,000 8,000 $25

Allocate the joint costs on a sales value basis.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Answer
Sales value of production:

Product P (15,000  $15) $225,000

Product Q (11,000  $25) $275,000

Therefore joint costs are apportioned 45%:55%.

Amount apportioned

Product P ($850,000  45%) $382,500

Product Q ($850,000  55%) $467,500

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Question to consider
D Co operates a process costing system, the final output from which is three different products: X, Y and
Z. Details of the three products for June are as follows.
X Y Z
Selling price per unit $25 $18 $32
Output for March 12,000 units 20,000 units 8,000 units

50,000 units of material were input to the process, costing $430,000. Conversion costs were $320,000.
No losses were expected and there were no opening or closing inventories.
Using the units basis of apportioning joint costs, what was the profit or loss on sales of X for June?

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Answer
Total output 40,000 units (12,000 + 20,000 + 8,000)
Total input 50,000 units
Abn loss 10,000 units
Total cost = $750,000

Cost per unit = $750,000 / 50,000 = $15

Cost of 'good' output = 40,000 units  $15 = $600,000

Amount apportioned to X:
(12,000/40,000)  $750,000 = $225,000

Profit for X = Sales revenue – apportioned costs

= (12,000  $25) – $225,000
= $75,000

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

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Chapter summary 1

• 1. Introduction
• Joint products are two or more products separated after a process, each of which has a significant
value.
• A by-product is an incidental product from a process which has an insignificant value compared to
the main product.

• 2. Treatment
• By-products are not allocated any of the joint costs.
• Joint products need to be apportioned a fair share of the joint costs at the split off point.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

Chapter summary 2

• 3. Apportioning joint costs

• The main methods of apportioning joint costs are by physical measurement and by relative sales
value.

Th.s Lê Như Hoa, Khoa Kế toán – Kiểm toán , VLU - 2021

 30/08/2024

KHOA KẾ TOÁN KIỂM TOÁN

F2- KẾ TOÁN QUẢN TRỊ (ACCA)-F2-

MANAGEMENT ACCOUNTING

Chapter 6
Forecasting

Prepared by Nhu Hoa – Faculty Accounting and Auditing

Syllabus learning outcomes

• Explain the advantages and disadvantages of using the high-low method to estimate
the fixed and variable element of costing.
• Construct scatter diagrams and lines of best fit.
• Calculate and interpret correlation coefficient and coefficient of determination.
• Establish a linear function using regression analysis and interpret the results.
• Use linear regression coefficients to make forecasts of costs and revenues.
• Adjust historical and forecast data for price movements.
• Explain the advantages and disadvantages of linear regression analysis.
• Describe the product life cycle and explain its importance in forecasting.
• Explain the principle of time series analysis.
• Calculate moving averages.
• Calculation of trend, including the use of regression coefficients.

Prepared by Nhu Hoa – Faculty Accounting and Auditing

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Syllabus learning outcomes

• Use trend and seasonal variation (additive and multiplicative) to make budget
forecasts.
• Explain the advantages and disadvantages of time series analysis.
• Explain the purpose of index numbers.
• Calculate simple index numbers for one or more variable.

Prepared by Nhu Hoa – Faculty Accounting and Auditing

Overview
Forecasting

Cost prediction Time series

High-low Scatter Linear

Additive Multiplicative
method graphs regression

Correlation Coefficient &

coefficient (r) determination (r2)

Index number Product life cycle

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Correlation

Correlation

• Understanding how one variable influences another is a

fundamental part of planning.
• For example, sales directors would like to know how
advertising affects sales.
• Doctors would like to know the efficacy of particular
treatments.
• Organisations need to know how costs are affected by
activity levels.

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Correlation

• Regression analysis attempts to discover the

nature of association between variables in the
Correlation form of an equation.
• It may then be possible to use the equation to
predict the consequences of decisions or events.
• Broadly we can identify four types of association:

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Correlation
Positive linear correlation
Positive means as one variable increases, so does the other.
Linear means that the relationship between the variables can be described by a straight line.
Correlation is the degree of association between the variables.

Weight

Height

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Correlation
Negative linear correlation
Negative means as one variable increases, the other decreases.
Linear means that the relationship between the variables can be described by a straight line.
Correlation is the degree of association between the variables.

Demand

Price

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Correlation
Curvilinear correlation
Curvilinear means that the relationship between the variables can be described by a curved line.
Curve fitting is not on your syllabus.

Rate of
marriage

Age

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Correlation
No correlation
If the variables have no apparent association then there would be no correlation.
It would be a waste of time using regression analysis as the variables are unconnected.

Salary Note that this is a

scattergraph

Day of birth (1 – 31)

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Correlation

• We could plot the cost against the output on a scattergraph and then joint up the
points to form a 'line of best fit'.
• The trouble is that because the points do not lie on a perfect straight line, different
people will draw different lines.
• This will imply different values for a and b in the equation y = a + bx
• Remember a is the intercept – the fixed cost in accountancy terms.
• And b is the gradient – the variable cost per unit in accountancy terms.

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Linear regression
We can instead use a method called the method of least squares to find a line of best fit which misses the
points by the least amount.

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Linear regression
We use two formulae (note that means 'the sum of')

For the line y = a + bx

b= n  xy  ( x)( y)
n  x2  ( x)2
a= y  bx

Where x and y are the arithmetic means of x and y

Y= bX+a

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Linear regression

• Strength of relationship can be assessed using the correlation coefficient ['r'] or

• The coefficient of determination: r2
• r2 measures the proportion of determinant variable ('y' axis) which can be explained by other
variable ('x' axis)

• If r = 0.992, then r2 = 0.984

• -> 98.4% of the variation in 'y' can be explained by variations in 'x'

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Linear regression

(n XY )  ( X  Y )
r
 nX 2  (X ) 2   nY 2  (Y ) 2 

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Linear regression

• The correlation coefficient, r must always fall between –1 and +1. If you get a value outside
this range you have made a mistake.

• r = +1 means that the variables are perfectly positively correlated

• r = –1 means that the variables are perfectly negatively correlated
• r=0 means that the variables are uncorrelated

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High low method

• Cost forecasting with the high-low method

• Select the periods with the highest and lowest activity levels
• High activity level cost – low activity level cost = the variable cost of the difference in activity
levels
• Calculate the variable cost per unit (difference in variable costs ÷ difference in activity levels)
• Calculate fixed cost (total cost at either output level – variable cost for output level chosen)

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Time series

• Time series = number of observations taken regularly over a period of time

• Eg sales over time
• Eg heating costs over time
• Eg exchange rates over time

• There is often a pattern which can be analysed into several components.

•

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Time series

• Seasonal variations – variations with a repeat period of less than or equal to one
year
• Trend – long-term underlying movement (eg a gentle increase)
• Random variations – difficult to predict
• Cyclical variations – long-term, slow variations such as trade cycles

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Time series

• Once the trend has been determined using moving averages then the trend can be
compared to actual figures for the period.
• The difference between trend and actual is known as the seasonal variation.
• This can be calculated by using either the additive model or the multiplicative model.

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Time series

• Additive model (Y = T + S)
• S = actual – trend (S = Y – T)
• T :Trend
• S : Seasonal variance

• Multiplicative/proportional model
• (Y = T × S)
• S = actual ÷ trend (S = Y/T)

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Index numbers

• Forecasting and indices

• The effects of inflation need to be removed for costs and revenues to be comparable
over time
• The only factor affecting costs and revenues will therefore be activity level
• We do this by adjusting figures to a common basis using index numbers

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Index numbers

• Step 1. Remove the effects of price movements by adjusting data to a common basis,
usually to the price level of the base period (cost  (100/index for the year in
question)).
• Step 2. Apply a forecasting technique to the data from Step 1.
• Step 3. Adjust the forecast produced in step 2 to take account of price movements
(unadjusted forecast  (index for year in question/100)).

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Index numbers
An index may be a price index or a quantity index
Pn  100
• A price index measures the change Price index =
P0
in the money value of a group of
items over time. The Retail Prices
Index (RPI) in the UK measures Where Pn is the price for the period
changes in the costs of items of under consideration and P0 is the
expenditure of the average price for the base period.
household.

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Index numbers
• A quantity index (or volume index) Quantity index =Qn/ Qo x100%
measures the change in the non-
monetary values of a group of
items over time eg productivity Where Qn is the quantity for the
index, measuring changes in the period under consideration and Q0
productivity of various is the quantity for the base period.
departments or groups of workers.

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Laspeyre, paasche and Fisher indices

1. Laspeyre indices
Laspeyer indices use weights from the base period and are therefore sometimes called base weighted
indices
 PnQo x100
Laspeyer price index =
 PoQo
Laspeyer quantity index =  PoQn x100
 PoQo

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Laspeyre, paasche and Fisher indices

2. Passche indices
Passche indices use current time period weights. In other words the weight are changed every time period

Passche price index =

 PnQn x100
 PoQn
Passche quantity index =  PnQn x100
 PnQo

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Laspeyre, paasche and Fisher indices

Fisher indices

Fisher’ ideal indices = LaspeyerxPassche

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Chapter summary 1

1. Correlation
Two variables are correlated if a change in the value of one variable is accompanied by a change in the
value of another variable.
Observations of the behaviour of two variables can be plotted on a scattergraph.

2. Linear regression
Linear regression is a mathematical technique that finds the line of best fit that defines the
relationship between two variables.

3. Reliability of regression line

The degree of correlation is measured by the correlation coefficient 'r'.

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Chapter summary 2

4. Coefficient of determination
The coefficient of determination, r2, measures the proportion of the total variation in the value of one
variable that appears to be explained by variations in the value of the other variable.

5. Advantages and limitations of linear regression

There are some important limitations of linear regression.

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Chapter summary 3

6. Time series
There are four components of a time series: trend, seasonal variations, cyclical variations and random
variations.
Additive model
TS = T + SV + RV + CV
Multiplicative model
TS = T  SV  RV  CV
Moving averages
One method of finding a trend is by the use of moving averages.

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Chapter summary 4

7. Index numbers
An index is a measure, over time, of the average changes in value (price or quantity) of a group of items
relative to the situation at some point in the past.

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KHOA KẾ TOÁN KIỂM TOÁN

F2- KẾ TOÁN QUẢN TRỊ (ACCA)-F2-

MANAGEMENT ACCOUNTING

Chapter 7
Methods of project
appraisal

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Syllabus learning outcomes

• Explain and illustrate the difference between simple and compound interest,
and between nominal and effective interest rates.
• Explain and illustrate compounding and discounting.
• Explain the distinction between cash flow and profit and the relevance of
cash flow to capital investment appraisal.
• Identify and evaluate relevant cash flows for individual investment decisions.
• Explain and illustrate net present value (NPV) and internal rate of return (IRR)
methods of discounted cash flow.
• Calculate present value using annuity and perpetuity formulae.
• Calculate NPV, IRR and payback (discounted and non-discounted).
• Interpret the results of NPV, IRR and payback calculations of investment
viability.

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Overview

Methods of project appraisal

Payback NPV IRR

Simple Discounted

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Project appraisal

Investment appraisal techniques attempt to give advice about which projects you should invest in.
Eg, if you had $100,000 how would you invest that?
You need to compare outlay to return.

Example

• If a construction company buys an excavator, the net inflows generated by it will vary from year to
year.
• As the machine ages, maintenance costs will rise and net income will fall. Eventually the machine will
be sold.
• The company needs some way of deciding whether the investment is likely to be worthwhile.

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Project appraisal

The key methods of project appraisal are:

• The payback period

• Net present value (NPV)
• Discounted payback period
• Internal rate of return (IRR)

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Payback period

• The payback period is the time taken for the initial investment to be recovered in the cash inflows
from the project.
• It's particularly relevant if there are liquidity problems, or if distant forecasts are very uncertain.
• It gives greater weight to cash flows generated in earlier years.

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Payback period

Eg, if a machine cost $40,000 and cash inflows generated from its use were $8,000 each year, the
payback would be:
$40,000 / $8,000 = 5 years
Target paybacks vary widely from business to business.

Note that cash flows are used, not profit.

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Payback period
If inflows are irregular you need to keep track of cumulative cash inflows.
Eg:

$ Cash flow $ Cumulative cash flow

Year 1 (80,000) Year 1 (60,000)

Year 1 20,000 Year 2 (35,000)

Year 2 25,000 Year 3 0

Year 3 35,000 Year 4 20,000

Year 4 20,000 Year 5 30,000

Year 5 10,000

You can see that the initial outlay has been recouped by the end of year 3 – a payback of 3 years.

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Payback period

Example
P Q
$'000 $'000
Investment (60) (60)
Year 1 profits 20 50
Year 2 profits 30 20
Year 3 profits 50 5

Q pays back first, but ultimately P's profits are higher on the
same amount of investment.

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Question to consider

A machine was bought for $18,000 and can be sold for $3,000 at the end of its life.
Pre-depreciation earnings for each of the next eight years are expected to be $300, $5,700, $4,200,
$1,800, $3,900, $2,800, $4,200, $1,800.
What is the payback period in years and months?

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Answer
The payback period is 5 years and 9 months.

Year Cash flow Cumulative cash flow

1 (18,000)

1 300 (17,700)

2 5,700 (12,000)

3 4,200 (7,800)

4 1,800 (6,000)

5 3,900 (2,100)

6 2,800 700

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Payback period

Advantages

• Simple to calculate and understand

• Concentrates on short-term, less risky flows
• Can identify quick cash generators

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Payback period

Disadvantages

• Ignores total project return

• Ignores time value of money (see next slide)
• Ignores timing of flows after payback period
• Arbitrary choice of cut-off

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The time value of money

Would you rather have $1,000 now or $1,000 in one year's time?
• Most people would say now.
• It can be invested for future enjoyment.
• There is less risk if it is taken now – despite hopes and promises it may not appear in a year!

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The time value of money

Say current interest rates were 10%.
If $1,000 is offered now or in a year then the choice is really

$1,000 now worth $1,000 now worth

$1,100 in 1 year $1,000 in 1 year

So two amounts of cash, received or paid at different times cannot be directly compared.
They must be adjusted for their different times.

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The time value of money

• To compare amounts received at different times we convert the amounts as at the present time – and
we call these present values.
• To calculate present values you need to understand compounding and discounting.

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The time value of money

Compound interest is when the interest accumulates.

Interest is calculated on the original amount and on interest so far.
Eg:
• Year 1 $1,000  10% = $100
• Year 2 $1,100  10% = $110
• Year 3 $1,210  10% = $121

Or we can use the formula.

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The time value of money

S (F) = P(1 + r)n
Where S (F) = future value of investment
P = amount invested now
r = rate of interest
n = number of years of investment

After three years at compound 10%, $1,000 will become:

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Question to consider

$800 is placed on deposit for five years at a rate of interest of 14% compound.
How much will be in the account at the end of the period?

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The time value of money

When interest is compounded at intervals of less than a year, an effective annual rate can be worked out
as:

(1+r) 12/n – 1
Or
(1+r)365/x – 1

Where
r is the rate for each time period
n is the number of months in the time period
x is the number of days in the time period

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The time value of money

So if you were told that interest was calculated at 3% compounded every quarter, the effective rate would
be:
(1 + 0.03)12/3 – 1 = 0.1255 or 12.55%

Note that this is higher than simply 4  3% as there is compounding within the year.

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The time value of money

A nominal rate of interest is an interest rate expressed as a per annum figure although the interest is
compounded over a period of less than one year.
The corresponding effective rate of interest is the annual percentage rate (APR)

Eg a bank quotes an annual rate of 12% (nominal) for a loan but it charges interest each quarter.
This means it charges 3% each quarter.
As we saw above, this is equivalent to 12.55%.

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The time value of money

Discounting is the reverse of compounding.
Remember the compounding formula was:
S = P(1 + r)n
We can rearrange this formula to calculate the amount we would have to invest now to build up an
investment to a particular size.

P = S / (1 + r)n =S * 1/(1+r)n
Where S = future value of investment
P = amount invested now
r = rate of interest
n = number of years of investment

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The time value of money

We can use this discounting formula to find a present value.
For example, the present value of $1,000 received at the end of two years using 10% is:
$1,000 / 1.12 = $826.45

P = S / (1 + r)n
Where S = future value of investment
P = amount invested now
r = rate of interest
n = number of years of investment

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Question to
consider
What is the present value of $1,000
received at the end of three years
using a 10% interest rate?

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Discounted cash flow

Discounted cash flow (DCF) is a technique of evaluating capital investment projects, using discounting
arithmetic to determine whether or not they will provide a satisfactory return.

DCF can be used in:

The net present value (NPV) method
The internal rate of return (IRR) method

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Discounted cash flow

The net present value method calculates the present value of all cash flows, and sums them to give the
net present value.
If this is positive, then the project is acceptable.

Eg:
A machine costs $20,000 and will yield net cash inflows of $8,000, $9,000 and $7,000 at the end of each of
the next three years.
Is the a worthwhile investment?

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Discounted cash flow

If no account is taken to timing differences then:
Cost = $20,000
Cash inflows = $24,000

However we know that it is not valid to compare the cash flows without adjusting for different timings.

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Discounted cash flow :

Time 0 means now. R =10%
A discount factor of 1 means no discount (because it is now).

Time Cash flow (A) Discount Present

factor (B) value (AB)
0 (20,000) 1 (20,000)

1 8,000 1 / 1.1 7,273

2 9,000 1 / 1.12 7,438

3 7,000 1 / 1.13 5,259

NPV: (30)

The present values are added to give an NPV of ($30).

As this is negative, the machine purchase is not worthwhile.
P = S/(1+r)^n = 8000/(1+0.1)^1 = 7273

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Discounted cash flow

To make discounted cash flow calculations easier we use discount tables.

These will be provided in the exam and look similar to this.

Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909

2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826

3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751

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Discounted cash flow

So if we had used the tables in our previous example, it would have looked like this:

Time Cash flow (A) Discount Present

factor (B) value (AB)
0 (20,000) 1 (20,000)
1 8,000
2 9,000
3 7,000
NPV:

You can see that this gives a slightly different NPV.

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Tackling the exam

In the exam always use the discount factor

tables where possible.

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Discounted cash flow

Annuities and perpetuities:

Annuities are an annual cash payment or receipt which is the same amount every year for a
number of years.
Eg, a cash flow of $8,000 every year

Time Cash flow (A) Discount Present

factor (B) value (AB)
0 Nil 1 Nil
1 8,000 0.909 7,272
2 8,000 0.826 6,608
3 8,000 0.751 6,008
NPV: 19,888

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Discounted cash flow

Annuities and perpetuities:
This is the same as
$8,000  (0.909 + 0.826 + 0.751) = $8,000  2.486 = $19,888

Time Cash flow (A) Discount Present

factor (B) value (AB)
0 Nil 1 Nil
1 8,000 0.909 7,272
2 8,000 0.826 6,608
3 8,000 0.751 6,008
NPV: 19,888

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Discounted cash flow

Annuities and perpetuities:
This is the same as
$8,000  (0.909 + 0.826 + 0.751) = $8,000  2.486 = $19,888

Time Cash flow (A) Discount Present

factor (B) value (AB)
0 Nil 1 Nil
1-3 8,000 2.487 19,896
NPV: 19,896

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Discounted cash flow

Annuities and perpetuities:

This is the same as
$8,000  (0.909 + 0.826 + 0.751) = $8,000  2.486 = $19,888

Or, we could use the annuity tables and look up the annuity factor for three years at 10%.
The table gives us 2.487.
Notice that this is slightly different from adding up the discount factors individually.

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Question to consider

A project would involve a capital outlay of $120,000. Profits (before depreciation) would be $30,000 per
year. The cost of capital is 12%. Would the project be worthwhile if it lasts:

(a) Five years

(b) Seven years

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Discounted cash flow

Annuities and perpetuities:

You may get a question with a more complicated annuity.

Eg, what is the present value of $10,000 costs incurred each year from years 3 to 6 when the cost of
capital is 10%?

We need to take the annuity factor for years 1 to 6 and deduct the annuity factor for years 1 to 2. This
will give us a factor for years 3 to 6 only.

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Discounted cash flow

• What is the present value of $10,000 costs incurred each year from years 3 to 6 when the cost of
capital is 10%?

• Annuity factor for years 1 to 6 4.355

• Less annuity factor for years 1 to 2 (1.736)
• Annuity factor for years 3 to 6 2.619

• PV of costs = $10,000  2.619 = $26,190

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Discounted cash flow

• A perpetuity is an annuity that lasts forever.

• The present value of a perpetuity of 'a' per annum, commencing in one year, is PV = a / r where r is
the cost of capital as a proportion.

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Discounted cash flow

The internal rate of return (IRR) technique uses a trial and error method to discover the discount rate
which produces the NPV of zero.

The internal rate of return method of DCF involves two steps.

• Calculating the rate of return which is expected from a project

• Comparing the rate of return with the cost of capital

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Discounted cash flow

 a 
 a  b  (B  A)
IRR = A +

Where
A is the discount rate which provides the positive NPV
a is the amount of the positive NPV
B is the discount rate which provides the negative NPV
b is the amount of the negative NPV
B>A

IRR= r1 + {(NPV1/(NPV1 - NPV2)) x (r2 - r1)}

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Discounted cash flow

NPV and IRR comparison

• For conventional cash flows both methods give the same decision

NPV
• Simpler to calculate
• Better for ranking mutually exclusive projects
• Easy to incorporate different discount rates

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Discounted cash flow

IRR

• More easily understood

• Ignores relative size of investments
• May be several IRRs if cash flows not conventional

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Discounted cash flow

Discounted payback method

The discounted payback method applies discounting to arrive at a payback period after which the NPV
becomes positive.
• It's is an adaptation of the payback technique.
• It takes some account of the time value of money.
• To calculate the discounted payback period, we establish the time at which the net present value of
an investment becomes positive.

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Discounted cash flow

For example:

Time Cash flow Discount Present Cumulative

(A) factor (B) value (AB) PV
0 (20,000) 1 (20,000) (20,000)
1 8,000 0.909 7,272 (12,728)
2 9,000 0.826 7,434 (5,294)
3 8,000 0.751 6,008 714
NPV: 714

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Discuss

Depreciation should be included in DCF calculation.

True
False
Why?

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Past exam question

The following question is taken from the June 2013 exam paper:

A project has an initial outflow of $12,000 followed by six equal annual cash inflows, commencing in
one year's time. The payback period is exactly four years. The cost of capital is 12% per year.
What is the project's net present value (to the nearest $)?
A $333
B -$2,899
C -$3,778
D -$5,926
(2 marks)

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Chapter summary 1

1. Payback period
Time taken for cash flows to repay the initial investment.

2. Time value of money

Compensation for the time value of money, recognising that $ today is worth more than $ in the future, due
to inflation, interest and risk.

3. Compounding
Earning interest on interest already received. Considered non annual rates of interest – equivalent rates
(EAR).

4. Discounted cash flows

Opposite of compounding, using tables or formula.

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Chapter summary 2

5. Net present value

The net total of the discounted cash flows of the project.

6. Annuities
A constant sum of money for a fixed period of time, the present value is calculated using the
cumulative discount tables.
Loan repayments, which included the annuities and the interest.
Perpetuities – annuity paid or received forever.

7. Internal rate of return

The discount rate that gives a NPV of zero.

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KHOA KẾ TOÁN KIỂM TOÁN

F2- KẾ TOÁN QUẢN TRỊ (ACCA)-F2-

MANAGEMENT ACCOUNTING

Chapter 8
Performance
measurement

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Syllabus learning outcomes

• Discuss the purpose of mission statements and their role in performance
measurement
• Discuss the purpose of strategic and operational and tactical objectives and
their role in performance measurement
• Discuss the impact of economic and market conditions on performance
management
• Explain the impact of government regulation on performance management
• Discuss and calculate measures of financial performance (profitability,
liquidity, activity and gearing) and non-financial measures
• Discuss the advantages and limitations of the balanced scorecard
• Describe performance indicators for financial success, customer satisfaction,
process efficiency and growth
• Discuss critical success factors and key performance indicators and their link
to objectives and mission statements

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Syllabus learning outcomes

• Establish critical success factors and key performance indicators in a specific
situation
• Explain the concepts of economy, efficiency and effectiveness
• Describe performance indicators for economy, efficiency and effectiveness
• Establish performance indicators for economy, efficiency and effectiveness
in a specific situation
• Calculate return on investment and residual income
• Explain the advantages and limitations of return on investment and residual
income
• Discuss the importance of non-financial performance measures
• Discuss the relationship between short-term and long-term performance
• Discuss the measurement of performance in non-profit seeking and public
sector organisations
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Overview
Performance
Measurement

Types of performance
Mission statement
measurement

Goals and Objectives

CSFs
Financial Non-financial
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Mission statements

• Performance measurement is a vital part of control.

• It aims to establish how well something or somebody is doing in relation to a planned activity.
• Elements that might be assessed include:

• A machine
• A factory/division
• An organisation as a whole
• An individual
• A group of people

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Mission statements

• As part of control, actual performance is compared with a standard or target.

• For machines, processes, departments and individuals, targets are set by the budget.
• At a higher level, to control the whole organisation, a more complex process is required.
• The mission statement is the vision of top management, what they are trying to achieve, and how
they wish to achieve it.
• It is an important part of the process of controlling the whole organisation.

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Mission statements

The importance of mission

• Values and feelings are integral elements of customers' buying decisions.
• A sense of mission can help motivate employees.
• Some people believe that there is an empirical relationship between strong corporate values and
profitability.
Vinamilk
“Vinamilk cam kết mang đến cho cộng đồng nguồn dinh dưỡng và chất lượng cao cấp hàng đầu bằng
chính sự trân trọng, tình yêu và trách nhiệm cao của mình với cuộc sống con người và xã hội”
Coca – cola
“Mang lại hạnh phúc cho thế giới và tạo sự khác biệt”

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Mission statements

Characteristics of a mission statement

• Brevity – easy to understand and remember

• Flexibility – to accommodate change
• Distinctiveness – to make the firm stand out

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Question to
consider

Devise a mission statement

for an independent cafe.

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Answer

A good mission statement should state what is unique about the cafe. Here are some suggestions:

• Provide tasty, homemade organic food in a relaxed cafe environment

• Quick, speedy lunches for people on the go
• Nutritious meals and snacks homemade on site
• Providing a local welcome for all

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Goals and objectives

Goals are derived from the mission and vision

• Operational goals can be expressed as objectives

Eg operational goal: Cut costs
Objective: 'Reduce budget by 5%'
• Non-operational goals
Eg a university's goal might be to 'seek truth'
Not all goals can be measured

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Goals and objectives

Many objectives are SMART

• Specific
• Measurable
• Attainable
• Results-orientated
• Time bounded

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Goals and objectives

Objectives can also be classified as strategic, tactical or operational.

• Strategic objectives: set the overall long-term objectives for the organisation as a whole
• Tactical objectives: the 'middle tier' of objectives , designed to plan and control individual functions
within the organisation. Tactical objectives are then implemented by setting operational objectives
• Operational objectives: day-to-day performance targets to ensure that the organisation's operations
are carried out efficiently or effectively

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Goals and objectives

A critical success factor (CSF) is

• 'An element of the organisational activity which is central to its future success. Critical success
factors (CSFs) may change over time, and may include items such as product, quality, employee
attitudes, manufacturing flexibility and brand awareness.'
(CIMA Official Terminology)
• A critical success factor is a performance requirement that is fundamental to competitive success.

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Goals and objectives

Critical success factor examples

• Profitability
• Productivity
• Personnel development
• Public responsibility
• Market share
• Product leadership
• Employee attitudes
• Balance between short range and long-range goals

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Goals and objectives

A key performance indicator (KPI) is

• Measure how well organisation is achieving the critical success factors through key performance
indicators (KPIs).
• CSFs represent 'what' an organisation needs to do in order to be successful.
• KPIs are the measures that are then used to assess whether or not the CSFs are being achieved.
• KPIs are a vital part of the control system for reviewing how successfully a strategy has been
implemented and how well an organisation is performing.

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Goals and objectives 7

• How they link together

• Mission statement – The business's rationale for existing and statement of aspirations

• Strategic objectives – Quantified embodiments of mission (timescales, profitability)

• CSFs – Elements which are central to future success

• KPIs – Measures used to assess whether CSFs are being achieved

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Performance measures

A range of performance measures is useful:

Financial measures

• Profit
• Revenue
• Cost
• Share price
• Cash flow

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Performance measures

Non- Quantitative Qualitative Non-financial Ratios Percentages

financial indicators
measures

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Economy, efficiency and effectiveness

The difficulties in valuing Economy, efficiency and

Comparing non-profit seeking
outputs led to the creation of effectiveness can be studied and
entities with the private sector
the 3E approach. measured with reference to
raises several problems.
inputs, process and outputs.

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Economy, efficiency and effectiveness 2

• Inputs
• Money
• Resources

• Process
• Usually some ratio of economy and effectiveness measure

• Outputs (ie results of an activity)

• Measurable as the services actually produced and the quality of the services

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Question to consider

• Using the 3 Es suggest a range of performance measures for a public sector

higher education college.

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Answer

Economy

Efficiency

Effectiveness

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Profitability and productivity

Gross profit=sale – Cost of sale

Net profit = Sale –cost of sale-Selling cost- administration cost
Profit (or net or sales) margin or operating profit % = (Operating profit/revenue) × 100%
• Key measure of efficiency for profit-making organisations
• Measure of the efficiency with which sales (input) has been used to generate profit (value of output)
• Increased by charging higher prices or reducing costs

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Profitability and productivity

Net profit margin

• Amount left after all direct costs and overheads have been deducted from sales revenue
• Therefore concerned with profit over which operational management can exercise day to
day control
• May be an interdependency with the asset turnover ratio

Limitations

• Affected by different inventory valuation and depreciation policies and fails to show
differences in cost structures

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Profitability and productivity

Asset turnover

• Calculated as revenue/capital employed using net current assets or long-term liabilities +

capital.
• Key measure of productivity measuring how intensively capital employed has been used
to generate sales.
• Again, the valuation of capital employed can have a significant effect on the ratio
reported.

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Profitability and productivity

Asset turnover continued

• 'New' non-current assets and/or a large non-current asset base can raise productivity but
will reduce ROCE and asset turnover.
• Asset turnover is expressed as 'n times' so that assets generate n times their value in
annual turnover.
• ROCE (ROI)= profit margin × asset turnover
• Profit/ Revenue x Revenue/ capital = Profit/Capital
• ROCE can be increased by improving the profit margin and/or increasing asset turnover.

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Profitability and productivity

Accounts receivable collection period

• Calculated as (receivables/turnover) × 365 days (or × 12 mths).

• This gives a rough measure of the average length of time it takes for a company's receivables
to pay what they owe.
• Trend is important.
• Supermarkets' ratio should be low, exporting companies' probably high.

• Limitation

• Figure used for receivables at end of accounting period might not be representative

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Profitability and productivity

Accounts payable payment period

• Calculated as (payables/purchases) × 365 days (or × 12 mths).

• Cost of sales can be used as an approximation for purchases.
• This gives a rough measure of the average length of time it takes for a company to pay
what it owes.
• It helps to assess a company's liquidity.
• An increase can be a sign of a lack of long-term finance or poor management of current
assets.
• This could result in use of extended credit from suppliers, increased bank overdraft etc.

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Profitability and productivity

Inventory turnover period

• Calculated as (inventory/cost of sales)× 365 days (or × 12 mths).

• Indicates the average number of days for which inventory is held.
• An increasing ratio indicates a slowdown in trading or a build up of inventory.
• Inventory turnover (n number of times a year) is a measure of business trading and is
calculated as cost of sales/inventory.
• The type of organisation and systems operated will impact on both ratios (eg JIT leads to
high inventory turnover).

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Profitability and productivity

Liquidity ratios

• Current ratio
• X : 1, where X = current assets
• current liabilities
• Should be < 1 otherwise business may not be able to pay its debts on time.

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Profitability and productivity

Quick (or acid test) ratio

• X : 1, where X = (current assets – inventory)
• current liabilities
• The trend in the current and quick ratios is all important
• Non-standard ratios may be calculated which are relevant to a particular organisation
• For example, you may calculate the percentage room occupancy for assessing the
performance of a hotel
• Or the average age of rent arrears in months for a student housing society (which is
simply the average age of receivables)

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The balanced scorecard

Balanced scorecard
• A way of measuring performance which integrates traditional financial measures with
operational, customer and staff issues.
• It is 'balanced' in the sense that managers are required to think in terms of all four
perspectives.
• This is to prevent improvements being made in one area at the expense of another.

Process efficency financial success

Mission

Customer
Growth
satisfaction
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The balanced scorecard

Customer perspective
• Measures relating to what actually matters to customers
• For example time, quality, performance of product

Examples
• Customer complaints
• On-time deliveries

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The balanced scorecard

Internal business perspective

• Measures relating to the business processes that have the greatest impact on customer
satisfaction
• For example quality, employee skills

Examples
• Average set-up time
• Quality control rejects

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The balanced scorecard

Innovation and learning perspective

• Measures to assess the organisation's capacity to maintain its competitive position

through the acquisition of new skills/development of new products

Examples

• Labour turnover rate

• % of revenue generated by new products

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The balanced scorecard

Financial perspective

• Measures that consider the organisation from the shareholder's point of view

Examples

• ROCE =ROI = actual profit/ capital

• RI = Actual profit – Profit min = ROI x capital – ROImin x capital

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External influences

External conditions can affect performance.

• Market conditions
Eg new competitor
• General economic conditions
Eg raising and lowering overall supply and demand

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External influences

Government influence can affect performance.

• Taxation
• Encouraging new investments
• Encouraging a wider spread of ownership
• Legislation
• Economic policy

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Chân thành cảm ơn

Chapter 1: Accounting for material
1. Which of the following functions are fulfilled by a goods received note (GRN)?
(i) Provides information to update the inventory records on receipt of goods
(ii) Provides information to check the quantity on the supplier's invoice
(iii) Provides information to check the price on the supplier's invoice
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i) only
2. There are 27,500 units of Part Number X35 on order with the suppliers and 16,250 units outstanding on existing
customers' orders.
If the free inventory is 13,000 units, what is the physical inventory/materials in inventory?
A 1,750
B 3,250
C 24,250
D 29,250
The following information relates to questions 3 and 4.
A domestic appliance retailer with multiple outlets sells a popular toaster known as the Autocrisp 2000, for which
the following information is available:
Average sales 75 per day
Maximum sales 95 per day
Minimum sales 50 per day
Lead time 12-18 days
Reorder quantity 1,750
3. Based on the data above, at what level of inventory would a replenishment order be issued? (reorder level)
A 600 units
B 1,125 units
C 1,710 units
D 1,750 units
4. Based on the data above, what is the maximum inventory level?
A 1,750 units
B 2,275 units
C 2,860 units
D 2,900 units
5. The annual demand for an item of inventory is 2,500 units. The cost of placing an order is $80 and the cost of
holding an item in stock for one year is $15. What is the economic order quantity, to the nearest unit?
A 31 units
B 115 units
C 163 units
D 26,667 units
6. Which of the following is correct with regard to inventories?
(i) Stock-outs arise when too little inventory is held
(ii) Safety inventories are the level of units maintained in case there is unexpected demand
(iii) A re-order level can be established by looking at the maximum usage and the maximum lead-time
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii).
7. What is the economic batch quantity used to establish?
Optimal
A reorder quantity.
B reorder level
C order quantity
D inventory level for production
8. The demand for a product is 12,500 units for a three month period. Each unit of product has a purchase price of
$15 and ordering costs are $20 per order placed. The annual holding cost of one unit of product is 10% of its
purchase price.
What is the Economic Order Quantity (to the nearest unit)?
A 577
B 816
C 866
D 1,155
9. A company determines its order quantity for a raw material by using the Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a
batch of raw material?
EOQ Total annual holding cost (TCh)
A Higher Lower
B Higher Higher
C Lower Higher
D Lower Lower.
10. Data relating to a particular stores item are as follows:
Average daily usage 400 units
Maximum daily usage 520 units
Minimum daily usage 180 units
Lead time for replenishment of inventory 10 to 15 days
Reorder quantity 8,000 units
What is the reorder level (in units) which avoids stockouts (running out of inventory)?
A 5,000
B 6,000
C 7,800
D 8,000
11. The material stores control account for a company for March looks like this:
MATERIAL STORES CONTROL ACCOUNT
$ $
Balance b/d 12,000 Work in progress 40,000
Suppliers (331) 49,000 Overhead control 12,000
Work in progress 18,000 Balance c/d 27,000
79,000 79,000
Balance b/d 27,000
Which of the following statements are correct?
(i) Issues of direct materials during March were $18,000
(ii) Issues of direct materials during March were $40,000
(iii) Issues of indirect materials during March were $12,000
(iv) Purchases of materials during March were $49,000
A (i) and (iv) only
B (ii) and (iv) only
C (ii), (iii) and (iv) only
D All of them
12. A manufacturing company uses 25,000 components at an even rate during a year. Each order placed with the
supplier of the components is for 2,000 components, which is the economic order quantity. The company holds a
buffer inventory of 500 components. The annual cost of holding one component in inventory is $2.
What is the total annual cost of holding inventory of the component?
A $2,000
B $2,500
C $3,000
D $4,000
13. A company wishes to minimise its inventory costs. Order costs are $10 per order and holding costs are $0.10
per unit per month. Fall Co estimates annual demand to be 5,400 units.
What is the economic order quantity?
A 949 units
B 90,000 units
C 1,039 units
D 300 units.
14. For a particular component, the re-order quantity is 6,000 units and the average inventory holding is 3,400 units.
What is the level of safety inventory (in whole units)?
A 400.
B 3,400
C 3,000
D 6,400
15. The following data relates to component L512:
Ordering costs $100 per order
Inventory holding costs $8 per unit per annum
Annual demand 1,225 units
What is the economic order quantity (to the nearest whole unit)?
A 175 units.
B 62 units
C 44 units
D 124 units
16. The following data relate to inventory item A452:
Average usage 100 units per day
Minimum usage 60 units per day
Maximum usage 130 units per day
Lead time 20-26 days
EOQ(reorder quantity) 4,000 units
What is the maximum inventory level?
A 3,380 units
B. 6,180 units
C 7,380 units
D 8,580 units
17. ACB Co gradually receives its re-supply of inventory at a rate of 10,000 units a week. Other information is
available as follows.
Weekly demand 5,000 units
Set-up costs for each production run $125
Weekly cost of holding one unit $0.0025
What is the economic production run? (EBQ)
A 1,577 units
B 7,071 units
C.31,623 units
D 894,427 units
18.
Where on the graph would you read off the value for the economic order quantity (EOQ)?
A At point A
B At point B
C.At point C
D At point D
19. A company uses an item of inventory as follows.
Purchase price $25 per unit
Annual demand 1,800 units
Ordering cost $32
Annual holding cost $4.50 per unit
EOQ 160 units
What is the minimum total cost assuming a discount of 2% applies to the purchase price and to holding costs on
orders of 300 and over?
A $45,720.00
B.$44,953.50
C $45,000.00
D $44,967.00
The following information relates to questions 20 and 21.
G Co makes the following purchases and sales.
1 January Purchases 4,000 units for $10,000
31 January Purchases 1,000 units for $2,000
15 February Sales 3,000 units for $13,000
28 February Purchases 1,500 units for $3,750
14 March Sales 500 units for $1,200
20. At 31 March which of the following closing inventory valuations using FIFO is correct?
A $8,000
B $7,500
C $7,000
D $6,500
21. At 31 March which of the following closing inventory valuations using LIFO is correct?
1 January Purchases 4,000 units for $10,000
31 January Purchases 1,000 units for $2,000
15 February Sales 3,000 units for $13,000
28 February Purchases 1,500 units for $3,750
14 March Sales 500 units for $1,200
A $6,500
B $7,000
C $7,500
D $8,000
22. A wholesaler had opening inventory of 300 units of product E valued at $25 per unit at the
beginning of January. The following receipts and sales were recorded during January.
Date 2 Jan 12 Jan 21 Jan 29 Jan
400
Issues 250 200 75
The purchase cost of receipts was $25.75 per unit. Using a weighted average method of valuation, calculate the
value of closing inventory at the end of January.
A $11,550
B $4,492.
C $4,192
D $9,550
Chapter 2: Accounting for labour
The following information relates to questions 1 and 2.
Budgeted and actual production data for the year that has just ended are as follows.
Product Budgeted production Actual production
Units Standard machine hours Units
W 15,000 3,000 12,000
X 20,000 8,000 25,000
Y 14,000 7,000 16,000
Z 6,000 9,000 5,000
Total machine hours worked in the period amounted to 29,000 hours.
1. What was the capacity ratio in the year, as a percentage to one decimal place?
A 93.1%
B 103.3%
C 105.5%
D 107.4%
2. What was the efficiency ratio in the year, as a percentage to one decimal place?
A 96.2%
B 103.3%
C 103.9%
D 107.4%

3. What does the labour cost graph below depict?

$

0 output

A A piece rate scheme with a minimum guaranteed wage

B A straight piece rate scheme
C A straight time rate scheme
D A differential piece rate scheme
4. The following data relate to work in the finishing department of a certain factory.
Normal working day 7 hours
Basic rate of pay per hour $5
Standard time allowed to produce 1 unit 4 minutes
Premium bonus payable at the basic rate 60% of time saved
On a particular day one employee finishes 180 units. What is his gross pay for the day?
A $35
B $50
C $56
D $60
5. An employee is paid on a piecework basis. The basis of the piecework scheme is as follows:
1 to 100 units – $0.20 per unit
101 to 200 units – $0.30 per unit
201 to 299 units – $0.40 per unit
with only the additional units qualifying for the higher rates. Rejected units do not qualify for payment.
During a particular day the employee produced 210 units of which 17 were rejected as faulty.
What did the employee earn for their day's work?
A $47.90
B $54.00
C $57.90
D $63.00
6. Employee A is a carpenter and normally works 36 hours per week. The standard rate of pay is $3.60 per hour. A
premium of 50% of the basic hourly rate is paid for all overtime hours worked. During the last week of October,
Employee A worked for 42 hours. The overtime hours worked were for the following reasons:
Machine breakdown: (idle time) 4 hours
To complete a special job at the request of a customer: 2 hours
How much of Employee A's earnings for the last week of October would have been treated as direct wages?
A $162.00
B $129.60
C $140.40
D $151.20
7. Which of the following statements is/are true about group bonus schemes?
(i) Group bonus schemes are appropriate when increased output depends on a number of people all making extra
effort
(ii) With a group bonus scheme, it is easier to award each individual's performance
(iii) Non-production employees can be rewarded as part of a group incentive scheme
A (i) only
B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only
8. X Co has recorded the following wages costs for direct production workers for November.
$
Basic pay 70,800
Overtime premium 2,000
Holiday pay 500
Gross wages incurred 73,300
The overtime was not worked for any specific job.
What are the accounting entries for these wages costs?
Debit Credit
$ $
A Work in progress account 72,800
Overhead control account 500
Wages control account 73,300
B Work in progress account 70,800
Overhead control account 2,500
Wages control account 73,300
C Wages control account 73,300
Work in progress account 70,800
Overhead control account 2,500
D Wages control account 73,300
Work in progress account 72,800
Overhead control account 500
9. A company had 30 direct production employees at the beginning of last year and 20 direct production employees
at the end of the year. During the year, a total of 15 direct production employees had left the company to work for
a local competitor. What is the labour turnover rate for last year?
A 16.7%
B 20.0%
C 25.0%
D 60.0%
10. Jane works as a member of a three-person team in the assembly department of a factory. The team is rewarded
by a group bonus scheme whereby the team leader receives 40 per cent of any bonus earned
by the team, and the remaining bonus is shared evenly between Jane and the other team member.
Details of output for one day are given below.
Hours worked by team 8 hours
Team production achieved 80 units
Standard time allowed to produce one unit 9 minutes
Group bonus payable at $6 per hour 70% of time saved
What is the bonus element of Jane's pay for this particular day?
A $5.04
B $7.20
C $10.08
D $16.80
11. In a typical cost ledger, what is the double entry for indirect labour cost incurred?
A DR Wages control CR Overhead control
B DR Admin overhead control CR Wages control
C DR Overhead control CR Wages control
D DR Wages control CR Admin overhead control
12. A company has 4,000 staff at the start of 20X6 and at the end this had reduced to 3,800 due to
redundancies being made. 210 staff took voluntary redundancy which was 10 more than the company
had anticipated and these 10 employees were replaced.
What is the labour turnover rate per year?
A 0.26%
B 5.38%
C 25.64%
D 5.13%

Chapter 3: Accounting for overheads

1. The following extract of information is available concerning the four cost centres of EG Limited.
Production cost Service cost
centres centre
Machinery Finishing Packing Canteen
Number of direct employees 7 6 2 –
Number of indirect employees 3 2 1 4
Overhead allocated and apportioned $28,500 $18,300 $8,960 $8,400
The overhead cost of the canteen is to be re-apportioned to the production cost centres on the basis of
the number of employees in each production cost centre. After the re-apportionment, what is the total
overhead cost of the packing department, to the nearest $?
A $1,200
B $9,968
C $10,080
D $10,160.
The following information relates to questions 2 and 3.
Budgeted information relating to two departments in a company for the next period is as follows.
Production Direct Direct Direct Machine
Department overhead material cost labour cost labour hours hours
$ $ $
1 27,000 67,500 13,500 2,700 45,000
2 18,000 36,000 100,000 25,000 300
Individual direct labour employees within each department earn differing rates of pay, according to their skills,
grade and experience.
2. What is the most appropriate production overhead absorption rate for department 1?
A 40% of direct material cost
B 200% of direct labour cost
C $10 per direct labour hour
D $0.60 per machine hour.
3. What is the most appropriate production overhead absorption rate for department 2?
A 50% of direct material cost
B 18% of direct labour cost
C $0.72 per direct labour hour.
D $60 per machine hour
4. Which of the following statements about predetermined overhead absorption rates are true?
(i) Using a predetermined absorption rate avoids fluctuations in unit costs caused by abnormally high or low
overhead expenditure or activity levels
(ii) Using a predetermined absorption rate offers the administrative convenience of being able to record full
production costs sooner
(iii) Using a predetermined absorption rate avoids problems of under/over absorption of overheads because a
constant overhead rate is available
A (i) and (ii) only.
B (i) and (iii) only
C (ii) and (iii) only
D All of them
5. Over-absorbed overheads occur when
A Absorbed overheads exceed actual overheads.
B Absorbed overheads exceed budgeted overheads
C Actual overheads exceed absorbed overheads
D Actual overheads exceed budgeted overheads
The following information relates to questions 6 and 7.
A company has the following actual and budgeted data for year 4.
Budget Actual
Production 8,000 units 9,000 units
Variable production overhead per unit $3 $3
Fixed production overheads $360,000 $432,000
Sales 6,000 units 8,000 units
Overheads are absorbed using a rate per unit, based on budgeted output and expenditure.
6. What was the fixed production overhead absorbed amount during year 4?
A $384,000
B $405,000.
C $432,000
D $459,000
7. By how much was the fixed production overhead under or over absorbed?
A Under absorbed by $27,000.
B Under absorbed by $72,000
C Under absorbed by $75,000
D Over absorbed by $27,000
8. Which of the following would be the most appropriate basis for apportioning machinery insurance cost to cost
centres within a factory?
A The number of machines in each cost centre
B The floor area occupied by the machinery in each cost centre
C The value of the machinery in each cost centre.
D The operating hours of the machinery in each cost centre
9. Factory overheads can be absorbed by which of the following methods?
(i) Direct labour hours
(ii) Machine hours
(iii) As a percentage of prime cost
(iv) $x per unit
A (i), (ii), (iii) and (iv)
B (i) and (ii) only
C (i), (ii) and (iii) only
D (ii), (iii) and (iv) only
10. The production overhead control account for R Limited at the end of the period looks like this.
PRODUCTION OVERHEAD CONTROL ACCOUNT
$ $
Stores control 22,800 Work in progress 404,800
Wages control 180,400 Profit and loss 8,400
Expense creditors 210,000
413,200 413,200
Which of the following statements are correct?
(i) Indirect material issued from inventory was $22,800
(ii) Overhead absorbed during the period was $210,000
(iii) Overhead for the period was over absorbed by $8,400
(iv) Indirect wages costs incurred were $180,400
A (i), (ii) and (iii)
B (i), (iii) and (iv)
C (i) and (iv).
D All of them
11. Which of the following is correct when considering the allocation, apportionment and reapportionment of
overheads in an absorption costing situation?
A Only production related costs should be considered.
B Allocation is the situation where part of an overhead is assigned to a cost centre
C Costs may only be reapportioned from production centres to service centres
D Any overheads assigned to a single department should be ignored
12. A company has over-absorbed fixed production overheads for the period by $6,000. The fixed production
overhead absorption rate was $8 per unit and is based on the normal level of activity of 5,000 units. Actual
production was 4,500 units.
What was the actual fixed production overheads incurred for the period?
A $30,000.
B $36,000
C $40,000
D $42,000
13. A company manufacturers two products, X and Y, in a factory divided into two production cost centres, Primary
and Finishing. The following budgeted data are available:

Cost centre Primary Finishing

Allocated and apportioned fixed overhead costs $96,000 $82,500
Direct labour minutes per unit:
– Product X 36 25
– Product Y 48 35
Budgeted production is 6,000 units of product X and 7,500 units of product Y. Fixed overhead costs are
to be absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for product Y?
A $11
B $12
C $14
D $15.
14. A company uses an overhead absorption rate of $3.50 per machine hour, based on 32,000 budgeted
machine hours for the period. During the same period the actual total overhead expenditure amounted to
$108,875 and 30,000 machine hours were recorded on actual production.
By how much was the total overhead under or over absorbed for the period?
A Under absorbed by $3,875.
B Under absorbed by $7,000
C Over absorbed by $3,875
D Over absorbed by $7,000
15. A factory consists of two production cost centres (P and Q) and two service cost centres (X and Y). The total
allocated and apportioned overhead for each is as follows:
P Q X Y
$95,000 $82,000 $46,000 $30,000
It has been estimated that each service cost centre does work for the other cost centres in the following proportions:
P Q X Y
Percentage of service cost centre X to 40 40 – 20
Percentage of service cost centre Y to 30 60 10 –
After the reapportionment of service cost centre costs has been carried out using a method that fully recognises the
reciprocal service arrangements in the factory, what is the total overhead for production cost centre P?
A $122,400
B $124,716
C $126,000
D $127,000.
16. The following data is available for a paint department for the latest period.
Budgeted production overhead $150,000
Actual production overhead $150,000
Budgeted machine hours 60,000
Actual machine hours 55,000
Which of the following statements is correct?
A There was no under or over absorption of overhead
B Overhead was $13,636 over absorbed
C Overhead was $12,500 over absorbed
D Overhead was $12,500 under absorbed
17. Actual overheads $496,980
Actual machine hours 16,566
Budgeted overheads $475,200
Based on the data above, and assuming that the budgeted overhead absorption rate was $32 per hour,
what were the budgeted number of hours (to the nearest hour) budgeted to be worked?
A 14,850
B 15,531
C 16,566
D 33,132
18.
Budgeted overheads $690,480
Budgeted machine hours 15,344
Actual machine hours 14,128
Actual overheads $679,550
Based on the data above, what is the machine hour absorption rate (to the nearest $)?
A 44 per machine hour
B 45 per machine hour
C 48 per machine hour
D 49 per machine hour
19. A company absorbs overheads on machine hours. In a period, actual machine hours were 22,435, actual
overheads were $496,500 and there was over absorption of $64,375.
What was the budgeted overhead absorption rate per machine hour (to the nearest $)?
A 19
B 22
C 25
D 27
20. A company absorbs fixed production overheads in one of its departments on the basis of machine hours. There
were 100,000 budgeted machine hours for the forthcoming period. The fixed production overhead absorption rate
was $2.50 per machine hour.
During the period, the following actual results were recorded:
Standard machine hours 110,000
Fixed production overheads $300,000
What was the fixed production overhead under/over absorption amount?
A Over absorbed by $25,000
B Under absorbed by $50,000
C Over absorbed by $50,000
D Under absorbed by $25,000
21. Consider the following statements, regarding the reapportionment of service cost centre overheads to production
cost centres, where reciprocal services exist:
(i) The direct method results in costs being reapportioned between service cost centres
(ii) If the direct method is used, the order in which the service cost centre overheads are reapportioned is irrelevant
(iii) The step down method results in costs being reapportioned between service cost centres
(iv) If the step down method is used, the order in which the service cost centre overheads are reapportioned is
irrelevant
Which statement(s) is/are correct?
A (i), (ii) and (iv)
B (i), (iii) and (iv)
C (ii) only
D (ii) and (iii)
22. CTF Co has two service centres serving two production departments. Overhead costs apportioned to each
department are as follows.
Production Service
departments centres
Mixing Stirring Stores Canteen
$ $ $ $
Allocated and apportioned overheads 216,400 78,800 181,600 47,200
Estimated work done by the service
centres for other departments
- Stores 50% 30% – 20%
- Canteen 45% 40% 15% –
The business uses the direct method of apportionment.
After the apportionment of the service centres to the production departments, what will the total overhead cost be
for the mixing department?
A $328,440
B $342,041
C $351,416
D $354,888
23. HMF Co has two service centres serving two production departments. Overhead costs apportioned to each
department are as follows.
Production Service
departments centres
Mixing Stirring Stores Canteen
$ $ $ $
Allocated and apportioned overheads 216,400 78,800 181,600 47,200
Estimated work done by the service
centres for other departments
- Stores 50% 30% – 20%
- Canteen 45% 40% 15% –
The business uses the step down method of apportionment.
After the apportionment of the service centres to the production departments, what will the total
overhead cost be for the mixing department?
A $325,968
B $344,784
C $351,416
D $354,888
24. The following question is taken from the June 2012 exam paper.
A company uses standard absorption costing to value inventory. Its fixed overhead absorption rate is
$12 per labour hour and each unit of production should take four hours. In a recent period where there
was no opening inventory of finished goods, 20,000 units were produced using 100,000 labour hours.
18,000 units were sold. The actual profit was $464,000.
What profit would have been earned under a standard marginal costing system?
A $368,000
B $440,000
C $344,000
D $560,000
25. The following question is taken from the January to June 2015 exam period.
A company uses blanket overhead absorpsion rate of $5 per direct labour hour. Actual overhead expenditure in a
period was as budgeted.
The under/over account for the period have the following entries:
DR CR
$ $
Production overhead 4,000 Profit or loss account 4,000
4,000 4,000
Which of the following statements is true?
A Actual direct labour hour were 800 less than budgeted
B Actual direct labour hour were 800 more than budgeted
C Actual direct labour hour were 4,000 less than budgeted
D Production overhead was over absorbed by $4,000
26. The following question is taken from the January to June 2016 exam period.
An accountant is using the repeated distribution method to reapportion service department costs. The following
table shows the work she has done so far. Figures that are yet to be calculated are show as “???”
Production Production Service Service
Department 1 Department 2 department X department Y
$ $ $ $
Apportioned and allocated
Production overhead 60,000 80,000 20,000 10,000
Service department X 8,000 10,000 -20,000 2,000
Service department Y 7,200 4,200 600 -12,000
Service department X ??? ??? -600 ….
Total production overhead ??? ??? 0
What is the total production overhead for production department 1 after the remaining reapportionment of the
overheads of service department X?
A $74,600
B $75,200
C $75,440
D $75,467

Chapter 4: Absorption and marginal Costing

1. The following data is available for period 9.
Opening inventory 10,000 units
Closing inventory 8,000 units
Absorption costing profit $280,000
What would be the profit for period 9 using marginal costing?
A $278,000
B $280,000
C $282,000
D Impossible to calculate without more information.
2. The overhead absorption rate for product T is $4 per machine hour. Each unit of T requires 3 machine
hours. Inventories of product T last period were:
Units
Opening inventory 2,400
Closing inventory 2,700
Compared with the marginal costing profit for the period, the absorption costing profit for product T will
be which of the following?
A $1,200 higher
B $3,600 higher.
C $1,200 lower
D $3,600 lower
3. In a period where opening inventories were 15,000 units and closing inventories were 20,000 units, a
firm had a profit of $130,000 using absorption costing. If the fixed overhead absorption rate was $8 per
unit, the profit using marginal costing would be which of the following?
A $90,000.
B $130,000
C $170,000
D Impossible to calculate without more information
The following information relates to questions 4 and 5.
Cost and selling price details for product Z are as follows.
$ per unit
Direct materials 6.00
Direct labour 7.50
Variable overhead 2.50
Fixed overhead absorption rate 5.00
21.00
Profit 9.00
Selling price 30.00
Budgeted production for the month was 5,000 units although the company managed to produce 5,800 units,
selling 5,200 of them and incurring fixed overhead costs of $27,400.
4. What is the marginal costing profit for the month?
A $45,400.
B $46,800
C $53,800
D $72,800
5. What is the absorption costing profit for the month?
A $45,200
B $45,400
C $46,800
D $48,400.
6. In a period, a company had opening inventory of 31,000 units and closing inventory of 34,000 units.
Profits based on marginal costing were $850,500 and on absorption costing were $955,500.
If the budgeted total fixed costs for the company was $1,837,500, what was the budgeted level of
activity in units?
A 32,500
B 52,500.
C 65,000
D 105,000
7. A company had opening inventory of 48,500 units and closing inventory of 45,500 units. Profits based
on marginal costing were $315,250 and on absorption costing were $288,250. What is the fixed
overhead absorption rate per unit?
A $5.94
B $6.34
C $6.50
D $9.00.
8. Which of the following are acceptable bases for absorbing production overheads?
(i) Direct labour hours
(ii) Machine hours
(iii) As a percentage of the prime cost
(iv) Per unit
A Methods (i) and (ii) only
B Methods (iii) and (iv) only
C Methods (i), (ii), (iii) and (iv)
D Methods (i), (ii) or (iii) only
9. Under absorption costing, the total cost of a product will include:
A Direct costs only
B Variable costs only
C All direct and indirect costs excluding a share of fixed overhead
D All direct and indirect costs
10. A company has established a marginal costing profit of $72,300. Opening inventory was 300 units and closing
inventory is 750 units. The fixed production overhead absorption rate has been calculated as
$5/unit.
What was the profit under absorption costing?
A $67,050
B $70,050
C $74,550.
D $77,550
11. A company produces and sells a single product whose variable cost is $6 per unit. Fixed costs have been
absorbed over the normal level of activity of 200,000 units and have been calculated as $2 per unit. The current
selling price is $10 per unit.
How much profit is made under marginal costing if the company sells 250,000 units?
A $500,000
B $600,000.
C $900,000
D $1,000,000
12. A company which uses marginal costing has a profit of $37,500 for a period. Opening inventory was
100 units and closing inventory was 350 units. The fixed production overhead absorption rate is $4 per unit. What
is the profit under absorption costing?
A $35,700
B $35,500
C $38,500.
D $39,300
13. A company manufactures and sells a single product. For this month the budgeted fixed production
overheads are $48,000, budgeted production is 12,000 units and budgeted sales are 11,720 units.
The company currently uses absorption costing.
If the company used marginal costing principles instead of absorption costing for this month, what
would be the effect on the budgeted profit?
A $1,120 higher
B $1,120 lower.
C $3,920 higher
D $3,920 lower
14. A company operates a standard marginal costing system. Last month its actual fixed overhead
expenditure was 10% above budget resulting in a fixed overhead expenditure variance of $36,000.
What was the actual expenditure on fixed overheads last month?
A $324,000
B $360,000
C $396,000.
D $400,000
15. Last month, when a company had an opening inventory of 16,500 units and a closing inventory of 18,000 units,
the profit using absorption costing was $40,000. The fixed production overhead rate was $10 per unit.
What would the profit for last month have been using marginal costing?
A $15,000
B $25,000.
C $55,000
D $65,000
16. Last month a manufacturing company's profit was $2,000, calculated using absorption costing principles. If
marginal costing principles has been used, a loss of $3,000 would have occurred. The company's fixed production
cost is $2 per unit. Sales last month were 10,000 units.
What was last month's production (in units)?
A 7,500
B 9,500
C 10,500
D 12,500.
17. HMF Co produces a single product. The budgeted fixed production overheads for the period are $500,000. The
budgeted output for the period is 2,500 units. Opening inventory at the start of the period consisted of 900 units and
closing inventory at the end of the period consisted of 300 units. If absorption costing principles were applied, the
profit for the period compared to the marginal costing profit would be which of the following?
A $125,000 higher
B $125,000 lower
C $120,000 higher
D $120,000 lower.
18. The following question is taken from the June 2013 exam paper.
A company has the following budgeted costs and revenues:
$ per unit
Sales price 50
Variable production cost 18
Fixed production cost 10
In the most recent period, 2,000 units were produced and 1,000 units were sold. Actual sales price, variable
production cost per unit and total fixed production costs were all as budgeted. Fixed production costs were over-
absorbed by $4,000. There was no opening inventory for the period.
What would be the reduction in profit for the period if the company has used marginal costing rather than absorption
costing?
A 4,000
B 6,000
C 10,000.
D 14,000

Chapter 5: Process costing, joint products and by-products

The following data relates to questions 1 and 2.
A company manufactures two joint products, P and R, in a common process. Data for June are as follows.
$
Opening inventory 1,000
Direct materials added 10,000
Conversion costs 12,000 labour cost + overhead cost
Closing inventory 3,000
Production Sales Sales price
Units Units $ per unit
P 4,000 5,000 5
R 6,000 5,000 10
1. If costs are apportioned between joint products on a sales value basis, what was the cost per unit of
product R in June?
A $1.25
B $2.22
C $2.50
D $2.75
2. If costs are apportioned between joint products on a physical unit basis, what was the total cost of
product P production in June?
A $8,000
B $8,800
C $10,000
D $12,000
3. Which of the following statements is/are correct?
(i) A by-product is a product produced at the same time as other products which has a relatively low
volume compared with the other products
(ii) Since a by-product is a saleable item it should be separately costed in the process account, and
should absorb some of the process costs
(iii) Costs incurred prior to the point of separation are known as common or joint costs
A (i) and (ii)
B (i) and (iii)
C (ii) and (iii)
D (iii) only.
4. A company manufactures two joint products and one by-product in a single process. Data for November
are as follows.
$
Raw material input 216,000
Conversion costs 72,000
There were no inventories at the beginning or end of the period.
Output Sales price
Units $ per unit
Joint product E 21,000 15
Joint product Q 18,000 10
By-product X 2,000 2
By-product sales revenue is credited to the process account. Joint costs are apportioned on a sales value
basis. What were the full production costs of product Q in November (to the nearest $)?
A $102,445
B $103,273
C $104,727
D $180,727
5. A company manufactures three joint products and one by-product from a single process.
Data for May are as follows.
Opening and closing inventories Nil
Raw materials input $180,000
Conversion costs $50,000
Output Sales price
Units $ per unit
Joint product L 3,000 32
Joint product M 2,000 42
Joint product N 4,000 38
By-product R 1,000 2
By-product sales revenue is credited to the sales account. Joint costs are apportioned on a sales value
basis.
What were the full production costs of product M in May (to the nearest $)?
A $57,687
B $57,844
C $58,193
D $66,506
6. Two products G and H are created from a joint process. G can be sold immediately after split-off. H
requires further processing before it is in a saleable condition. There are no opening inventories and no
work in progress. The following data are available for last period:
$
Total joint production costs 384,000
Further processing costs (product H) 159,600
Product Selling price Sales Production
per unit Units Units
G $0.84 400,000 412,000
H $1.82 200,000 228,000
Using the physical unit method for apportioning joint production costs, what was the cost value of the
closing inventory of product H for last period?
A $36,400
B $37,520
C $40,264
D $45,181
7. Two products (W and X) are created from a joint process. Both products can be sold immediately after
split-off. There are no opening inventories or work in progress. The following information is available for
last period:
Total joint production costs $776,160
Product Production units Sales units Selling price per unit
W 12,000 10,000 $10
X 10,000 8,000 $12
Using the sales value method of apportioning joint production costs, what was the value of the closing
inventory of product X for last period?
A $310,464
B $388,080
C $155,232
D $77,616

Chapter 6: Forcasting
1. The following four data pairs have been obtained: (1, 5), (2, 6), (4, 9), (5, 11). Without carrying out any
calculations, which of the following correlation coefficients best describes the relationship between x and y?
A –0.98
B –0.25
C 0.98
D 0.25
2. A company's management accountant is analysing the reject rates achieved by 100 factory operatives working in
identical conditions. Reject rates, Y%, are found to be related to months of experience, X, by this regression
equation: Y = 20 – 0.25X. (The correlation coefficient was r = –0.9.)
Using the equation, what is the predicted reject rate for an operative with 12 months' experience?
A 17%
B 19%
C 20%
D 23%
3. A regression equation Y = a + bX is used to forecast the value of Y for a given value of X. Which of the following
increase the reliability of the forecast?
(i) A correlation coefficient numerically close to 1
(ii) Working to a higher number of decimal places of accuracy r= 0.25374859683772284 ….
(iii) Forecasting for values of X outside the range of those used in the sample
(iv) A large sample is used to calculate the regression equation
A (i) only
B (i) and (ii) only
C (i) and (iii) only
D (i) and (iv) only
1.4. If x = 12, y = 42, x2 = 46, y2 = 542, xy = 157 and n = 4, what is the correlation coefficient?
A 0.98
B –0.98
C 0.26
D 0.008
5. Using data from twelve European countries, it has been calculated that the correlation between the level of car
ownership and the number of road deaths is R=0.73. Which of the statements shown follow from this?
(i) High levels of car ownership cause high levels of road deaths
(ii) There is a strong relationship between the level of car ownership and the number of road deaths
(iii) 53% of the variation in the level of road deaths from one country to the next can be explained by
the corresponding variation in the level of car ownership (0.73)^2
(iv) 73% of the variation in the level of road deaths from one country to the next can be explained by
the corresponding variation in the level of car ownership
A (i) and (ii) only
B (i) and (iii) only
C. (ii) and (iii) only
D (ii) and (iv) only
6. The regression equation Y = 3 + 2X has been calculated from 6 pairs of values, with X ranging from 1 to 10. The
correlation coefficient is 0.8. It is estimated that Y = 43 when X = 20. Which of the following are true?
(i) The estimate is not reliable because X is outside the range of the data
(ii) The estimate is not reliable because the correlation is low
(iii) The estimate is reliable
(iv) The estimate is not reliable because the sample is small
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iv) only
D (i) and (iv) only.
7. In calculating the regression equation linking two variables, the standard formulae for the regression coefficients
are given in terms of X and Y. Which of the following is true?
A X must be the variable which will be forecast Y=a +bx
B It does not matter which variable is which
C. Y must be the dependent variable
D Y must be the variable shown on the vertical axis of a scatter diagram
8. A company uses regression analysis to establish a total cost equation for budgeting purposes.
Data for the past four months is as follows:
Month Total cost Quantity produced
 $'000 (Y) $'000 (x)
1 57.5 1.25
2 37.5 1.00
3 45.0 1.50
4 60.0 2.00
200.0 5.75
The gradient of the regression line is b= 17.14.
What is the value of a?
A 25.36
B 48.56
C 74.64
D 101.45
9. Regression analysis is being used to fine the line of best fit (y = a + bx) from eleven pairs of data. The calculations
have produced the following information:
x = 440, y = 330, x2 = 17,986, y2 = 10,366 and xy = 13,467
What is the value of 'a' in the equation for the line of best fit (to 2 decimal places)?
A 0.63
B 0.69
C 2.33
D 5.33
10. Which of the following is a feasible value for the correlation coefficient?
A – 2.0
B – 1.2
C0
D + 1.2
11. Over an 18-month period, sales have been found to have an underlying linear trend of y(T)=7.112+ 3.949x,
where y is the number of items sold and x represents the month. Monthly deviations from trend have been calculated
and month 19 is expected to be 1.12 times the trend value.
What is the forecast number of items to be sold in month 19?
A 91
B 92
C 93
D 94
12. Based on the last 15 periods the underlying trend of sales is y(T)= 345.12 – 1.35x. If the 16th period has a
seasonal factor of –23.62, assuming an additive forecasting model, what is the forecast for that period, in whole
units?
A 300
B 301
C 324
D 325
13. Unemployment numbers actually recorded in a town for the second quarter of the year 2000 were 4,700. The
underlying trend at this point was 4,300 people and the seasonal factor is 0.92. Using the multiplicative model for
seasonal adjustment, what is the seasonally-adjusted figure (in whole numbers) for the quarter?
A 3,932
B 3,956
C 5,068
D 5,109.
14. Monthly sales have been found to follow a linear trend of y(T) = 9.82 + 4.372x, where y is the number of items
sold and x is the number of the month. Monthly deviations from the trend have been calculated and follow an
additive model. In month 24, the seasonal variation is estimated to be plus 8.5. What is the forecast number of items
to be sold in month 24? (to the nearest whole number.)
A 106
B 115
C 123
D 152
15. Which of the following are necessary if forecasts obtained from a time series analysis are to be reliable?
(i) There must be no unforeseen events
(ii) The model used must fit the past data
(iii) The trend must be increasing
(iv) There must be no seasonal variation
A (i) only
B (i) and (ii) only
C (i), (ii) and (iii) only
D (i), (ii), (iii) and (iv).
16. What is the purpose of seasonally adjusting the values in a time series?
A To obtain an instant estimate of the degree of seasonal variation
B To obtain an instant (tức thời) estimate of the trend
C To ensure that seasonal components total zero
D To take the first step in a time series analysis of the data
17. The following data represents a time series:
X 36 Y 41 34 38 42
A series of three point moving averages produced from this data has given the first two values as 38 and 39. What
are the values of (X, Y) in the original time series?
A (38, 39)
B (38, 40)
C (40, 38)
D (39, 38)
18. Using an additive time series model, the quarterly trend (Y) is given by Y(T) = 65 + 7t, where t is the quarter
(starting with t = 1 in the first quarter of 20X5). If the seasonal component in the fourth quarter is –30, what is the
forecast for the actual value for the fourth quarter of 20X6, to the nearest whole number?
A 63
B 546
C 85
D 91
19. The trend for monthly sales ($Y) is related to the month (t) by the equation Y(T) = 1,500 – 3t where t = 1 in the
first month of 20X8. What are the forecast sales (to the nearest dollar) for the first month of 20X9 if the seasonal
component for that month is 0.92 using a multiplicative model?
A $1,377
B $17,904
C $1,344
D $1,462
20. Which of the following are necessary if forecasts obtained from a time series analysis are to be reliable?
(i) The trend must not be increasing or decreasing
(ii) The trend must continue as in the past
(iii) Extrapolation must not be used
(iv) The same pattern of seasonal variation must continue as in the past
A (i) only
B (i) and (ii) only
C (ii) and (iv) only
D (i) and (iii) only
21. Under which of the following circumstances would a multiplicative model be preferred to an additive model in
time series analysis?
A When a model easily understood by non-accountants is required
B When the trend is increasing or decreasing
C When the trend is steady
D When accurate forecasts are required T
22. A company's annual profits have a trend line given by Y(T) = 20t – 10, where Y is the trend in $'000 and t is
the year with t = 0 in 20X0. What are the forecast profits for the year 20X9 using an additive model if the cyclical
component for that year is –30?
A $160,000
B $140,000
C $119,000
D $60,000
23. In January, the unemployment in Ruritania is 567,800. If the seasonal factor using an additive time series model
is +90,100, what is the seasonally-adjusted level of unemployment (to the nearest whole number)?
A 90,100
B 477,700
C 567,800
D 657,900
24. The following statements relate to Paasche and Laspeyre indices.
(i) Constructing a Paasche index is generally more costly than a Laspeyre index
(ii) With a Laspeyre index, comparisons can only be drawn directly between the current year and the
base year.
Which statements are true?
A Both statements are true
B Both statements are false
C (i) is true and (ii) is false
D (ii) is true and (i) is false
25. The following information is available for the price of materials used at P Co.
Laspeyre index for price in 20X5 (with base year of 20X0) 150.0
Corresponding Paasche index 138.24
What is Fisher's ideal index?
A 12.00
B 16.98
C 144.00
D 288.24
26. A large bag of cement cost $0.80 in 20X3. The price indices are as follows.
20X3 91
20X4 95
20X5 103
20X6 106
How much does a bag of cement cost in 20X6?
A $0.69
B $0.85
C $0.93
D $0.95
27. Four years ago material X cost $5 per kg and the price index most appropriate to the cost of material X stood at
150. The same index now stands at 430.
What is the best estimate of the current cost of material X per kg?
A $1.74
B $9.33
C $14.33
D $21.50
28. Six years ago material M cost $10 per kg and the price index most appropriate to the cost of material M was
130. The same index now stands at 510.
What is the best estimate of the current cost of material M per kg?
A $2.55
B $29.23
C $39.23
D $51.00
29. Which of the following are common applications of spreadsheets used by management accountants?
(i) Variance analysis
(ii) Cash flow budgeting and forecasting
(iii) Preparation of financial accounts
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
30. A spreadsheet is unlikely to be used for which of the following tasks?
A Cash flow forecasting
B Monthly sales analysis by market
C Writing a memo (bản ghi nhớ)
D Calculation of depreciation
31. The following question is taken from the December 2012 exam paper.
The following data relates to a company's overhead cost.
Time Output Overhead cost Price index
(units) ($)
2 years ago 1,000 3,700 121
Current year 3,000 13,000 155
Using the high low technique, what is the variable cost per unit (b) (to the nearest $0.01) expressed in current
year prices?
A $3.22
B $4.13
C $4.65
D $5.06
32. The following question is taken from the June 2013 exam paper.
An additive time series has the following trend and seasonal variations:
Trend Y(T)=4,000 + 6X where Y= sales in units
X is the number of quarters, with the first quarter of 2014 being 1, the second quarter of 2014 being 2 etc.
Seasonal variation
Quarter 1 2 3 4
Quarterly variation (units) –4 –2 +1 +5
What is the forecast sales volume for the fourth quarter of 2015?
A 4,029
B 4,043
C 4,048
D 4,053
33. The following question is taken from the July to December 2015 exam period.
The following spreadsheet shows part of a time series analysis of a company’s sales.
Year Quarter Sales(units) Four quarter moving total (unit)
2014 1 1,100

2 1,700
7,000
3 1,900
9,000
4 2,300
11,000
2015 1 3,100
12,00h0
2 3,700

3 4,100
What is the four quarter centred moving average of sales units for quarter 4, 2014?
A 2,500
B 5,025
C 5,000
D 10,000

34. The following question is taken from the January to June 2017 exam period.
The following information relates to company’s semi-variable production overheads.
Year units index Output Overhead($) Relevant price
2012 1,000 12,000 130
2013 1,200 14,000 140
What is the variable overhead cost per units, expressed in 2013 prices?
A $5.00
B $5.38
C $10.00
D $11.67

Chapter 7: Methods of project appraisal

1. A building society adds interest monthly to investors' accounts even though interest rates are expressed in annual
terms. The current rate of interest is 6% per annum. An investor deposits $1,000 on 1 January. How much interest
will have been earned by 30 June?
A $30.00
B $30.38
C $60.00
D $300

2. A one-year investment yields a return of 15%. The cash returned from the investment, including principal and
interest, is $2,070. What is the interest?
A $250
B $270
C $300
D $310.50
3. If a single sum of $12,000 is invested at 8% per annum with interest compounded quarterly, what is
the amount to which the principal will have grown by the end of year three? (approximately)
A $15,117
B $9,528
C $15,219
D $30,924
4. Which is worth most, at present values, assuming an annual rate of interest of 8%?
A $1,200 in exactly one year from now
B $1,400 in exactly two years from now
C $1,600 in exactly three years from now
D. $1,800 in exactly four years from now
5. A bank offers depositors a nominal 4% pa, with interest payable quarterly. What is the effective annual rate of
interest?
A 1%
B 4%
C 1.025%
D 4.06%.
6. A project requiring an investment of $1,200 is expected to generate returns of $400 in years 1 and 2 and $350 in
years 3 and 4. If the NPV = $22 at 9% and the NPV = –$4 at 10%, what is the IRR for the project?
A 9.15%
B 9.85%
C 10.15%
D 10.85%
7. A sum of money was invested for 10 years at 7% per annum and is now worth $2,000. What was the
original amount invested (to the nearest $)?
A $1,026
B $1,017
C $3,937
D $14,048
8. House prices rise at 2% per calendar month. What is the annual rate of increase correct to one decimal
place?
A 24%
B 26.8%
C 12.7%
D 12.2%
9. What is the present value of ten annual payments of $700, the first paid immediately and discounted at 8%, giving
your answer to the nearest $?
A $4,697
B $1,050
C $4,435
D $5,073.
10. An investor is to receive an annuity of $19,260 for six years commencing at the end of year 1. It has a present
value of $86,400.
What is the rate of interest (to the nearest whole percent)?
A 4%
B 7%
C 9%.
D 11%
11. How much should be invested now (to the nearest $) to receive $24,000 per annum in perpetuity if the annual
rate of interest is 5%? PV= a/r= 24000/5%=480,000
A $1,200
B $25,200
C $120,000
D $480,000.
12. The net present value of an investment at 12% is $24,000, and at 20% is –$8,000. What is the internal rate of
return of this investment?
A 6%
B 12%
C 16%
D 18%
State your answer to the nearest whole percent.
The following data is relevant for questions 13 and 14.
Diamond Ltd has a payback period limit of three years and is considering investing in one of the following projects.
Both projects require an initial investment of $800,000. Cash inflows accrue evenly throughout the year.
Project Alpha Project Beta
Year Cash inflow Year Cash inflow
$ $
1 250,000 1 250,000
2 250,000 2 350,000
3 400,000 3 400,000
4 300,000 4 200,000
5 200,000 5 150,000
6 50,000 6 150,000
The company's cost of capital is 10%.
13. What is the non-discounted payback period of Project Beta?
A 2 years and 2 months
B 2 years and 4 months
C 2 years and 5 months
D 2 years and 6 months
14. What is the discounted payback period of Project Alpha?
A Between 1 and 2 years
B Between 3 and 4 years
C Between 4 and 5 years
D Between 5 and 6 years
15. A capital investment project has an initial investment followed by constant annual returns.
How is the payback period calculated?
A Initial investment ÷ annual profit
B Initial investment ÷ annual net cash inflow
C (Initial investment – residual value) ÷ annual profit
D (Initial investment – residual value) ÷ annual net cash inflow
16. A machine has an investment cost of $60,000 at time 0. The present values (at time 0) of the expected net cash
inflows from the machine over its useful life are:
Discount rate Present value of cash inflows
10% $64,600
15% $58,200
20% $52,100
What is the internal rate of return (IRR) of the machine investment?
A Below 10%
B Between 10% and 15%
C Between 15% and 20%
D Over 20%
17. An investment project has a positive net present value (NPV) of $7,222 when its cash flows are discounted at
the cost of capital of 10% per annum. Net cash inflows from the project are expected to be $18,000 per annum for
five years. The cumulative discount (annuity) factor for five years at 10% is 3.791.
What is the investment at the start of the project?
A $61,016.
B $68,238
C $75,460
D $82,778
18. Which of the following accurately defines the internal rate of return (IRR)?
A The average annual profit from an investment expressed as a percentage of the investment sum
B The discount rate (%) at which the net present value of the cash flows from an investment is zero.
C The net present value of the cash flows from an investment discounted at the required rate of return
D The rate (%) at which discounted net profits from an investment are zero
19. An investment project has the following discounted cash flows ($'000):
Year Discount rate
0% 10% 20%
0 (90) (90) (90)
1 30 27.3 25.0
2 30 24.8 29.8
3 30 22.5 17.4
4 30 20.5 14.5
30 5.1 (12.3)
The required rate of return on investment is 10% per annum.
What is the discounted payback period of the investment project?
A Less than 3.0 years
B 3.0 years
C Between 3.0 years and 4.0 years.
D More than 4.0 years
20. What is the effective annual rate of interest of 2.1% compounded every three months?
A 6.43%
B 8.40%
C 8.67%.
D 10.87%
21. If the interest rate is 8%, what would you pay for a perpetuity of $1,500 starting in one year’s time? (to the
nearest $)
A $1,620
B $17,130
C $18,750
D $20,370
22. The following question is taken from the June 2012 exam paper.
An investor has the choice between two investments. Investment Exe offers interest of 4% per year compounded
semi-annually for a period of three years. Investment Wye offers one interest payment of 20% at the end of its four-
year life.
What is the annual effective interest rate offered by the two investments?
Investment Exe Investment Wye
A 4.00% 4.66%
B 4.00% 5.00%
C 4.04% 4.66%
D 4.04% 5.00%
23. The following question is taken from the June 2013 exam paper.
A project has an initial outflow of $12,000 followed by six equal annual cash inflows, commencing in one year’s
time. The payback period is exactly four years. The cost of capital is 12% per year.
What is the project’s net present value (NPV) (to the nearest $)?
A $333
B –$2,899
C –$3,778
D –$5,926

Chapter 8: Performance measurement

1. All of the following, except one, are sound principles for devising objectives in order to enact the corporate
mission. Which is the exception?
A They should be observable or measurable
B They should be easily achievable
C They should relate to a specified time period
D They should be specific
2. Which one of the following performance indicators is a financial performance measure?
A Quality rating
B Number of customer complaints
C Cash flow
D System (machine) down time
3. A government body uses measures based upon the 'three Es' to the measure value for money generated by a
publicly funded hospital. It considers the most important performance measure to be 'cost per successfully treated
patient'.
Which of the three E's best describes the above measure?
A Economy
B Effectiveness
C Efficiency
D Externality
4. In order for a business's strength to have a real benefit, it has to be linked to critical success factors. What are
critical success factors?
A Factors contributing to reduced costs
B Factors necessary to match strengths to opportunities
C Factors necessary to build on strengths
D Factors fundamental to strategic success
5. The following summarised statement of financial position is available for L Co.
$'000 $'000
Non-current assets 31,250
Current assets
Inventory 35,000
Receivables 40,000
Cash 1,250
107,500
EQUITY AND LIABILITIES

Capital and reserves 47,500

Current liabilities (payables only) 60,000
107,500
What is the value of the acid test ratio?
A 0.6875
B 0.7093
C 1.2708
D 2.000
6. In general terms, which of the following elements should organisations include in their mission
statements?
(i) Policies and standards of behaviour
(ii) Values – a description of the culture, assumptions and beliefs regarded as important to those managing the
business
(iii) Profitability
(iv) Strategy – the commercial logic for the business, defining the nature of the business
A (i) and (ii) only
B (ii) and (iv) only
C (i), (ii) and (iv) only
D (iii) and (iv) only
7. Which of the following short-term objectives may involve the sacrifice of longer-term objectives?
(i) Reducing training costs
(ii) Increasing quality control
(iii) Increasing capital expenditure projects
A (i) only
B (i), (ii) and (iii)
C (ii) and (iii) only
D (i) and (ii) only
8. Which of the following statements are true?
(i) Non-financial performance indicators are less likely to be manipulated than financial ones (ii) Non-financial
performance indicators offer a means of counteracting short-termism
A (i) and (ii) are true
B (i) and (ii) are false
C (i) is true and (ii) is false
D (i) is false and (ii) is true
9. What is short-termism?
A It is when non-financial performance indicators are used for measurement
B It is when organisations sacrifice short term objectives
C It is when there is a bias towards short term rather than long term performance
D It is when managers' performance is measured on long term results (2 marks)
10. Which of the following performance measures is most likely to be recorded because of government regulations?
A Sales growth
B Customer numbers
C CO2 emissions
D Return on investment
11. Market conditions and economic conditions can impact on performance measurement. Which of the
following statements are true?
(i) The entry of a new competitor in the market will cause a business to examine sales performance measures more
closely
(ii) General economic conditions can raise or lower overall demand and supply
A (i) and (ii) are true
B (i) and (ii) are false
C (i) is true and (ii) is false
D (i) is false and (ii) is true
12. The following question is taken from the December 2011 exam paper.
A company has current assets of $1.8m, including inventory of $0.5m, and current liabilities of $1.0m. What would
be the effect on the value of the current and acid test ratios if the company bought more raw material inventory on
three months' credit?
Current ratio Acid test
A Increase Increase
B Decrease Increase
C Increase Decrease
D Decrease Decrease
13. The following question is taken from the June 2012 exam paper.
An investment centre earns a return on investment of 18% and a residual income of $300,000. The cost of capital
is 15%. A new project offers a return on capital employed of 17%. If the new project were adopted, what would
happen to the investment centre's return on investment and residual income?
Return on investment Residual income
A Increase Decrease
B Increase Increase
C Decrease Decrease
D Decrease Increase
14. Which of the following BEST explains the relationship between mission statements and performance
measurement.
A Mission statements are a marketing tool and have no part to play in performance measurement
B To be of value, a performance measure must have an obvious link to the mission statement
C Performance measurement involves comparing actual performance against a target and the mission statement
represents the organisation's overall target
D Mission statements include detailed performance standards that actual performance can be measured against
15. Which of the following describes the role of tactical objectives?
A 'Middle tier' objectives to facilitate the planning and control of individual functions within the organisation
B Day-to-day performance targets related to the organisation's operations
C A clear vision of the organisation's reason for existing
D Long-term objectives for the organisation as a whole
16. A company sells new, high quality motor vehicles in many countries around the world. Half way through the
company's current financial year, the global economy unexpectedly goes in to recession. What impact would the
unexpected recession have on performance measurement relating to sales and revenue?
A The impact of a recession on the sales of new, high quality motor vehicles cannot be predicted
B Sales and revenue are likely to decrease in the second half of the year and performance should be measured in
that context
C No impact as a recession is unlikely to impact the sales and revenue of motor vehicles
D Sales and revenue are likely to increase in the second half of the year and performance should be measured in
that context
17. Which of the following is NOT a way in which governments influence performance measurement?
A Accurate records of financial performance are required for taxation purposes
B By requiring all private sector organisations to implement the Balanced Scorecard
C By encouraging measurement of environmental impact including CO2 emissions
D Requiring 'value for money' performance measures to be implemented in public sector organisations
18. An extract from a company's financial results for 20X6 are shown below.
20X6
$'000
Sales 5,400
Less cost of sales: 1,950
3,450
Less expenses:
Wages 1,700
Repairs and maintenance 240
All other expenses 490
Net profit 1,020
What is the gross profit percentage for 20X6, to one decimal place?
A 18.9%
B 18.8%
C 63.9%
D 63.8%
19. Which of the following describes the role of strategic objectives?
A 'Middle tier' objectives to facilitate the planning and control of individual functions within the organisation
B Day-to-day performance targets related to the organisation's operations
C A clear vision of the organisation's reason for existing
D Long-term objectives for the organisation as a whole
20. A company's financial results for 20X4 are shown below.
20X4
$'000
Sales 7,200
Less cost of sales: 2,900
Gross profit 4,300
Less expenses:
Wages 1,600
Repairs and maintenance 360
Directors' salaries 150
Directors' bonuses 55
Other costs (including depreciation) 400
Net profit 1,735
What is the net profit percentage for 20X4, to one decimal place?
A 59.7%
B 24.0%
C 24.1%
D 59.8%
21. What is the main focus of the current ratio?
A Profitability
B Efficiency
C Liquidity
D Productivity
22. The following information has been extracted from the statement of financial position of X Company.
EQUITY AND LIABILITIES
Capital and reserves 585,000
Long term liabilities (long-term loan) 670,000
Current liabilities (payables only) 84,000
1,339,000
What is the capital gearing ratio, expressed as a percentage to one decimal place?
A 53.4%
B 128.9%
C 228.9%
D 69.6%
23. Which of the following BEST describes the advantage of a Balanced Scorecard approach?
A The Balanced Scorecard approach enables organisations that are struggling financially to emphasise other areas
B The Balanced Scorecard approach enables organisations to consider all areas of performance relevant to achieving
their strategic goals
C The Balanced Scorecard approach enables organisations to more easily benchmark their performance against
others
D The Balanced Scorecard approach enables organisations to demonstrate their ethical credentials
24. What is the main focus of the acid test ratio?
A Profitability
B Efficiency
C Liquidity
D Productivity
25. Why would an organisation use non-financial performance measures?
A To appear socially responsible
B To prevent a narrow focus on short-term financial performance
C To prevent scrutiny of financial performance
D To encourage short termism
26. The Balanced Scorecard measures performance from four perspectives. What are they?
A Customer satisfaction, growth, financial stability and process efficiency
B Customer retention, growth, financial stability and process efficiency
C Customer satisfaction, growth, financial success and process effectiveness
D Customer satisfaction, growth, financial success and process efficiency