ACCA MA (F2) – Management Accounting

Chapter 1 – Accounting for ManagementComplete Study Notes

THE PURPOSE OF MANAGEMENT INFORMATION WITHIN AN ORGANISATION

The purpose of cost and management accounting is to provide information to

managers that will help them to:

• plan the activities

e.g. plan number of units to produce this year

• make decisions regarding activities

e.g. purchase materials required for production

• control the activities

e.g. control amount of materials being used for production

• evaluate the activities

e.g. evaluate whether more/less materials were used per unit in comparison
to the original plan

The information is used by managers, employees and decision makers

internal to the organisation.Management information is generally supplied in
the form of reports.
Reports may be:

• routine (monthly management accounts) or

• prepared for a specific purpose (e.g. one-off decisions)

Cost accounting and management accounting are terms which are often
used interchangeably.

It is not correct to do so.

Cost accounting is a part of management accounting.

Cost accounting is mainly concerned with:

• Preparing statements (e.g. budgets, costing)

• Cost data collection

• Applying costs to inventory, products and services

Therefore, management accounting goes beyond cost accounting.

In general, cost accounting information is unsuitable for decision-making.

Good Information

Attributes of good information

Good information should be ACCURATE.

• Accurate – Information should be accurate because using incorrect

information could have serious and damaging consequences.

• Complete – A user should have all the information he needs but it should
not be excessive.

• Cost-effective – The benefits obtainable from the information must exceed

the costs of acquiring it.

• Understandable – Information must be clear to the user. If the user does

not understand it properly he cannot use it properly.

• Relevant – Information must be relevant to the purpose for which a

manager wants to use it.

• Accessible – Information should be accessible via the appropriate channels

of communication and to the right people.

For example, emails should be used if the person who needs the information
is not physically present.

• Timely – Information should be made available before a decision needs to

be made to be considered useful. If it is made available after a decision is
made, it will be useful only for comparisons

• Easy to Use
Functions of Management Accounting (4 Functions )

The management process implies the four basic functions of:

(1)Planning.

(2)Organising

(3)Controlling, and

(4)Decision-making.

Management accounting plays a vital role in these managerial functions

performed by managers.

(1)Planning:

Planning is formulating short term and long-term plans and actions to

achieve a particular end. A budget is the financial planning showing how
resources are to be acquired and used over a specified time interval.

Management accounting is closely interwoven in planning both because it

provides information for decision-making and because the entire budgeting
process is developed around accounting-related reports.
Management accounting helps managers in planning by providing reports
which estimate the effects of alternative actions on an enterprise’s ability to
achieve desired goals. For example, if a business enterprise determines a
target profit for a year, it should also determine how to reach that target.

For example, what products are to be sold at what prices? The management
accountant develops data that help managers identify the more profitable
products. Similarly, the effects of alternative prices and selling efforts (say,
what will profit be if we cut prices by 5% and increase volume by 15%, etc.)
can easily be determined by the management accountant. As part of the
budgeting process, management accountants prepare budgeted (forecasted)
financial statements, often called proforma statements.

(2)Organizing:

Organising is a process of establishing an organizational framework and

assigning responsibility to people working in an organization for achieving
business goals and objectives. The type of organizational structure differs
from one business enterprise to another. In the organising process,
departmentalization can be done by setting up divisions, departments,
sections, branches.

Organising requires clarity about each manager’s responsibility and lines of

authority. The various departments and units are interrelated in a hierarchy,
with a formal communication structure in which information and instructions
are passed downwards to lower level management and upwards to top
management level.

Management accounting helps managers in organising by providing reports

and necessary information to regulate and adjust operations and activities in
the light of changing conditions. For example, the reports under
management accounting can be prepared on product lines on which basis
managers can decide whether to add or eliminate a product line in the
current product mix. Similarly management accountant can provide sales
report, production report to the respective manager for taking suitable action
about the sales and production position.

(3)Controlling:

Control is the process of monitoring, measuring, evaluating and correcting

actual results to ensure that a business enterprise’s goals and plans are
achieved. Control is accomplished with the use of feedback. Feedback is
information that can be used to evaluate or correct the steps being taken to
implement a plan. Feedback allows the managers to decide to let the
operations and activity continue as they are, take remedial actions to put
some actions back in harmony with the original plan and goals or do some
rearranging and re-planning at midstream.

Management accounting helps in the control function by producing

performance reports and control reports which highlight variances between
expected and actual performances. Such reports serve as a basis for taking
necessary corrective action to control operations. The use of performance
and control reports follows the principle of management by exception. In
case of significant differences between budgeted and actual results, a
manager will usually investigate to determine what is going wrong and
possibly, which subordinates or units might need help.

(4)Decision-making:

Decision-making is a process of choosing among competing alternatives.

Decision-making is inherent in each of three management functions
described above, namely, planning, organising and controlling. A manager
cannot plan without making decisions and has to choose among competing
objectives and methods to carry out the chosen objectives. Similarly in
organising, managers need to decide on an organization structure and on
specific actions to be taken on day-to-day operations. In control function
managers have to decide whether variances are worth investigating.
The decision-making process includes the following steps:

(i) Identifying a problem requiring managerial action.

(ii) Specifying the objective or goal to be achieved (e.g.

maximising return on investment).

(iii) Listing the possible alternative courses of action.

(iv) Gathering the information about the consequences of each

alternative.

(v) Making a decision, by selecting one of the alternatives.

Management accounting plays a critical role in step 4 of the decision-making

process. Management accounting system contains a storehouse of valuable
information for predicting the results of various courses of action. The
management accounting can assist management in formally structuring
decision problems as well as placing the alternatives and their consequences
in a form that will be easier for management to evaluate. While developing
and gathering information for decision making purposes, the management
accountant should include qualitative information also in his report to help
managers better in their decision-making tasks.

Management accountants perform three important roles—problem solving,

scorekeeping and attention directing.

Problem Solving:
Comparative analysis for decision making. This role asks, of the several
alternatives available, which is the best?

Storekeeping:

Accumulating data and reporting reliable results to all levels of management.

This role asks how am I doing?

Attention Directing:

Helping managers properly focus their attention. This role asks which
opportunities and problems should I look into?

What is the triangles structure of information?

The framework view decision making in such a way that there are many
operational decisions at the bottom level of the triangle. Some tactical
decision in the middle level and few but very important strategic decision at
the highest level. The higher in the triangle and item is the most scope it
covers in the organization and the less precise it becomes on an individual
level – So decisions at the top management level are broad , strategically are
critical and are seldom very specific as items move down, they become more
detailed and applied more precisely to people and processes.

So now the management process consist of these distinct level as proposed

by Anthony. Now the level at the top is the Strategic Planning level where the
level in the middle is the Managerial control level and the level at the bottom
is the Operational control level.
The Strategic Planning level : it is the level that deals with the goals and the
objectives of the organizations

The Managerial control level: So the managerial control is the middle level
where this level ensures that the resources required to attain organizational
objectives are acquired and used effectively and efficiently.

The Operational control level: The mandate in this level is to carry out
specific tasks with a view to follow the directives set by the higher level so
the directive are set at the middle level ( the managerial control level) and
the task are actually performed in the operational control level.

Where is this framework actually used?

This framework actually offers a hierarchical view of decision making and

information needs – Then Management information systems therefore can
view this to classify and categorise the information available and can ensure
that the right level of information is available to the specific levels of
personal that operate at different levels for optimal decision making and task
management.
ACCA MA (F2) - Management Accounting

 Chapter 2a - Sources of Data

 Complete Study Notes
Chapter 2a - Sources of Data

Information within and outside the organisation

Different sources of information are available to organisations, including those available

within and outside the organisation.

Such information will become the input into an organisation’s decision making and
management accounting systems.

Classification of data

Data can be classified as:

1. Primary vs secondary data

2. Discrete vs continuous data

3. Sample vs population data

1. Primary data is data collected especially for a specific purpose e.g. raw data.

Secondary data is data which has already been collected elsewhere, for some other
purpose but which can be used or adapted for the survey being conducted, e.g. official
statistics, data obtained from financial newspapers, trade journals, etc.

2. Discrete data is data which can only take a finite or countable number of values
within a range, e.g. you cannot have 1.25 units but 1 unit, 2 units etc.

Continuous data is data which can take on any value. It is measured rather than
counted, e.g. a person can be 1.585m tall.
3. Sample data is data arising as a result of investigating a sample. A sample is a
selection from the population.

Population data is data arising as a result of investigating the population. A

population is the group of people or objects of interest to the data collector.

Internal Sources of Information

1. Accounting System

The accounts system will collect data from source documents such as invoices,
timesheets and journal entries.

The data will be sorted and analysed by the coding system, type of expense,
department, manager and job.
Reports of direct and indirect costs compared to budgets may be produced at regular
intervals to help managers plan and control costs.
Ad hoc reports may be produced to help managers make specific decisions.

2. Payroll System

The payroll system may provide information concerning detailed labour costs.

Hours paid may be analysed into productive work and non-productive time such as
training, sick, holiday, and idle time.
Labour turnover by department or manager may be analysed and may help
management to assess the employment and motivation policies.

These will be described in more detail later on.

3. Strategic Planning System

The strategic planning system may provide information relating to the organisation’s
objectives and targets.

Assumptions relating to the external environment may be detailed.

Details of the organisation’s capital investment programme and product launch

programme may also be recorded here.

Some of this information will be very commercially sensitive and only accessed by top
managers in the organisation.

External Sources of Information

Businesses are finding it increasingly difficult to succeed if they ignore the external
environment which will influence their activities. The process is known as environmental
scanning or environmental monitor. Data is collected from outside, as well as from
inside, the organisation and used in the decision-making process. It is important to note
that internal information is produced by the company itself so they are aware of any
limitations in its quality or reliability. External information is not under the control of the
organisation - they may not be aware of any limitations in its quality.

1. Government Sources

The primary purpose of this data is to provide information for economic planning at the
national level.

This data also serves the purpose of providing industry with useful background
information for deciding on future policies such as raising new finance or recruiting
specialised labour.

The data is only published in general terms (e.g. for a particular industry or
geographical area).

2. Business Contacts
Government-produced information will be broadly based and general, dealing with the
economy as a whole or particular sectors or industries.

An organisation may be looking for information more focused on its own position. Its
day-to-day business contacts, customers and suppliers, can be a useful source of this
information.

Customers can provide information on such matters as:

- The product specification which they require and their quality requirements

- Requirements for delivery periods

- Preference for packaging and distribution methods

- Feedback on the above and on general aspects of customer service.

Suppliers may be able to provide information on:

- Quantity discounts and volume rebates which may help the organisation to decide on
order size

- Availability of products and services

- Alternative products or services which may be available or may become available

- Technical specifications of their product.

3. Trade Associations and Trade Journals

Most major industries have their own trade association. The role of these organisations
includes:

◦ Representing their member firms in legal and other disputes

◦ Providing quality assurance schemes for customers of member organisations

◦ Laying down codes of practice to be followed by their member organisations
◦ Publishing trade journals and other information useful for the management and
development of their businesses.

4. The Financial Press, Business Press and Other Media

In the UK, particular newspapers such as The Financial Times, the Guardian, The Times
and the Daily Telegraph provide statistics and financial reviews as well as business
economic news and commentary.
Such information is now also widely available via electronic media and digital television
services. There is also the internet as a widely available source of up-to-date financial
information.

5. The Internet

The internet is a global network allowing any computer with a telecommunications link
to send and receive information to and from any other computer. Information on the
internet is not necessarily good information. The reliability and reputation of the
provider is important.

The impact of general economic environment on costs/ revenue

The economic environment affects firms at national and international level, both in
thegeneral level of economic activity and in particular factors, e.g. inflation,
interestrates and exchange rates.

Inflation affects the decisions taken by businesses. An increase in interest rates affects
cash flow especially for those businesses which carry a high level of debt. Exchange
rates affect the imports and exports of the company. Even the state of the economy will
influence the planning process of an organisation.

In times of boom, consumer demand and consumption increases. In times of recession,

the company has to focus on its survival through cost effectiveness and competition.

Sampling Technique

The purpose of sampling is to gain as much information as possible about the

population by observing only a small proportion of that population
i.e. by observing a sample. The sample must be of a certain size. The term population is
used to mean all the items under consideration in a particular enquiry.
A sample is a group of items drawn from that population. For example, in order to
ascertain which television programmes are most popular, asample of the total viewing
public is interviewed and, based on their replies, the programmes can be listed in order
of popularity with all viewers.

Sampling Techniques

A probability sampling method is a sampling method in which there is a known chance

of each member of the population appearing in the sample.
Probability sampling methods are:

1. Random
2. Systematic
3. Stratified random
4. Multi-stage
5. Cluster
Quota sampling is a non-probability sampling method, i.e. the chance of each member
of the population appearing in the sample is not known.

Sampling method in a specific situation

1. Random Sampling
A simple random sample is defined as a sample taken in such a way that every member
of the population has an equal chance of being selected. The normal way of
achievingthis is by numbering each item in the population.

2. Systematic Sampling
If the population is known to contain 50,000 items and a sample of size 500 is required,
then 1 in every 100 items is selected.
The first item is determined by choosing randomly a number between 1 and 100 e.g.
67, then the second item will be the 167th, the third will be the 267th... up to the
49,967thitem.
Systematic sampling should not be used if the population follows a repetitive
pattern.

3. Stratified Sampling

If the population under consideration contains several well defined groups (called strata
or layers),e.g. men and women, smokers and non-smokers, etc, then a random sample
is taken from each group.
This method ensures that a representative cross-section of the strata in the population
is obtained, which may not be the case with a simple random sample of the whole
population.
The method is often used by auditors to choose a sample to confirm receivables’
balances. In this case a greater proportion of larger balances will be selected.

4. Multi-Stage Sampling

This method is often applied if the population is particularly large, for example all TV
viewers in Malta. The process involved here would be as follows:

Step 1 The country is divided into areas (towns and villages) and a random sample of
areas is taken.
Step 2 Each area chosen in Step 1 is then subdivided into smaller areas and a random
sample of this is taken.
Step 3 Each area chosen in Step 2 is further divided into roads and a random sample of
roads is then taken.
Step 4 From each road chosen in Step 3 a random sample of houses is taken and the
occupiers interviewed.
This method is used, for example, in selecting a sample for a national opinion poll.
Fewer investigators are needed and hence it is less costly.
However, there is the possibility of bias if a small number of occupiers are interviewed.

5. Cluster Sampling

This method is similar to the previous one in that the country is split into areas and a
random sample taken. Further sub-divisions can be made until the required number
ofsmall areas have been determined.
Then every house in each area will be visited instead of just a random sample of
houses. In many ways this is a simpler and less costly procedure as no time is wasted
finding particular houses and the amount of travelling by interviewers is much reduced.
6. Quota Sampling

Quota sampling is a non-probability sampling method in which the chance of each

member of the population appearing in the sample is not known.
With quota sampling, the interviewer will be given a list compromising the different
types of people to be questioned and the number of quota of each type
e.g. 20 males, aged 20 to 30 years, manual workers; 15 females, 25 to 35, not working;
10 males, 55 to 60, professionals, etc.

ACCA MA (F2) - Management Accounting

 Chapter 2b - Presenting information

 Complete Study Notes
Chapter 2b - Presenting information

Written reports representing management information

When producing written reports, the management accountant needs to carry out four
steps

1. Prepare: determine the type of document required and establish the user of
the information
2. Plan: select the relevant date: summarise, analyse, illustrate to turn the raw
data into useful information
3. Write
4. Review what has been written

The Structure of a Report

A typical report structure will be as follows

• Title
• Introduction
• Analysis

• Conclusion

• Appendices

Different ways how information can be presented

We will be looking at different ways how information can be presented through the use
of tables, charts and graphs. Scatter graphs will be described in detail when discussing
forecasting methods later on in the course notes.

Tables

Tabulation is the process of presenting data in the form of a table – an arrangement of

rows and columns.

The purpose of tabulation is to summarise the information and present it in a more

understandable way.

1. Rules of Tabulation

1. Title: the table must have a clear and self-explanatory title.

2. Source: the source of the material used in drawing up the table should be stated
(usually by way of a footnote).

3. Units: the units of measurement that have been used must be stated.

4. Headings: all column and row headings should be clear and concise.

5. Totals: these should be shown where appropriate, and also any subtotals that may be
applicable to the calculations.

6. Percentages and ratios: these are sometimes called derived statistics and should be
shown, if meaningful, with an indication of how they were calculated.

7. Column layout: for ease of comparison columns containing related information should
be adjacent and derived figures should be adjacent to the column to which they refer.

8. Simplicity: the table should be as concise as possible.

9. Layout: wherever possible ensure that the table is set up so that there is no need to
turn the page. This will affect the choice of columns and rows.

2. Charts and Graphs

Clarity of presentation of information can be further improved if data is presented in the

form of charts or graphs (diagrams).

The following are the principal types of diagrams:

◦ Bar charts

◦ Line graphs

◦ Pie charts

◦ Scatter graphs

Bar Charts

A bar chart is a widely used method of illustrating quantitative data. Quantities are
shown in the form of bars on a chart, the length of the bars being proportional to the
quantities.
1. Simple bar charts

A simple bar chart consists of one or more bars, in which the length of each bar
indicates the size of the corresponding information.

2. Component bar chart

A component bar chart is used when each total figure in the data is made up of a
number of different components and it is important that these component elements are
shown as well as the total figure.

3. Percentage component bar chart

4. Compound (multiple) bar charts

Compound bar charts are sometimes termed multiple bar charts. A compound bar chart
is one where there is more than one bar for each sub-division of the chart. For example
if the sales per product for each year are given then for each year there could be a
separate bar for each product.

Graphs
1. Simple line graphs
In many instances data can be more clearly and understandably presented in the form
of a line graph. The x axis would represent the independent variable whereas the y axis
represent the dependent variable.

2. Multiple line graphs

You may be required to plot more than one set of variables on the same graph. If more
than one line is to appear on a graph then they must also be drawn to the same scale
and the different line should be clearly indicated by use of a key (e.g. continuous line,
broken line, dotted line) or different colour.
Pie Charts

A pie chart is a circular chart divided into sectors, illustrating proportion. In a pie chart,
the arc length of each sector (and consequently its central angle and area), is
proportional to the quantity it represents. Together, the sectors create a full disk.
How to Choose Which Type of Graph to Use?

When to Use . . .

. . . a Line graph.

Line graphs are used to track changes over short and long periods of time. When
smaller changes exist, line graphs are better to use than bar graphs. Line graphs can
also be used to compare changes over the same period of time for more than one
group.

. . . a Pie Chart.

Pie charts are best to use when you are trying to compare parts of a whole. They do not
show changes over time.

. . . a Bar Graph.

Bar graphs are used to compare things between different groups or to track changes
over time. However, when trying to measure change over time, bar graphs are best
when the changes are larger.

Mark Complete

ACCA MA (F2) - Management Accounting

 Chapter 3a - Cost Classification

 Complete Study Notes
COST CLASSIFICATION
Cost accounting is used for:
1. Preparing statements (e.g. budgets, costing)
2. Cost data collection
3. Applying costs to inventory, products and services

For the preparation of financial statements, costs are often classified as:
1. production
2. non-production costs

Production costs
- are costs identified with goods produced for resale.
- are all the costs involved in the manufacture of goods (costs incurred inside the
factory)
For example:

 direct material

 direct labour

 direct expenses

 variable production overheads

 fixed production overhead

Non-Production costs
are not directly associated with production of manufactured goods (costs incurred
outside the factory). They are taken directly to the income statement as expenses in
the period in which they are incurred. Such costs consist of:

1. administrative costs
2. selling and distribution expenses
3. finance costs

Fixed vs. Variable Costs

At All Costs
Fixed and variable costs are types of expenses that businesses pay in order to operate.
The difference
The difference between fixed and variable costs is simple:

 Fixed costs remain the same no matter how much the business
produces.
 Variable costs change with output—rising as a business makes more
stuff or provides more services.

Here are some common examples of fixed vs. variable costs:

Variable
Fixed costs
costs

Rent
Raw goods
payments or
and inputs
property tax

Salaries for Wages for

people who employees
run the involved in
company production,
(e.g., like
executives, assembly-
administrative
 staff) line workers

Shipping and
Insurance
delivery
premiums
costs

Loan Sales
payments commissions

Equipment Employee
depreciation bonuses

Direct Cost vs Indirect Cost

Direct cost is the cost incurred by the organization while performing their core
business activity and can be attributed directly in the production cost like raw material
cost, wages paid to factory staff etc, whereas, Indirect cost is the cost that cannot be
directly attributed to the production as these costs are incurred in general and can be
fixed or variable in nature like the office expenses, salary paid to administration, etc.

Functional costs

(a) Production costs are the costs which are incurred by the sequence of operations
beginning with the supply of raw materials, and ending with the completion of the
product ready for warehousing as a finished goods item. Packaging costs are production
costs where they relate to 'primary'packing (boxes, wrappers and so on).
(b) Administration costs are the costs of managing an organisation; that is, planning
and controlling its operations, but only insofar as such administration costs are not
related to the production,sales, distribution or research and development functions.
(c) Selling costs, sometimes known as marketing costs, are the costs of creating
demand for products and securing firm orders from customers.
(d) Distribution costs are the costs of the sequence of operations with the receipt of
finished goods from the production department and making them ready for despatch
and ending with the reconditioning for reuse of empty containers.
(e) Research costs are the costs of searching for new or improved products, whereas
development costs are the costs incurred between the decision to produce a new or
improved product and the commencement of full manufacture of the product.
(f) Financing costs are costs incurred to finance the business, such as loan interest
Mark Complete
ACCA MA (F2) – Management Accounting

Chapter 3b – Cost BehaviorComplete Study Notes

Chapter 3b – Cost Behavior

Types of Cost Behaviour

Costs can be classified according to the way that they behave within
different levels of activity. Cost behaviour tends to classify costs as

• Variable cost

• Fixed cost

• Stepped fixed cost

• Semi-variable cost

Variable cost

A variable cost is a cost which tends to vary directly with the volume of
output. As total costs increase with activity levels, the variable cost per unit
remains constant. By their nature, direct costs will be variable costs.
Examples of variable costs include raw materials and direct labour.
Graph 1: Total variable costs

Variable costs in total change in direct proportion to the level of activity.

Graph 2: Variable cost per unit

The cost per unit of variable costs remains constant.

Fixed Costs

A fixed cost is a cost which is incurred for an accounting period, and which,
within certain activity levels remains constant.

Examples of fixed costs include the salary of the managing director, the rent
of a building and straight line depreciation of machinery.

Graph 1: Total Fixed Costs

Total fixed costs remain constant over a given level of activity.

Graph 2: Fixed cost per unit

The fixed cost per unit falls as the level of activity increases but never
reaches zero.

Stepped Fixed Costs

A stepped fixed cost is only fixed within certain levels of activity. The
depreciation of a machine may be fixed if production remains below 1,000
units per month. If production exceeds 1,000 units, a second machine may
be required, and the cost of depreciation (on two machines) would go up a
step.

Other stepped fixed costs include rent of warehouse (more space required if
activity increases) and supervisors’ wages (more supervisors required if
number of employees increase).

Graph 1: Total Stepped fixed costs

Graph 2: Stepped fixed costs per unit

Fixed costs increase in steps as activity level increases beyond a certain

limit.

Examples of semi-variable costs includes

• Electricity and gas bills

Fixed cost = standing charge

Variable cost = commission on sales made

• Salesman’s salary

Fixed cost = basic salary

Variable cost = commission on sales made

• Costs of running a car

Fixed cost = road tax, insurance

Variable costs = petrol, oil, repairs

Graph 1: Total semi-variable costs

Graph 2: Semi-variable costs per unit

Introduction

The High-Low Method is a technique of cost accounting, which is used to split

mixed costs into variable and fixed components.

High-Low Method

When applying the High-Low method for our cost model, we start by
calculating the Variable Cost per unit, via the following formula:

Where:

AC is Activity Cost, or the costs at certain activity level;

AU is Activity Units, or the units at the same activity level.

Once we have calculated the Variable Costs (VC) per unit, we can now use it
to calculate the Fixed Costs (FC). There are two ways to do that, either using
the Highest Activity or the Lowest Activity:

This way, we can arrive at a simple cost model:

Remember that when figuring out the highest and lowest data points, we
should not look at cost, but rather at unit volumes, as they are the driver
behind the cost. What this means is that if we have a cost of 1,000 at a unit
volume of 200 and a cost of 980 at 210 units, our High data point should be
at 210 units, even if the value at 200 exceeds that.

Example

Let us look at an example to understand better how to apply the High-Low

method. We start with our reference data, which will be used to forecast
costs for FY 2019. Therefore we have the Costs and the Units Volume of
production for FY 2018 as a starting point.

Linear Equations

Also known as Equation of a Straight Line

Equation of a straight line: y = a + bx

The equation of a straight line is y = a + bx

‘a’ – the intercept, i.e. the value of y when x = 0

‘b’ – the gradient of the line y = a +bx (the change in y when x increases by
one unit)

‘x’ – the independent variable

‘y’ – the dependent variable

Cost Equation

‘a’ is the fixed cost per period

‘b’ is the variable cost per unit

‘x’ is the activity level

‘y’ is the total cost = fixed cost + variable cost

Illustration

Y = 10,000 + 50X

What is the total cost of 500 units and 700 units?

Solution:

Y = 10,000 + 50 x 500

Y = $35,000

Y = 10,000 + 50 x 700

Y = $45,000

Therefore, we can see that the change in cost between these two levels of
activity is $45,000 - $35,000 = $10,000

Mark Complete

ACCA MA (F2) – Management Accounting

Chapter 4 a – Introduction to ForecastingComplete Study Notes

Chapter 4 a – Introduction to Forecasting

Correlation

Correlation measures the strength of the relationship between two variables.

One way of measuring ‘how correlated’ two variables are, is by drawing the
‘line of best fit’ on a scatter graph. When correlation is strong, the estimated
line of best fit should be more reliable.

Another way of measuring ‘how correlated’ two variables are, is to calculate

a correlation coefficient, r.

Different degrees of correlation

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The correlation coefficient ®

The correlation coefficient measures the strength of a linear relationship

between two variables. It can only take on values between -1 and +1.

R = +1 indicates perfect positive correlation

R = 0 indicates no correlation

R = -1 indicates perfect negative correlation

The correlation coefficient is calculated as follows

This formula is also given in the exam

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What Is the Correlation Coefficient?

The correlation coefficient is a statistical measure of the strength of the
relationship between the relative movements of two variables. The values
range between -1.0 and 1.0. A calculated number greater than 1.0 or less
than -1.0 means that there was an error in the correlation measurement. A
correlation of -1.0 shows a perfect negative correlation, while a correlation of
1.0 shows a perfect positive correlation. A correlation of 0.0 shows no linear
relationship between the movement of the two variables.

What is the Coefficient of Determination?

The coefficient of determination (R² or r-squared) is a statistical measure in a

regression model that determines the proportion of variance in the
dependent variable that can be explained by the independent variable. In
other words, the coefficient of determination tells one how well the data fits
the model (the goodness of fit).

What is the difference between coefficient of determination, and coefficient

of correlation?

Coefficient of correlation is “R” value which is given in the summary table in

the Regression output. R square is also called coefficient of determination.
Multiply R times R to get the R square value. In other words Coefficient of
Determination is the square of Coefficeint of Correlation.

R square or coeff. Of determination shows percentage variation in y which is

explained by all the x variables together. Higher the better.

It is always between 0 and 1. It can never be negative – since it is a squared

value.

Advantages & Disadvantages

Advantages of Linear Regression

• It provides a more reliable approach to forecasting, as it arrives at the
equation of the regression line from the use of mathematical principles,
known as the least squares method.

• Unlike the high-low method, which uses only two past observations,
regression analysis can build into the regression line a large number of
observations – this is likely to make the relationship derived more accurate.

Disadvantages of Linear Regression

• It is only valid where the relationships involved are linear.

• It still uses past data to forecast future values of the variables – if the
relationship which existed in the past is not valid for the future, the forecast
will be inaccurate.

• It is a more complex technique to apply, requiring the mathematical

derivation of values for a and b in the regression equation.

Moving Average

A moving average is a technique to get an overall idea of the trends in a data

set; it is an average of any subset of numbers. The moving average is
extremely useful for forecasting long-term trends. You can calculate it for any
period of time. For example, if you have sales data for a twenty-year period,
you can calculate a five-year moving average, a four-year moving average, a
three-year moving average and so on. Stock market analysts will often use a
50 or 200 day moving average to help them see trends in the stock market
and (hopefully) forecast where the stocks are headed.

An average represe”ts the “middling” value of a set of numbers. The moving

average is exactly the same, but the average is calculated several times for
several subsets of data. For example, if you want a two-year moving average
for a data set from 2000, 2001, 2002 and 2003 you would find averages for
the subsets 2000/2001, 2001/2002 and 2002/2003. Moving averages are
usually plotted and are best visualized.

Time series analysis and forecasting

This is carried out in two steps:

Establishing the long-term underlying trend using moving averages or linear

regression. A moving average is an average of the results of a fixed number
of periods.

2. Establishing the regular seasonal variations (SV).

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Trend and Linear Regression Analysis

The trend can be found by linear regression analysis.

Trend and Seasonal Variations

Seasonal variations arise in the short-term. It is very important to distinguish

between trend and seasonal variation.
Seasonal variations must be taken out, to leave a figure which might be
taken as indicating the trend (deseasonalised data). One such method is
called moving averages.

A moving average is an average of the results of a fixed number of periods,

i.e. the midpoint of that particular period.

Please note that when the number of time periods is an even number, we
must calculate a moving average of the moving average.

This is because the average would lie somewhere between two periods.

Seasonal Variations

These seasonal variations can be estimated using the additive model or the
proportional (multiplicative) model.

The additive model

This is based upon the idea that each actual result is made up of two
influences.

Actual = Trend + Seasonal Variation (SV) + Random Variations

The SV will be expressed in absolute terms. Please note that the total of the
average SV should add up to zero.
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Advantages & Disadvantages

Advantages of Time Series Analysis

• it is useful when forecasting data which has a regular seasonal pattern as

may be the case with sales of certain products

• it is a rather simplistic approach

Disadvantages of Time Series Analysis

• it assumes that past trends will continue indefinitely and that extrapolating
data based on historic information will give valid conclusions.

• In reality, the sales of products may be influenced by the actions of

competitors, particularly in relation to new products becoming available on
the market.

Index Number

An index number is a technique for comparing, over time, changes in some

feature of a group of items (e.g. price, quantity consumed, etc) by expressing
the property each year as a percentage of some earlier year.

The year that is used as the initial year for comparison is known as the base
year. The base year should also be fairly recent on a regular basis.
Types of index numbers

1. Simple Indices

A simple index is one that measures the changes in either price or quantity
of a single item in comparison to the base year.

Therefore there are two types of simple indices

• A price index – this measures the change in the money value of a group of
items over time.

• A quantity (volume) index – this measures the change in the non-monetary

values of a group of items over time.

The formulae for calculating simple indices are:

Where

P0 is the price for the base period

Pn is the price for the period under consideration

Q0 is the quantity for the base period

Qn is the quantity for the period under consideration

 2. Composite indices

Composite indices are used when we have more than one item

3. Weighted aggregate Indices

A weighted index involves multiplying each component value by its

corresponding weight and adding these products to form an aggregate.

This is done for both the base period and the period in question.

The aggregate for that period is then divided by the base period aggregate.

Where:

V0 is the value of the commodity in the base period

Vn is the value of the commodity in the period in question

Price indices are usually weighted by quantities and quantity indices are
usually weighted by prices.

Laspeyre, Paasche and Fisher indices

Laspeyre and Paasche indices are special cases of weighted aggregate
indices.

Laspeyre index is a multi-item index using weights at the base date. It is

sometimes called base weighted index.

Paasche index is a multi-item index using weights at the current date. Hence,
the weights are changed every time period.

Fisher’s ideal index is found by taking the geometric mean of the Laspeyre
index and the Paasche index.

Fisher’s ideal index = √(Laspeyre x Paasche)

Advantages of Indices

Indices present changes in data or information over time in percentage term,

i.e. more meaningful information.

The use of indices makes comparison between items of data easier and more
meaningful- it is relatively easy to make comparisons and draw conclusions
fromfigures when you are starting from a base of 100.

The ability to calculate separate price and quantity indices, allows

management to identify the relative importance of changes in each of two
variables.

A typical application of this technique is to allow management to identify

price and quantity effects and their relative influence on changes in total
revenue and total costs.

Disadvantages of Indices
The Laspeyre and Paasche approaches give different results.

This suggests that there may be no single correct way of calculating an

index, especially the more sophisticated index numbers. The user of the
information should bear in mind the basis on which the index is calculated.

The overall result obtained from multi-item index numbers, such as Laspeyre
and Paasche are averages – they may hide quite significant variations in
changesinvolved in the component items.

An index number, to be meaningful, should only be applied to the items

which are included in the index calculation.

Index numbers are relative values, not absolute figures and may not give the
whole picture.

For example, Division A has achieved growth of 10% compared to last year
while Division B has only achieved 5%.

At first glance it may appear that Division A is performing better than

Division B.

The actual sales figures for the period are $27,500 for Division A and
$262,500 for Division B.

The absolute increase in sales revenue compared to last year is $2,500 for
Division A ($2,200/$25,000 x 100% = 10% increase) but $12,500 for Division
B ($12,500/$250,000 x 100%= 5 % increase)

Mark Complete

ACCA MA (F2) – Management Accounting

Chapter 4 b – Summarizing and Analyzing DataComplete Study Notes

Chapter 4 b – Summarizing and Analyzing Data

Big Data

Is an emerging technology that has implications across all business

departments.

It involves the collection and analysis of a large amount of data to find

trends, understand customer needs and help organisations to focus
resources more effectively.

The 3 V’s

Big data has a role to play in information management Gartner’s 3Vs

definition of “Big Data”:

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Volume

The quantity of data now being produced is being driven by social media and
transactional-based data sets recorded by large organisations. For example,
data captured from in-store loyalty cards.

Velocity

Velocity refers to the speed at which ‘real time’ data is being streamed into
the organisation. To make data meaningful it needs to be processed in a
reasonable time frame.
Variety

Modern data takes many different forms.

Structured data may take the form of numerical data whereas unstructured
data may be in the format of email or video

Standard normal distribution and probability

Standard normal distribution

Probability and normal distribution

The normal distribution is a probability distribution that associates the

normal random variable X with a cumulative probability .

The normal distribution is defined by the following equation:

Z=(x-μ)/Ϭ

Where:

Z is a Z-score that need to be calculated in order to get the probability (using

probability tables);

μ is the mean and

σ is the standard deviation of the variable X.

Normal distribution is also known as Gaussian curve.

As it covers all possibilities, total area below the curve is equal to 1 (100% -
all possible outcomes).

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ACCA MA (F2) - Management Accounting

 Chapter 4 b - Summarizing and Analyzing Data

 Complete Study Notes
Chapter 4 b - Summarizing and Analyzing Data

Big Data

is an emerging technology that has implications across all business departments.

It involves the collection and analysis of a large amount of data to find trends,
understand customer needs and help organisations to focus resources more effectively.

The 3 V's

Big data has a role to play in information management Gartner’s 3Vs definition of "Big
Data":

Volume
The quantity of data now being produced is being driven by social media and
transactional-based data sets recorded by large organisations. For example, data
captured from in-store loyalty cards.

Velocity

Velocity refers to the speed at which 'real time' data is being streamed into the
organisation. To make data meaningful it needs to be processed in a reasonable time
frame.

Variety

Modern data takes many different forms.

Structured data may take the form of numerical data whereas unstructured data may
be in the format of email or video

Standard normal distribution and probability

Standard normal distribution

Probability and normal distribution

The normal distribution is a probability distribution that associates the normal random
variable X with a cumulative probability .
The normal distribution is defined by the following equation:
Z=(x-μ)/Ϭ
where:
Z is a Z-score that need to be calculated in order to get the probability (using
probability tables);
μ is the mean and
σ is the standard deviation of the variable X.
Normal distribution is also known as Gaussian curve.
As it covers all possibilities, total area below the curve is equal to 1 (100% - all possible
outcomes).
Mark Complete

ACCA MA (F2) - Management Accounting

 Chapter 5 - Materials
 Complete Study Notes

Chapter 5 - Inventory
Stock Control

This refers to the processes involved in ordering, purchasing, receiving stocks into
stores, storing and issuing stocks and maintaining appropriate levels of stocks.
The following are the major steps in stock control:

1.Ordering and purchasing

2.Reception and inspection
3.Coding
4.Storage
5.Issuing
6.Stock taking
7.Setting stock levels.

Storage, Recording and Stocktaking

Materials are normally stored in bins or racks. Proper storage is necessary for the
following reasons:

Prompt receipt and issue

1. Protection of materials from damage, theft, deterioration, etc.

2. Correct location and identification of materials
3. Efficient use of storage space
4. Maintenance of correct stock levels
5. Putting stocks under the care of a responsible official and so on.

The following are the two main documents used for recording the receipt,
issue and balance of stocks held:

1. Bin Card: It is used to record the movements of stocks in a particular bin or

location. It records receipts and issues of materials by the storekeeper as well
as stock balances.
2. Stores Ledger Account: It is a subsidiary Ledger maintained by the stores
department to record the movement of stocks both in quantity and value.

Note that stock balance may refer to physical stock balance or free stock
balance. Free stock balance can be calculated as:
Materials in stock (Physical Stock balance) xxxx

Materials on order from suppliers xxxx

Materials requisitioned but not issued (xxxx)

Free stock balance xxxx

Stock Cost

Appropriate levels of stocks must be maintained so as to avoid minimise stock costs.

Stock costs are made up of:

1.Cost of purchase

2.Cost of ordering

3.Cost of holding or storage

4.Stock out cost

The objective of stock control is to minimise the above stock costs.

1.Cost of purchase refers to the amount paid to suppliers for goods bought. This
constitutes the largest of all stock costs.

2.Ordering cost is the cost associated with the processes involved in placing an order
and receiving goods into store. Examples include;

(i)Clerical and administrative cost associated with purchasing, receiving and recording
stocks.

(ii)Transportation costs

(iii)Set-up cost (for stocks manufactured internally, etc.

3.Holding cost refers to the costs associated with keeping stocks in the store. These
include.

(i)Insurance cost.
(ii)Deterioration.
(iii)Obsolescence.
(iv)Interest on capital tied up in stocks.
(v)Cost of storage and handling of stocks such as rent, storage equipment, cost of extra
staff salary for operation of the store, etc.

The following may be some of the reasons for holding stocks:

1. To avoid interruptions in the production process due to shortages.

2. To take care of seasonal fluctuations or variations in demand usage.
3. To meet future shortages in supply.
4. To ensure that expected demand can be met.
5. To take advantage of bulk discounts.
6. A means of investment.
7. To minimise the effect of inflation.
8. As a necessary part of the production process i.e. in the case of maturing
cheese, wine, etc.
9. To provide buffer between process.

Stock out Costs

Stock out refers to the running out of stocks by a business. The cost of stock out may
include:

(i)Loss of customer goodwill.

(ii)Cost of production stoppages.

(iii)Demotivation of production personnel due to stoppages in production.

(iv)Loss of contribution from lost sales

(v)Additional cost of urgent orders

Some Documents Used for Purchasing and Issuing Materials

1.Purchase Requisition Note or Form: It is a document issued by the stores

department or a user department to the purchasing department authorising the
department to order new stocks.

2.Quotation or Tender Document: This is a document issued to prospective suppliers

to obtain their terms of supply, such as; price, delivery, quantity and quality. Reliability
of supply is also an important factor that needs to be considered when selecting a
supplier.
3.Purchase Order: It is a document prepared by the purchasing department and sent
to a supplier for goods to be supplied.

4.Delivery Note: It is a document which accompanies goods received from a supplier.

This document is signed by the store keeper to confirm that goods have been delivered.

5.Goods received note: It is a document prepared to acknowledge the acceptability of

goods delivered by a supplier.

6.Materials or stores requisition note: It is a document issued by a production or

user department to request for materials from the stores department.
7.Materials Return Note: It is used with materials being returned to store. The details
on this document are similar to materials Requisition Note (since material return is the
reverse of material requisition).

8.Materials Transfer Note: It is issued with materials transferred from on job or cost
centre to another, without first being returned to store. Note that stock control
documents are issued in duplicates or triplicates and copies sent to all relevant
departments.

The objectives of a good Storekeeping are as under: -

1. To receive the materials ordered by the purchase department (in case of

Decentralised system) and supplied by the vendors in a proper maintains as
per the laid down procedure.
2. To ensure the correctness in the quality, quantity, specifications, condition of
the materials received from vendors.
3. To stock the materials received from vendors properly as to ensure easy
access identification, verification, handling, maintenance etc.
4. To ensure proper stocking of materials by using appropriate method of care
and preservation to avoid any damage and loss.
5. To ensure a smooth issue of materials to the issue department.
6. To ensure accurate accounting of the materials receiver and issued.
7. To ensure a favorable working atmosphere is maintained for the personnel
working in the store.
8. To ensure proper safety measures are taken for the safety of the store
building, materials in the store and the men working in the store.
9. To ensure that the store is always maintained up to date in all respects in a
presentable condition.

Codification of Stocks
This refers to the use of numbers, letters and/ or symbols for the identification of
materials. Some of the benefits gained for using codes are:

1. Time saving
2. Prevention of ambiguity
3. Accurate identification of materials leading to production efficiency
4. Makes computerisation easier
5. More flexible

Stocktaking

This refers to the physical verification of stocks in a store and checking the result
against the book stocks. This may be done on a continuous (more frequent) or periodic
basis.

a.Continuous Stocktaking is the counting and valuing of physical stocks more

frequently. This involves a specialist team counting and checking a number of stock
items on daily basis, so that each item is checked at least once a year. Valuable items
with high turnover could be checked more frequently.

This system has the following advantages:

i.It avoids the long disruption associated with the annual stock count.
ii.Stock discrepancies are revealed promptly.
iii.Hold-ups in production are eliminated because stores staff will not be so busy as to be
unable to deal with material issues.
iv.Improvement in control over stock levels is enhanced.
v.Serves as a moral check on stores staff.
vi.More time is available for stock count and this reduces errors in stock count.
vii.Regular skilled stock takers can be employed to reduce likely errors.
Disadvantages

i.Not suitable where less stocks are carried.

ii.May interfere with the core activities of the business.

iii.Employment of regular stock takers may lead to additional cost.

b.Periodic Stocktaking

This is the counting and valuing of physical stocks at the end of an accounting period,
usually annually. This system is suitable where low levels of stocks are carried.

Discrepancies after Stocktaking

The physical stocks counted in a store may be different from the book stocks in the
stock records. This discrepancy must be investigated so as to prevent further
occurrence. The following may be the causes of stock discrepancies:

1.Poor record keeping such as omissions or over/under statement of receipts and issues
of stocks.
2.Theft or pilferage
3.Damages, deterioration or evaporation
4.Errors in stock count.

Perpetual and Periodic Inventory Systems

Stock recording may be done regularly or at the end of an accounting period. The
recording of stocks such that the stock records are updated after each receipt and issue
is called Perpetual Inventory System. Where the sock records are updated with total
receipts and issues for a particular accounting period, the system is called Periodic
Inventory System.

Stock Levels

The following are the three main levels of stocks that are set:

1.Maximum stock level: This is the level beyond which stocks should not exceed. If
stocks exceed this level, too much capital will be tied up in stocks. The level is
calculated as,
Maximum stock level = Re-order level + Re-order quantity − (Minimum Usage ×
Minimum lead time)

Factors influencing this level are:

1. Rate of consumption.
2. Lead time.
3. Reliability of suppliers.
4. General economic and political conditions.
5. Storage capacity or facility.
6. Rate of deterioration.
7. Availability of funds.

2.Re-order level: The level at which a new purchase order must be issued for the
replenishment of stocks.

Re-order Level = Maximum usage × Maximum lead time.

3.Minimum Stock Level: It is the least quantity of stocks below which stocks should
not fall if stock out is to be prevented. It is calculated as;

Minimum stock level = Re-order level − (Average usage × Average lead time)

Minimum stock level is also called Buffer stock or Safety stock.

Other Terminologies:

Lead time is the period between when an order is made and the receipt of stocks. It is
also called re-order period, delivery period, etc.

Usage: This is also known as consumption and refers to the quantity of stocks
consumed during a specified period.

Re-order quantity refers to the quantity of stocks ordered when stocks get to the re-
order stock level. Re-order quantity can be calculated from the maximum stock level
formula. Where this quantity is carefully chosen so as to minimise total stock cost, the
quantity is called Economic Order Quantity (EOQ).

The EOQ can be ascertained using any of the following:

 Formula approach,
 Tabular approach,
 Graphical approach.

The formula is given below:

The graph is given below:

The table is given below:

Valuation of Inventory

When it comes time to account for the inventory, businesses may use the following
three primary accounting methodologies:

 Last in, first out (LIFO) accounting

 First in, first out (FIFO) accounting
 Weighted average cost accounting

First In, First Out (FIFO)

The first in, first out (FIFO) accounting method relies on a cost flow assumption that
removes costs from the inventory account when an item in someone’s inventory has
been purchased at varying costs, over time. When a business uses FIFO, the oldest cost
of an item in an inventory will be removed first when one of those items is sold. This
oldest cost will then be reported on the income statement as part of the cost of goods
sold.

Last In, First Out (LIFO)

The last in, first out (LIFO) accounting method assumes that the latest items bought are
the first items to be sold. With this accounting technique, the costs of the oldest
products will be reported as inventory. It should be understood that, although LIFO
matches the most recent costs with sales on the income statement, the flow of costs
does not necessarily have to match the flow of the physical units.
Weighted Average
The weighted average method, which is mainly utilized to assign the average cost of
production to a given product, is most commonly employed when inventory items are
so intertwined that it becomes difficult to assign a specific cost to an individual unit.
This is frequently the case when the inventory items in question are identical to one
another. Furthermore, this method assumes a store sells all of its inventories
simultaneously.

To use the weighted average model, one divides the cost of the goods that are available
for sale by the number of those units still on the shelf. This calculation yields the
weighted average cost per unit—a figure that can then be used to assign a cost to both
ending inventory and the cost of goods sold.
Weighted Average vs. FIFO vs. LIFO Example
Consider this example: Suppose you own a furniture store and you purchase 200 chairs
for $10 per unit. The next month, you buy another 300 chairs for $20 per unit. At the
end of an accounting period, let's assume you sold 100 total chairs. The weighted
average costs, using both FIFO and LIFO considerations are as follows:

 200 chairs at $10 per chair = $2,000. 300 chairs at $20 per chair = $6,000
 Total number of chairs = 500

Weighted Average Cost

 Cost of a chair: $8,000 divided by 500 = $16/chair
 Cost of Goods Sold: $16 x 100 = $1,600
 Remaining Inventory: $16 x 400 = $6,400

First In, First Out Cost

 Cost of goods sold: 100 chairs sold x $10 = $1,000
 Remaining Inventory: (100 chairs x $10) + (300 chairs x $20) = $7,000

Last In, First Out Cost

 Cost of goods sold: 100 chairs sold x $20 = $2,000
 Remaining Inventory: (200 chairs x $10) + (200 chairs x $20) = $6,000
Mark Complete

Mark Complete

ACCA MA (F2) - Management Accounting

 Chapter 6 - Labor
 Complete Study Notes

Chapter 6 - Labor
Production and productivity
Production is the quantity or volume of output produced. Productivity is a measure of
the efficiency with which output has been produced. An increase in production without
an increase in productivity will not reduce unit costs.

(a) Production is the total units.

(b) Productivity is a relative measure of the hours actually taken and the hours that
should have been taken to make the output.
The standard hour in performance measurement

The standard hour is a useful concept in performance measurement and is relevant to

items

Definition
A standard hour is the amount of work achievable, at the expected level of efficiency, in
an hour.

the budgeted direct labour hours, the actual direct labour hours and the expected direct
labour hours to manufacture the actual output, a series of ratios can be calculated to
measure the performance of the cost centre as a whole in period 1 and to understand
the causes. The ratios are:

 Production volume ratio

 Capacity utilisation ratio
 Efficiency ratio

Production volume ratio

The production volume ratio measures how the actual production output for a period,
measured in direct labour hours, compares with that budgeted for a production cost
centre. It is calculated as:

(Expected direct labour hours of actual output ÷ budgeted direct labour hours) × 100%.

A ratio of > 100% will indicate above budget production volume and vice versa.

The production volume ratio can be further analysed by:

 The number of hours worked compared with budget (measured by the

capacity utilisation ratio).
 The efficiency with which the output is produced (measured by the efficiency
ratio).

Capacity utilisation ratio

The capacity utilisation ratio measures whether the total direct labour hours worked in a
production cost centre in a period was greater or less than what was budgeted. It is
calculated as:

(Actual direct labour hours worked ÷ budgeted direct labour hours) × 100%.

A ratio of > 100% will indicate that more direct labour hours were worked than budget
and vice versa.

Efficiency ratio

The efficiency ratio measures whether the production output for a period in a production
cost centre took more or less direct labour time than expected. It is calculated as:

(Expected direct labour hours of actual output ÷ actual direct labour hours worked) ×
100%.

A ratio of > 100% will indicate greater labour efficiency than budgeted and vice versa.

Remuneration methods

Labour remuneration methods have an effect on:

1. The cost of finished products and services.

2. The morale and efficiency of employees.

There are two basic methods:

1. Time-based systems

2. Piecework systems

Time-based systems

Employees are paid a basic rate per hour, day, week or month.

Total Wages = (hours worked x basic rate of pay per hour) + (overtime hours

worked x overtime premium per hour)

Basic time-based systems do not provide an incentive for employees to improve

productivity / efficiency. Therefore, close supervision is necessary.

Piecework systems

A piecework system pays a fixed amount per unit produced.

Total wages = units produced x rate of pay per unit

There are two main piecework systems

1. Straight piecework systems

Today, it is normal for pieceworkers to be offered a guaranteed minimum wage, so that

they do not suffer loss of earnings when production is low through no fault of their own.

2. Differential piecework systems

– these systems involve different piece rates for different levels of production.

They offer an incentive to employees to increase their output by paying higher rates for

increased levels of production. For example:

• up to 80 units per week, rate of pay per unit = $1.00

• 80 to 90 units per week, rate of pay per unit = $1.20

• above 90 units per week, rate of pay per unit = $1.30

Incentive (bonus) schemes - characteristics:

1. Employees are paid more for their efficiency.

2. The profits arising from productivity improvements are shared between employer and
employee.

3. Morale of employees is likely to improve since they are seen to receive extra reward
for extra effort.

Individual vs. group bonus schemes

An individual bonus scheme is a remuneration scheme whereby individual employees

qualify for a bonus on top of their basic wage, with each person’s bonus being
calculated separately.

Hence, the bonus is unique to the individual and it gets higher if efficiency is improved.

A group bonus scheme is related to the output performance of an entire group of

workers, a department or even the whole factory. It increases co-operation between

team members and is easier to administer.

Profit sharing scheme

- a scheme in which employees receive a certain proportion of their company’s year-end

profits (the size of their bonus being related to their position in the company and the

length of their employment to date).

Value added incentive schemes

These incentive schemes exclude any bought-in costs and are affected only by costs
incurred internally such as labour.

Value added = sales – cost of bought-in materials and services.

For example, valued added should be treble the payroll costs and one third of any
excess earned would be paid as a bonus.

Payroll costs $50,000

Value added target (x3) $150,000

Value added achieved $180,000

Excess value added $30,000

Employee’s share $10,000

Main Types of Labour Cost Records

The following points highlight the four main types of labour cost records.

Job Cards:

The time sheets relate to individual employees and may contain bookings relating to
numerous jobs. A job card relates to a single job or batch and is likely to contain entries
relating to numerous employees. On completion of the job it will contain a full record of
the times and quantities involved in the job or batch.

The use of job cards, particularly for jobs which stretch over several weeks, makes
reconciliation of work time and attendance time a difficult task. These cards are difficult
to incorporate directly into the wage calculation procedures.

Daily or Weekly Time Sheet:

A daily or weekly time sheet is a document on which the employee records how his time
has been spent. The total time on the time sheet should correspond with the time
shown on the clock card or attendance record.

The daily or weekly time sheet will analyze his movement and when signed by the
foreman, an analysis of the labour cost is made for various jobs and operations. The
time sheet should be designed to show the other information like overtime, idle time,
travelling time etc.

Attendance Card

An employee attendance card is a document that records the presence, absence, sick
leave, and other attendance data of employees for payroll or scheduling.

Personnel Department:

This department in a large organisation is responsible for recruitment, training

discharge, transfer etc. and maintaining their records.

The main functions are:

(i) Receiving requisition for labour from various departments

(ii) Selection and Recruitment

(iii) Information to the concerned departments like requisioning department and pay roll
department.

Time Keeping Department:

Its functions are maintenance of attendance records of employees and job time
booking.

Payroll Department:

This department has to perform following functions:

(i) To maintain record of job classification and wage rate of each and every employee,

(ii) To verify and to summarize the time of each worker as shown on daily time cards,

(iii) To calculate wages earned by each and every worker

(iv) To prepare payroll of every department,

(v) To calculate total amount of wages and deductions for each employee

(vi) To disburse wages

(vii) To devise a suitable internal check preparing and paying out wages.

Cost Accounting Department:

This department is concerned with:

(i) Documentation of Wages Accounting

(ii) Analysis of total labour cost and

(iii) Treatment of idle time, Overtime, Leave Pay etc

Labour Turnover
- is the rate at which employees leave a company relative to the average number of
people employed.
This rate should be kept as low as possible.
Causes of Labour Turnover
Some employees will leave their job and go to work for another company or
organisation.
Sometimes the reasons are unavoidable.
• Illness or accidents
• A family move away from the locality
• Marriage, pregnancy or difficulties with child care provision
• Retirement or death
However, some other causes can be avoidable. Example
• Poor remuneration
• Poor working conditions
• Lack of promotion prospects
• Bullying at the workplace

Costs of Labour Turnover

The costs of labour turnover can be large and management should attempt to keep
labour turnover as low as possible so as to minimise these costs.
The cost of labour turnover may be divided into the following
• Preventative costs
• Replacement costs

Replacement costs
These are the costs incurred as a result of hiring new employees.
These include:
• Cost of selection and placement
• Inefficiency of new labour; productivity will be lower
• Costs of training
• Loss of output due to delay in new labour becoming available
• Increased wastage and spoilage due to lack of expertise among new staff
• The possibility of more frequent accidents at work
• Cost of tool and machine breakage

Preventative costs
These are costs incurred in order to prevent employees leaving and they include
• Cost of personnel administration incurred in maintaining good relationships and
eliminating bullying in the workplace
• Cost of medical services including check-ups, nursing staff and so on
• Cost of welfare services, including sports facilities and canteen meals
• Pension schemes providing security to employees
• Investigate high labour turnover rates objectively

How can high labour turnover be reduced?

• Paying satisfactory wages
• Offering satisfactory hours and conditions of work
• Creating a good informal relationship between employees
• Offering good training schemes and career or promotion ladder
• Improving the content of jobs to create job satisfaction
• Proper planning so as to avoid redundancies
• Investigating the cause of an apparently high labour turnover

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