Hello my name's Jo and I'm a subject specialist from BPP
I'm here today to talk to you about
Performance Management for ACCA F5.
We're going to be looking at how the syllabus area section B could be
examined, decision making techniques specifically looking at part one
of relevant costing.
In the session then we'll be looking at the knowledge that you require to
attempt this section of the examination,
we shall also be having a look at the best approach to take to these type of
questions
and then we're going to have a look at how this would have worked
in the December 2011 exam
looking at question one
and pulling out some of the points from the examiner's report which could
help you to achieve a better score
if this topic were to be examined.
So what kind of knowledge then and how could this be tested?
Relevant cost analysis then has split into three areas
so we could be asked to have a look at the concept of relevant costing
this is where the knowledge comes into play and what relevant costing is
actually all about,
you could also be asked to identify and calculate a relevant cost for a specific
situation so
this is very much application and taking the information that is being provided in the
scenario
and making sure that you can sift through it
using that knowledge about what a relevant cost actually is
and you might also have to explain the concepts of opportunity costs.
It could link in then with the other parts of the syllabus here
and there could actually be some application
through some kind of make or buy,
through outsourcing, through further processing of joint costs or it could be
linked into transfer pricing
or as it was for December 2011
looking at a one off contract
and how much should be charged for this.
So what is a relevant cost then? It is essential that we understand the
knowledge behind the concept
before we actually start
and what we need to be looking at then
is making sure that we've got the knowledge that we can apply to those
situations and the scenario
given to us in the exam.
The examiner then commented in the 2011 December report
that many students failed to understand what relevant costing
actually is all about
so relevant costing then is a future incremental cash flow
so we're looking then at an amount of expenditure which is going to actually
occur
in the future as opposed to a cost that is historical, sunk, or something that
we've already committed to
and agreed to,
it should be incremental, so it should go up as a result of the decision
to undertake the work,
it might be that we have to pay overtime to our staff above and beyond their
additional wages
or it might be that we have to recruit an additional person
or buy some additional materials but whatever it is it should be money that
we weren't already planning to spend.
It also needs to be a cash flow, so although as accountants we often used
to be thinking about
accounting estimates like depreciation and profit
these are not cash outflows
what we're looking at then is whether or not this would result
in basically extra money being paid
out of the bank account
so would it show on the bank statement?
That's what's going to make it a cash flow.
How do we approach the questions then?
Well we need to make sure then that we work out the amount of time that
we've got
we're looking at 1.8 minutes per mark
and you should break that down into the sub requirements as well, so part A and part B
as well.
When we're looking at exam questions then we want to read the introduction only, get a
feel for what the company is
get yourself into the mindset of the scenario that you're looking at
but don't read all of the detail
because there's no point at the moment, it doesn't matter what this company is up
to in detail because you don't know what you're going to be asked to do with that
information, so once you've read the introduction, read the requirement carefully
highlight out any key words
and make sure you pull out
all of the requirements, so if you're asked for a conclusion
make sure you highlight that out as well
so that you don't forget to
give that conclusion at the and of your answer.
Also
once we know what we've got to do, we can now go back to this scenario so we can
go through this scenario in detail
reading the information carefully
and making notes.
This is something that you could do during the reading time
on a question like this, and we'll have a look at the detail on December 2011's
questions shortly.
Once you have realised then if you need to do some kind of cost statement
you need to set up a pro forma so you can slot the easy numbers in first
and make sure at the end that you state the minimum cost
or give the conclusion
to round off your answer
following the detail and any workings afterwards
making sure that your answer is professionally presented and easy
for the marker to follow.
So lets have a look then at question one
from the December 2011 paper
the telephone company,
here you can see then that we've got the requirement
for part A
and you would have had almost twenty five minutes to do this
it wouldn't have been a particularly time pressured question
as this topic doesn't tend to be time pressured
so it might be that you would have been able to save yourself some time to use on
trickier aspects
or more time-consuming aspects of your paper,
this question in my mind is an excellent one for approaching during the reading
time because you can have an answer drafted
before the examination starts
ready to write it up
and then give you more time to work on the other areas of the paper.
So we had to prepare a cost statement, the requirement was very clear that that's
what we needed to do
so it wouldn't have been sufficient to just give an amount
and we were told to use relevant costing principles, there was a big hint as to
the area of the syllabus needed
and we had to show the minimum cost
so we've got two things to do so far:
prepare the statement
and produce the minimum cost,
then we're asked to make detailed notes
showing how each cost has been arrived at
and explaining why they've been included or excluded.
The examiner here is being very very generous in the wording of the question
the words 'detailed' and 'explaining' are in capital letters so drawing out their
importance to you, hopefully you'll have appreciated then
that its going to be insufficient to just say relevant or not relevant
in the notes, because we're asked for detailed explanations very very clearly.
It would have been insufficient
to just do the numbers here, if you'd excluded the discussion
that would have been at the detriment of your answer
because eight out of the fourteen marks going
were for discussion
were for the explanation and the why you've done something.
So you know why you're doing it otherwise you wouldn't be doing it in the first place
all you've got to do here is communicate to the marker that you know why and it
wasn't just a lucky guess to leave something out
or you didn't leave it out because you didn't have a clue what to do with it
and it was very clear that you should also provide the explanation
for things that you excluded, so as I've said a very generous requirement in
the way that it was worded
and unfortunately in the examiners report
it didn't seem to be that students had accepted this gift very generously.
The explanation then must say
more than that it's relevant or not relevant
so remember to say why something is relevant
so lets have a look then at the requirement and the scenario that we were given for
telephone company
and see then how we could have actually annotated this during the reading time
to give us those points ready to write up once the examination actually started
and make good progress during those first few minutes of the exam.
So we're told then that we're hopeful of future business
that's more relevant for part B, so we'll come back to that one in a minute
but we're told then in part one
that something has already happened, so the salesmen have already been to visit
as soon as something is in the past
it's a sunk cost, we're not going to recover that money
if this doesn't go ahead
so we need to make it clear in our explanation then
that we've excluded this because it's something
which has happened in the past and won't be recovered even if we're unable
to win the work.
The next requirement then, the next note then was quite detailed
and it was here then
that many students I think probably thought 'oh I know a little bit about
loss contribution
and I need to make sure I include that'
you needed to read all the way through though
to actually appreciate
that it wasn't that this work was not going to go ahead it's just that
it was going to be delayed
so we're looking here then at
the penalty for delay
rather than loss contribution.
It's very important here that you read the information detailed
and make sure that you think about it in the context of this particular
question
rather then trying to learn
what happens every time.
The technical adviser then is at full capacity
and so is going to have to work overtime, so we'll need to do a calculation
for that overtime
and explain that it's because we're going to have to pay them over and above
their additional wages.
Note 4 then when we're looking at the independent contractor
again in the examiners report it was highlighted here that it was more to do
with students ability to read and think calmly in the exam
rather than
to do with technical knowledge.
It says very clearly then
that the contractor is not employed by the telephone company
and will be paid directly by push
this then means that we don't need to include it
but we do remember need to include the explanation as to why we have
excluded it.
We're told then that the trainer is going to go to the company and deliver
this training
they'd guaranteed this salary then of fifteen hundred pounds
which is a committed cost
so we're not going to try and apportion part of that salary
because we're going to be paying our trainer
whether he's sat
in the office doing nothing
or whether he's out doing this training,
the increment comes then
from the fact that we are paying him some commission
the days that he spends at client sites
and it's that amount that we need to make sure we include but we need to give
the justification for not including
any of the the fifteen hundred.
The handsets then
we're given information about the current cost of these
and also
the historical cost
it was a great disappointment that lots of students actually
chose to use the historical cost here
we're not told and it's never very likely
that you can ring someone up and ask for a refund
because you've decided not to use it so
what you've paid for it is completely irrelevant
it's what you're going to have to pay to replace it
for something which is in continual use.
The computerised system then, the 'Swipe 2'
also caused some problems
with things like this then you need to consider what your options are and then
think about the cost of those different options
so undoubtedly we had the option to go out
and buy a brand new 'Swipe 2' for ten thousand eight hundred dollars
but also then
we had this option of modifying the one that we've already got,
the cost then of the one that we've got is irrelevant
it's the fact
that we would be unable to sell it for three thousand dollars if we decide to use it
so we're forgoing those scrap proceeds,
they would have come into our business
but if we decide to use it we're forgoing that so therefore it is a cash flow,
it is irrelevant.
So it's the three thousand plus the modification costs and you can see that
that actually comes in lower
and you'd need to explain how you considered the different options
and why you'd chosen
the three thousand rather than their current market price.
Finally then we need to think about the meters of cable
that are needed for the system
and we're told that it's used frequently, this is a very typical
requirement for any type of relevant costing
it's frequently used
so therefore it's the replacement cost
and when you see words like 'frequently used' it's replacement cost words
that should be triggering
and then you just need to read the detail to make sure that there aren't any added
complications
or
interesting points in the scenario that you needed to actually consider.
Then finally we're given some information
which I think is there to try and get you to try and apportion those costs but
it may have been needed
in part nine.
So as I'm going through then
I've made those notes, what I'm doing then is setting up a proforma
which will look something like this
where you've got all the different items listed down
it makes good sense to write them in the same order as which they appear in the
question paper,
you probably want to leave a space between each line
so that if you've missed something out you can easily slot it in on one of the
vacant lines
and add it in rather than having to try
and slot it into a very small gap,
remember this will help with the presentation of your exam
and then you can reference it to the detailed notes afterwards.
So in here then
note one would be about the demonstration and the lunch
and I would be able to write underneath
that this was a sunk cost because the expenditure had already occurred and it
wouldn't be reclaimed if the work were not to be won, if the contract was not
to be won.
Then you can total it all up
and give the value of
the cost and then you can explain that this is the minimum price of the job,
hopefully then when your script comes to be marked
somebody would be able to glance down when marking it
see that you've got the total right
and award you the marks for the calculation
and then read through your notes
and give you the marks for the explanation, scoring you hopefully
fourteen,
or nearly close to that
marks available.
What you want to make sure then is that it's well referenced so that if you have made
an error on one of the items
that it's easy for someone to understand
and you lose the minimum number of marks
possible.
In part B then, this is also going to be discussion, there are no more
calculations to undertake here
reinforcing then that this exam is
about discussion
as much as it is about numbers,
explain the relevant costing principles then that you've used
and also what the implications are of using these,
so the implications of the minimum price.
Explaining the relevant costing principles then, was all
about taking that knowledge from one of the earlier slides about a future
incremental cash flow
and explaining what that is all about.
The implications then
are much more applications skills
where you're thinking about what it means here,
well we've got an amount then which is a minimum cost
but it doesn't include any mark up, it isn't going to see T company
making any profits
so we might need to add in an element for that.
There are also fixed costs which are not incremental which have not been
considered
and you can also talk about some of the commercial aspects of this, so thinking
about the fact then that you may be setting a precedent for a lower price in the
future.
You wouldn't have needed to include all of these points in order to score
the six marks, you just need to make sure that you use the marking guide as an
indication
of how much to write
so we'll be looking at six marks then so we need to make six well
explained points.
When you're making a point remember to make the point, to explain it and then apply
it back to the scenario
so for example in this question our point was then that it might be that it leads to
an expectation of lower prices in the future, or low prices in the future
then we need to explain that this might be difficult when their
tendering for future work and the need to cover their costs, and all of their costs and to
make a profit and then application, we are told here that they're hopeful in the scenario of
winning future contracts, so therefore it's very relevant here because we want to
make sure then that the price that we quote will give us access to
this company, but also sustainable in terms of getting future work from them.
If you'd like more practice then on this area you can have a look at
December 2009, question 5, Stay Clean and June
2009, Bits and Pieces question.
These then are similar types of questions so in Bits and Pieces then you're looking
at the incremental costs versus the incremental benefit of Sunday trading
and in Stay Clean the decision is whether or not to cease
production now or in twelve months time
so the scenarios then are always going to be different
but the skills then
and the knowledge are going to be very very similar.
These questions then and the examiner's reports can be downloaded from the
ACCA website, good luck with your exam and remember to practice lots
of questions before the exam so that you get into the mindset of the examiner from
the past papers and are prepared for what could come your way in the exam.