EXAM

Question 1

When talking about variances see this useful article

For top marks need to not only explain possible reasons for variances but also Link them

Answer 1

https://www.firstintuition.co.uk/fihub/written-variance-questions-in-the-decision-and-control-assessment/

Question 2

https://kfknowledgebank.kaplan.co.uk/management-accounting/performance-management/variance-analysis

V good

Answer 2

.

Question 3

If analysing variances watch for

Answer 3

whether you are looking at the calculated variances or a reconciliation statement !!! . Remember the brackets (or minus plus symbols) get reversed in the RS so don’t muddle whether the variances are adverse/favourable in the analysis as I did in one exercise!!!

Question 4

Variances - check whether things like bonus payments are direct lab and therefore can be a contaxt reason for variances.. or a red herring

Answer 4

.

Question 5

Variances

How to word an explaination of the variances

Answer 5

Start with:

For Price/Rate:
The variance shows the SAVING or OVERSPEND that resulted from paying a lower or higher price/hourly rate THAN STANDARD for the direct material/hours used/worked IN THE PERIOD.

For Usage/Efficiency:
The variance shows the SAVING or OVERSPEND AT STANDARD prices/rates which resulted from using/working less or more material/hours THAN STANDARD to manufacture the production for the period.

Question 6

Variances - if its a measurement error does this mean it’s not to be used as a reason for variance - ie. in exam assume that only variances that could result in cost savings / control should be used as ‘reasons’? Ie assuming measurement error would have been detected and factored out before variances were reported??

Answer 6

.

Question 7

Watch out for AAT favourite tricks like Gross Profit… remember this isn’t affected by change in sales volume .. only by change in selling price or costs.

Answer 7

.

Question 8

If talking about standards, basic, ideal etc and variances..

Answer 8

remember to go to sub-variance level… eg. “Basic standard … out of date … Price vars will be Adverse but Efficiency vars will be Favourable (because of modernisation, mechinisation.)”

whereas Ideal standards will always be Adverse (but still mention both price & usage)

Question 9

Fixed OH
When creating the budget and flexing it you don’t flex FOH…. but when creating the operating statement (showing the Budgeted/standard cost for actual production and reconciling to Actual cost of actual) you do…

I don’t really get this as it feels like you are flexing for volume twice since the FO vol var appears in the reconcile…. see p51 BPP QB. Actually no..
If you are reconciling original budget to actual spend … this is just the left hand side of the FO ‘square’ that I use… so you would need to only include the expenditure variance to reconcile…

So it looks like for a Marginal operating statement you leave FO in at original budget price (shown seperately in BPPQB) whereas Absorbtion you flex the FOH at the top of the OS (Hidden) and then work from there … including the adjustment for FO VV which is effectively reversing out the adjustment… bit weird

see task 3 of the 2 AAT practices and jsut have to look very carefully at this task in live exam to see whats required..compare to BPP pages 49-52 or so..

Answer 9

.

Question 10

Make sure fine with splitting a variance into controllable/ noncontrollable.
eg. Material price standard £8 p/kg. but there is a ww market (uncontrollable) shortage and the price rises to £8.50.

Answer 10

Think carefully eg. Could redo the calculation with £8.50 as the ‘new’ standard… then recalc the MPV and any remaining var would be ‘controllable’.

Question (BPP6.3) is confusing IMO though …it says ‘The price of materials has been unexpectedly increased to £8.50 at beginning of month… to me this implied we had to pay £8.50 … but we actually paid £8.81 from the ‘actual’ figures given… just have to interpret the question by thinking what skill they likely want to test!

Question 11

variances and seasonal variation in price/kg.
I think if the seasonal variation is a minus number then the ‘uncontrollabe’ variance must be favourable. (The ctual quantity used multiplied by the discount)

Answer 11

might be able to check/confirm by redo the calc with the adjusted base price to get the variation that is ‘controllable’

Yes don’t worry too much about adverse/ fav at first …
1. Work out total MPV (will be certain whether A or F).

2. Work out diff between standard p/kg and ‘seasonal or indexed’ p/kg and multiply by actual quantity used..
3. Work out diff between ‘seasonal or indexed’ p/kg and actual price/kg multiplied by actual quantity used.
4. It should then be poss to compare the 3 figs and confirm whether 2 & 3 are F or A since the net must equal 1.

Question 12

be careful when reading variance questions … don’t just read ‘total’ and think its the total cost variance MCV.. the ‘total’ might refer to the MPV if the question is about identifying how much is due to a non-controllable seasonal price element for example

Answer 12

RTFQ

Question 13

ROCE is a bit confusing but what 2 things to remember about what to include/exclude?

Answer 13

Capital employed is the money available to management so it includes long term loans and also ‘debentures’ which are just another form of loan. (Remember memory aid DEBenTures)

You can calc in 2 ways should get same fig.

1. use Total assets less current liabilities. (TALCL) …. not that you are only deducting CL not loans.
2. Or you can use Shareholders Equity (including any reserves, retained profit) PLUS Long term loans.
   This is because the equity figure has had loans deducted so you need to add them back in.

The other thing to remember is that the profit figure should be before any interest expense.
I think best way to remember this is as per Kaplan P373 that it should be the return available to the providers of the equity… they actually get that interest as well so don’t exclude it from the profit figure..

Question 14

ROCE - what to remember about ‘return’ figure

Answer 14

The other thing to remember is that the profit figure should be before any interest expense.

I think best way to remember this is as per Kaplan P373 that it should be the return available to the providers of the equity… they actually get that interest as well so don’t exclude it from the ‘return’ figure..

Question 15

Dont try & shortcut calculations… do on paper if needed.

Answer 15

I was given sales 380K and GPM 48% and asked for GP.

I should have done 380K * 0.48
I did 380K / 0.48 in error.

When I wrote the equation down and multiplied by denominator both sides it was correct … don’t try and do in head in exam … or at least check the answer as doing this exposed the error.

Question 16

watch out for being given a P&L which has sales sales & sales returns on it (and net revenue)

Answer 16

I got an asset turnover question wrong by using Revenue for Net asset turnover and OPM.

Getting OP wrong is BAD !!! Do not repeat this error !!!

Question 17

Customer service measures

Don’t forget Time between order & delivery

Answer 17

(Orders received - Net sales) * 365
___________________
Net sales

Question 18

Customer service measures

Answer 18

Dont forget just ‘Money spent on R&D’ or ‘Money spent on Training’ can be a valid CS performance measure.

Question 19

‘Historic cost accounting’
If comparing 2 divisions Net Assets (BPPQB 7.9) and talking of limitations of RONA this could be a factor..

If one division is new and paid higher price for ‘plant’ and has less accumulated dep’n this will affect RONA

Answer 19

.

Question 20

Remember the top 3 financial ratios & their relationship.
Worth checking that ROCE = AT * OPM

Assume works for RONA (as long as using NAT not AT)
RONA = NAT * OPM

Answer 20

I assume this also works for

Question 21

Things to think about when analysing 2 options
(BPPQB 7.12)
I when asking about ‘other considerations’ after analysing profit they were looking for ‘people & planet’ considerations but it wasn’t …

Answer 21

.. it was more about risk..and recognising that

1. Gearing - one option was buying very expensive machinery which would require borrowing making the company more risky
2. Cost behaviour - the other option with cheap machinery but more labour was not more profitable

BUT because of the zero-hour contracts the labour was a variable cost so if harvest was bad this cost could disappear whereas the depreciation was a fixed cost which would happen regardless and would depress profit.

Conclusion was short … since profit was more or less equal you would recommend the one with lower risk/gearing.

Question 22

Analysing performance across several months (BPP 7.13)

Answer 22

Overall division performed worst / best in …?

Profit margin/ROCE fell / rose by (% change)

The higher profit is outweighed by the large increase in assets (ie. be thinking about the calculation and talk about the 2 elements profit/assets)

Question 23

Remember with Operating statements difference between Absorption OS & Marginal OS

Answer 23

With Absorption you are flexing the FOH so you need the FO Volume variation in the reconciliation.

With Marginal you don’t flex the FOH - it is treated as a separate item so there is no Volume Variance.

NB. The FO Expenditure Variance is the same either way … diff between Budgeted spend and Actual spend

Question 24

When you see a closing inventory that is negative (in brackets) what to remember when working out ratios?

Answer 24

.. if its on an income statement its just because you deduct it when calculating COS. .. when calculating a ratio for example inventory turnover you don’t use the negative !!!

Question 25

When calculating variances - really try and reconcile to flush out silly errors.

Especially I found splitting sub variances into controllable/uncontrollable fine but not easy to say whether F or A. However this can be worked out by reconciling them with the total variance.

Answer 25

.

Question 26

Limited supply question deciding whether to pay a premium for extra material (or labour)

Answer 26

If the PREMIUM is more than the CONTRIBUTION PER LF say YES

Question 27

LIFECYCLE COSTING with dicount factors .. what to watch out for..

Answer 27

1. Really be careful if its cost or income..
2. Will be working out NPV or NPC so when deciding which is better … be careful which! If NPV higher is better … if NPC lower is better !!
3. Arrears/advance … Watch if something eg lease pmt is payment in advance in which case first payment will be in year 0
4. Watch for discount factor whether year 0 is given or not … its always going to be 1. Don’t forget to put that in the box if appropriate, ie don’t leave an empty box

Question 28

Check each task that haven’t missed filling any boxes … sometimes I miss ‘peripheral’ ones… like DF year zero.

Answer 28

.

Question 29

Dont forget to use company name in written answers, keep referring to narrative with examples etc & do little calcs where poss..

Answer 29

.

Question 30

Lifecycle costing

don’t fully get why but it seems that the proportion of costs that are fixed and variable will change over the product lifecycle.

Answer 30

At initial stages (Dev, launch, growth) majority of costs will be fixed (eg design, product dev & marketing)

As the cycle continues (Maturity) a lower level of fixed costs will usually be needed to sustain the product as customers are aware and marketing reduces.

Question 31

Target costing.
REALLY watch with questions working out target fixed costs for 2 scenarios and then selecting based on actual production cost… I chose the option where my target cost was below the actual cost… I suppose I was thinking along the lines of I had just worked out the cost for that scenario and it was the one that ‘came in under’ … but of course I had really worked out the MAX spend on FC and the actual costs were higher so I should have rejected..

Answer 31

.

Question 32

Target costing.
REALLY watch with questions working out target fixed costs for 2 scenarios and then selecting based on actual production cost… I chose the option where my target cost was below the actual cost… I suppose I was thinking along the lines of I had just worked out the cost for that scenario and it was the one that ‘came in under’ … but of course I had really worked out the MAX spend on FC and the actual costs were higher so I should have rejected..

Answer 32

Really have to take time and think these type of questions through VERY carefully

Question 33

Re David malt house

If calculating profit for the year what sneaky element to look out for ?

Answer 33

Under / over absorption

Remember adjustment to income statement needed

Question 34

If making an index it should be based on actuals or trend ?

Answer 34

Actuals