Chapter 5 extract from our ExPress notes for
use with the current video.
A full set of F2 ExPress notes can be downloaded
free of charge at www.theexpgroup.com.
Notes
ACCA Paper F2
Management Accounting
For exams in 2011
theexpgroup.com
ExPress Notes
ACCA F2 Management Accounting
Materials
Labour
Fixed O/Hs
Total
90,000
225,000
100,000
415,000
Prepare a flexed budget for an output level of 1,075 units.
Based on the data (below), the


variable cost of labour is $125 per unit, and the
fixed cost of labour is $75,000
Output:
1000
1200
Mats
75,000
90,000
Labour
200,000
225,000
Fix
100,000
100,000
Total
375,000
415,000
Therefore the cost of labour at output of 1,075 units is $209,375.
Absorption Costing
This method argues that focusing on marginal costs is potentially misleading in the longer
run because fixed production costs have also to be covered. Accounting conventions require
that fixed production costs be reflected in each unit produced.
Fixed Overhead Absorption Rate (FOAR) =
Budgeted production O/H
Budgeted level of production
Budget (normal) production
Year 1
(units)
1,100
Year 2
(units)
1,100
Actual fixed production O/Hs
$16,500
$16,500
Fixed Overhead Absorption Rate (FOAR) = $15 ($16,500/1,100)
Page | 2
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
ACCA F2 Management Accounting
Cost card (Absorption costing)
Cost card (per unit):
Direct materials
Direct labour
Variable production O/Hs
Fixed production O/Hs
Total production costs
45
18
9
15
87
Having established the OAR, we now have a basis on which the production department can
keep track of the fixed overheads being generated as the manufacturing process proceeds.
Actual output (units) x OAR = Fixed O/H absorbed
Basic variance analysis
The following data is from a manufacturing company
Budget
Production:
Sales:
Sales Price:
1,100 units
1,000 units
$120 / unit
Actual results
Production:
1,000 units
Sales:
950 units
Materials:
4,900 kg, $45,025
Labour:
3,100 hrs, $19,050
Variable O/Hs: $9,250
Fixed O/Hs:
$17,000
Sales price:
$115 / unit
Cost card (per unit)
Materials (5kgs x $9 per kg)
Labour (3hrs x $6 per hr)
Variable O/Hs (3 hrs x $3 per hr)
Fixed O/Hs (3 hrs x $5 per hr)
Page | 3
45
18
9
15
87
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
ACCA F2 Management Accounting
Variance calculations
Sales volume variance (Absorption costing)

Budgeted sales volume

Actual sales volume
Sales volume variance
@ standard margin ($120-$87)
1,000
950
50 (A)
$1,650 (A)
Sales volume variance (Marginal costing)

Budgeted sales volume

Actual sales volume
1,000
950
Sales volume variance
50 (A)
@ standard contribution ($120-$72) $2,400 (A)
Sales price variance

950 units should have sold @$120
114,000

Actual revenues (950 units x $115)
109,250
Sales price variance
4,750 (A)
Material variances
(i)
Material price variance

Materials used (4,900 kg) should have cost @ $9
44,100

Materials (4,900 kg) did cost
45,025
Materials price variance
Page | 4
$925 (A)
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
ACCA F2 Management Accounting
(ii)
Material usage variance

1,000 units should have used @ 5 kg
5,000 kg

1,000 units did use
4,900 kg
Materials usage variance
@ standard $9
Materials total variance:
100 kg (F)
$900 (F)
$ 25 (A)
Labour variances
(i)
Labour rate variance

Labour (3,100 hrs) should have cost @ $6
18,600

Labour (3,100 hrs) did cost
19,050
Labour rate variance
(ii)
$450 (A)
Labour efficiency variance

1,000 units should have taken @ 3 hrs
3,000 hrs

1,000 units did take
3,100 hrs
Labour efficiency variance
@ standard $6
Labor total variance:
100 hrs (A)
$600 (A)
$ 1,050 (A)
Variable O/H variances
(i)
Variable O/H expenditure variance

3,100 hrs should have cost @ $3
9,300

3,100 hrs did cost
9,250
Variable O/H expenditure variance
Page | 5
50 (F)
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
ACCA F2 Management Accounting
(ii)
Variable O/H efficiency variance

1,000 units should have taken @ 3 hrs
3,000 hrs

1,000 units did take
3,100 hrs
Variable O/H efficiency variance
@ standard $3
Variable O/H total variance:
100 hrs (A)
$300 (A)
$ 250 (A)
Fixed O/H total variance (Absorption costing)

Overhead actually incurred
$17,000

Overhead absorbed (1,000 units x $15)
$15,000
Fixed O/H total variance
$ 2,000 (A)
This can be broken down into two components:
(i)
Fixed O/H expenditure variance

Budgeted O/H should have cost (1,100 units x $15) 16,500

Actual O/H cost
Fixed O/H expenditure variance
(ii)
$500 (A)
Fixed O/H volume variance (Absorption Costing)

Budgeted production
1,100 units

Actual production
1,000 units
Fixed O/H volume variance
@ standard $15
Page | 6
17,000
100 units (A)
$1,500 (A)
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
ACCA F2 Management Accounting
Interpreting variances
Material price
Favourable:
Unanticipated discounts received, better purchasing/negotiation,
cheaper (substandard) materials
Adverse:
Price inflation, poor purchasing, better quality materials
Material usage
Favourable:
Better quality materials, more efficient processing
Adverse:
Substandard material, waste, poor quality control, theft
Labour rate
Favourable:
Low pay rates, cheap workers
Adverse:
Wage inflation
Labour efficiency
Favourable:
More efficient production, motivated/better trained workers, better
materials and/or equipment
Adverse:
Poorly trained workers, deficient work organization, materials or
equipment
Overhead expenditure
Page | 7
Favourable:
Cost savings, more efficient use of ancillary services
Adverse:
Poor cost disciplines, complexity and bureaucracy
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
ACCA F2 Management Accounting
Overhead volume
Favourable:
Using production capacities beyond the level budgeted
Adverse:
Under-utilization of production capacities
Inter-connections among variances
As can be seen above, a factor causing a favourable variance may at the same time be the
cause of an adverse variance in another part of the company’s operations.
It is management’s responsibility to understand these relationships and to be able to
anticipate, and if possible quantify, the impact of their actions on overall performance.
At the same time, management needs to review standards for their relevance and
usefulness, as well as apply common sense to the materiality and controllability of specific
variances.
Reconciliation of budgeted profit and actual profit
Operating statement
Prepare a reconciliation between the profit budgeted and that realized.
Budgeted profit (Absorption costing)
33,000
Sales volume variance
1,650 (A)
Sales price variance
4,750 (A)
26,600
Cost variances:
Materials
F
Price
Usage
A
925
900
Labour
Page | 8
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any
other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always
obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes
will be accepted by the ExP Group.
theexpgroup.com