CIMA (P2) Advanced Management Accounting

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CIMAOOpenTuitionNovemFree resources for accountancy studentsAdvancedManagementAccounting(P2)Spread the word about OpenTuition, sothat all CIMA students can benefit.How to use OpenTuition:1) Register & download the latest notes2) Watch ALL OpenTuition free lectures3) Attempt free tests online4) Question practice is vital - you must obtainalso Exam Kit from Kaplan or BPPber2019

The best thingsin life are freeIMPORTANT!!! PLEASE READ CAREFULLYTo benefit from these notes you must watch the free lectures on theOpenTuition website in which we explain and expand on the topics covered.In addition question practice is vital!!You must obtain a current edition of a Revision / Exam Kit - the CIMAapproved publisher is Kaplan. It contains a great number of exam standardquestions (and answers) to practice on.We also recommend getting extra questions from BPP - if you order on line,you can use our 20% discount code: bppcima20optuYou should also use the free “Online Multiple Choice Tests” which you can findon the OpenTuition website:http://opentuition.com/cima/

2019 Syllabus - November 2019 ExamsWatch free CIMA P2 lectures 1P2 Advanced Management AccountingA. MANAGING THE COST OF CREATING VALUE1.2.3.4.Activity Based Costing & Activity Based ManagementModern Manufacturing EnvironmentTarget CostingLife-cycle Costing55172531B. MANAGING AND CONTROLLING THE PERFORMANCE OF ORGANISATIONAL UNITS 375.6.7.8.9.Divisional Performance MeasurementTransfer PricingFinancial Performance MeasurementAlternative Performance IndicatorsPerformance in the Not-For-Profit SectorC. CAPITAL INVESTMENT DECISION MAKING10.11.12.13.14.Basic Investment Appraisal Techniques – ARR and PaybackDiscounted Investment Appraisal Techniques (Net present Value and IRR)Relevant Cash Flows in DCF (Inc. Tax and Inflation)Discounted Cash Flow – Further AspectsPricingD. RISK AND CONTROL15.16.17.18.Investment Appraisal Under UncertaintyRisk and UncertaintyRisk ManagementData Collection and Use of InformationANSWERS TO EXAMPLES37475359636565717783879595101107117121Only on OpenTuition you can find: Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums

2019 Syllabus - November 2019 ExamsWatch free CIMA P2 lectures2Only on OpenTuition you can find: Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums

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2019 Syllabus - November 2019 ExamsWatch free CIMA P2 lectures 5A. MANAGING THE COST OF CREATING VALUEChapter 1ACTIVITY BASED COSTING & ACTIVITYBASED MANAGEMENT1. IntroductionThis chapter begins with revision of the key principles behind ABC costing which should be familiarto you from your CIMA P1 studies. Following this, we move on to look at other applications of theactivity based approach namely Activity Based Management (ABM), Direct Product Profitability(DPP), Direct Customer profitability and distribution channel profitability – all of thesetechniques being mentioned specifically on CIMA’s P2 updated syllabus.1.1. Revision of ABC CostingTraditional absorption costing systems share overheads across all products based on a single costdriver (usually machine or labour hours).It is argued that a modern manufacturing environment requires a more sophisticated andintelligent costing system.The automation of manufacturing environments gives rise to a greater proportion of overheadswithin total costs than was seen in past decades – so it has become more crucial that these costsare accounted for correctly.Under ABC costing, overhead costs gain visibility and the activities which cause these costs areunderstood. The costing of products becomes more accurate as it will reflect the resourcesconsumed in making that product . More accurate costs should result in better product decisionsand pricing, both of which are essential in a globally, competitive environment.The difference in an ABC calculated cost per unit compared to Absorption cost per unit can bequite significant particularly when there is a high overhead value to be shared across a diverseproduct range.Only on OpenTuition you can find: Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums

2019 Syllabus - November 2019 ExamsWatch free CIMA P2 lectures61.2. Example Case Study – XY co –Printer ManufacturerConsider XY Co a printer manufacturer who produces two types of office printers.One is a very simple model which prints only black and white text. The other is a high tech‘smart’ printer with multiple capabilities.Despite their differences, both printers take approximately 3 machine hours each to produce.Their traditional absorption costing method, that shares the cost of overheads based on number ofmachine hours at a predetermined OAR rate assigns both models with a similar amount ofoverhead cost per unit.However, when management scrutinise these overhead costs they find that the overheads relate toa variety of different causes. They include costs for activities such as quality inspections, wi-fitesting, ordering costs, customer service enquiries and so on.Through conducting this analysis, they recognise that the high tech printer’s complexrequirements are causing the majority of the overheads. This printer requires a greater range ofspecialised quality testing, a greater number of component requisitions and also receives far morepost-sale customer enquiries than the simple model.Therefore, it is unfair to allocate the two printers the same amount of overheads based on a crudemeasure of machine hours. Instead the high-tech printer should attract the greater share of theoverhead costs because they are largely caused by that model.Through ABC this fairer cost allocation can be actioned.Example 1Explain the benefits which can be gained from better allocation of overheads and moreaccurate product costing.Only on OpenTuition you can find: Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums

2019 Syllabus - November 2019 ExamsWatch free CIMA P2 lectures 71.3. Method – ABC CostingYou may be required to compute costs under an ABC system, therefore, a reminder of this processis given below:๏Identify the major ‘activities’ that give rise to overhead costs (e.g. quality testing, orderingcosts etc)๏Determine what causes the cost of each activity – the cost driver (e.g. number of inspections,number of orders)๏Calculate the total costs for each activity – the cost pools.๏Calculate a cost per cost driver (e.g a cost per inspection)๏Allocate the overhead costs to product lines based on their usage of the cost drivingactivities.๏Calculate the overhead cost per unit for each item of output.๏Add the overhead per unit to other direct costs to find a full product cost under ABC costing.NOTE on CIMA new objective test exams.It is unlikely that CIMA objective tests questions (worth approx. 2 marks each) will require youto complete a full ABC cost allocation necessitating all the steps above. However, it isimportant to be familiar with the entire process before you can answer questions on isolatedareas of the sequence.Only on OpenTuition you can find: Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums

2019 Syllabus - November 2019 ExamsWatch free CIMA P2 lectures8Example 2Una manufactures three products: A, B, and C.Data for the period just ended is as follows:A20,000 20 52 hoursProduction (units)Sales price ( per unit)Material cost (per unit)Labour hours (per unit)B25,000 20 101 hourC2,000 20 101 hour(Labour is paid at the rate of 5 per hour)Overheads for the period were as follows:Set-up 5,000 190,000Cost driver data:AMachine hours per unitNumber of set-upsNumber of deliveries receivedNumber of orders despatchedB2101020C213102022220a) Calculate the cost (and hence profit) per unit, absorbing all the overheads on the basis oflabour hours.b) Calculate the cost (and hence profit) per unit absorbing the overheads using an ActivityBased Costing approach.Only on OpenTuition you can find: Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums

2019 Syllabus - November 2019 ExamsWatch free CIMA P2 lectures 92. ABC Cost HierarchyABC costing classifies costs into the following categories.๏Unit level cost – are incurred with each unit of output -e.g. power is used by factorymachines each time a unit is produced.๏Batch level costs –increase with each ‘batch’ of output -e.g. equipment set-up costs areincurred each time a new batch is processed.๏Product Sustaining costs – this type of cost does not increase in relation to batches or unitsproduced, but are necessary costs to support particular product lines – e.g. design costs.๏Facility level costs – General manufacturing overheads which can not easily be traced toproduction activity e.g. admin staff salaries.3. Strengths / Weaknesses of ABC CostingOnly on OpenTuition you can find: Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums

2019 Syllabus - November 2019 ExamsEngendering acost-consciouscultureWatch free CIMA P2 lecturesManaging therisks inherent indriving costcompetitivenessUnderstandingcost drivers: Costaccountingsystems andprocessesIncorporatingsustainability tooptimise profits10ConnectingProducts withProfitabilityGeneratingmaximum valuethrough newproductsThe CGMA cost transformation model suggests six changes which are designed to to helpbusinesses achieve and retain cost competitiveness.๏Creating a cost conscious culture‣‣‣๏Understanding cost drivers‣‣‣๏Investigation of cause of costs & impact of different variables on these costs.Plans should look to reduce the drivers of costs AND costs themselves.ABC costing is a tool to use here.Managing the risks that come from a cost conscious culture‣‣๏Organisations need to strive for cost-leadership (costs should be lower competitors –benchmarks should be used here)Commitment to cost reduction needs to be throughout the organisation -all levels- allemployeesAbility to use technology to control costsRisks that impact quality & customer satisfactionRisk management process needs to identify these risks and mitigateConnecting products with profitability‣‣Ensuring products and services are profitable & make positive contributionAllocation of shared costs and accurate individual product costs are important hereOnly on OpenTuition you can find: Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums

2019 Syllabus - November 2019 Exams๏Maximising value from new products‣‣๏Watch free CIMA P2 lectures 11Profitability of new products must be assessed before production begins.New products / services should aim to be adaptable/ flexible so can be changed tosatisfy as many customer segments as possibleIncorporate Sustainability : Consider the environmental impact of products‣Negative impacts (such as creating unnecessary waste) can add costs as well asdamaging reputation and sales.Actions to Take / DosActions to Avoid / Don’ts๏Get buy-in from the rest of thebusiness. ABC provides businessmanagers, as well as the financefunction, with the information neededto make value-based decisions๏Do not get caught up in too muchattention to detail and control. It canobscure the bigger picture or make thefirm lose sight of strategic objectives ina quest for small savings๏Use ABC for pricing and productprioritisation decisions๏๏ABC should be implemented bymanagement accountants as they arebest placed to manage the process andto ensure benefits realisationIt is important not to fall into the trap ofthinking ABC costs are relevant for alldecisions. Not all costs will disappear ifa product is discontinued, an examplebeing building occupancy costs.4. Activity based management.Activity based management uses the principles and information from activity-based costing tocontrol and reduce unnecessary costs by focussing on their cause. This will streamline and drivecontinuous improvements through focusing on value as perceived by customers.ABC costing will enable management to better understand the cause of costs, and from hereaction can be taken to control and reduce costs through controlling and reducing the demand forcost causing activities.Activity based management applies this approach to understand the true cost of otherbusiness outputs – such as the true cost of dealing with customer segments, projects and servicesoffered by the company.ABM uses this insight to make better operational and strategic decisions for example, investmentin new methods/ machinery, re-designing product components and changing service levelsoffered.Only on OpenTuition you can find: Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums

2019 Syllabus - November 2019 ExamsWatch free CIMA P2 lectures125. Activity Based Management Principles – in practice๏Identify activities within all processes and functions of the business.๏Classify these activities into Value-adding and Non-value adding activities.๏Value adding activities are crucial to the organisation’s success,๏non-value adding activities represent inefficiency and waste and should be reduced,ideally eliminated.๏Train and empower all staff to be able to support activity based approach๏Improve profits through combining principles of lean production, continuous improvementand focus on increasing value from customer perspective.5.1. Continuous Improvement – performance management under ABMSuccessful implementation of ABM, will give management an understanding of costs relating tovalue-adding and non-value adding activities within the organisation.The total costs of each type can then be monitored and the performance of these activities canalso be measured – for example, in terms of speed, efficiency and quality.5.2. Activity Based Management – conditions for success๏Requires commitment of whole organisation – a total culture change that will need to beincentivised and proactively managed through effective leadership and employeeinvolvement.๏Investment in terms of time and money is needed to support a fully integrated ABMapproach.๏New systems will be required relating to cost recording, performance measurement andreporting of information. This will be dependent on IT capabilities and compatibility ofaccounting systems with other parts of the organisation.๏ABM should be aligned with strategic objectives – not a short term focused cost-cuttingexercise. It has to increase product profitability and value for customers.Only on OpenTuition you can find: Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums

2019 Syllabus - November 2019 ExamsWatch free CIMA P2 lectures 136. Customer Profitability AnalysisCustomer profitability analysis (CPA) is an application of Activity Based principles to customers orcustomer segments.Revenues and service costs attributable to specific customer types are analysed to identify thecustomers’ level of profitability.Customers are supposed to be king, but it is often found that some customers are moreprofitable to a business than others.Management may find that some customers are actually costing more than the revenue they6.1. Pareto AnalysisIt is often found that a small number of customers provide the majority of a businesses profit.Sometimes referred to as 80:20 rule or Pareto’s law this can be used to describe a situation wherejust 20% of the customers are responsible for 80% of the total profit. Amongst the remaining80% of customers, the rule suggests that half will contribute a lower margin and the other half willactually be loss making.Using this knowledge, strategies can be formulated to ensure service levels are focused onretaining the most profitable customers, whereas the lower margin groups will have less timedevoted to

Advanced Management Accounting CIMA (P2) The best things in life are free To benefit from these notes you must watch the free lectures on the OpenTuition website in which we explain and expand on the topics covered. In addition question practice is vital!! You must obtain a current edition of a Revision / Exam Kit - the CIMA approved publisher is Kaplan. It contains a great number of exam .

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