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S T U D Y T E X T PERFORMANCE MANAGEMENT BPP Learning Media is the sole ACCA Platinum Approved Learning Partner – content for the ACCA qualification.In this, the only Paper F5 study text to be reviewed by the examiner: †¢ †¢ †¢ †¢ †¢ †¢ †¢ †¢ We discuss the best strategies for studying for ACCA exams We highlight the most important elements in the syllabus and the key skills you will need We signpost how each chapter links to the syllabus and the study guide We provide lots of exam focus points demonstrating what the examiner will want you to do We emphasise key points in regular fast forward summaries We test your knowledge of what you've studied in quick quizzes We examine your understanding in our exam question bank We reference all the important topics in our full indexBPP's i-Pass product also supports this paper. FOR EXAMS IN 2011 First edition 2007 Fourth edition November 2010 ISBN 9780 7517 8921 8 (Previous ISBN 9870 7517 6367 6) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA www. bpp. com/learningmedia Printed in the United Kingdom We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions.The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd, except where otherwise stated. All our rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd.Your learning materials, published by BPP Learning Media Ltd, are printed on paper sourced from sustainable, managed forests.  © BPP Learning Media Ltd 2010 ii Contents Page Introduction Helping you to pass – the O NLY F5 Study Text reviewed by the examiner! Studying F5 The exam paper v vii xi 3 21 33 41 49 63 73 95 123 157 173 199 215 233 267 287 319 337 365 387 403 419 463 Part A Specialist cost and management accounting techniques 2a 2b 2c 2d 2e 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Costing Activity based costing Target costing Lifecycle costing Throughput accounting Environmental accounting Cost volume profit (CVP) analysis Limiting factor analysis Pricing decisions Short-term decisions Risk and uncertainty Objectives of budgetary control Budgetary systems Quantitative analysis in budgeting Budgeting and standard costing Variance analysis Behavioural aspects of standard costing Performance measurement Divisional performance measures Further performance management Part B Decision-making techniques Part C BudgetingPart D Standard costing and variances analysis Part E Performance measurement and control Exam question bank Exam answer bank Index Review form and free prize draw Contents iii A note about copyright Dear Customer What does the little  © mean and why does it matter? Your market-leading BPP books, course materials and e-learning materials do not write and update themselves. People write them: on their own behalf or as employees of an organisation that invests in this activity. Copyright law protects their livelihoods. It does so by creating rights over the use of the content.Breach of copyright is a form of theft – as well as being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics. With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: †¢ †¢ Photocopying our materials is a breach of copyright Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright You can, of course, sell your books, in the form in which you hav e bought them – once you have finished with them. Is this fair to your fellow students? We update for a reason. ) But the e-products are sold on a single user licence basis: we do not supply ‘unlock’ codes to people who have bought them second-hand. And what about outside the UK? BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website. A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that do.If they act illegally and unethically in one area, can you really trust them? iv Helping you to pass – the ONLY F5 Study Text reviewed by the examiner! BPP Learning Media – the sole Platinum Approved Learning Partner – content As ACCA’s sole Platinum Approved Learning Partner – content, BPP Learning Media gives you the unique o pportunity to use examiner-reviewed study materials for the 2011 exams. By incorporating the examiner’s comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA-approved support for your studies. NEW FEATURE – the PER alert!Before you can qualify as an ACCA member, you do not only have to pass all your exams but also fulfil a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the ‘PER alert’ feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement. Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments.The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success. Developing exam awareness Our Texts are completely focused on helping you pass your exam. Our advice on Studying F5 outlines the content of the paper, the necessary skills the examiner expects you to demonstrate and any brought forward knowledge you are expected to have. Exam focus points are included within the chapters to highlight when and how specific topics were examined, or how they might be examined in the future.Using the Syllabus and Study Guide You can find the syllabus and Study Guide on page xi of this Study Text Testing what you can do Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt. We include Questions – lots of them – both within chapters and in the Exam Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content. Introduction v Chapter features Each chapter contains a number of helpful features to guide you through each topic.Topic list Topic list Syllabus reference Tells you what you will be studying in this chapter and the relevant section numbers, together the ACCA syllabus references. Puts the chapter content in the context of the syllabus as a whole. Links the chapter content with ACCA guidance. Highlights how examinable the chapter content is likely to be and the ways in which it could be examined. What you are assumed to know from previous studies/exams. Summarises the content of main chapter headings, allowing you to preview and review each section easily. Demonstrate how to apply key knowledge and techniques.Definitions of important concepts that can often earn you easy marks in exams. Tell you when and how specific topics were examined, or how they may be examined in the future. Formulae that are not given in the exam but which have to be learnt. T his is a new feature that gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER). Introduction Study Guide Exam Guide Knowledge brought forward from earlier studies FAST FORWARD Examples Key terms Exam focus points Formula to learn Question Case StudyGive you essential practice of techniques covered in the chapter. Provide real world examples of theories and techniques. Chapter Roundup Quick Quiz Exam Question Bank A full list of the Fast Forwards included in the chapter, providing an easy source of review. A quick test of your knowledge of the main topics in the chapter. Found at the back of the Study Text with more comprehensive chapter questions. Cross referenced for easy navigation. vi Introduction Studying F5 The F5 examiner wants candidates to be able to apply management accounting techniques in business environments.The key question you need to be able to answer is ‘what does it all ac tually mean? ‘ Modern technology is capable of producing vast amounts of management accounting information but it has to be used to help managers to make good decisions and manage effectively. The emphasis in this paper is therefore on practical elements and application to the real world. The examiner does not want to trick you and papers will be fair. The F5 examiner The examiner for this paper is Ann Irons, who replaced Geoff Cordwell from the December 2010 sitting onwards.Ann Irons has written several articles in Student Accountant, including one on how to approach the paper (September 2010 issue). Make sure you read these articles to gain further insight into what the examiner is looking for. Syllabus update The F5 syllabus has been updated for the June 2011 sitting onwards. The full syllabus and study guide can be found in this Study Text on pages xi to xviii. The main changes are the omission of backflush accounting and the inclusion of environmental accounting and cost volume profit (CVP) analysis. The syllabus order has also been changed, which has been reflected in this Study Text.A full summary of the changes to the F5 syllabus is given on the next page.. Introduction vii viii Introduction Introduction ix 1 What F5 is about The aim of this syllabus is to develop knowledge and skills in the application of management accounting techniques. It covers modern techniques, decision making, budgeting and standard costing, concluding with how a business should be managed and controlled. F5 is the middle paper in the management accounting section of the qualification structure. F2 concerns just techniques and P5 thinks strategically and considers environmental factors.F5 requires you to be able to apply techniques and think about their impact on the organisation. 2 What skills are required? †¢ †¢ †¢ †¢ †¢ You are expected to have a core of management accounting knowledge from Paper F2 You will be required to carry out calculation s, with clear workings and a logical structure You will be required to interpret data You will be required to explain management accounting techniques and discuss whether they are appropriate for a particular organisation You must be able to apply your skills in a practical context 3 How to improve your chances of passing †¢ †¢ †¢ †¢ †¢ †¢ †¢ There is no choice in this paper, all questions have to be answered. You must therefore study the entire syllabus, there are no short-cuts Practising questions under timed conditions is essential. BPP's Practice and Revision Kit contains 20 mark questions on all areas of the syllabus Questions will be based on simple scenarios and answers must be focused and specific to the organisation Answer plans will help you to focus on the requirements of the question and enable you to manage your time effectively Answer all parts of the question.Even if you cannot do all of the calculation elements, you will still be ab le to gain marks in the discussion parts Make sure your answers focus on practical applications of management accounting, common sense is essential! Keep an eye out for articles as the examiner will use Student Accountant to communicate with students Read journals etc to pick up on ways in which real organisations apply management accounting and think about your own organisation if that is relevant 4 Brought forward knowledge You will need to have a good working knowledge of basic management accounting from Paper F2.Chapter 1 of this Study Text revises costing and brought forward knowledge is identified throughout the text. If you struggle with the examples and questions used to revise this knowledge, you must go back and revisit your previous work. The examiner will assume you know this material and it may form part of an exam question. x Introduction The exam paper Format of the paper The exam is a three-hour paper containing five compulsory 20 mark questions. You also have 15 min utes for reading and planning. There will be a mixture of calculations and discussion and the examiner's aim is to cover as much of the syllabus as possible.Syllabus and Study Guide The F5 syllabus and study guide can be found on the next page. Introduction xi xii Introduction Introduction xiii xiv Introduction Introduction xv xvi Introduction Introduction xvii xviii Introduction Introduction xix Analysis of past papers The table below provides details of when each element of the syllabus has been examined and the question number in which each element appeared. Further details can be found in the Exam Focus Points in the relevant chapters. Covered in Text chapter June 2010 Dec 2009 June 2009 Pilot PaperSPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES 2a 2b 2c 2d 2e 3 4 5 6 7 8 9 9 10 8 Activity based costing Target costing Life cycle costing Throughput accounting Environmental accounting DECISION-MAKING TECHNIQUES Cost-volume-profit analysis Multi-limiting factors and the use of linear programming and shadow pricing Pricing decisions Make-or-buy and other short-term decisions Dealing with risk and uncertainty in decision-making BUDGETING Objectives Budgetary systems Types of budget Quantitative analysis in budgeting Behavioural aspects of budgeting STANDARD COSTING AND VARIANCE ANALYSIS 11 12 12 13 13 14 15 16 Budgeting and standard costing Basic variances and operating systems Material mix and yield variances Planning and operational variances Behavioural aspects of standard costing PERFORMANCE MEASUREMENT AND CONTROL The scope of performance measurement Divisional performance and transfer pricing Performance analysis in not-for-profit organisations and the public sector 4 4 2 4 2 2 1 1 3 2 2 5 3 5 3 3 1, 4 4 4 1 1 2 1 xx Introduction Exam formulae Set out below are the formulae you will be given in the exam. If you are not sure what the symbols mean, or how the formulae are used, you should refer to the appropriate chapter in this Study Text. Chapter in Study Text Learning curve Y = axb Where Y a x b LR = cumulative average time per unit to produce x units = the time taken for the first unit of output = the cumulative number of units = the index of learning (log LR/log 2) = the learning rate as a decimal 10 Regression analysis y = a + bx b= a= 10 n ? xy ? ? x ? y n ? x 2 ? (? ) 2 ?y b? x ? n n (n? x 2 ? (? x)2 )(n? y 2 ? (? y)2 ) 5 r= n? xy ? ? x ? y Demand curve P b a = a – bQ = change in price change in quantity = price when Q = 0 MR = a – 2bQ Introduction xxi xxii Introduction P A R T A Specialist cost and management accounting techniques 1 2 Costing Topic list 1 Costing 2 The problem of overheads 3 A revision of absorption costing 4 Overhead absorption 5 Marginal costing 6 Absorption costing and marginal costing compared Introduction Part A of this Study Text looks at specialist cost and management accounting techniques. This chapter serves as a revision of concepts you will have covered in your previous studies.I n the following chapter we will be looking at more complex techniques so it is important that you are familiar with the key concepts and terminology in this chapter. If you want to get free study material of CAT, ACCA, CIMA, CFA, CIA visit : freefor911. wordpress. com 3 Exam guide This chapter serves as an introduction to your study of cost and management accounting techniques, as knowledge is assumed from Paper F2 Management Accounting and is still examinable at this level. Questions in this paper will focus on interpretation rather than doing calculations. 1 Costing FAST FORWARD Costing is the process of determining the costs of products, services or activities.Cost accounting is used to determine the cost of products, jobs or services (whatever the organisation happens to be involved in). Such costs have to be built up using a process known as cost accumulation. In your earlier studies you will have learnt how to accumulate the various cost elements which make up total cost. Abso rption costing cost accumulation system 2 The problem of overheads FAST FORWARD Indirect costs, or overheads, are costs incurred in making a product or providing a service, but which cannot be traced directly to the product or service. Absorption costing is a means of incorporating a fair share of these costs into the cost of a unit of product or service provided.If a company manufactures a product, the cost of the product will include the cost of the raw materials and components used in it and cost of the labour effort required to make it. These are direct costs of the product. The company would, however, incur many other costs in making the product, which are not directly attributable to a single product, but which are incurred generally in the process of manufacturing a large number of product units. These are indirect costs or overheads. Such costs include the following. †¢ †¢ Factory rent and rates Machine depreciation †¢ †¢ Supervision costs Heating and lig hting 4 1: Costing ? Part A Specialist cost and management accounting techniques Key termsA direct cost is a cost that can be traced in full to the product, service or department that is being costed. An indirect cost or overhead is a cost that is incurred in the course of making a product, providing a service or running a department, but which cannot be traced directly and in full to the product, service or department. In some companies, the overheads cost might greatly exceed the direct production costs. It might seem unreasonable to ignore indirect costs entirely when accumulating the costs of making a product, and yet there cannot be a completely satisfactory way of sharing out indirect costs between the many different items of production which benefit from them. 2. Using absorption costing to deal with the problem of overheads Traditionally, the view has been that a fair share of overheads should be added to the cost of units produced. This fair share will include a portion of all production overhead expenditure and possibly administration and marketing overheads too. This is the view embodied in the principles of absorption costing. 2. 1. 1 Theoretical justification for using absorption costing All production overheads are incurred in the production of the organisation's output and so each unit of the product receives some benefit from these costs. Each unit of output should therefore be charged with some of the overhead costs. 2. 1. 2 Practical reasons for using absorption costing (a) Inventory valuations Inventory in hand must be valued for two reasons. i) (ii) For the closing inventory figure in the statement of financial position For the cost of sales figure in the income statement The valuation of inventories will affect profitability during a period because of the way in which the cost of sales is calculated. Cost of goods sold = (b) Pricing decisions Many companies attempt to set selling prices by calculating the full cost of production or sales o f each product, and then adding a margin for profit. ‘Full cost plus pricing' can be particularly useful for companies which do jobbing or contract work, where each job or contract is different, so that a standard unit sales price cannot be fixed. Without using absorption costing, a full cost is difficult to ascertain. c) Establishing the profitability of different products This argument in favour of absorption costing states that if a company sells more than one product, it will be difficult to judge how profitable each individual product is, unless overhead costs are shared on a fair basis and charged to the cost of sales of each product. cost of goods produced + the value of opening inventories – the value of closing inventories 2. 2 Using marginal costing to deal with the problem of overheads For many purposes absorption costing is less useful as a costing method than marginal costing. In some situations, absorption costing can be misleading in the information it su pplies.Advocates of marginal costing take the view that only the variable costs of making and selling a product or service should be identified. Fixed costs should be dealt with separately and treated as a cost of the accounting period rather than shared out somehow between units produced. Some overhead costs are, Part A Specialist cost and management accounting techniques ? 1: Costing 5 however, variable costs which increase as the total level of activity rises and so the marginal cost of production and sales should include an amount for variable overheads. 3 A revision of absorption costing FAST FORWARD Absorption costing is a traditional approach to dealing with overheads, involving three stages: allocation, apportionment and absorption.Apportionment has two stages, general overhead apportionment and service department cost apportionment. Key term Absorption costing is a method of product costing which aims to include in the total cost of a product (unit, job and so on) an approp riate share of an organisation's total overhead, which is generally taken to mean an amount which reflects the amount of time and effort that has gone into producing the product. You should have covered absorption costing in your earlier studies. We will therefore summarise the simpler points of the topic but will go into some detail on the more complex areas to refresh your memory. Knowledge brought forward from earlier studiesAbsorption costing †¢ †¢ Product costs are built up using absorption costing by a process of allocation, apportionment and overhead absorption. Allocation is the process by which whole cost items are charged directly to a cost unit or cost centre. Direct costs are allocated directly to cost units. Overheads clearly identifiable with cost centres are allocated to those cost centres but costs which cannot be identified with one particular cost centre are allocated to general overhead cost centres. The cost of a warehouse security guard would therefore be charged to the warehouse cost centre but heating and lighting costs would be charged to a general overhead cost centre.The first stage of overhead apportionment involves sharing out (or apportioning) the overheads within general overhead cost centres between the other cost centres using a fair basis of apportionment (such as floor area occupied by each cost centre for heating and lighting costs). The second stage of overhead apportionment is to apportion the costs of service cost centres (both directly allocated and apportioned costs) to production cost centres. The final stage in absorption costing is the absorption into product costs (using overhead absorption rates) of the overheads which have been allocated and apportioned to the production cost centres. Costs allocated and apportioned to non-production cost centres are usually deducted from the full cost of production to arrive at the cost of sales. †¢ †¢ †¢ †¢ Question Cost apportionmentBriefly discuss the type of factors which could affect the choice of the bases an organisation can use to apportion service department costs. 6 1: Costing ? Part A Specialist cost and management accounting techniques Answer (a) (b) (c) (d) (e) The type of service being provided The amount of overhead expenditure involved The number of departments benefiting from the service The ability to be able to produce realistic estimates of the usage of the service The resulting costs and benefits Question More cost apportionment A company is preparing its production overhead budgets and determining the apportionment of those overheads to products. Cost centre expenses and related information have been budgeted as follows.Total $ 78,560 16,900 16,700 2,400 8,600 3,400 40,200 402,000 100 35,000 25,200 45,000 Machine shop A $ 8,586 6,400 Machine shop B $ 9,190 8,700 Assembly $ 15,674 1,200 Canteen $ 29,650 600 Maintenance $ 15,460 – Indirect wages Consumable materials Rent and rates Buildings insurance P ower Heat and light Depreciation (machinery) Value of machinery Power usage (%) Direct labour (hours) Machine usage (hours) Area (sq ft) Required 201,000 55 8,000 7,200 10,000 179,000 40 6,200 18,000 12,000 22,000 3 20,800 – 15,000 – – – – 6,000 – 2 – – 2,000 Using the direct apportionment to production departments method and bases of apportionment which you consider most appropriate from the information provided, calculate overhead totals for the three production departments. AnswerTotal $ Indirect wages 78,560 Consumable materials 16,900 Rent and rates 16,700 Insurance 2,400 8,600 Power Heat and light 3,400 Depreciation 40,200 166,760 Reallocate – Reallocate – Totals 166,760 A $ 8,586 6,400 3,711 533 4,730 756 20,100 44,816 7,600 4,752 57,168 B $ 9,190 8,700 4,453 640 3,440 907 17,900 45,230 5,890 11,880 63,000 Assembly $ 15,674 1,200 5,567 800 258 1,133 2,200 26,832 19,760 – 46,592 MainCanteen tenance $ $ 29,650 15,460 600 – 2,227 742 320 107 – 172 453 151 – – 33,250 16,632 (33,250) – – (16,632) – – Basis of apportionment Actual Actual Area Area Usage Area Val of mach Direct labour Mach usage Part A Specialist cost and management accounting techniques ? 1: Costing 7 4 Overhead absorption FAST FORWARDAfter apportionment, overheads are absorbed into products using an appropriate absorption rate based on budgeted costs and budgeted activity levels. Having allocated and/or apportioned all overheads, the next stage in absorption costing is to add them to, or absorb them into, the cost of production or sales. 4. 1 Use of a predetermined absorption rate Knowledge brought forward from earlier studies Step 1 Step 2 Step 3 The overhead likely to be incurred during the coming year is estimated. The total hours, units or direct costs on which the overhead absorption rates are based (activity levels) are estimated. Absorption rate = estima ted overhead ? budgeted activity level 4. 2 Choosing the appropriate absorption base Question Absorption basesList as many possible bases of absorption (or ‘overhead recovery rates') as you can think of. Answer (a) (b) (c) (d) (e) (f) (g) (h) A percentage of direct materials cost A percentage of direct labour cost A percentage of prime cost A percentage of factory cost (for administration overhead) A percentage of sales or factory cost (for selling and distribution overhead) A rate per machine hour A rate per direct labour hour A rate per unit The choice of an absorption basis is a matter of judgement and common sense. There are no strict rules or formulae involved. But the basis should realistically reflect the characteristics of a given cost centre, avoid undue anomalies and be ‘fair'.The choice will be significant in determining the cost of individual products, but the total cost of production overheads is the budgeted overhead expenditure, no matter what basis of abs orption is selected. It is the relative share of overhead costs borne by individual products and jobs which is affected. Question Absorption rates Using the information in and the results of the question on page 7, determine budgeted overhead absorption rates for each of the production departments using appropriate bases of absorption. 8 1: Costing ? Part A Specialist cost and management accounting techniques Answer Machine shop A: Machine shop B: Assembly: $57,168/7,200 = $7. 94 per machine hour $63,000/18,000 = $3. 50 per machine hour $46,592/20,800 = $2. 24 per direct labour hour 4. 3 Over and under absorption of overheads FAST FORWARDUnder-/over-absorbed overhead occurs when overheads incurred do not equal overheads absorbed. The rate of overhead absorption is based on estimates (of both numerator and denominator) and it is quite likely that either one or both of the estimates will not agree with what actually occurs. Actual overheads incurred will probably be either greater tha n or less than overheads absorbed into the cost of production, and so it is almost inevitable that at the end of the accounting year there will have been an over absorption or under absorption of the overhead actually incurred. †¢ †¢ Over absorption means that the overheads charged to the cost of sales are greater than the overheads actually incurred.Under absorption means that insufficient overheads have been included in the cost of sales. Suppose that the budgeted overhead in a production department is $80,000 and the budgeted activity is 40,000 direct labour hours, the overhead recovery rate (using a direct labour hour basis) would be $2 per direct labour hour. Actual overheads in the period are, say $84,000 and 45,000 direct labour hours are worked. $ Overhead incurred (actual) 84,000 90,000 Overhead absorbed (45,000 ? $2) Over-absorption of overhead 6,000 In this example, the cost of production has been charged with $6,000 more than was actually spent and so the cost that is recorded will be too high.The over-absorbed overhead will be an adjustment to the profit and loss account at the end of the accounting period to reconcile the overheads charged to the actual overhead. Question Under and over-absorption The total production overhead expenditure of the company in the questions above was $176,533 and its actual activity was as follows. Machine shop A Machine shop B Assembly Direct labour hours 8,200 6,500 21,900 Machine usage hours 7,300 18,700 – Required Using the information in and results of the previous questions, calculate the under- or over-absorption of overheads. Answer $ Actual expenditure Overhead absorbed Machine shop A Machine shop B Assembly $ 176,533 ,300 hrs ? $7. 94 18,700 hrs ? $3. 50 21,900 hrs ? $2. 24 57,962 65,450 49,056 172,468 4,065 Under-absorbed overhead Part A Specialist cost and management accounting techniques ? 1: Costing 9 4. 4 The reasons for under-/over-absorbed overhead The overhead absorption rate is pre determined from budget estimates of overhead cost and activity level. Under or over recovery of overhead will occur in the following circumstances. †¢ †¢ †¢ Actual overhead costs are different from budgeted overheads. The actual activity level is different from the budgeted activity level. Actual overhead costs and actual activity level differ from those budgeted. QuestionOver and under-absorption Elsewhere has a budgeted production overhead of $180,000 and a budgeted activity of 45,000 machine hours. Required Calculate the under-/over-absorbed overhead, and note the reasons for the under-/over-absorption in the following circumstances. (a) (b) (c) Actual overheads cost $170,000 and 45,000 machine hours were worked. Actual overheads cost $180,000 and 40,000 machine hours were worked. Actual overheads cost $170,000 and 40,000 machine hours were worked. Answer The overhead recovery rate is $180,000/45,000 = $4 per machine hour. (a) Actual overhead Absorbed overhead (45, 000 ? $4) Over-absorbed overhead $ 170,000 180,000 10,000Reason: Actual and budgeted machine hours are the same but actual overheads cost less than expected. (b) Actual overhead Absorbed overhead (40,000 ? $4) Under-absorbed overhead $ 180,000 160,000 20,000 Reason: Budgeted and actual overhead costs were the same but fewer machine hours were worked than expected. $ (c) Actual overhead 170,000 160,000 Absorbed overhead (40,000 ? $4) Under-absorbed overhead 10,000 Reason: A combination of the reasons in (a) and (b). 10 1: Costing ? Part A Specialist cost and management accounting techniques 5 Marginal costing FAST FORWARD In marginal costing, inventories are valued at variable production cost whereas in absorption costing they are valued at their full production cost.Marginal cost is the cost of one unit of a product/service which could be avoided if that unit were not produced/provided. Contribution is the difference between sales revenue and variable (marginal) cost of sales. Margi nal costing is an alternative to absorption costing. Only variable costs (marginal costs) are charged as a cost of sales. Fixed costs are treated as period costs and are charged in full against the profit of the period in which they are incurred. Knowledge brought forward from earlier studies Key terms Marginal costing †¢ In marginal costing, closing inventories are valued at marginal (variable) production cost whereas, in absorption costing, inventories are valued at their full production cost which includes absorbed fixed production overhead.If the opening and closing inventory levels differ, the profit reported for the accounting period under the two methods of cost accumulation will therefore be different. But in the long run, total profit for a company will be the same whichever is used because, in the long run, total costs will be the same by either method of accounting. Different accounting conventions merely affect the profit of individual periods. †¢ †¢ Quest ion Absorption and marginal costing A company makes and sells a single product. At the beginning of period 1, there are no opening inventories of the product, for which the variable production cost is $4 and the sales price $6 per unit.Fixed costs are $2,000 per period, of which $1,500 are fixed production costs. Normal output is 1,500 units per period. In period 1, sales were 1,200 units, production was 1,500 units. In period 2, sales were 1,700 units, production was 1,400 units. Required Prepare profit statements for each period and for the two periods in total using both absorption costing and marginal costing. Answer It is important to notice that although production and sales volumes in each period are different, over the full period, total production equals sales volume. The total cost of sales is the same and therefore the total profit is the same by either method of accounting.Differences in profit in any one period are merely timing differences which cancel out over a longe r period of time. Part A Specialist cost and management accounting techniques ? 1: Costing 11 (a) Absorption costing. The absorption rate for fixed production overhead is $1,500/1,500 units = $1 per unit. The fully absorbed cost per unit = $(4+1) = $5. $ Sales Production costs Variable Fixed Add opening inventory b/f Less closing inventory c/f Production cost of sales Under-absorbed o/hd Total costs Gross profit Other costs Net profit (300? $5) (300? $5) Period 1 $ 7,200 $ Period 2 $ 10,200 Total $ $ 17,400 6,000 1,500 7,500 – 7,500 1,500 6,000 – 6,000 1,200 (500) 700 5,600 1,400 7,000 1,500 8,500 – 8,500 100 8,600 1,600 (500) 1,100 1,600 2,900 14,500 1,500 16,000 1,500 14,500 100 14,600 2,800 (1,000) 1,800 (b) Marginal costing The marginal cost per unit = $4. Sales Variable production cost Add opening inventory b/f Less closing inventory c/f Variable prod. cost of sales Contribution Fixed costs Profit Period 1 $ 7,200 6,000 – 6,000 1,200 4,800 2,400 2,00 0 400 $ Period 2 $ 10,200 5,600 1,200 6,800 – 6,800 3,400 2,000 1,400 $ Total $ 11,600 1,200 12,800 1,200 11,600 5,800 4,000 1,800 $ 17,400 (300? $4) (300? $4) Question Direct labour Direct materials Production overhead Standard production cost per unit 3 hours at $6 per hour 4 kilograms at $7 per kg Variable Fixed Marginal and absorption costing $ 18 28 3 20 69RH makes and sells one product, which has the following standard production cost. Normal output is 16,000 units per annum. Variable selling, distribution and administration costs are 20 per cent of sales value. Fixed selling, distribution and administration costs are $180,000 per annum. There are no units in finished goods inventory at 1 October 20X2. The fixed overhead expenditure is spread evenly throughout the year. The selling price per unit is $140. Production and sales budgets are as follows. Six months ending Six months ending 31 March 20X3 30 September 20X3 Production 8,500 7,000 Sales 7,000 8,000 12 1: Costing ? Part A Specialist cost and management accounting techniquesRequired Prepare profit statements for each of the six-monthly periods, using the following methods of costing. (a) (b) Marginal costing Absorption costing Answer (a) Profit statements for the year ending 30 September 20X3 Marginal costing basis Six months ending 31 March 20X3 $'000 $'000 Sales at $140 per unit 980 Opening inventory – Std. variable prod. cost (at $49 per unit) 416. 5 416. 5 Closing inventory (W1) 73. 5 343 637 Variable selling and so on costs 196 Contribution 441 Fixed costs: production (W2) 160 selling and so on 90 250 Net profit 191 Profit statements for the year ending 30 September 20X3 Absorption costing basis Six months ending 31 March 20X3 $'000 $'000 Sales at $140 per unit 980 Opening inventory – Std. cost of prod. at $69 per unit) Closing inventory (W1) (Over-)/under-absorbed overhead (W3) Gross profit Selling and so on costs Variable Fixed Net profit 586. 5 586. 5 103. 5 483. 0 (10. 0) 473 507 196 90 286 221 224 90 314 234 Six months ending 30 September 20X3 $'000 $'000 1,120 73. 5 343. 0 416. 5 24. 5 392 728 224 504 160 90 250 254 (b) Six months ending 30 September 20X3 $'000 $'000 1,120 103. 5 483. 0 586. 5 34. 5 552. 0 20. 0 572 548 Part A Specialist cost and management accounting techniques ? 1: Costing 13 Workings 1 Opening inventory Production Sales Closing inventory Marginal cost valuation (? $49) Absorption cost valuation (? $69) 2 3 Normal output (16,000 ? 2) Budgeted output Difference ? std. ixed prod. o/hd per unit (Over-)/under-absorbed overhead Six months ending 31 March 20X3 Units – 8,500 8,500 7,000 1,500 $73,500 $103,500 Six months ending 30 September 20X3 Units 1,500 7,000 8,500 8,000 500 $24,500 $34,500 Budgeted fixed production o/hd = 16,000 units ? $20 = $320,000 pa = $160,000 per six months Six months ending 31 March 20X3 8,000 units units 8,500 500 units ? $20 ($10,000) Six months ending 30 September 20X3 8,000 units 7,000 units 1, 000 units ? $20 $20,000 6 Absorption costing and marginal costing compared FAST FORWARD If opening and closing inventory levels differ profit reported under the two methods will be different.In the long run, total profit will be the same whatever method is used. 6. 1 Reconciling the profit figures given by the two methods The difference in profits reported under the two costing systems is due to the different inventory valuation methods used. (a) If inventory levels increase between the beginning and end of a period, absorption costing will report the higher profit because some of the fixed production overhead incurred during the period will be carried forward in closing inventory (which reduces cost of sales) to be set against sales revenue in the following period instead of being written off in full against profit in the period concerned.If inventory levels decrease, absorption costing will report the lower profit because as well as the fixed overhead incurred, fixed production ov erhead which had been carried forward in opening inventory is released and is also included in cost of sales. (b) 6. 2 Example: Reconciling profits The profits reported for period 1 in the question on page 11 would be reconciled as follows. Marginal costing profit Adjust for fixed overhead in inventory (inventory increase of 300 units ? $1 per unit) Absorption costing profit $ 400 300 700 Exam focus point Remember that if opening inventory values are greater than closing inventory values, marginal costing shows the greater profit. 14 1: Costing ?Part A Specialist cost and management accounting techniques 6. 3 Marginal versus absorption costing: reporting to management FAST FORWARD Marginal costing is more useful for decision-making purposes, but absorption costing is needed for financial reporting purposes to comply with accounting standards. We know that the reported profit in any period is likely to differ according to the costing method used, but does one method provide a more re liable guide to management about the organisation's profit position? With marginal costing, contribution varies in direct proportion to the volume of units sold. Profits will increase as sales volume rises, by the amount of extra contribution earned.Since fixed cost expenditure does not alter, marginal costing gives an accurate picture of how a firm's cash flows and profits are affected by changes in sales volumes. With absorption costing, in contrast, there is no clear relationship between profit and sales volume, and as sales volume rises the total profit will rise by the sum of the gross profit per unit plus the amount of overhead absorbed per unit. Arguably this is a confusing and unsatisfactory method of monitoring profitability. If sales volumes are the same from period to period, marginal costing reports the same profit each period (given no change in prices or costs). In contrast, using absorption costing, profits can vary with the volume of production, even when the volume of sales is constant.Using absorption costing there is therefore the possibility of manipulating profit, simply by changing output and inventory levels. 6. 4 Example: Manipulating profits Gloom Co budgeted to make and sell 10,000 units of its product in 20X1. The selling price is $10 per unit and the variable cost $4 per unit. Fixed production costs were budgeted at $50,000 for the year. The company uses absorption costing and budgeted an absorption rate of $5 per unit. During 20X1, it became apparent that sales demand would only be 8,000 units. The management, concerned about the apparent effect of the low volume of sales on profits, decided to increase production for the year to 15,000 units.Actual fixed costs were still expected to be $50,000 in spite of the significant increase in production volume. Required Calculate the profit at an actual sales volume of 8,000 units, using the following methods. (a) (b) Absorption costing Marginal costing Explain the difference in profits cal culated. Solution (a) Absorption costing Sales (8,000 ? $10) Cost of production (15,000 ? $9) Less: over-absorbed overhead (5,000 ? $5) $ 135,000 (25,000) (110,000) (30,000) 63,000 33,000 $ 80,000 Closing inventory (7,000 ? $9) Profit Part A Specialist cost and management accounting techniques ? 1: Costing 15 (b) Marginal costing Sales Cost of sales Cost of production (15,000 ? $4) Closing inventory (7,000 ? $4) Contribution Fixed costs Loss $ $ 80,000 0,000 ((28,000) 32,000 48,000 50,000 (2,000) The difference in profits of $35,000 is explained by the difference in the increase in inventory values (7,000 units ? $5 of fixed overhead per unit). With absorption costing, the expected profit will be higher than the original budget of $10,000 (10,000 units ? ($10 – 9)) simply because $35,000 of fixed overheads will be carried forward in closing inventory values. By producing to absorb overhead rather than to satisfy customers, inventory levels will, of course, increase. Unless th is inventory is sold, however, there may come a point when production has to stop and the inventory has to be sold off at lower prices.Marginal costing would report a contribution of $6 per unit, or $48,000 in total for 8,000 units, which fails to cover the fixed costs of $50,000 by $2,000. The argument above is not conclusive, however, because marginal costing is not so useful when sales fluctuate from month to month because of seasonal variations in sales demand, but production per month is held constant in order to arrange for an even flow of output (and thereby prevent the cost of idle resources in periods of low demand and overtime in periods of high demand). Question Absorption v marginal costing A clothing manufacturer makes a specific brand of jeans which it sells at a standard price of $100 per pair. The manufacturer’s costs are as follows.Standard variable production cost: $16 per pair Total fixed production cost per month: $240,000 (10,000 pairs are planned to be p roduced per month) Total fixed non-production costs: $300,000 per month In Month 1, when the opening inventory is 1,000 pairs, production of 10,000 pairs is planned and sales of 8,000 pairs are expected. In Month 2, sales are planned to be 9,000 pairs and production is still 10,000 pairs. Required (a) What would be the net profit for Months 1 and 2 under (i) (ii) (b) Absorption costing Marginal costing What comments could you make about the performance of this business? 16 1: Costing ? Part A Specialist cost and management accounting techniques Answer (a) Absorption standard cost per unit = $16 + 240,000/10,000 = $40 Absorption costing Month 1 Month 2 $’000 $’000 $’000 $’000 800 900 Marginal costing Month 1 Month 2 $’000 $’000 $’000 $’000 800 900Sales 8,000 @$100 Cost of sales Opening inventory (1,000 @ $40) Production (10,000 @ $40) Less: closing inventory* (3,000 @ $40) Gross profit Contribution Less other costs Fixed product ion Fixed non-production 40 400 (120) (320) 480 120 400 (160) (360) 540 1,000 @ $16 10,000 @ $16 3,000 @ $16 16 160 (48) (128) 672 (240) (300) 48 160 (64) (144) 756 (240) (300) (300) 180 (300) 240 (540) 132 (540) 216 * Closing inventory = 1,000 + 10,000 – 8,000 (b) The absorption costing net profit is higher than the marginal costing net profit in both months because inventories are rising. Under absorption costing, where inventories are increasing, a greater amount of the fixed production cost is carried forward n the closing inventory valuation than was brought forward in the opening inventory valuation. This means that the impact of these costs on profit is delayed under absorption costing. Under marginal costing, the full impact of the fixed production costs on profit is immediate. The business is profitable and sales have increased. However, a build up of inventories in the clothing manufacturing industry is unwise as demand is subject to tastes and fashion. The business needs to respond rapidly to changes in demand or it will become rapidly uncompetitive. Part A Specialist cost and management accounting techniques ? 1: Costing 17 Chapter Roundup †¢ †¢ Costing is the process of determining the costs of products, services or activities.Indirect costs, or overheads, are costs incurred in making a product or providing a service, but which cannot be traced directly to the product or service. Absorption costing is a means of incorporating a fair share of these costs into the cost of a unit of product or service provided. Absorption costing is a traditional approach to dealing with overheads, involving three stages: allocation, apportionment and absorption. Apportionment has two stages, general overhead apportionment and service department cost apportionment. After apportionment, overheads are absorbed into products using an appropriate absorption rate based on budgeted costs and budgeted activity levels. Under-/over-absorbed overhead occurs wh en overheads incurred do not equal overheads absorbed.In marginal costing, inventories are valued at variable production cost whereas in absorption costing they are valued at their full production cost. If opening and closing inventory levels differ profit reported under the two methods will be different. In the long run, total profit will be the same whatever method is used. †¢ Marginal costing is more useful for decision-making purposes, but absorption costing is needed for financial reporting purposes to comply with accounting standards. †¢ †¢ †¢ †¢ †¢ †¢ 18 1: Costing ? Part A Specialist cost and management accounting techniques Quick Quiz 1 Here are some terms you should have encountered in your earlier studies. Match the term to the definition.Terms Direct cost Prime cost Overhead Classification by function Fixed cost Variable cost Product cost Avoidable cost Controllable cost Relevant cost Cost centre Cost unit (b) (c) (d) (e) (f) (g) (h) (i ) (j) (k) (l) 2 3 Definitions (a) Specific costs of, say, an activity, which would not be incurred if the activity did not exist Total of direct costs Future cash flow which will be changed as the result of a decision Product produced by an organisation Dividing costs into production, administration, selling and distribution, research and development and financing costs Cost that can be traced in full to whatever is being costed Organisation's departments A cost that varies with the level of output A cost that is incurred in the course of making a product but which cannot be traced directly and in full to the product Cost that is incurred for a particular period of time and which, within certain activity levels, is unaffected by changes in the level of activity Cost identified with goods produced or purchased for resale and initially included in the value of inventory Cost which can be influenced by management decisions and actions †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢ € ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ is the process of determining the costs of products, activities or services. How is an overhead absorption rate calculated? A B C D Estimated overhead ? actual activity level Estimated overhead ? budgeted activity level Actual overhead ? actual activity level Actual overhead ? budgeted activity level 4 Over absorption means that the overheads charged to the cost of sales are greater than the overheads actually incurred. True False 5Fill in the blanks in the statements about marginal costing and absorption costing below. (a) (b) If inventory levels †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ between the beginning and end of a period, absorption costing will report the higher profit. If inventory levels decrease, †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ costing will report the lower profit. 6 Fill in the following blanks with either ‘marginal' or ‘absorption'. (a) (b) (c) (d) (e) Using †¦Ã¢â‚ ¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ costing, profits can be manipulated simply by changing output and inventory levels. Fixed costs are charged in full against the profit of the period in which they are incurred when †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ costing is used. †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ costing fails to recognise the importance of working to full capacity. †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ costing could be argued to be preferable to †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ costing in management accounting in order to be consistent with the requirements of accounting standards. †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ costing should not be used when decision-making information is required. Part A Specialist cost and management accounting techniques ? 1: Costing 19 Answers to Quick Quiz 1 Direct cost Prime cost Overhead Classification by function Fixed co st Variable cost Product cost Avoidable cost Controllable cost Relevant cost Cost centre Cost unit Costing B True (a) (b) (a) (b) (c) (d) (e) Increase Absorption absorption marginal marginal absorption, marginal absorption (f) (b) (i) (e) (j) (h) (k) (a) (l) (c) (g) (d) 2 3 4 5 6 Now try the questions below from the Exam Question Bank Number Q1Level Introductory Marks 10 Time 18 mins 20 1: Costing ? Part A Specialist cost and management accounting techniques Activity based costing Topic list 1 Activity based costing 2 Absorption costing versus ABC 3 Merits and criticisms of ABC Syllabus reference A1 (a), (b) A1 (c) A1 (c) Introduction Chapter 2 covers Part A of the syllabus, specialist cost and management accounting techniques. It has been divided into five sub-chapters to reflect the examiner's emphasis that all five techniques are equally important and equally examinable. In this chapter we will be looking at the first alternative method of cost accumulation, activity based costin g (ABC).ABC is a modern alternative to absorption costing which attempts to overcome the problems of costing in a modern manufacturing environment. If you want to get free study material of CAT, ACCA, CIMA, CFA, CIA visit : freefor911. wordpress. com 21 Study guide Intellectual level A1 (a) (b) (c) Activity based costing Identify appropriate cost drivers under ABC Calculate costs per driver and per unit using ABC Compare ABC and traditional methods of overhead absorption based on production units, labour hours or machine hours 1 2 2 Exam guide There was a question on ABC in the Pilot Paper for F5. It was also examined in June 2008 and June 2010 and is therefore a crucial topic to understand. 1 Activity based costing FAST FORWARD /08, 6/10 An alternative to absorption costing is activity based costing (ABC). ABC involves the identification of the factors (cost drivers) which cause the costs of an organisation's major activities. Support overheads are charged to products on the basis of their usage of an activity. †¢ †¢ For costs that vary with production level in the short term, the cost driver will be volume related (labour or machine hours). Overheads that vary with some other activity (and not volume of production) should be traced to products using transaction-based cost drivers such as production runs or number of orders received. 1. 1 Reasons for the development of ABCThe traditional cost accumulation system of absorption costing was developed in a time when most organisations produced only a narrow range of products (so that products underwent similar operations and consumed similar proportions of overheads). And overhead costs were only a very small fraction of total costs, direct labour and direct material costs accounting for the largest proportion of the costs. The benefits of more accurate systems for overhead allocation would probably have been relatively small. In addition, information processing costs were high. In recent years, however , there has been a dramatic fall in the costs of processing information.And, with the advent of advanced manufacturing technology (AMT), overheads are likely to be far more important and in fact direct labour may account for as little as 5% of a product's cost. It therefore now appears difficult to justify the use of direct labour or direct material as the basis for absorbing overheads or to believe that errors made in attributing overheads will not be significant. Many resources are used in non-volume related support activities, (which have increased due to AMT) such as setting-up, production scheduling, inspection and data processing. These support activities assist the efficient manufacture of a wide range of products and are not, in general, affected by changes in production volume.They tend to vary in the long term according to the range and complexity of the products manufactured rather than the volume of output. The wider the range and the more complex the products, the more support services will be required. Consider, for example, factory X which produces 10,000 units of one product, the Alpha, and factory Y which produces 1,000 units each of ten slightly different versions of the Alpha. Support activity costs in the factory Y are likely to be a lot higher than in factory X but the factories produce an identical number of units. For example, factory X will only need to set-up once whereas Factory Y will have to set-up the 22 2a: Activity based costing ?Part A Specialist cost and management accounting techniques production run at least ten times for the ten different products. Factory Y will therefore incur more set-up costs for the same volume of production. Traditional costing systems, which assume that all products consume all resources in proportion to their production volumes, tend to allocate too great a proportion of overheads to high volume products (which cause relatively little diversity and hence use fewer support services) and too small a pr oportion of overheads to low volume products (which cause greater diversity and therefore use more support services). Activity based costing (ABC) attempts to overcome this problem. 1. Definition of ABC Key term Activity based costing (ABC) involves the identification of the factors which cause the costs of an organisation's major activities. Support overheads are charged to products on the basis of their usage of the factor causing the overheads. The major ideas behind activity based costing are as follows. (a) (b) (c) Activities cause costs. Activities include ordering, materials handling, machining, assembly, production scheduling and despatching. Producing products creates demand for the activities. Costs are assigned to a product on the basis of the product's consumption of the activities. 1. 3 Outline of an ABC systemAn ABC system operates as follows. Step 1 Step 2 Key term Identify an organisation's major activities. Identify the factors which determine the size of the costs of an activity/cause the costs of an activity. These are known as cost drivers. A cost driver is a factor which causes a change in the cost of an activity. Look at the following examples. Costs Ordering costs Materials handling costs Production scheduling costs Despatching costs Possible cost driver Number of orders Number of production runs Number of production runs Number of despatches Step 3 Step 4 Collect the costs associated with each cost driver into what are known as cost pools.Charge costs to products on the basis of their usage of the activity. A product's usage of an activity is measured by the number of the activity's cost driver it generates. Question Which of the following definitions best describes a cost driver? A B C D Any activity which causes an increase in costs A collection of costs associated with a particular activity A cost that varies with production levels Any factor which causes a change in the cost of an activity Cost driver Part A Specialist cost and mana gement accounting techniques ? 2a: Activity based costing 23 Answer D Any factor which causes a change in the cost of an activity. Exam focus pointABC is a popular exam topic. Questions on activity based costing often require a comparison with more traditional methods. The implications for the business of each approach is often required. 2 Absorption costing versus ABC 6/08, 6/10 The following example illustrates the point that traditional cost accounting techniques result in a misleading and inequitable division of costs between low-volume and high-volume products, and that ABC can provide a more meaningful allocation of costs. 2. 1 Example: Activity based costing Suppose that Cooplan manufactures four products, W, X, Y and Z. Output and cost data for the period just ended are as follows.Number of production runs in the Material cost Direct labour Machine Output units period per unit hours per unit hours per unit $ W 10 2 20 1 1 X 10 2 80 3 3 Y 100 5 20 1 1 80 3 3 Z 100 5 14 Direct labour cost per hour $5 Overhead costs Short run variable costs Set-up costs Expediting and scheduling costs Materials handling costs Required Prepare unit costs for each product using conventional costing and ABC. $ 3,080 10,920 9,100 7,700 30,800 Solution Using a conventional absorption costing approach and an absorption rate for overheads based on either direct labour hours or machine hours, the product costs would be as follows. W $ 200 50 700 950 10 $95 X $ 800 150 2,100 3,050 10 $305 Y $ 2,000 500 7,000 9,500 100 $95 Z $ 8,000 1,500 21,000 30,500 100 $305 Total $ Direct material Direct labour Overheads * Units produced Cost per unit 4,000 * $30,800 ? 440 hours = $70 per direct labour or machine hour. 24 2a: Activity based costing ? Part A Specialist cost and management accounting techniques Using activity based costing and assuming that the number of production runs is the cost driver for setup costs, expediting and scheduling costs and materials handling costs and that machi ne hours are the cost driver for short-run variable costs, unit costs would be as follows. W $ 200 50 70 1,560 1,300 1,100 4,280 10 $428 X $ 800 150 210 1,560 1,300 1,100 5,120 10 $512 Y $ 2,000 500 700 3,900 3,250 2,750 13,100 100 $131 Z $ 8,000 1,500 2,100 3,900 3,250 2,750 21,500 100 $215 Total $Direct material Direct labour Short-run variable overheads (W1) Set-up costs (W2) Expediting, scheduling costs (W3) Materials handling costs (W4) Units produced Cost per unit Workings 1 2 3 4 $3,080 ? 440 machine hours = $10,920 ? 14 production runs = $9,100 ? 14 production runs = $7,700 ? 14 production runs = Conventional costing unit cost $ 95 305 95 305 44,000 $7 per machine hour $780 per run $650 per run $550 per run ABC unit cost $ 428 512 131 215 Difference per unit $ + 333 + 207 + 36 – 90 Difference in total $ +3,330 +2,070 +3,600 –9,000 Summary Product W X Y Z (a) (b) The figures suggest that the traditional volume-based absorption costing system is flawed.It underal locates overhead costs to low-volume products (here, W and X) and over-allocates overheads to higher-volume products (here Z in particular). It underallocates overhead costs to smaller-sized products (here W and Y with just one hour of work needed per unit) and over allocates overheads to larger products (here X and particularly Z). 2. 2 ABC versus traditional costing methods Both traditional absorption costing and ABC systems adopt the two stage allocation process. 2. 2. 1 Allocation of overheads ABC establishes separate cost pools for support activities such as despatching. As the costs of these activities are assigned directly to products through cost driver rates, reapportionment of service department costs is avoided. 2. 2. Absorption of overheads The principal difference between the two systems is the way in which overheads are absorbed into products. (a) (b) Absorption costing most commonly uses two absorption bases (labour hours and/or machine hours) to charge overheads to p roducts. ABC uses many cost drivers as absorption bases (eg number of orders or despatches). Absorption rates under ABC should therefore be more closely linked to the causes of overhead costs. Part A Specialist cost and management accounting techniques ? 2a: Activity based costing 25 2. 3 Cost drivers The principal idea of ABC is to focus attention on what causes costs to increase, ie the cost drivers. a) The costs that vary with production volume, such as power costs, should be traced to products using production volume-related cost drivers, such as direct labour hours or direct machine hours. Overheads which do not vary with output but with some other activity should be traced to products using transaction-based cost drivers, such as number of production runs and number of orders received. (b) Traditional costing

Mini Motor Homes Manufactured Essay

This case is about Mini Motor Homes Manufactured by Jim Ballenger in Kalamazoo, Michigan. According to the case, Jim Ballenger has a problem to make a decision to change his current inventory system to JIT system. From the current inventory system, Jim has spent a lot of cost on his inventory system. This is because mostly of the component used in manufactured are bought from other vendor and his company actually only manufactured very few of it component. Because of this, the transportation and inventory cost contribute to a relatively large portion of its component part of expenses. Jim Ballenger was very aware on the cost that may arise once the JIT system adopted. The cost that he may be aware to arise is the cost of management standpoint, the shipment of the component and the rate of the component purchased. Besides that, he also has inquiry about the component purchased will be arrived on time or not or the duration taken of delivering the component. This is because, if the component are not suitable to use, his team has to replace it and it will entail expensive rush order for the replacement component or the downtime for the entire plant. Jim Ballenger also concern about his relationship with his suppliers. He thought that his supplier may difficult become one part of his team. Since the supplier will expect to have special effort on their quality control or delivery flexibility on behalf of one of its almost miniscule discount. Jim Ballenger has been rent a public warehouse near his plant to keep his inventory that cost $500,000 to $1,000,000, which he paid more than 1. 5% per month from the borrowed funds to buy it. Since he starts to producing the different model, and using so many different appliances, the cost of the safety stock increased day by day. The JIT presume table has drawn with two considerations. Since the major component, chassis can be purchased at one time basis from the local supplier and out of stock situation is hardly happen, thus this component has excluded from using JIT system. The two considerations will be (1) Ballenger’s inventory carrying costs of are assumed to be 20% per year on the average investment in inventory on hand comprising acquisition and transportation costs, (2) those components that can obtain from closer sources, one week of the safety stock is sustain, if the component is further form the stock, two weeks to one month of safety stock should be available.

Advantages And Disadvantages Of Networked Medium Information Technology Essay

Advantages And Disadvantages Of Networked Medium Information Technology Essay Bus networks use a common backbone to connect all devices. A single cable, the backbone functions as a shared communication medium that devices attach or tap into with an interface connector. A device wanting to communicate with another device on the network sends a broadcast message onto the wire that all other devices see, but only the intended recipient actually accepts and processes the message. Ring topology: In a ring network, every device has exactly two neighbors for communication purposes. All messages travel through a ring in the same direction. A failure in any cable or device breaks the loop and can take down the entire network. Star topology: Many home networks use the star topology. A star network features a central connection point called a â€Å"hub† that may be a  hub,  switch  or router. Devices typically connect to the hub with Unshielded Twisted Pair (UTP) Ethernet. Compared to the bus topology, a star network generally requires more cable, but a fai lure in any star network cable will only take down one computer’s network access and not the entire LAN. b) Advantages and disadvantages of each medium. Network medium is the physical channel that used for transmission in the network. The types of the medium are: Wire Fiber air Wire: UTP cable is a medium that is composed of pairs of wires.  UTP cable is used in a variety of networks. Each of the eight individual copper wires in UTP cable is covered by an insulating material. In addition, the wires in each pair are twisted around each other. Fiber: Long distance signal transmission. Large Bandwidth, Light Weight, and Small Diameter Long Lengths Easy Installation and Upgrades Non-Conductivity Security Designed for Future Applications Needs Air: Mobility. Elimination of unsightly cables. c) Recommendation for topology and medium to use: Topology: Figure 1.1 : Star topology We select the star topology for this in-house network. Because the star topology is most popular topolog y for in-house network (LAN). Also we can be benefit by using the star topology in a LAN. Benefits: Information can be easily shared allowing for quick and informed decisions to be made, saving time and money. A more productive and competitive environment is achieved through greater teamwork within the organization. Network-based communication such as email is considerably cheaper than using the phone or fax and sharing resources such as printers gives more efficient use of equipment at lower costs. Standard versions of procedures and directories can be made accessible to everyone. IT administration can be centralised. Data can be backed-up from a single point on a scheduled basis ensuring consistency. Medium: Figure1.2: WI-FI network We select the WI-FI for this in-house network. Because Mobility. Elimination of unsightly cables. Problem Identification: Task 2 – 10 Marks Investigate the Internet connection requirements for the Fire Department. a) Describe the Internet servic es that may be required. b) Explain the connection speeds that are suitable for these requirements. c) Find examples of Internet Service Providers (ISPs) that can meet these requirements in your country. d) Make a recommendation to use one ISP based upon the services offered and price charged.

Benefits of green tea on oral health Research Paper - 1

Benefits of green tea on oral health - Research Paper Example These illnesses included periodontitis, gingivitis, as well as dental trauma, for example, oral cysts, subluxation, and after wisdom tooth removal. Oral health is a determining element for quality life, vital for healthiness, and a vital part of over-all health. In the European Union, the socio-economic obligation of oral illnesses is substantial: they affect a greater part of school-aged kids and grown-ups, and make up 5 percent of public health expenditure (Cho, Oh & Oh 357). Costs of established curative cure have escalated from 54 billion pounds in 2000 to 79 billion pounds in 2012, plus are projected to increase up to 93 bn pounds by 2020. Therapy expenditure surpasses that of other illnesses, including heart disease, cancer, dementia as well as stroke. This is alarming, since most of dental diseases burden is avertible (Pavel & Pave 104). A variety of health disorders is linked with oral ailment. Poorly regulated diabetes ailment is a well-recognized risk cause for fostering periodontal failure and latest research displays how protracted gum diseases may increase diabetic impediments (Erridge, Cox & Dixon 152). Gum ailments are also linked with coronary heart syndrome, rheumatoid arthritis, and adversative pregnancy outcomes. Oral illnesses are easily avoidable by healthy nutrition, consistent dental check-ups as well as routine personal dental hygiene habits, including re-current oral check-ups, the usage of mouthwashes and toothpastes with fluoride, inter-dental washing, and chewingno-sugar chewing gum while traveling. Frequent fluoride exposure, consistent brushing, a nutritious diet as well as routine dental care all add to enhanced oral health results and a decrease in oral healthiness inequities (Pham-Huy, Pham-Huy & He 12). In revelation of this, attempting to expose the full capacity of oral inhibition appears to be an extremely encouraging policy method to decrease the considerable costs and burden of oral

Reliability of Standardized Testing Essay Example | Topics and Well Written Essays - 1000 words

Reliability of Standardized Testing - Essay Example If we take into account the basic ideology of standardized testing, it deals with providing information about performance of individual students and also provides an evaluation of the program. In short, we can say that standardized testing makes not only teachers accountable for the poor performance of the students, but also holds the administration equally accountable for the result as well. This is quite pertinent, because the administration is responsible for providing the teachers the basic facilities in order to carry out their jobs, hence the teachers cannot be made scapegoats under this system. Hence this system does have reliability in the sense that every body involved in the education system is accountable to some extent. The reliability of standardized testing has been put under the scanner several times in the past, in fact, as early as in the summer of 1977, at the National Consortium on testing. In this consortium it was decided to "promote a wider understanding of standardized testing among educators, legislators and public at large" (p.2). At that point itself, there was a lot of criticism from a segment of educators and administrators who felt that there had to be changes made in the system. According to Monroe (1924), the standardized tests provided "scientific" and "standard units" (p.7) for measuring the achievements of a student. These arguments are totally valid and indicate the reliability of standardized testing. However, considering there have been enormous changes in the education system, since these comments were made. If we take the current scenario into question, we have to address a host of issues in order to answer this question. There have been a number of testing methodologies that have emerged since then, and in the current scenario, we have to take these into consideration while evaluating the reliability of standardized testing. One of the strongest proponents of standardized testing was Atkinson (2001), who had argued that for use of only standardized tests in admission process in U.S Universities, as he believed that they were quite reliable and provided were fair. He was right in the sense that standardized tests not only provide comprehensive evaluation of the performance of the student, but also strengthen the basic foundation and principles involved in teaching. There are may be varying opinions over standardized testing, but there is no doubt that standardized testing is quite effective efficient. The reliability has often been questioned partly due to the efficiency and effectiveness of this methodology. As mentioned before standardized testing not only evaluates the performance of student, but also tests the efficacy of the teachers, administration and the school itself. In this way everybody involved in the system is accountable and that raises doubts that people involved may get desperate and adopt illegal mechanisms, so that they are not held accountable and this is the reason why the reliability of standardized testing has been questioned. However, the opponents of standardized education system believe that the problem with accountability is that it could cause a cascading effect; in the sense that the teachers may be influenced to design the

Marketing communication Essay Example | Topics and Well Written Essays - 1000 words

Marketing communication - Essay Example In this report, we are going to develop a marketing communication plan for the center in order to improve the business by making the center more attractive and eye-catching for the public. The marketing plan will include such strategies which will play their role in creating awareness among the public about the facilities and entertainment provided by Viejas Outlet Center. Luther (2001) found that analysis of the current situation of any company or firm is necessary before development of a marketing plan. It is because analysis lets us know about the strengths, weaknesses, opportunities and threats regarding any specific company for which the plan is to be developed. So in the case of Viejas Outlet Center, we carried out a thorough analysis regarding the current business situation of the outlet in order to know the defficiencies and strengths regarding the outlet. Strengths of the outlet include entertainment spots and various other facilities such as casino, shopping stores, danceclubs, restaurants, and water fountain for the children. These facilities are good enough to attract the customers towards the outlet but it needs a suitable marketing plan in order to creae awareness among the public. The major drawback of Viejas Outlet Center is its marketing strategy. The marketing strategy has a lot of flaws in it due to which the outlet is unable to attract the public. Marketing plan is very old fashioned and is not adjustable with the demands of modern marketing strategies and tactics. Threats to the Viejas Outlet Center include creation of other outlets in the reigon which may not have such faciltities and entertainment spots as the Viejas Outlet Center holds, but the effective marketing strategies of the new outlets may provide them with dominance or egde over Viejas Outlet Center. That is why, Viejas Outlet Center needs to have an effective and innovative

Take a position...Are Animals Conscious Essay Example | Topics and Well Written Essays - 1250 words

Take a position...Are Animals Conscious - Essay Example Inanimate things and organisms such as plants have limited capability to demonstrate such control of actions since the absence of a brain in their makeup eliminates chance for knowingness. It is a difficult affair to demonstrate the various levels or consciousness as possessed by various animals since the emergence of the debate on whether there is consciousness in animals. However, it is agreeable across both sides of the debate that consciousness exists in human beings. Debate therefore appears to revolve around the issue on whether consciousness exists in animals, and up to which level of organism organization. Debate has since emerged about the possibility of animals possessing consciousness as would elevate them to the same status with human beings (Schà ¶nfeld, 1). This discourse addresses the standoff on paradigms, aware of the fact that earlier versions support consciousness in human beings alone while emergent thoughts support existence of consciousness in animals as well. The first section explores older schools of thought that restrict possession of consciousness in humans while the second section explores the paradigm shift occasioning the inclusion of animals among those creatures possessing consciousness. A personal reflection is contained in the ending of the discourse, giving a position on the debate. Making an account of animal consci ousness debate, it is clear that current thinking about animal consciousness is a mess as Dennett brands it. A comparison of the old and the new paradigms and scientific propositions on the consciousness debate affirms the view that there has been a generally perception that animals are not like human beings regarding several aspects. Among the aspects that seemingly existed without much questioning and doubt is the issue of animal consciousness. As it appears, Schà ¶nfeld holds the opinion that the there was a feeling that it was not scientifically indulge research into

Role Of Information Systems In Business Operation Essay

Role Of Information Systems In Business Operation - Essay Example Human Resources Information Systems is essential in handling data regarding the management of humans. This is in ensuring effective allocation of tasks as per their respective capacities as well as salaries they ought to receive. Hence, an effective HRIS provides information on the company’s needs to track and examine relevant information about employees, applicants and former employees (Stair, 2012, p. 229). The application of appropriate HRIS enables Human Resources staff to allow employees undertake roles as necessitated besides enjoying allocated own benefits, receiving updates and addressing any evident changes. In addition, HRIS facilitates provision necessary, for instance, data necessary for employee knowledge development, management and career development (Hirschheim, Heinzl & Dibbern, 2009, p. 9).The introduction of accounting information system facilitates operation of business activities, in particular, accounting activities. The use of modern technology in account ing has eased financial tasks in various ways. They have the ability to collect financial data immediately a transaction occurs. After that, the collection of necessary financial data commences before directed to the accounts’ desk for analysis, execution, and storage. Accounting information system also stores and evaluates financial data essential in planning future financial goals. Use of accounting information system in gathering financial information as well as analyzing it makes the entire work easier, cheaper and efficient.

Obamacare , AKA the Affordable Care Act Research Paper - 1

Obamacare , AKA the Affordable Care Act - Research Paper Example However, this new health reform has been protested against by many as it may raise costs for pharmacies and businesses, a penalty will apply to those who do not buy coverage, and some low-wage workers would still find it unaffordable (ObamaCare Facts; Amadeo; Tozzi 2013). Basically, Obamacare has made it compulsory for all those Americans without a health insurance to get one. An important thing to note is that Obamacare does not replace Medicaid, Medicare or private insurance- it is a separate reform, although it has expanded Medicare. The law requires business companies to provide their employees with premiums, which will be less than 9.5 percent of the employees’ incomes. However, this only applies to businesses with less than fifty employees. The larger companies will receive tax credits in order to help its employees pay premiums. Obamacare also allows children to be put on their parents’ health insurance plans up to the age of twenty six. In addition, insurance companies are not allowed to deny insurance to individuals who are already suffering from a health problem. Those individuals who do not buy these premiums or health insurance will be subject to a new penalty of $95 or one percent of income, which will come in effect from 2 014-this penalty will keep increasing every year. Another part of Obamacare is the national menu labeling law, which requires restaurant chains with more than twenty branches to post calorie counts for each standard menu item (ObamaCare Facts; Amadeo; Shen 2013). Ever since President Obama introduced this health care reform, more than a hundred million Americans have already benefitted from it. According to statistics posted by the official White House site, about fifty million Americans are covered for preventive services, and approximately thirty three million Americans with Medicare use a free preventive service. This is because Obamacare has eliminated any additional cost, such as

Women as Property and Marriage as Slavery (responses) Assignment

Women as Property and Marriage as Slavery (responses) - Assignment Example Also, I agree with Anthony’s arguments on the need to list women in the property rights and ownership. This is because men are less responsible in managing property and children through their ill behaviors of drunkenness and licentiousness. In this case, women stand a greater chance of suffering in the society given that they depend on men for daily bread and property. That is why Anthony states, â€Å"Most prosecutions in our courts concern breach of promise, divorce, adultery, bigamy, seduction and rape.† I disagree with John Stuart Mill’s arguments on the subjection of women. It is essential for women to have rights and freedom of existence in a free world. The legal subordination of women to men due to the natural acts that state, â€Å"The conquered should obey the conquerors† should be a forgotten past. Women and men should have a perfect equality where both have powers, privileges, independence and development records on a personal ground (Mill 74). I also support the arguments of Engels on the need to create a worker-run state socialism where there would be formation of trade and wage labor unions and abolish capitalism. Engels derived his argument from the fact that women suffered inequality in a capitalist society where there was inequality in workplaces and homes. He states, â€Å"The division of labor between two sexes is determined by quite other causes than by position of women in the society.† Consequently, the society should empower women since they take part in agriculture, amassing surplus wealth and property yet they are not entitled to ownership in the government (Engels,

Poems of Edgar Allan Poe Essay Example for Free

Poems of Edgar Allan Poe Essay A tell-tale heart – essay The gradual descent into insanity is a common characteristic of Edgar Allan Poe as an auteur. This being one of Poe’s shortest stories separates itself from his other literature as it draws its focus onto the irony of the stalking, and confession of the murder of an old man. ‘The Tell-Tale Heart’ explores the mind of a mentally unstable and delusional individual on his descent to madness. In doing so the short story touches upon the contrasts between the rational and irrational. The ‘The Tell-Tale Heart’ presents two physical settings. It is clear from the narrator’s perspective that there is a change of setting. â€Å"Observe how healthily – how calmly I can tell you the whole story†, the narrator then continues, â€Å"It is impossible to say how first the idea entered my brain†. This passage indicates that the story that is narrated, is told in retrospect. The passage can be interpreted as being the narrator attempting to justify his murder and convince the reader that he is not mad as he can tell the story calmly and sanely. The passage can also be perceived as being directed towards the police officers that are introduced at the end of the story. In doing so the narrator might also try to convince the police officers that his deed was justified and necessary. The theme of insanity is shown through the narrators descend into madness. The narrator states that â€Å"very gradually – I made up my mind to take the life of the old man† which marks the beginning of his descent. It is made clear to the recipient of the story that the narrator believes he is sagacious in his lurking. However, the narration gives the impression that he is a madman. The narrator says â€Å"I undid the lantern cautiously-oh, so cautiously – cautiously† and also says â€Å"I kept pushing it on steadily, steadily† and â€Å"you cannot imagine how stealthily, stealthily†. The narrator’s reiterations present a sort of vocal tic which adds to his characteristic of being mentally unstable and mad. The story explores the contrasts between the rational and irrational. The theme of rationality is shown through the narrator’s attempts to rationalize his actions. The premise of the narrator’s suffocation of the old man is the ‘evil eye’ he has. Whenever the narrator gazes at the â€Å"dull blue† eye he experiences chills through â€Å"the very marrow† in his bones. This suggests that the old man’s eye terrifies him. It does, however, seem very unlikely that the old man has an inhuman eye â€Å"no human eye – not even his†. The rational explanation for the appearance of the eye that the narrator is fixated about, is that the old man is suffering from cataract. The disease bears a close resemblance to the eye of a vulture. This is proven by the narrator’s very similar description of the eye’s â€Å"pale blue, with a film over it† and â€Å"a dull blue, with a hideous veil†. This can also explain why the old man is never woken up or is disturbed by having the light shone into his â€Å"evil eye†. This is because he might be lacking vision in one eye. The narrator attempts to convince the reader that he is cunning and wise when observing the old man in his bed. The narrator’s irrational nature is emphasized in this passage where he very slowly enters the bedroom with only his head and lantern â€Å"It took me an hour to place my whole head within the opening so far that I could see him as he lay upon his bed†. The use of irony in the short story adds to the narrator’s complete unawareness of his own instability expressed through his lack of rational perception. The narrator contradicts himself implicitly. He states that he â€Å"loved the old man† and that â€Å"he had never wronged me†. This implies that he had no quarrels with the old man and therefore had no motivation for murdering him. He then contradicts himself by being excited by the old man’s â€Å"uncontrollable terror†. The theme of irony is also shown when the narrator hears the old man’s â€Å"groan of mortal terror† and recognizes the feeling. The narrator â€Å"knew the sound well†, he had experienced them himself being â€Å"welled up from my own bosom, deepening, with its dreadful echo, the terrors that distracted me†. This can be interpreted as the narrator explaining that he suffers from terrors which indicates that he has been or is feeling fear to the marrow of his bones and has experienced something horrific. This is also supported by the symbolism of the narrator burying the old man underneath the floorboards, which can be interpreted as him repressing his emotions and hiding them and then eventually being welled up when he confesses the murder. However, it is vaguely explained and remains a mystery to the readers. This corresponds well with the characteristic of the narrator which is only described implicitly. The narrator’s gender is not revealed. This might be because the gender of the narrator is not important to the story and that Edgar Allan Poe has written the story in such a way that the common reader assumes the gender of the narrator to be male. The most prominent ironic situation is the narrator’s own sagaciousness and over-acuteness that end up being the reasons for his confession to the police officers. His own hypersensitivity betrays him. This also supports his irrationality as he had confirmed the death of the old man when he felt his heart. He is however still convinced that the beating heart belongs to the â€Å"stone dead† man. This also shows his descent into madness as he perceives the noise as being a ringing in his ears, but then convinces himself that it is â€Å"the beating† of the old man’s â€Å"hideous heart†. He contradicts himself in this passage where he has previously described himself as cunning but is unable to correctly identify the source of the beating heart. ‘The Tell-Tale Heart’ is a story that largely focuses on the inability of the narrator to judge his own state of sanity. This is further supported by the narrator frequently being deceived by his own senses and even contradicting himself which diminishes his reliability. The topic of repressed emotions and the border between sanity and insanity is addressed by interpreting the narrator’s behavior and actions. This determines that the narrator is indeed a madman.

Responsible Borrowing Worksheet Essay Example for Free

Responsible Borrowing Worksheet Essay Many students borrow federal student loans to pay for college. The goal of this assignment is to help you learn how to borrow responsibly, which may mean that you do not borrow at all or that you borrow only what you truly need. To borrow responsibly, you must understand your options and establish a financial plan for your entire program. With that plan in place, you can then focus on your classes and making connections with instructors and other students. There are two steps listed below for this assignment. Respond to the questions for each step in this worksheet only and submit your completed document to the Assignment Files tab. Step 1 Watch the â€Å"Responsible Borrowing (Financial Aid)† video on the orientation website located here: http://www.phoenix.edu/student-orientation.html. Respond to the following three questions in the spaces provided below: What is financial aid? Financial aid is an invaluable resource that will help a student and their families pay for college expenses. The expenses that may be covered includes college tuition, living expenses, books, laptop, necessary supplies and even transportation costs. Financial aid options available are grants, scholarships, loans and also work study programs. How do grants differ from loans? Grants are money that does not have to be paid back. They are free money for college. Grants are usually based on a student’s financial needs. Loans are  money that is borrowed and must be paid back, usually with interest costs. The major grants available for students are federal Pell Grants and Cal Grants. There are smaller federal grants that are also available. What effect does class attendance have on funding availability? The effects that class attendance has on a student’s funding availability are a student will lose their government student aid funding if the minimum attendance requirements are not met. If a student withdraws or quits or has been withdrawn or failed because of class attendance the student is required to repay any of the federal aid that was used during their time of enrollment for the course(s). Step 2 Access the Financial Plan at www.phoenix.edu/financialplan. Enter your program and respond to the questions. Explore the information about options for payment, reducing cost, and military students (if applicable). If you have already completed the plan as part of the enrollment process, you can use those results for this step. Respond to the following two questions in the spaces provided below: Based on this plan, what is your estimated monthly payment when you enter repayment? As a result of completing the plan, what changes can you make to reduce the amount you may borrow? Why?

Main Objective Is Profit Maximization Commerce Essay

Main Objective Is Profit Maximization Commerce Essay In this assignment I am looking at profitable organizations which have main objective is profit maximization. I am going to look at this in the context of starting a small firm. I will be looking at the problems and requirements when aiming to begin a business either in manufacturing or in the tertiary sector. I will future explain that why plan is important for baseness? Also I will right about types of businesses, sectors, of businesses and I will talk about some businesses. Market analyzing mission and vision statement also are very important for a success business. Introduction In this assignment I am going to write about the business plan. What are the important factors for a new business? I will write about the requirement of the business, types of the business, business sector and then I will explain each business sector advantages and disadvantages. 2. Business Definition Business is an economic or financial activity, which is associated with permanent and regular production and sharing of goods and services for fulfilling human needs .Stephenson defines business as, The regular production or purchase and sale of goods undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human wants. According to Dicksee, Business refers to a form of activity conducted with an objective of earning profits for the benefit of those on whose behalf the activity is conducted. (KALYAN CITY LIFE, 2011) A business plan is the arrangement for the business, clarifying that what it exists, for and what products, services it provides to society. Rebecca Jones wrote in Information Outlook. A business plan is a roadmap for the organization, showing the destination it seeks, the path it will follow to get there, and the supplies and wherewithal required to complete the journey. almost every succeed company needs a business plan. Due to Lack or upland of proper planning is one of the most frequently cited reasons for business failures. So business plans helpful for companies identify their goals and objectives also provide them with channels and strategies to reach those goals. (Reference for Business, 2012) There are main three types of business one primary, secondary and Tertiary. à ¢Ã¢â€š ¬Ã‚ ¢ Extractive (primary) à ¢Ã¢â€š ¬Ã‚ ¢ Manufacturing (secondary) à ¢Ã¢â€š ¬Ã‚ ¢ Services (tertiary 3. Deferent Types of Businesses Sectors We have three type of businesses sectors one is public sector 2nd is private sector and 3rd is voluntary sector/ non profitable but I will discuss about private sector. 3.1 Public Sector Public sector can be defined in the different way, Public sector in owned and run by the Government for the people. Government collect money by taxes and this money are used to finance most of the public sector. Central or local government or public corporations are Involves. The government makes all decisions in this sector Shareholders have LIMITED LIABILITY. A board of directors run the business and must have the words public limited with the company name or letters PLC. Accounts must be published. Main aims of public are to use recourses well for the benefit of the community. Some example is royal mail in the UK and BBC TV channel. 3.2 Private Sector A company owned by at least 2 shareholders and shares are sold privately. Profits are shared with shareholders dividends and Shareholders have LIMITED LIABILITY. Private sector has a board of directors to run the business. Name must be end with the word Limited or letters Ltd. Private sector business are owned and run by private individual. 3.2.0 Types of Private Sector: We have many types of private business but the most common are bellow. à ¢Ã¢â€š ¬Ã†â€™ 3.2.1Sole Trader Business of this sector has owned and controlled by one person Money is usually provided by the owner. This means that legally the owner and the business are the same. Sole trader has unlimited liability. There is not much legal paper work. Funding for business will be from owner side, banks, credit card, and bank overdraft. Power and right will be on one hand, profit will on one share low VAT and tax. 3.2.2 Partnership When 2 or more than 2 people running a business which aims to make a profit is called partnership. The maximum number of partners is usually 20. Money is provided by partners. They are easy to set up but may have a Deed of Partnership and will share their profit and loss according to their agreement. They are unincorporated. Easy to start, funding is same like sole trader also from partners. 3.2.3 Franchise It is an agreement between a franchisor and a franchisee and allows the use of a business name to franchise. Franchisee must provide the money to start their business and franchisor provides materials, training and advice. Franchisee must make regular payments to the franchisor. Main aims of private sector are profit, growth, increased market share and maximize sales. 4. Legal requirement For a new business you should know the legal requirement of the business and must register the company companies act 2006 in the UK. For example the business should be legal and register with company registrar. If the business is partnership then must submit partners all agreement paper with registrar without registration of the company no one can start the business in the UK.4. Legal requirement For a new business you should know the legal requirement of the business and must register the company companies act 2006 in the UK. For example the business should be legal and register with company registrar. If the business is partnership then must submit partners all agreement paper with registrar without registration of the company no one can start the business in the UK. 5. Funding Options For business funding is the most important fact without money no one can start business and fund will never have enough, so shortage can be serious at firs stage. Depending on the structure of Business, business will have different sources of funding or finance. Some resources are: à ¢Ã¢â€š ¬Ã‚ ¢ Loans from Banks and Financial Institutions à ¢Ã¢â€š ¬Ã‚ ¢ Shareholders à ¢Ã¢â€š ¬Ã‚ ¢ Some banks provide our draft à ¢Ã¢â€š ¬Ã‚ ¢ Some time government provide loans for some business such in Pakistan for agriculture à ¢Ã¢â€š ¬Ã‚ ¢ Sale shares à ¢Ã¢â€š ¬Ã‚ ¢ Partners Some other resources are shareholders and partners, depending on the organization legal structure of firm. 6. Compliances 7. Protecting your Intellectual Property IPR main benefits are to save the company products and services from your Oppositions or competitors and prevent unauthorized users and action. If you have branded a only one of its kind product then you must patent it. This means registering the manufactured goods and its design to put a stop to others from doubling it. If dont, then the competition can just steal the product design from you, and will cost you a lot. Example of a patent shielding a firm from any more business copying its product was when apple clime that Samsung copy their product and the court still on process for more detail ( http://news.cnet.com ). Patenting is an expensive or valuable, though, and it must be done correctly. So IPR is very important for a company to register other hand it will cost a lot to the company. 7.1 Trademark A trademark is a brand name. A trademark includes any name, word, sign, device, or any combination, used or intended to be used to identify the organization such as MacDonald, HP computers, coca cola. http://www.bitlaw.com 7.2 Copyrights Copyright is the ownership of the of intellectual property (IP) The select right to make copies, and otherwise exploit a literary, musical, and artistic work, even audio, printed, video. It should register under copyright law act January 1, 1978, is protected for the duration of the author or inventor and for 50 years period of after his or her death. For example Adam Smith is the right person for his book Wealth of Nation no one can write this book or print it by other name. 7.3 Industrial Designs Manufacturing Design is concerned with all the human being aspects of machine-made goods and their bond to people and the environment. The designer is responsible for these products and their impact on society and nature. Such as apple I pone 5, 7.4 Patents The protection a person or a company a new product or way of doing something by stopping anyone else from copying or using it for a particular period of time. For example any Madison formula. 8. Contracts An agreement between two or more parties to avoid the future problem and it is written and enforceable by law. For new business you have to sign many corrects like with Employment, Shareholders, Agency, Vendors, with other business, banks and financial institutes. Every things should be clear and must be Confidential also it must include Term, Confidential information, representations and warranties, indemnity, limitation of liability, assignment protection of intellectual property. 9. Insurance 10. Mission statements: Mission statements are targeted at external and internal stakeholders its means that the statements must be suitable for a wide range of audients or readers. A mission statement is a idea or guiding hand, which provides a shared direction and focus for the firm internally so its mean that mission statement are meant to encourage and motivate everybody. The mission statement should: à ¢Ã¢â€š ¬Ã‚ ¢ Show the direction and aiming that the business to head in à ¢Ã¢â€š ¬Ã‚ ¢ Give some sort of statement of success -what the business wants to do and achieve à ¢Ã¢â€š ¬Ã‚ ¢ Classify the way in which the business is aiming to develop over a period of time à ¢Ã¢â€š ¬Ã‚ ¢ Allow the business to use the mission statement for the growth of specific goals and objectives to reach their aims. these should be relevant for all levels of the organization à ¢Ã¢â€š ¬Ã‚ ¢ Provide inspiration to employees to work towards achieving the goals and objects or vision set out by the statement. (mindtools, 2012) 11. Vision statements While a mission statement shows the way on which a business wants to head now and is of immediate relevance to all stakeholders, a vision statement is a more common statement looking at where the business or organization wants to be in the future. A vision statement essentially outlines what a company wants to be in the future and it may well be related to some sort of future outcome. (mindtools, 2012) http://www.diffen.com/difference/Mission_Statement_vs_Vision_Statement à ¢Ã¢â€š ¬Ã†â€™ 12. Market analyzing Market analyzing will assist to the business and some benefits are below à ¢Ã¢â€š ¬Ã‚ ¢ Understand the market and give you a bug picture à ¢Ã¢â€š ¬Ã‚ ¢ Attract the customers and beat the competitors à ¢Ã¢â€š ¬Ã‚ ¢ Market size à ¢Ã¢â€š ¬Ã‚ ¢ Who is your customers and who is your competitors à ¢Ã¢â€š ¬Ã‚ ¢ What customers need Best way to understand the market is market research. Market analyzing will help to understand the market and give you a big picture to you organization by analyzing the market will understand the behavior of end users and will beat the competitors because you know that what customers wants. Market research will give lots of information about the competitors. Try to make the products different from your competitors and this different will stand the business out from crowd and for competition there are three main things are very important 1. Quality issues 2. Customer services 3. High price 12.1 Segmentation Customers Its mean grouping of customers by their age, gander, stander, location by segmentation will easily target the customers so we can segment it by 1. Demographic ( how old they are) 2. Socio-Economical (who much they want to spend ) 3. Geographic ( where the live ) 13 PEST Analysis 14. Planning a new business For this section I have a profitable business plan and I will recommend a Dominos franchise which is much better than other businesses. If we start a sole trade business or partnership business it is very difficult for as to competition with big business. So there is a big chance to failure of the business. We will run business under the banner of an already established business I mean Dominos Pizza. We also take advantages of their brand, ideas, operating techniques and much more which already tested and tried. Brand name we can use Dominos pizza is well know brand in the market and have much demand in the all over the globe. à ¢Ã¢â€š ¬Ã†â€™ 14.1 Capital investment For Dominos pizza franchise total investment is  £290000 + (VAT approx  £49000. VAT will claim back/ Constriction cost (shop fitting and project management fee) approx  £130000 Equipment cost approx  £ 80000 Legal/ Planning / Architects approx  £17000 Opening cost approx  £ 25000 Fees (training fees approx  £ 45000 Total approx  £ 290000 + VAT More detail available in appendix 14.2 Funding In assignment question the say that dont worry about money but any way in case we face to the shortage of funding we can use alternative way like loan from banks, bank overdraft, credit card, and loan from financial institute. 14.3 HR and Training In one franchise approximately 25 jobs we can create so we will advertise it in local news paper and we will select right candidate for training. After the selection we have to do contract with our employees for minimum 2 years. à ¢Ã¢â€š ¬Ã†â€™ Conclusion From above discussion it is clearer that planning is very fore a business. Without planning no one can achieve their goals effectively. Also invest the capital on the right business because everyone wants to invest their money for profit and other important thing is we should do business on legal way. If you want to be a success business man you have to create image in the society like Apple, MacDonald and, Dominos. Policies and procedure should clear to employees and customer and Health and safety environment provide to employees and customer. Franchise is more profitable the other business because we can use their logo, trademark also it is well known in the market,.