Paper f5 Mnemonics Sample Download v2

Mnemonics and Charts Paper F5: Performance Management
FORMULAE
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NEXT CHART NEXT MNEMONIC FORMULAE
Fact Sheet: Backflush Accounting - Overview

Backflush Accounting is a product costing approach, used in Just-In-Time (JIT) operating
environments, in which accounting entries are delayed until the products are complete. Standard
costs are then flushed backward through the system to assign costs to products. The result is that
detailed tracking of costs is eliminated. Ledger entries to inventory accounts may be delayed until the
time of product completion (or even the time of sale) and standard costs are used to assign costs to
units when ledger entries are made.
Definition: Backflush accounting
A cost accounting system which focuses on the output of an organisation and then works
backwards to attribute costs to inventories and cost of sales.
End of Definition
The traditional method

(a) Sequential tracking
Sequential tracking is the traditional product costing method in which ledger entries occur in the
same order as actual purchases and production.
(b) Trigger point for accounting entry

A trigger point is a stage in the production cycle at which ledger entries are made.
The traditional trigger points are shown in the following diagram and detailed inventory ledger
accounts for raw material, three work-in-processes and finished goods using standard process
accounting are shown on the next screen.
Traditional Trigger Points
Purchase Production Completion

Sale of a
of of of a good
finished
Direct work in finished
good
Materials progress unit/batch
Backflush Accounting
Backflush Accounting (sometimes called 'Backflush Costing') is an approach to product and inventory
costing which delays recording changes in the status of the product and the inventory until the products
are certified as good and completed (as finished goods). Completion of good finished goods is the
trigger point. Other trigger points are: invoices for materials and timing of conversion costs.
Furthermore, for the sake of simplicity of record keeping, numerous work-in-process accounts are
merged with raw materials inventory into one, meaning that only two inventory ledgers are maintained:
raw-in-process, and finished goods.
Backflush Accounting uses standard costs to work backward and flush out costs for the units produced.
The diagram shown on the second screen applies the data used in the next screen (the traditional
'sequential tracking' method), to illustrate the two inventory accounts produced by using Backflush
Accounting.
NEXT CHART NEXT MNEMONIC

©Tony Surridge Online Limited, 2010 www.tonysurridge.co.uk 2
Fact Sheet: Backflush Accounting - Overview

Backflush Accounting is a product costing approach, used in Just-In-Time (JIT) operating
environments, in which accounting entries are delayed until the products are complete. Standard
costs are then flushed backward through the system to assign costs to products. The result is that
detailed tracking of costs is eliminated. Ledger entries to inventory accounts may be delayed until the
time of product completion (or even the time of sale) and standard costs are used to assign costs to
units when ledger entries are made.
Definition: Backflush accounting
A cost accounting system which focuses on the output of an organisation and then works
backwards to attribute costs to inventories and cost of sales.
End of Definition
The traditional method

(a) Sequential tracking
Sequential tracking is the traditional product costing method in which ledger entries occur in the
same order as actual purchases and production.
(b) Trigger point for accounting entry

A trigger point is a stage in the production cycle at which ledger entries are made.
The traditional trigger points are shown in the following diagram and detailed inventory ledger
accounts for raw material, three work-in-processes and finished goods using standard process
accounting are shown on the next screen.
Traditional Trigger Points
Purchase Production Completion

Sale of a
of of of a good
finished
Direct work in finished
good
Materials progress unit/batch
Backflush Accounting
Backflush Accounting (sometimes called 'Backflush Costing') is an approach to product and inventory
costing which delays recording changes in the status of the product and the inventory until the products
are certified as good and completed (as finished goods). Completion of good finished goods is the
trigger point. Other trigger points are: invoices for materials and timing of conversion costs.
Furthermore, for the sake of simplicity of record keeping, numerous work-in-process accounts are
merged with raw materials inventory into one, meaning that only two inventory ledgers are maintained:
raw-in-process, and finished goods.
Backflush Accounting uses standard costs to work backward and flush out costs for the units produced.
The diagram shown on the second screen applies the data used in the next screen (the traditional
'sequential tracking' method), to illustrate the two inventory accounts produced by using Backflush
Accounting.

Fact Sheet: Conventional standard process

accounting
RAW MATERIAL INVENTORY ACCOUNT Note: there is a
$‘000 $‘000 separate inventory
Balance b/fwd 100 To Process 1 400 account for
(actual kg at standard price) (actual kg at standard price)
Actual cost 500 Residual variance 50  raw material
(actual kg at actual price) (in this case the variance is adverse)
 work-in-progress
Balance c/fwd 150  finished goods
(actual kg at standard price)
600 600
PROCESS 1 WORK-IN-PROCESS INVENTORY ACCOUNT

$‘000 $‘000
Balance b/fwd 80 To Process 2 900
(actual kg at standard cost) (actual kg at standard cost)
From raw materials 400 Residual variance 80
(actual kg at standard price) (in this case the variance is adverse)
Actual conversion cost 700 Balance c/fwd 200
(actual labour/overhead) (actual kg at standard cost)
1,180 1,180 Remember … all
transfers are at
PROCESS 2 WORK-IN-PROCESS INVENTORY ACCOUNT standard cost and all
$‘000 $‘000 inventory is valued at
Balance b/fwd 90 To Process 3 1,500 standard cost
(actual kg at standard cost) (actual kgs at standard cost) …
From Process 1 900 Residual variance 120
(actual kg at standard cost) (in this case the variance is adverse)
That’s why it’s called
(actual labour/overhead) (actual kg at standard cost) STANDARD process
1,790 1,790 accounting
…
PROCESS 3 WORK-IN-PROCESS INVENTORY ACCOUNT
$‘000 $‘000 And the RESIDUAL
Balance b/fwd 70 To Finished goods 2,000 VARIANCE is simply a
(actual kg at standard cost) (actual kgs at standard cost) single figure which is
From Process 2 1,500 Residual variance 90 the difference between
(actual kg at standard cost) (in this case the variance is adverse)
the ACTUAL costs and
(actual labour/overhead) (actual kg at standard cost) the STANDARD costs
2,170 2,170 …
FINISHED GOODS INVENTORY ACCOUNT We could analyse this
$‘000 $‘000
variance in more detail
Balance b/fwd 100 To Cost of goods sold 1,980
(actual kg at standard cost) (actual kgs at standard cost) somewhere else on the
From Process 3 2,000 Inventory lost/damaged 50 spreadsheet
(actual kgs at standard price) (actual kg at standard cost) …
Returns 30
(from customers, replacements THE SAME FIGURES
sent – actual kg at standard cost) ARE SHOWN ON THE
Balance c/fwd 40 NEXT SCREEN
(actual kg at standard cost)
USING
2,100 2,100
BACKFLUSH
ACCOUNTING

Fact Sheet: Backflush standard process accounting
RAW MATERIAL AND WORK-IN-PROCESS INVENTORY ACCOUNT

$‘000 $‘000 The ‘Raw material and
Balance b/fwd 340 To Finished goods 2,000 work-in-process
(actual kgat standard price) (actual kg at standard price) account’ is simply an
Materials 500 Residual variance 340 amalgamation of the
(actual kg at actual price) (in this case the variance is adverse) conventional ‘Raw
Actual conversion cost 2,100 Balance c/fwd 600 material’ and separate
(Actual labour/overhead) (actual kg at standard price) work-in-process
2,940 2,940 accounts
…
FINISHED GOODS INVENTORY ACCOUNT
$‘000 $‘000 It is only necessary to
Balance b/fwd 100 To Cost of goods sold 1,980 ADD together the
(actual kg at standard cost) (actual kgs at standard cost)
separate values,
From Process 3 2,000 Inventory lost/damaged 50
(actual kgs at standard price) (actual kg at standard cost) conversion costs and
Returns 30 residual values from
(from customers, replacements the different
sent – actual kg at standard cost) conventional raw
Balance c/fwd 40 material and work-in-
(actual kg at standard cost) process inventory
2,100 2,100 accounts
…
The ‘Finished goods

account’ does not
change
The human race has had long experience and a fine tradition in surviving adversity.
But we now face a task for which we have little experience, the task of surviving
prosperity.
Alan Gregg
Pollster

Fact Sheet: Backflushing from the finished goods

stage
The product is Start here

manufactured
Finished Goods
Units $ Units $
The finished
product is
packaged into a
box or carton
No accounting entries
so far ….
Raw-in-Process
Units $ Units $
Materials (on the bill of materials) are credited to the

The operator wands the bar code Raw-in-Process Inventory account
Standard conversion costs are credited to the Raw-

This triggers in-Process Inventory account
several events:
Finished Goods Inventory account is debited by the
carton quantity and standard cost of materials, labour
and overhead
A carton label is printed
Open quality (amount still to be produced) on the

Works Order is reduced

Fact Sheet: Backflush Accounting: the logic
Think about the situation logically.
When inventory levels are held at a very low

and constant level then costs incurred in a
period MUST end up in the period’s income
statement either as standard cost or variance.
So why bother to track ALL these costs through

ALL the accounts simply to arrive at the same
end result?
Original costs
Such as labour Raw material Work-in-Process Finished Goods Income statement
account inventory inventory inventory
Backflush accounting is part of modern ‘Lean Accounting’.
Yesterday is ashes; tomorrow wood.

Only today does the fire burn brightly.
Eskimo proverb

Benefits of using backflush accounting

Backflush accounting is a product costing approach, used in a Just-In-Time (JIT) operating environment,
in which costing is delayed until goods are finished. Standard costs are then flushed backward through the
system to assign costs to products. The result is that detailed tracking of costs is eliminated. Journal
entries to inventory accounts may be delayed until the time of product completion or even the time of sale,
and standard costs are used to assign costs to units when journal entries are made, that is, to flush costs
backward to the points at which inventories remain. It can also be argued that backflush accounting
simplifies costing since it ignores both labour variances and work-in-progress. Backflush accounting is
employed where the overall cycle time is relatively short and inventory levels are low.
Conventional standard process costing involves building a cost for a process by recording quantities and
values as resources are input, or output, or losses occur - in an account opened for each separate
process. In this way each process account is used to track costs and show transfers into and out of the
process. For this reason the process work-in-progress accounts are detailed, and present a 'front-end'
focus.
The main advantages of using backflush accounting are detailed below.
C Cost reduction in the accounting system. The simplicity of backflush costing will reduce the
cost of the accounting system, by cutting back the need for accounting entries, supporting vouchers
and relevant documents.
R Reduction in the volume of documentation/computer files. In production systems where stocks
are low, such as those organisations using just-in-time systems, the majority of input resources
directly form the cost of sales, and inventory valuation (as provided by the conventional system) is
less relevant, leaving scope for simplification. Unlike the conventional system, backflush costing
does not attempt to differentiate between stocks of raw materials, work-in-progress and sometimes
even finished goods. This removes the need for the large volume of documentation found in
conventional systems.
A Appropriate for a system of ‘inventory back flushing’ Back flushing is simply automatic goods
issue. The inventory system will automatically post the goods issued when operations are
confirmed. There is no need for stock entries to be made, the issue is automatically posted. For
example, when a 4-wheeler car is rolled out from the assembly line, 5 wheels 5 tyres are deemed to
be consumed and issued to a production order automatically by way of back flushing by the system.
The assembly line picks the material from stores and uses it. No physical issue and associated
manual posting of the issue is made by Stores. Back flushing is used for materials which are
standard in the product and have a fixed relationship with the product.
M Movement of material (including between processes) is not accounted for with large savings
by way of input costs.
S Stock level are reduced. Back flush costing will also reduce the motivation for managers to build
up work-in-progress and finished goods in order to increase short-term profit, which itself may be a
non-value adding activity, since individual processes will not be credited with stock values under
the backflush costing procedures.
Memory jog: the backflush accounting system simply ‘CRAMS’

materials and ALL processing into one account.

Limitations of backflush accounting

The main limitations are listed below.
L Low levels of inventory must be maintained. Backflush costing should only be used when
there are low levels of stocks and stable raw material prices and labour inputs, as variations in
these costs will result in significant errors in stock valuation. In dynamic cost environments,
influenced by interest rates, inflation, currency rates and so on, it may be difficult to rely on stable
standard costs. To the extent that backflush cost accounting depends on standard costs for the
backward valuation, this may prove to produce an unreliable and inaccurate record of costs/events.
A Attempts are not made to track particular costs. In the absence of actual input data, backflush
cost accounting calculates an expected stock figure by deducting the standard cost of goods
produced from costs incurred. Thus no attempt is made to track particular costs with particular
items of output. For this reason cost control is made more difficult.
S Suppliers’ invoices are more difficult to verify. One purpose of the conventional raw material
stock receipt/valuation system is to provide a basis for the verification of suppliers' invoices.
Depending upon the method of backflush cost accounting adopted (for example, some
practitioners advocate backflushing direct from the finished goods [or even income statement] back
to the trade creditors' account), this important internal control may be weakened.
T Traditional stock-take is made more difficult. The traditional stock-take uses stock levels
based on inputs (i.e. stock available at any time), and stock control methods also use input
documentation, such as material requisitions. Furthermore the system of forward allocation of
stock and subsequent purchasing may be complicated.
Memory jog: even though backflush accounting presents a number of

problems we have not seen the ‘LAST’ of this modern method of
cost accounting.
In the business world, everyone is paid in two coins:

cash and experience. Take the experience first, the
cash will come later.
Harold Geneen
CEO, IT&T

Fact Sheet: Throughput Accounting (TA): Overview
The principles and practices associated with throughput accounting over the past decade or so have been
developed as an alternative system of management accounting in a modern industrial plant, especially
one operating in a Just-in-Time (JIT) environment. It can be used as an alternative approach to the
traditional marginal costing and associated contribution analysis when making production/service mixture
decisions and other decisions which are affected by relevant (or opportunity) costs. Throughput has been
described as follows:
‘Throughput Accounting is not costing and does not allocate costs to products and services. It
can be viewed as a business technique used for profit maximisation. Conceptually, throughput
accounting seeks to increase the velocity at which products move through an organisation by
eliminating, or effectively using, bottlenecks within the organisation.’
Definition: Throughput accounting
A method of performance measurement which relates production and other costs to throughput.
Throughput accounting product costs relate to usage of key resources by various products.
End of definition
Calculation of 'throughput‘
Throughput is defined as sales revenue less direct material cost. We see from this equation that
throughput only exists when there is a sale of the product or service. Producing work-in-progress or
finished goods that sit in a warehouse does not count. Throughput is therefore the rate at which a system
produces money, in contrast to output, which may be stored in a warehouse and for which money has not
yet been received. Output that becomes part of the inventory in a warehouse may mislead management
and investors about the organisation's condition by inflating the apparent value of its assets.
Aim of throughput accounting

The aim of throughput accounting is to maximise the throughput measure. (Confusingly, "Throughput" is
sometimes referred to as "Throughput Contribution" and has similarities to the concept of "Contribution" in
Marginal Costing. You should be able to compare "Throughput Contribution" with the traditional
'Contribution' which is defined as sales revenue less all direct and other variable costs.) The aim, with
traditional marginal costing is to maximise contribution but without necessarily reducing investment in
inventory.
Practice question on Backflush accounting: EVCO Company

Page 17
To manage a business well is to manage its future: and to manage the future is
to manage information.
Marion Harper

Fact Sheet: The concepts of Throughput Accounting
Throughput accounting for JIT, according to Galloway and Waldron is based on three concepts.
Concept 1
In the short run, most costs in the factory (with the exception of material costs) are fixed. These fixed
costs include direct labour. (This takes a different view from the proponents of activity-based costing
(ABC), who argue that many costs are 'variable with activity'.) It is therefore useful to group all these
costs together (such as 'direct' labour, machine cell costs and support costs) and call them 'Total Factory
Costs (TFC)'. (Note: this is a term worth remembering.)
Tutorial comment
When cost accounting was developed in the 1890's, labour was the largest fraction of product cost and
workers might not know how many hours they would work in a week when they reported on Monday
morning. If they were not required to work, for whatever reason, they were not paid. Now, however,
workers who come to work on Monday morning almost always are guaranteed a wage based on a
specified number of hours (say, 40 hours) regardless of whether there is idle time or not. Labour cost
now is fixed rather than variable, as it used to be.
End of definition
Concept 2
In a JIT environment, all inventory is undesirable, and the ideal inventory level is zero. Products should
only be made in response to a customer order and this means, theoretically, that the factory operates at
the pace of the slowest process of the moment. This results in unavoidable idle capacity in some
operations (which must be accepted) except for the operation that is the bottleneck at that point in time.
This restricts the company's manufacturing cycle time (which we might refer to as the time taken to
convert material into a finished product.)
Work in progress and finished goods (although logically, if products are made in response to
customers' order there will be minimum finished goods inventory) should be valued at material cost
only, until the output is sold, so that no profit will be earned (or value added) until the sale takes place.
This is a very important concept, and because of this, managers will recognise that working on output
(for which a sale has not already been agreed) will just add to either work in progress or finished
goods inventory without creating profit, and will then not be encouraged to perform such work.
Concept 3
Profitability is therefore determined at the rate at which cash is generated. (You may remember the
concept of traditional costing techniques which suggest that profit is generated at the rate at which
products are made.) In a modern factory environment, especially a JIT environment, the speed at which
sales revenue is received depends on how quickly goods can be produced to satisfy customer orders. The
concept of synchronous management techniques have been developed for this objective.

Fact Sheet: Throughput Accounting: A summary
Conforms with:
- World Class Manufacturing aims
OBJECTIVE:
- JIT philosophy
TO INCREASE
THROUGHPUT
This is accomplished
in two ways
- This will NOT encourage managers to build
ALL STOCK IS stock for profit.
VALUED AT - Profit will only be obtained at the point of
RAW sale.
MATERIAL - Managers will therefore be encouraged to
PURCHASE maximise throughput.
1 COST
THROUGHPUT
IS - The bottleneck constraint is identified.
REGULATED - Efforts are made to increase the capacity of
BY THE the bottleneck constraint.
CAPACITY/ - Objective then is to maximise the utilisation
USAGE OF of the bottleneck capacity, by:
THE - efficiency in use
BOTTLENECK - optimum mix of products.
2
CONSTRAINT
- Throughput = Sales – Material costs

THROUGHPUT - Throughput is affected by:
COSTING THROUGHPUT - sales price
MEASURES - volume of sales
- material prices
- material usage
- capacity of the bottleneck constraint
- Efficiency of bottleneck constraint % - efficiency of use of the bottleneck
constraint
- Throughput Accounting Ratio: - mix of products using the bottleneck
constraint.
Return per hour
TAR =
Factory cost per hour
where :
Throughput per unit
Return per hour =
Number of hours per unit in bottleneck constraint
Total factory cost per period

Factory cost per hour =
Number of hours per period

Fact Sheet: Example of a bottleneck constraint in a

factory
Example: The production of a product that moves in sequence through 4

different processes, each of which works at a different production capacity
CUTTING MOULDING POLISHING FINISHING
PROCESS 1 PROCESS 2 PROCESS 3 PROCESS 4
83 units per hour 122 units per hour 71 units per hour 95 units per hour
Constraint
If work-in-progress stock is not to accumulate the product flow needs to

work at the production rate of the slowest process, i.e. 71 units per hour.
Process 3 (polishing) is therefore the bottleneck constraint.

Fact Sheet: Theory of Constraints (TOC) and the use

of the Five Focusing Steps
Theory of Constraints (TOC) is an overall management philosophy introduced by Dr. Goldratt (1984) that
is geared to help organisations continually achieve their goal. The title comes from the contention that any
manageable system is limited in achieving more of its goal by a very small number of constraints, and that
there is always at least one constraint. The TOC process seeks to identify the constraint and restructure
the rest of the organisation around it, through the use of the Five Focusing Steps.
Constraints
A constraint is anything that prevents the system from achieving more of its goal. There are many ways
that constraints can show up, but a core principle within TOC is that there are not tens or hundreds of
constraints. There is at least one and at most a few in any given system. Constraints can be internal or
external to the system. An internal constraint is in evidence when the market demands more from the
system than it can deliver. If this is the case, then the focus of the organisation should be on discovering
that constraint and following the five focusing steps to open it up (and potentially remove it). An external
constraint exists when the system can produce more than the market will bear. If this is the case, then the
organization should focus on mechanisms to create more demand for its products or services.
Types of (internal) constraints are
• Equipment: The way equipment is currently used limits the ability of the system to produce more
saleable goods/services.
• People: Lack of skilled people limits the system.
• Policy: A written or unwritten policy prevents the system from making more.
The five focusing steps

Theory of Constraints is based on the premise that the rate of goal achievement is limited by at least one
constraining process. Only by increasing flow through the constraint can overall throughput be increased.
Assuming the goal of the organisation has been articulated (e.g., "Make money now and in the future") the
steps are:
STEP 1 IDENTIFY the constraint (the resource/policy that prevents the organization from
obtaining more of the goal)
STEP 2 Decide how to EXPLOIT the constraint (make sure the constraint's time is not wasted
doing things that it should not do)
STEP 3 SUBORDINATE all other processes to above decision (align the whole system/
organization to support the decision made above)
STEP 4 ELEVATE the constraint (if required/possible, permanently increase capacity of the
constraint; "buy more")
STEP 5 If, as a result of these steps, the constraint has moved, return to Step 1. Don't let inertia
become the constraint.
The five focusing steps aim to ensure ongoing improvement efforts are centred around the organization's
constraints. In the TOC literature, this is referred to as the Process of Ongoing Improvement (POOGI).

Constraints on throughput
Throughput Accounting (TA) is an alternative to conventional cost accounting. Throughput Accounting
is not cost accounting or costing because it does not allocate all costs (variable and fixed expenses,
including overheads) to products and services. Only costs that are totally variable e.g. raw materials are
deducted from sales to determine Throughput. Throughput Accounting is a management accounting
technique used as the performance measures in the Theory of Constraints (TOC). Unlike traditional cost
accounting that primarily focuses on 'cutting costs' and reducing expenses to make a profit, throughput
accounting primarily focuses on generating more throughput. Conceptually, throughput accounting seeks
to increase the velocity or speed at which throughput is generated by products and services with respect to
the organisation's operational constraint, whether the constraint is internal or external to the organization.
An important factor influencing throughput is the volume of sales (hence, throughput). This in turn is
influenced by production bottlenecks, or constraints.
Constraints on throughput might include:
S Shortage of production resources (resulting in production delays). Such shortage also includes
production bottlenecks.
P Poor product quality and reliability (resulting in wasted work, reduced production volume and
reduced sales).
U Uncompetitive selling prices.
R Reliability of raw materials is inconsistent. This results in production delays and reduced sales
volume.
It is management's task to eliminate these constraints. Shortages of resources are usually termed
bottlenecks which is the prime concern in the 'Theory of Constraints'.
Memory jog: such problems act as a ‘SPUR’ to management

seeking to increase their profits.

NEXT CHART FORMULAE
Assessment of throughput accounting (TA)

A critical evaluation of throughput accounting (TA) would argue the following:
S Short-term perspective. TA is a highly short term perspective on costs, which treats only material
as variable or activity related. In the medium term (and many decisions relate to the medium term)
labour and other costs are within the control of management and are variable by nature.
L Labour and other variable overhead costs are neglected within the TA measure. The TA
method does not focus on controlling and reducing these significant costs.
A As a result there is the risk of less than optimal performance resulting from the wrong
production/service mix, or inappropriate production focus.
M Material must be a high proportion of the cost or selling price for the TA approach to be
effective.
S Sales demand must be constant enough, or high enough, to put pressure on the output and
production resources. In other words, the bottleneck capacity should not exceed the production
resources necessary. This would result in an ‘external constraint’ for which the logic behind the
throughput accounting ratio might not be applicable. .
Memory jog: remember this by word association: the above criticisms

‘SLAMS’ a big question mark against the use of throughput
accounting in some situations.
As in a game of cards, so in the game of life we must play

what is dealt to us; and the glory consists, not so much in
winning, as in playing a poor hand well.
Henry Wheeler Shaw, 1818 - 1885
NEXT CHART
FORMULAE
Fact Sheet: Distinctions between throughput costing

and orthodox cost accounting
The concepts entailing the use of throughput accounting (TA) shown in the table below provide a
contrast to the fundamental principles of orthodox marginal cost accounting:
Differences between throughput costing and orthodox costing systems
Throughput accounting Orthodox marginal cost accounting
1. Inventory is not an asset. Inventory is an asset.

Inventory is a result of unsynchronised
production (i.e. a lack of synchronisation
of production, logistics and market
demand) and is an impediment to making
profit.
2. Costs are classified as (a) direct material, Costs can be classified either as direct or
and (b) total factory costs (all other costs). indirect.
3. Profitability is determined by the rate at Product profitability can be calculated by the

which sales income is earned. contribution earned per unit of limiting factor.
4. Profit cannot be manipulated by changes Profit can be manipulated by increasing

in inventory levels. or reducing inventory levels.
5. Profit is a function of material cost, total Profit can be increased by reducing direct
factory cost and throughput. and indirect costs.
It is much more difficult to measure non-performance than performance.

Performance stands out like a ton of diamonds. Non-performance can almost
always be explained away.
Harold Geneen
CEO, IT&T
Practice question on Throughput accounting: Sennelager Company

Page 23

FORMULAE
EVCO Company: Question – 1 of 2

(A question covering Back Flush Costing)
EVCO Company produces and sells a single product by passing a single raw material through three
consecutive production processes - making, converting and finishing. A system of standard process
costing is in operation for which the following information is available for the period ended 31st
December 2009:
(i) Stocks are held at constant levels at the beginning and end of the period as follows: raw material
(4,000 kg at $0.75 per kg); WIP - converting (500 units); WIP - finishing (500 units); finished goods
(500 units).
(ii) Process accounts are debited with the actual costs incurred for the period.
(iii) All losses and transfers between processes or into finished goods are valued at standard costs at
their stage of completion. Such unit standard costs may be determined from the information in
Table A.
(iv) WIP in converting and finishing is held at the beginning of each process.
(v) The units transferred into finished goods will eventually comprise free replacements to customers,
finished goods stock losses and the balance as net sales to customers.
Table B shows the summary profit and loss account for the period ended 31st December 2009 showing
budget and actual analysis of gross profit/(loss).
Information relevant to the profit and loss account is as follows:
(i) Free replacements to customers and finished goods stock losses are valued at standard cost per
unit.
(ii) The price reduction penalty is allowable on goods delivered late to customers at 5% of the normal
selling price of $30 per unit.
EVCO Company presently relies on the variances ($) reported in its standard process system as its
main source of control information.
Required:
(a) Prepare accounts for the period 31st December 2009 using 'backflush accounting' instead of the
present system. The accounts required are (i) raw materials and in-process account (ii) finished
goods stock account. (10 marks) A
(b) Discuss the merits of the use of the backflush accounting procedure in EVCO Company as in (a)
above. (5 marks) A

FORMULAE
EVCO Company: Question – 2 of 2

(A question covering Back Flush Costing)
(c) Prepare a report for the period ended 31st December 2009 to the management team of EVCO
Company which details the factors which have contributed to the poor performance of EVCO
Company (5 marks) A
(Show all relevant workings) (20 marks)
Table A
EVCO Company: Standard process accounts for the period ended 31st December 2009
Making process Converting process Finishing process

Product $ Product $ Product $
units units units
DR
WIP b/fwd 500 7,909 500 10,054
Transfers from previous process 6,800 107,563 6,025 121,156
Raw material cost 8,000 96,000
Conversion costs 18,800 30,100 14,390
8,000 114,800 7,300 145,572 6,525 145,600
CR
Normal losses 800 504 298
Transfers to next process 6,800 107,563 6,025 121,156 5,365 124,655
WIP damage (written off) 75 1,186 60 1,207
Abnormal process losses 400 6,327 196 3,934 302 6,822
Residual variance 910 11,387 2,862
WIP c/f 500 7,909 500 10,054
8,000 114,800 7,300 145,572 6,525 145,600
EVCO Company: Summary profit and loss account for the period ended 31st December 2009
Actual Budget
$ $ $ $
Sales revenue 145,050 150,000
Less standard cost of sales 112,341 116,175
Standard contribution 32,709 33,825
Less:
WIP damage losses 2,393 1,437
Finished goods losses 697 232
Abnormal losses 17,083
Residual process variances 15,159
Free replacement to customers 11,617 4,832
Price reduction penalty 1,160 750
Raw material stock damage losses 240 48,349 120 7,371
Gross profit/(loss) (15,640) 26,454

FORMULAE
EVCO Company: Answer - 1 of 4

(A question covering Backflush Costing)
Q
What confused students in the exam was the way the three work-in-process accounts were
presented. Many management accountants use spreadsheet software to hold their accounts
and obviously the ‘flat file’ approach of a spreadsheet makes the columnar approach
appropriate – after all, it saves duplicating the text labelling (on the left side of the account).
Look carefully and you will see that ‘T accounts’ are still used but that the CR side of the
account has been inserted under the DR entries rather than to the right side. Other than this
there are no differences to the way conventional accounts are held.
Remember, with backflush accounting the ‘Raw Materials and In-process Account’ is simply
an amalgam of the accounts previously held separately,
(a)
RAW MATERIALS AND IN-PROCESS ACCOUNT
Working note $ Working note $

Raw material and WIP (b/fwd) 1 20,963 Transfers to finished goods 4 124,655
Raw material input 2 96,000 Residual variances 5 34,635
Conversion costs 3 63,290 Raw material and WIP c/fwd (bal) 20,963
180,253 180,253
FINISHED GOODS INVENTORY ACCOUNT

Working note $ Working note $
Finished goods inventory b/fwd 6 11,617 To cost of sales (P&L a/c) 7 112,341
Materials and in-process a/c 124,655 Inventory loss (P&L a/c) 8 697
Free replacements 9 11,617
Finished goods c/fwd 11,617
136,272 136,272
Notice the use of the system that cross references workings.

FORMULAE
EVCO Company: Answer – 2 of 4

Q
WORKING NOTES
1. (4,000 kgs x $0.75) + $7,909 (converting a/c) + $10,054 (finishing a/c)
2. From making process a/c
3. Total from all three accounts
4. From finishing process a/c

$
5. Residual variances (for all processes) 15,159
Abnormal losses (for all processes) 17,083
Units damaged in WIP (for all processes) 2,393
34,635
6. 500 units (finished goods inventory) x $124,655/5,365(from finishing a/c) = $11,617
7. From actual P&L a/c
(b)
Answer plan: part (b)

It’s a 5-mark question, so try
The question and write about five things.
Ask yourself …. What requires you to
is being examined discuss the merits of
here? using backflush
accounting Answer
plan
format
Backflush
The company In modern
accounting is a Reduces a lot EVCO currently
currently uses organisations
simplified of accounting holds constant
conventional inventory value
standard administration inventory levels
costing is less relevant
costing system
Q

FORMULAE

Q
The company currently uses conventional costing
EVCO Company currently uses conventional standard process costing, which involves recording values
and quantities in an account for each of the organisation's three processes. Each process account
shows the transfers into and out of the process, the various resources input to the process and any
losses and residual variances.
Inventory value is less relevant

In organisations where inventory levels are low and the vast majority of manufacturing costs form part of
the cost of sales rather than being deferred in closing inventory values (such as in organisations
operating a policy of just-in-time production and purchasing), inventory valuation (as provided by a
system of process costing accounts) is less relevant, however, and can therefore be simplified to a
certain extent. In such circumstances, backflush accounting can be used.
Backflush is a simplified system

Backflush accounting is a simplified standard costing system which focuses on the output of an
organisation and then works backwards, allocating costs between inventories and the cost of goods
sold (or finished goods). It therefore attempts to eliminate detailed accounting transactions since there
is no separate accounting for work in progress.
Reduces accounting work

Apart from its simplicity, other advantages include the reduction in accounting entries, supporting
vouchers, documents and so on and the fact that it may discourage managers from producing for
inventory since working on material does not add value if it moves into inventory.
Relevant for EVCO

Backflush accounting would be particularly appropriate for EVCO Company since it currently has a
policy of holding constant levels of inventory and WIP. Back flush costing will also reduce the motivation
for managers to build up work-in-progress and finished goods in order to increase short-term profit, which
itself may be a non-value adding activity, since individual processes will not be credited with stock
values under the backflush costing procedures.
Answer plan: part (c) The question requires your

answer to be in report format.
The question simply

requires a
Ask yourself …. What
comparison between
is being examined Answer
the budget and actual
here? plan
results. Do this line
by line. format
Actual loss
Sales
compared Units Productivity Late Customer
volume was Losses
with budgeted damaged levels delivery replacement
down
profit

FORMULAE

Q
REPORT
To : Management Team
From : Accountant
Date : 31st January 2010
Subject: Performance for period ended 31st December 2009
An analysis of the actual results achieved on selling and producing our product during the period ended
31st December 2009 highlight a number of problems.
1. Actual loss was $15,640 whereas profit was budgeted at $26,454
2. The actual sales volume was over 3% lower than the budgeted sales volume.
3. Losses occurring during processing were far greater than budgeted, as indicated by the level of
abnormal losses.
4. The value of units damaged in WIP, losses of raw material and losses of finished goods were far
higher than budgeted.
5. The high level of residual variances indicates that productivity levels were low and idle time was
high.
6. The level of price reductions given because of late delivery was considerably greater than
anticipated.
7. Far more units had to be replaced than expected, indicating possible problems with quality control in
the production process.
The causes of these abnormalities need to be investigated and we would be pleased to offer our
assistance in this matter on receiving instruction from yourselves.

FORMULAE
Sennelager Company: Question – 1 of 2

(A question covering Throughput Accounting)
Sennelager Company manufactures and markets an industrial electronic product with the brand name
'Athlone'. Each Athlone sells for $3,000 and the material cost is $900. Conversion costs which are
regarded as fixed are $20,220 each week. Other fixed production costs are $674,960 per annum, and
in addition, marketing and administration costs are $397,500 per annum.
The Athlone is made on four different machines:
- Machine A, a complex machine lathe, can machine 78 units of Athlone per week.
- Machine B makes four main components required for each Athlone. Its maximum output is 272
components per week. Machine B is old and unreliable and breaks down frequently. It is estimated
that, on average, between 15 and 20 hours of production are lost over each four week period.
- Machine C can polish 82 units of Athlone per week.
- Machine D, another old machine although reasonably reliable, can assemble 45 units of Athlone per
week.
Sennelager Company operates a policy to hold minimum work-in-progress and no finished goods
inventory from week to week. The company works a 40-hour week, 52 weeks a year but cannot meet
market demand. The demand for Athlones next year is predicted to be as follows. This demand
(including the week/month pattern) is expected to be typical of the demand for the next six years.
Number of weeks in Units per week Number of weeks Units per week
the month the month
January 5 45 July 5 72
February 4 45 August 4 70
March 5 50 September 4 63
April 4 54 October 5 60
May 4 58 November 4 50
June 4 66 December 4 45
The production engineer has suggested that the company replaces Machine D with new technology,
Machine E. Machine E can process 68 units of Athlone per week and costs $3,200,000. It is estimated
that the conversion cost per week will increase by $6,750 if Athlones are assembled using Machine E.
The maintenance engineer is keen to spend $300,000 on a major overhaul of machine B - she says
this will make it 100% reliable.
Required:
(a) Calculate the 'throughput accounting ratio' (defined below) for Sennelager Company for the
constraint (key) resource for an average hour next year: (8 marks) A
Throughput return per factory hour
Throughput accounting ratio =
Factory cost per hour
where :
Sales price - material cost per unit

Throughput return per hour =
Time spent on key resource

FORMULAE
Sennelager Company: Question – 2 of 2

(b) Explain the concept of 'throughput accounting'. (5 marks) A

(c) Discuss how the concept of contribution in throughput accounting differs from that in marginal
costing. (5 marks) A
(d) The management of Sennelager Company have decided to purchase Machine E and spend
$300,000 on a major overhaul of Machine B. Calculate the pay-back period of the combined
investment, to the nearest full month. (7 marks) A
Notes: 1. Ignore taxation.
2. Ignore the time value of money.
3. Assume that neither investment has a disposal value at the end of six years. (25 marks)

FORMULAE
Sennelager Company: Answer – 1 of 5

Q
Step 1 involves determining which of the machines is the bottleneck constraint. The answer
is simply ‘copy out’, except for Machine B which needs some thought. Don’t just make
assumptions – the examiner will have allocated marks for the calculations involved and you
need to gain them!
(a) Step 1: Identify the bottleneck constraint

Maximum number
of units of
Athlone per week
Machine A 78
Machine B
Maximum output (100% capacity) = 272/4 = 68 units per week
Average downtime per 4-week period: (15 + 20)/2 = 17.5 hours
therefore, average downtime per week: 17.5 hours/4 = 4.375 hours
Machine B's practical capacity: (68/40) x (40 - 4.375) = 60.5
Machine C 82
Machine D 45
Machine D is the bottleneck (or 'key') resource and the maximum weekly output of Athlones is 45 units.
Step 2: Calculate the throughput per factory hour
Using weekly data:
45 x ($3,000 - $900) Steps 2 and 3

Throughput per factory hour = $2,362.5 involve
40 hours
calculating the
TAR.
Step 3: Calculate the factory cost per hour
$674,960
Other fixed production costs are = $12,980 per week
52
$20,220 + $12,980
Therefore : = $830 per hour
40 hours
Answer: Throughput accounting ratio (TAR)
Throughput return per hour $2,362.5

TAR = = = 2.846
Factory cost per hour $830

FORMULAE

Q
(b)
Answer plan: part (b) Your answer could spread

across the three main
concepts associated with TA
The question
requires an
Ask yourself …. What
explanation of the
is being examined Answer
‘concept’ of
here? plan
throughput
accounting format
Profitability
Inventory is is
Total Factory
The TA valued at determined
Costs are
formula raw materials at the rate at
fixed
prices which cash
is generated
Throughput is defined as sales revenue less direct material cost.
Throughput accounting is based on three main concepts.
(i) In the short run, most costs in the factory (with the exception of material costs) are fixed.
These fixed costs include direct labour. It is therefore useful to group all these costs
together (such as 'direct' labour, machine cell costs and support costs) and call them 'Total
Factory Costs (TFC)'.
(ii) In modern industry, inventory is undesirable, and the ideal stock level is zero. Products
should only be made in response to a customer order and this means, theoretically, that the
factory operates at the pace of the slowest process of the moment. This results in
unavoidable idle capacity in some operations (which must be accepted) except for the
operation that is the bottleneck at that point in time. The bottleneck resource restricts the
company's manufacturing cycle time (which we might refer to as the time taken to convert
material into a finished product.)
Work in progress should be valued at material cost only, until the output is sold, so that no
profit will be earned (or value added) until the sale takes place. This is a very important
concept, and because of this, managers will recognise that working on output (for which a
sale has not already been agreed) will just add to either work in progress or finished goods
stock without creating profit, and will then not be encouraged to perform such work.
(iii) Profitability is therefore determined at the rate at which cash is generated. (This is different
from the concept of traditional marginal and opportunity costing techniques which suggest
that profit is generated at the rate at which sales are made.) In a modern factory environment,
especially a JIT environment, the speed at which sales revenue is received depends on how
quickly goods can be produced to satisfy customer orders. The concept of synchronous (or
synchronised) management techniques have been developed for this objective.
Q

FORMULAE

Q
(c)
Answer plan: part (c) A diagram is always useful –
if you can draw one, and
The question have the time!
requires a
Ask yourself …. What Answer
comparison between
is being examined plan
traditional marginal
here? format
costing and
throughput costing
A chart
Comparison
The JIT showing
of the two
environment main points
approaches
of difference
The JIT environment

The principles and practices associated with throughput accounting over the past decade or so have been
developed as an alternative system of management accounting in a modern industrial plant, especially one
operating in a JIT environment. It can be used as an alternative approach to the traditional marginal
costing and associated contribution analysis when making production/service mixture decisions and other
decisions which are affected by relevant (or opportunity) costs.
The aims of throughput accounting and traditional marginal costing

The aim of throughput accounting is to maximise the throughput measure (sales less material costs).
This should be compared with the traditional 'contribution' (marginal costing) which is defined as sales
revenue less all direct and other variable costs. The aim, with traditional marginal costing is to maximise
contribution. Unlike traditional marginal costing, throughput accounting assumes that all internal costs are
fixed in the short term, and only the external cost of materials is variable.
The following chart summarsises the differences between the two accounting approaches.
Throughput accounting Orthodox marginal cost accounting

1. Inventory is not an asset. Inventory is an asset.
Inventory is a result of unsynchronised
production (i.e. a lack of synchronisation
of production, logistics and market
demand) and is an impediment to making
profit.
2. Costs are classified as (a) direct material, Costs can be classified either as direct or
and (b) total factory costs (all other costs). indirect.
3. Profitability is determined by the rate at Product profitability can be calculated by the
which sales income is earned. contribution earned per unit of limiting factor.
4. Profit cannot be manipulated by changes Profit can be manipulated by increasing
in inventory levels. or reducing inventory levels.
5. Profit is a function of material cost, total Profit can be increased by reducing direct
factory cost and throughput. and indirect costs. Q

FORMULAE

Q
(d)
There are 4 steps involved in answering part (d):
STEP 1: Identify the revised bottleneck resource (assuming the two investments take place).
STEP 2: Calculate the incremental increase in production/sales per year.
STEP 3: Calculate the incremental annual return of the two investments.
STEP 4: Calculate the payback period (in years and months).
STEP 1: Identify the revised bottleneck resource
Maximum number
of units of
Athlone per week
Machine A 78
Machine B 68
Machine C 82
Machine D 68
Machines B and D are the bottleneck (or 'key') resources and the maximum weekly output of
Athlones is now 68 units.
STEP 2: Calculate the incremental increase in production/sales per year
Month Weekly demand Weeks in month Increase in Athlones

(above previous 45) (units)
January (45- 45) x 5 = Nil

February (45 - 45) x 4 = Nil
March (50- 45) x 5 = 25
April (54 - 45) x 4 = 36
May (58- 45) x 4 = 52
June (66 - 45) x 4 = 84
July (68*- 45) x 5 = 115
August (68*- 45) x 4 = 92
September( 63 - 45) x 4 = 72
October (60 - 45) x 5 = 75
November (50 - 45) x 4 = 20
December (45 - 45) x 4 = Nil
Annual incremental increase in sales (units) 571
* 68 is the revised maximum weekly production capacity.

FORMULAE

Q
STEP 3: Calculate the incremental annual return of the investment
$
Incremental annual throughput: 571 x ($3,000 - $900) = 1,199,100
Incremental annual cost: $6,750 x 52 weeks = (351,000)
Annual incremental return 848,100
STEP 4: Calculate the payback period
Investement cost
Payback period =
Annual profit from the investment
$3,200,000 + $300,000
= = 4.12687 years
$848,100
ANSWER
From the data provided the payback period is calculated as:
4 years + (0.12687 x 12) = 4 years and 1.5 months = 4 years and 1 complete month.

FORMULAE
Glossary of terms
Accountability
Accountability is often used synonymously with such concepts as responsibility, answerability,
enforcement, blameworthiness, liability and other terms associated with the expectation of account-giving.
Artificial intelligence
John McCarthy, who coined the term in 1956, defines artificial intelligence as "the science and
engineering of making intelligent machines."
Balanced scorecard
The Balanced Scorecard (BSC) is a performance management tool for measuring whether the smaller-
scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and
strategy.
By focusing not only on financial outcomes but also on the operational, marketing and developmental
inputs to these, the Balanced Scorecard helps provide a more comprehensive view of a business, which in
turn helps organisations act in their best long-term interests. This tool is also being used to address
business response to climate change and greenhouse gas emissions.
Benchmarking
Benchmarking is the process of comparing the cost, cycle time, productivity, or quality of a specific
process or method to another that is widely considered to be an industry standard or best practice.
Essentially, benchmarking provides a snapshot of the performance of a business and helps management
understand where the company in relation to a particular standard. The result is often a business case for
making changes in order to make improvements. Some say that the term benchmarking was first used by
cobblers to measure ones feet for shoes. They would place the foot on a "bench" and mark to make the
pattern for the shoes.
Breakeven
In business, specifically management accounting, the break-even point (BEP) is the point at which cost or
expenses and revenue are equal: there is no net loss or gain.
Budget
An finance budget is a short-term (usually annual) plan of action made in terms of physical resources
and their monetary equivalents.
Budgetary control
Budgetary control is the establishment of budgets relating the responsibilities of executives to the
requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure
by individual action the objective of that policy or to provide a basis for its revision.
Bureaucracy
Bureaucracy is the structure and set of regulations in place to control activity, usually in large
organisations and government. It is represented by standardised procedures (rule-following) that dictate
the execution of most or all processes within the organisation, formal division of powers, hierarchy, and
relationships.

FORMULAE
Glossary of terms - 2
Closed system
A closed system is a state of being isolated from the environment. No system can be completely closed;
there are only varying degrees of closure.
Compromise
In disputes or arguments, compromise is a basis of finding agreement through communication, through a
mutual acceptance of terms - often involving variations from an original goal or desire.
Consensus
Consensus a general agreement among the members of a given group, each of which exercises some
discretion in decision making and follow-up action.
Contingency plan
A contingency plan is an alternative plan to be put into operation if needed, especially in case of
emergencies, or if a primary plan fails. Contingency planning is sometimes referred to as ‘soft planning’.
Convention
A convention is a set of agreed, stipulated or generally accepted standards, norms, social norms or
criteria, often taking the form of a custom.
Coordination
Coordination is the act of coordinating, making different people or things work together for a goal or
effect.
Correlation
In statistics, correlation (often measured as a correlation coefficient, r) indicates the strength and direction
of a linear relationship between two random variables. That is in contrast with the usage of the term in
colloquial speech, which denotes any relationship, not necessarily linear.
Critical Success Factor (CSF)

Critical Success Factor (CSF) is a business term for an element which is necessary for an organization
or project to achieve its mission. There are a number of critical factors or activities required for ensuring
the success of an organisation, department or individual manager. The following are examples of
organisational CSFs:
• Finance: positive cash flow, revenue growth, and profit margins.

• Market: Acquiring new customers and/or distributors.
• Customer satisfaction
• Quality:
• Product or service development: Innovative skills that will increase business with existing
customers and attract new ones?
• Intellectual capital: Increasing knowledge.
• Strategic relationships: New sources of business, products and external revenue.
• Employee attraction and retention:
Strategy should be implemented that takes into consideration the organisation’s critical success factors.

FORMULAE
Customer empowerment
The process which enables a customer to gain power and influence the decisions of suppliers. Customer
empowerment is the totality of the following or similar capabilities:-
• Having independent decision-making (choice) power.

• Having access to information and resources for taking proper decision.
• Having a range of options from which to make choices (not just yes/no, either/or.).
• Ability to exercise assertiveness in buying agreements.
In short, customer empowerment is the process that allows a person to gain the knowledge, buying-skills
and attitude needed to make free choices between competing products and services.
Cybernetic control
Cybernetic control is closely related to control theory and systems theory and relates to systems that
self-regulate or control themselves. In other words, systems than contain activities designed for control
purposes and where the control mechanism is closed within the system itself. (For example, it you injure
yourself slightly, your body will ‘automatically’ heal itself without reference to any external control agent,
such as a doctor.)
Data mining
Data mining is the process of extracting hidden patterns from electronic data. As more data is gathered,
with the amount of data doubling every three years, data mining is becoming an increasingly important tool
to transform this data into information. It is commonly used in a wide range of profiling practices, such as
marketing, surveillance, fraud detection and scientific discovery.
Data warehouse
A Data warehouse is a repository of an organization's electronically stored data. Data warehouses are
designed to facilitate reporting and analysis.
Decision Support Systems (DSS)

Decision support systems constitute a class of computer-based information systems including
knowledge-based systems that support decision-making activities.
Dividend per share (DPS)

The Dividend per share (DPS) is the portion of a company’s profits paid as dividend to each outstanding
ordinary share (or share of common stock). For example, a company that paid $10 million dividends last
year and has 10 million shares in issue would report dividends of $1 per share. Current and future
dividends per share are key statistics in evaluating a share’s outlook.
Dysfunctional
Dysfunctional refers to abnormality, in the sense of something deviating from the normal or differing from
the typical and is a subjectively defined behavioural characteristic. One example of dysfunction is
distress in which a person displays depression, anxiety, unhappiness, etc.

FORMULAE
Dynamic change
Dynamic change can be related to as ‘change which makes an organisation change what it is doing’.
This is compared with change that does not have a direct impact on an organisation’s strategy or
operations.
Earnings per share (EPS)

The Earnings per share (EPS) is the portion of a company’s profits allocated to each outstanding ordinary
share (or share of common stock). For example, a company that earned $20 million profits last year and
has 10 million shares in issue would report earnings of $2 per share. Current and future earnings per
share are key statistics in evaluating a share’s outlook.
Economies of scale
Economies of scale are the cost advantages that a business obtains due to expansion. They are factors
that cause a producer’s average cost per unit to fall as volume (or scale) is increased. Economies of scale
may be utilized by any size firm expanding its scale of operation. The common ones are purchasing (bulk
buying of materials through long-term contracts), managerial (increasing the specialisation of managers),
financial (obtaining lower-interest charges when borrowing from banks and having access to a greater
range of financial instruments), and marketing (spreading the cost of advertising over a greater range of
output).
Ecosystem
An ecosystem is a unit of interdependent organisms which share the same habitat. For example, an
industry could be called an ecosystem.
Efficacy
Efficacy is the capacity to produce an effect. It is used to mean different specific things in different fields.
Environment
An organisation’s environment comprises all those features of the surrounding world which in some way
are detectable and which affect the organisation’s behaviour. In considering the effects of the environment
upon management behaviour is useful to consider the environment as being those factors which
management do not control. For example, management do not control the behaviour of their customers
(market) or their competitors, government policy, technological change, economic events or stock-
exchange prices, and so on.
Ex ante data
Ex-ante is used most commonly in the commercial world, where results of a particular action, or series of
actions, are forecast in advance on the basis of the data available at the time of the forecast. The opposite
of ex-ante is ex-post.
Exception
Exception is an action that is not part of ordinary operations or standards.

FORMULAE
Executive Support System (ESS)
An Executive Support System (ESS) (or Executive Information System [EIS]) is a type of management
information system intended to facilitate and support the information and decision-making needs of senior
executives by providing easy access to both internal and external information relevant to meeting the
strategic goals of the organisation.
Expert system
An expert system is software that attempts to reproduce the performance of one or more human experts,
most commonly in a specific problem domain, and is a traditional application and/or subfield of artificial
intelligence.
Ex post data
Ex post data is based on knowledge of the past. For example, after a control period is over management
might then know that the ex ante data used to predict a budget was inaccurate or inappropriate. They
know this from the ex-post data they have available after the budget period has finished.
Extrapolation
In mathematics, extrapolation is the process of constructing new data points outside a discrete set of
known data points. It is similar to the process of interpolation, which constructs new points between known
points, but the results of extrapolations are often less meaningful, and are subject to greater uncertainty.
Facilitator
A facilitator is someone who helps a group of people understand their common objectives and assists
them to plan to achieve them without taking a particular position in the discussion. The facilitator will try to
assist the group in achieving a consensus on any disagreements that pre-exist or emerge in the meeting
so that it has a strong basis for future action.
Feedback
Feedback is a process (mechanism or signal) whereby results (‘back from the process, i.e. after the
process’) is looped back to control the process within itself. Such a loop is called a feedback loop. The
system then becomes self-regulating because it enables a system that is out of control to be returned to a
controlled state. It is a cybernetic control system. Feedback is considered to be reactive in that the
system reacts to an event after it has occurred.
Feedforward
Feedback is a process (mechanism or signal) whereby predicted results (‘before the process, i.e. in
advance of the input’) is looped forward to control the process within itself. It involves predicting
environmental influences affecting both the system’s input and processing state. It is a cybernetic control
system. Feedback is considered to be proactive in that the system reacts to an event before the deviation
occurs.
Forecasting
Forecasting is the process of estimating how a condition will be in the future.

FORMULAE
GAAP
Generally Accepted Accounting Principles (GAAP) is the term used to refer to the standard framework
of guidelines for financial accounting used in any given jurisdiction. GAAP includes the standards,
conventions, and rules accountants follow in recording and summarising transactions, and in the
preparation of financial statements.
Goal
A goal is a projected state of affairs that an organisation plans or intends to achieve. It is normally less
specific than business objectives which are derived from it.
Goal congruence
Goal congruence is the state which leads individuals or groups to take actions which are in their best
interests and in the best interests of the organisation. It is an ideal state, but one that is difficult to achieve.
Greenfield strategy
Greenfield strategy refers to a situation where a company plans to ‘start up’ using its own resources
rather than acquire another company or enter into some other form of business alliance.
Industry
Industry is any branch of manufacture or trade and is often classified into groups. For example heavy
industry relates to such basic industries as coalmining, steel-making, shipbuilding, etc. involving heavy
equipment, light industry to small factory-process goods, e.g. knitwear, glass, electronics components, etc.
Intermediaries
An intermediary is a third party that offers intermediation services between two trading parties. The
intermediary acts as a conduit (or channel) for goods or services offered by a supplier to a consumer.
Typically the intermediary offers some added value to the transaction that may not be possible by direct
trading. An example of an intermediary would be a retail outlet that intermediates between manufacturer
and consumer.
Internal controls
In accounting and auditing, internal control is defined as a process effected by an organization's
structure, work and authority flows, people and management information systems, designed to help the
organization accomplish specific goals or objectives.
Laissez-faire
Laissez-faire is a term used to describe a policy of allowing events to take their own course. The term is a
French phrase literally meaning "let do".
Lean enterprise
Lean manufacturing or lean production, which is often known simply as "Lean", is a production practice
that considers the expenditure of resources for any goal other than the creation of value for the end
customer to be wasteful, and thus a target for elimination. Working from the perspective of the customer
who consumes a product or service, "value" is defined as any action or process that a customer would be
willing to pay for. Basically, lean is centered around creating more value with less work.

FORMULAE
Litmus test
Blue litmus paper turns red under acidic conditions and red litmus paper turns blue under basic (i.e.
alkaline) conditions. It now taken to represent any event or outcome seen as an indicator of importance.
Lobbying
Lobbying is the practice of influencing decisions made by management or a group. It includes all attempts
to influence managers and group members.
Macro-economics
Macroeconomics (from Greek: μακρύ-ς /ma΄kri-s/ long, large and οικονομία /ikono΄mia/ economy) a branch of
economics that deals with the performance, structure, and behaviour of a national or regional economy as
a whole. Along with microeconomics (a branch of economics that studies how individuals, households
and firms make decisions to allocate limited resources) macroeconomics is one of the two most general
fields in economics. It is the study of the behaviour and decision-making of entire economies.
Management accounting
Management accounting is concerned with the provisions and use of accounting information to
managers within organizations, to provide them with the basis to make informed business decisions that
will allow them to be better equipped in their management and control functions.
In contrast to financial accountancy information, management accounting information is:
• usually confidential and used by management, instead of publicly reported;

• forward-looking, instead of historical;
• pragmatically computed using extensive management information systems and internal controls, instead of
complying with accounting standards.
This is because of the different emphasis: management accounting information is used within an organization,
typically for decision-making.
Management information system (MIS)

A management information system (MIS) is a subset of the overall internal controls of a business
covering the application of people, documents, technologies, and procedures by management
accountants to solving business problems such as costing a product, service or a business-wide strategy.
Market development strategy

Market development is one of the four growth strategies of the Product-Market Growth Matrix defined by
Ansoff. Market development occurs when a company sells existing products in a new market.
Marketing mix
The marketing mix is generally accepted as the use and specification of the 'four P's' describing the
strategic position of a product in the marketplace. A prominent marketer, E. Jerome McCarthy, proposed a
4 P classification in 1960, which has seen wide use. The four Ps concept of Product, Price, Place and
Promotion is explained in most marketing textbooks. In recent years with the advent of website selling a
further 3Ps have been added to the mix: Physical evidence, Process and People.

FORMULAE
Market penetration strategy
Market penetration is one of the four growth strategies of the Product-Market Growth Matrix defined by
Ansoff. Market penetration occurs when a company penetrates an existing market with current products.
Market research
Market research is the management process of discovering what people want, need, or believe. It can also
involve discovering what their buying behaviour is. Once that research is completed, it can be used to
determine the products (services) the customer requires and how they should be marketed.
Market segmentation
Market segmentation is the process of dividing a market into groups who have unique needs, wants and
buying behaviour or who might want different products and services so that a distinct marketing mix can be
offered to them. (For example, students wanting to pass Paper F5 represent a market, but within this
market there are different needs [or segments] such as those wanting [1] a full-time course, [ii] a weekend
course, [iii] a home-study course, [iv] a revision-course or [v] e-book course (!).) Segmentation leads to
small market targets, which in turn lead to ‘small batch production/service.
Matrix organisation
A matrix organisation is a combination of different structures. For example it could include the
combination of product and geographic divisions operating in tandem.
Mission statement
A mission statement is a brief written statement of the purpose of a company or organization. Ideally, a
mission statement guides the actions of the organisation, spells out its overall goal, provides a sense of
direction, and guides decision making for all levels of management.
Negative feedback
The nature of some types of system dictate that the detected errors need to be eradicated by changing
the activity or process without changing or affecting the state of the objective or standard. The signal
resulting in this action is termed negative feedback. In this case it is thought expedient to maintain the
initial standard for a term. In this case the activities within the process would be changed in an
endeavour to reach the standard.
Objective
An objective is a projected state of affairs that an organisation plans or intends to achieve and is more
detailed than the mission or goal from which it derives. An objective usually has the following ‘SMART’
characteristics.
S specific
M measurable
A achievable
R relevant
T time based

FORMULAE
Objectivity
An objective fact means a truth that remains true everywhere, independently of human thought or
feelings. For instance, it is true always and everywhere that 'in base 10, 2 plus 2 equals 4'. Objectivity
means basing decisions on true facts and not on opinion or judgement.
Open system
An open system is a state of a system, in which a system continuously interacts with its environment.
Operational management
Operational decisions are made in response to changing circumstances so as to make best use of
existing resources. It often refers to day-to-day working decisions.
Optimising
Optimising involves planning what is best for the achievement of a goal or result. It involves the
generation and evaluation of optional courses of action available to achieve the goal.
Ordinal scale
An ordinal scale defines a total pre-order of objects; the scale values themselves have a total order;
names may be used like "bad", "medium", "good"; if numbers are used they are 1st, 2nd, 3rd and so on.
Participation
Participation is the process during which individuals, groups and organisations are consulted about or
have the opportunity to become actively involved in a project or program of activity.
Portmanteau
A portmanteau word is used broadly to mean a blend of two (or more) words, such as ‘BLOG’ is a blend
of WeB and LOG (diary).
Positive feedback
The nature of some types of system dictate that the detected errors need to be eradicated by changing
the system objective or standard. The signal resulting in this action is termed positive feedback. For
example, if an advertising budget is overspent but the resultant increase in the sales of it's products is
sufficient to justify the overspending, or where there is a situation causing an acceptable favourable
deviation (for example, the use of lower-than-standard-price material which is found suitable for its
purpose), it may be decided that the objective or standard (the control parameter) be adjusted
immediately, in which case the deviation is eliminated and will not be subject to amplification as the
objectives of the system have been changed.
Proactive management
Proactive management is where managers make decisions to act in advance to deal with an expected
change or difficulty.
Process of elimination
The process of elimination is a basic logical tool to solve real world problems. By subsequently removing
options that may be deemed impossible, illogical, or can be easily ruled out due to some sort of explicit
understanding relative to the entire set of options, the pool of remaining possibilities grows smaller.

FORMULAE
Product development
Product development is one of the four growth strategies of the Product-Market Growth Matrix defined by
Ansoff. Product development occurs when a company sells a new product in an existing market.
Prognosis
Prognosis is the foretelling : an indication of something to come, what is likely to happen.
Prototype
In many fields, there is great uncertainty as to whether a new design will actually do what is desired. New
designs often have unexpected problems. A prototype is often used as part of the product design process
to allow engineers and designers the ability to explore design alternatives, test theories and confirm
performance prior to starting production of a new product. Engineers use their experience to tailor the
prototype according to the specific unknowns still present in the intended design. For example, some
prototypes are used to confirm and verify consumer interest in a proposed design where as other
prototypes will attempt to verify the performance or suitability of a specific design approach.
Ratio analysis
A ratio is an expression that compares quantities relative to each other. The most common examples
involve two quantities, but any number of quantities can be compared. It is possible to identify and analyse
over 100 different financial ratios.
Rationality
A decision or situation is often called rational if it is in some sense optimal, and individuals or
organisations are often called rational if they tend to act somehow optimally in pursuit of their goals. Thus
one speaks, for example, of a rational allocation of resources, or of a rational corporate strategy.
Reactive management
Reactive management is where managers make decisions that react to past events and results rather
than anticipating the future.
Relevant range
The ‘relevant range’ is the range of volume change in which a linear relationship can be assumed
between two variables, such as costs and units. When a decision causes a volume change that exceeds
the relevant range the linear relationship is no longer applicable.
Quality circle
A Quality Circle is a volunteer group composed of workers usually under the leadership of their supervisor
(but they can elect a team leader), who are trained to identify, analyse and solve work-related problems
and present their solutions to management in order to improve the performance of the organization, and
motivate and enrich the work of employees

FORMULAE
Satisficing
Satisficing (a portmanteau of "satisfy" and "suffice") is a decision-making approach which attempts to
meet criteria for adequacy, rather than to identify an optimal solution. A satisficing decision may often be
near optimal. The word satisfice was coined by Herbert Simon. He pointed out that human beings lack the
cognitive resources to maximise: we usually do not know the relevant probabilities of outcomes, we can
rarely evaluate all outcomes with sufficient precision, and our memories are weak and unreliable. A more
realistic approach to rationality takes into account these limitations: This is called bounded rationality.
Scattergraph
A scatter graph is a type of display using coordinates to display values for two variables for a set of data.
The data is displayed as a collection of points, each having the value of one variable determining the
position on the horizontal axis and the value of the other variable determining the position on the vertical
axis. A scatter graph is also called a scatter chart, scatter diagram and scatter plot.
Semi-variable cost
Semi variable cost is an expense which contains both a fixed cost component and a variable cost
component. The fixed cost element shall be a part of the cost that needs to be paid irrespective of the level
of activity achieved by the entity. On the other hand the variable Component of the cost is payable
proportionate to the level of activity. A semi-variable cost might be divided into the fixed and variable
components by using any one of a number of quantitative techniques.
Sensitivity analysis
Sensitivity analysis is the term used to describe a systematic approach to risk by which variation in the
expected outcome of a decision is associated with the possible behaviour of the individual variables
making up the decision.
Sensor
A sensor is a process (device or mechanism) that measures results and converts them into a signal
which can be read by a regulator (human) or by an instrument. In management the process of using
sensors to measure the results of activity (costs, budgets, etc.) is known as ‘monitoring’.
Set up
A 'set up' is the work needed at the end of one job or batch of work to get the production process ready
for the next job or batch. An example would be the need to change the colour of paint in a paint machine
between the manufacture of one batch of products and a batch of different products. The paint machine
would need to be closed down, stripped, cleaned and then the new (required) paint put into the machine
before the new production starts.
It is obvious that the overhead cost involved (including the machine downtime cost) would be the same
regardless of the number (volume) of products involved in the new batch.
Simulation
Simulation is the imitation of some real thing, state of affairs, or process. Simulation can be used to show
the eventual real effects of alternative conditions and courses of action.

FORMULAE
Spillover
Spillover effects are externalities of economic activity or processes upon those who are not directly
involved in it. For example a permanent rise in the price of petrol would have a negative spillover effect on
the sales of large-engine cars.
Statistical significance
In statistics, a result is called statistically significant if it is unlikely to have occurred by chance.
Status quo
Status quo, is a Latin term meaning the current or existing state of affairs. To maintain the status quo is to
keep the things the way they presently are.
Strategic management
Strategic management is the process of drafting, implementing and evaluating cross-functional decisions
that will enable an organisation to achieve its long-term objectives. It is the process of specifying the
organisation's mission, and objectives, developing policies and plans, often in terms of projects and
programs, which are designed to achieve these objectives, and then allocating resources to implement the
policies and plans, projects and programs. A balanced scorecard is often used to evaluate the overall
performance of the business and its progress towards objectives.
Subjectivity
Subjectivity refers to a person's perspective or opinion, particularly feelings, beliefs, and desires. It is
often used casually to refer to unsubstantiated personal opinions, in contrast to knowledge and fact-based
beliefs. In philosophy, the term is often contrasted with objectivity.
Sub-optimal
Sub-optimal is a state where the objective of a sub-system (e.g. department) is achieved at the expense of
the objective of the overall system (company). It results from a situation where there is lack of goal
congruence between the system and the sub-system.
Surrogate
A surrogate is a thing (or person) standing in for another thing (or person). Financial surrogates are often
used to represent physical events, such as the inefficient use of labour (i.e. an adverse labour rate
variance valued in $s)
Synchronous management
Synchronous management's strategic objective is to simultaneously increase throughput while reducing
inventory and operating expenses. In order to reduce inventory there needs to be synchronisation
(coordination) between market demand and production volume, and also between production volume and
input logistics. Costs incurred because of the lack of such synchronisation are usually 'non-value added'
(or more simply, 'waste').

FORMULAE
Synergy
Synergy (from the Greek syn-ergos, συνεργός meaning working together) is the term used to describe a
situation where different entities, people or activities cooperate advantageously for a final outcome. Simply
defined, it means that the whole is greater than the sum of the individual parts. If used in a business
application it means that teamwork will produce an overall better result than if each person was working
toward the same goal individually.
System
System (or process) is a set of interacting or interdependent activities forming an integrated whole.
Tactical management
Tactical decisions are those taken to put into effect the details of a strategic decision. Because tactics
refer to the detailed implementation of a strategy it is this sense distinguished from operational planning in
that it can involve the introduction of new resources.
Transparency
A cost is transparent a manager knows:
• What cost is being incurred.
• Why the cost is being incurred.
• What are the options.
Trouble-shooting
Trouble-shooting is a form of problem solving most often applied to repair of failed products or
processes. It is a logical, systematic search for the source of a problem so that it can be solved, and so the
product or process can be made operational again. Troubleshooting requires identification of the
malfunction(s) or symptoms within a system. Then, experience is commonly used to generate possible
causes of the symptoms. Determining which cause is most likely is often a process of elimination -
eliminating potential causes of a problem. Finally, troubleshooting requires confirmation that the solution
restores the product or process to its working state.
Value chain
A value chain is a chain of activities. Products pass through all activities of the chain in order and at each
activity the product gains some value.
World Class Manufacturing (WCM)

There is no defined meaning to the term world class manufacturing, but the words are self explanatory.
Companies now recognise that their competitors are not localised but are worldwide and that to compete
successful they must excel or at least equal the best world class enterprises; they regard the world as
their market. These companies identify important competitive imperatives and strive to achieve them.
The world-class competitive strategy can be taken to have four key elements.
- Total quality management

- Just in time manufacturing (JIT)
- Total employee involvement (TEI)
- Flexible approach to customer requirements

FORMULAE
Note: some pages notated as ‘Chart’ consist of discussion sheets.
Title Page
SPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES 26
Chart Modern industry 27
Chart Traditional versus modern Industry 29
Mnemonic Modern industry 30
Mnemonic Modern organisation structures 31
Chart Modern industry: some effects of market fragmentation 32
Chart Management accounting versus financial accounting 33
Chart Modern Management Accounting Information Systems 34
(MAIS)
Mnemonic Weaknesses of traditional MAISs 35
Chart Finance function within a large company/group 36
Chart Management Accounting Information System (MAIS) 37
Chart Modes of production and associated methods of 38
management accounting
Chart Main roles of the manager 39
Chart Strategic, tactical and operational financial management 40
Mnemonic The role of ‘Strategic Management Accounting’ 41
Chart Accounting for fixed production overhead costs 42
Chart Activity based techniques 43
Chart The Activity Based Costing (ABC) system – Overview 44
Mnemonic Benefits of using activity based costing (ABC) 46
Mnemonic Criticisms of introducing an ABC system 47
Mnemonic When is activity based costing relevant? 48
Chart Lean Accounting 49
Mnemonic Cost drivers used in activity based costing 50
Chart Target costing – Overview 51
Chart Traditional cost management versus target cost 53
management
Mnemonic The underlying philosophy of target costing 54
Chart Case study: Target costing 55
Chart Target costing – new product 58
Chart New-product target costing 59
Mnemonic The ‘cost reduction’ management approach 60
Mnemonic Cost reduction techniques 61
Chart Life Cycle Costing (LCC) – Overview 62
Chart Life-Cycle Costing (LCC) 63
Chart Costs and expenditures of the product-life cycle 64
Mnemonic Benefits of using Life Cycle Costing (LCC) 65
Chart Backflush Accounting – Overview 66
Chart Conventional standard process accounting 67
Chart Backflush standard process accounting 68
Chart Backflushing from the finished goods stage 69
Chart Backflush Accounting: the logic 70

FORMULAE

Title Page
SPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES 26
Mnemonic Benefits of using backflush accounting 71
Mnemonic Limitations of backflush accounting 72
Chart Throughput Accounting (TA): Overview 73
Chart The concepts of Throughput Accounting 74
Chart Throughput accounting: A summary 75
Chart Example of a bottleneck constraint in a factory 76
Mnemonic Theory of Constraints (TOC) and the use of the Five 77
Focusing Steps
Mnemonic Constraints on throughput 78
Mnemonic Assessment of throughput accounting (TA) 79
Mnemonic Distinctions between throughput costing and orthodox cost 80
accounting
DECISION-MAKING TECHNIQUES 81
Chart Rules for short-term cost-based decision making 82
Mnemonic Limitations of the linear programming model 83
Chart Pricing strategy: Overview 84
Chart Examples of pricing objectives 85
Mnemonic Factors that influence a company’s pricing strategy 86
Mnemonic Determinants of price elasticity of demand 87
Chart Price elasticity of demand 88
Chart Linear approximation of a curvilinear function 89
Chart Marginal revenue and marginal costs 90
Mnemonic Analysing competitors’ costs, prices and offers 91
Chart Cost-based pricing strategies 92
Chart Cost-based pricing strategies 93
Mnemonic Cost-based pricing strategies: cost variables 96
Chart Demand-based pricing strategies 97
Chart Demand-based pricing strategies 98
Chart The decision cycle 102
Chart Appropriateness of Relevant () Costing 103
Chart Relevant costs 104
Chart Relevant costs 105
Mnemonic The qualitative (non-financial) issues surrounding make 107
versus buy decisions
Mnemonic The financial issues surrounding make versus but decisions 108
Mnemonic The qualitative (non-financial) issues surrounding the ‘stay 109
open or close’ decision
Mnemonic The financial (monetary) issues surrounding the ‘stay open 110
or close’ decision
Chart Maximax, maximin and minimax regret techniques 111
Chart Probability d expected values 115
Mnemonic Problems of using expected values in budgeting 121

FORMULAE

Title Page
BUDGETING 122
Chart Budgetary control – The main areas of study 123
Chart Budgets and budgetary control 124
Chart Role of the Budget Officer 125
Chart Budgetary control procedures 126
Chart Budgetary control feedback loop 127
Mnemonic Principles of responsibility accounting 128
Chart A structure for ‘Responsibility Accounting’ 129
Chart Terms used in ‘Responsibility Accounting’ and the role of the 130
management accountant
Chart Examples of cost responsibilities 131
Mnemonic Benefits of ‘Responsibility Accounting’ 132
Mnemonic Problems associated with ‘Responsibility Accounting’ 133
Mnemonic Advantages of budgetary control 134
Mnemonic Stages involved in a budgetary control system 135
Chart Cybernetic control systems 136
Chart Cybernetic control: Feedback 139
Mnemonic Problems when using a ‘closed feedback control loop’ 140
Chart Cybernetic control: feed-forward 141
Mnemonic Feed-forward control 142
Chart Top-down and Bottom-up budgeting 143
Chart Bottom-up planning: a caution 144
Chart Example of a bottom-up budgetary control system in a 145
manufacturing concern
Chart Example of an incremental budget plan as part of an 152
incremental budgeting system
Mnemonic Justification for using the incremental (periodic) budgeting 153
approach
Mnemonic Disadvantages of using the incremental (periodic) budgeting 154
approach
Chart Zero-based budgeting (ZBB) 155
Chart Example of a ‘Mutually-exclusive decision package’ as part of 158
a zero-based budgeting system
Mnemonic Justification for using the zero-based budgeting (ZBB) 162
approach
Mnemonic Disadvantages associated with the zero-based budgeting 163
(ZBB) approach
Chart Activity-based budgeting (ABB) 164
Chart Example of an activity cost matrix for a sales order department 165
as part of an activity-based budgeting (ABB) system
Mnemonic Justification for using the activity-based budgeting (ABB) 166
approach

FORMULAE
Title Page
BUDGETING 122
Chart Rolling budgets 167
Mnemonic Justification for using the rolling budgeting approach 168
Mnemonic Disadvantages associated with rolling budgets 169
Chart Overviews of incremental budgeting and zero-based budgeting 170
Chart Overviews of activity-based budgeting and rolling budgets 171
Mnemonic Ways of implementing a change to a company’s budgeting 172
system
Mnemonic Difficulties of changing a budget system 173
Chart Functional budgets 174
Mnemonic Constraints and limiting factors in budget planning 174
Chart Chilgrove Co: Opening Balance Sheet 175
Mnemonic Factors considered in preparing the Sales Budget 176
Chart Chilgrove Co: Sales Budget 177
Chart Production Budget (including Chilgrove Co.) 178
Chart Direct Materials Cost Budget (including Chilgrove Co.) 179
Chart Direct Labour Cost Budget (including Chilgrove Co.) 180
Chart Plant Utilisation Budget 181
Chart Production Overhead Budget (including Chilgrove Co.) 181
Chart Selling and Administration Budget (including Chilgrove Co.) 182
Chart Research and Development Budget 183
Chart Master Budget 184
Chart Cash Budget (including Chilgrove Co.) 185
Chart Budgeted Income Statement (including Chilgrove Co.) 186
Chart Budgeted Balance Sheet (including Chilgrove) 187
Mnemonic Reasons for having a budgeted balance sheet (for closing date) 188
as part of the ‘Master budget’)
Chart Problems with budgetary control 189
Mnemonic Assumptions underlying breakeven calculations and graphs 190
Mnemonic Benefits of identifying and understanding costs 191
Mnemonic Factors that influence cost behaviour 192
Chart Quantitative ways of separating fixed and variable costs 193
Mnemonic Problems with using the high-low method of cost estimation 194
Chart Scattergraph: example 195
Mnemonic Flexing a budget 196
Chart Flexible budgeting 197
Chart Correlation analysis 199
Chart Time-series analysis 202
Chart Forecasting seasons: additive method 203
Chart Forecasting seasons: proportional method 204
Chart The distinction between additive and proportional models 205

FORMULAE
Title Page
BUDGETING 122
Chart Learning curve 206
Mnemonic Uses for the learning curve 208
Mnemonic Potential problems associated with the learning curve 209
Mnemonic Difficulties of budget forecasting 210
Mnemonic Assumptions made in the budget planning stage 211
Mnemonic Aides to budget forecasting 212
Mnemonic Factors which affect the degree of forecasting success 213
Mnemonic Evaluation of forecasting techniques 214
Mnemonic Sources and causes of forecasting errors 215
Mnemonic Ways of reducing forecasting errors 216
Mnemonic Behavioural problems of using participation in budgetary control 217
system
Mnemonic Pre-requisites for a successful participatory budgetary control 218
system
Mnemonic Resolution of budget conflict 219
Mnemonic Reasons why budget-holders set difficult to achieve budgets 220
Mnemonic Reasons why budget-holders set easy to achieve budgets 221
Mnemonic Ways that budget-centre managers use to ‘hide’ slack in budgets 222
Mnemonic Reasons why ‘budget slack’ should be accepted 223
Mnemonic Problems with accepting ‘budget slack’ 224
Mnemonic ‘ Technical’ problems with budgetary control 225
Mnemonic Difficulties of budget forecasting 226
Mnemonic Benefits of using spreadsheets in budgeting 227
Mnemonic Dangers inherent in using spreadsheets in budgeting 228
STANDARD COSTING AND VARIANCE ANALYSIS 229
Chart The system of standard costing and variance analysis (flowchart) 230
Chart Example of a ‘unit standard cost’ 231
Mnemonic Classification of standards 232
Chart Typical standard costing and variance analysis system 233
Mnemonic Purposes of using standard costing and variance analysis 234
Mnemonic Problems associated with conventional standard costing and 235
variance analysis
Chart Basic standard costing variances 236
Chart Idle time variance 237
Chart Example of an operating control report (absorption costing) 240
Chart Example of an operating report (including mix and yield 241
variances)
Chart Example of an operating report (marginal costing) 242
Chart Problems with traditional standard costing variances 243

FORMULAE

Title Page
STANDARD COSTING AND VARIANCE ANALSYSIS 229
Chart Possible causes of sales and cost variance 244
Chart Possible interrelationships between variances 245
Mnemonic General causes of variances 246
Chart Investigation of variances 247
Mnemonic Policy for investigation of variances 248
Chart Policy for investigation of variances 249
Chart Control chart based on materiality of deviation = 10% of standard 251
Chart Control chart based on materiality of deviation = 10% of standard 252
Chart Control chart based on statistical significance of 95% 253
Mnemonic Ways of improving manufacturing labour efficiency (productivity) 254
Mnemonic Causes for idle time in a manufacturing system 255
Chart Planning and operating variances: Market size and market share 256
variances
Chart Steps for producing a performance report using planning and 258
operational variances
Chart Example of an operating report (planning/operational variances) 259
PERFORMANCE MEASUREMENT AND CONTROL 260
Chart Performance measurement 261
Chart Hierarchy of objectives 262
Chart Example of Statement for QualTech Design Co. 263
Chart Examples of Goal Statements for QualTech Design Co. 263
Chart Examples of Objective Statements for QualTech Design Co. 264
Chart Examples of Critical Success Factors 265
Chart Examples of Performance Indicators for QualTech Design Co. 266
Chart Value for Money 267
Chart Measuring performance in a hospital 268
Chart Benchmarking 269
Mnemonic Benefits of business benchmarking 270
Chart Kaplan and Norton’s ‘Balanced Scorecard’ 271
Chart Two levels of strategic management 272
Mnemonic Role of head office 273
Mnemonic Responsibilities of divisional managers 274
Chart The divisional decision structure 275
Chart Different group structures 276
Mnemonic Concept of ‘Principal-agency Theory’ applied to divisional structures 277

FORMULAE

Title Page
PERFORMANCE MEASUREMENT AND CONTROL 260
Mnemonic Criteria used for measuring management performance 278
Mnemonic Problems in trying to achieve goal congruence 279
Mnemonic Performance indicators commonly used for measuring the 280
performance of divisional management
Mnemonic Advantages of the ROI performance measure 281
Mnemonic Limitations of the ROI performance measure 282
Mnemonic Management aspects over which management claim they lack 283
controllability
Mnemonic Putting divisional managers back in control 284
Mnemonic Bases used for comparing performances 285
Mnemonic Critical success factors for achieving customer satisfaction 286
Mnemonic Success factors for a strategic management information system 287
(SMAIS)
Mnemonic The critical success factors for just-in-time (JIT) management 288
Mnemonic The aims of transfer pricing between divisions 289
Mnemonic Main problems with transfer pricing 290
Chart Types of cost-based transfer price 291
Chart Transfer price based on a variable (marginal) cost 292
Mnemonic Problems with market-based transfer prices 293
Mnemonic Problems with selling to the intermediate market 294
Mnemonic Factors related to negotiated transfer prices 295
Chart The basis for negotiating a transfer price 296
Chart Dual transfer pricing 297
Chart Dual transfer pricing: A numerical example 298
Chart The framework for deciding a transfer price 300
Chart The rules of transfer pricing 301

FORMULAE
Complementary Questions and Answers Page 302

(Note: These Questions and Answers are also hyper-linked from appropriate teaching screens.)
Title Page
Question KitchenScope Company (re: ABC) 303
Answer KitchenScope Company 304
Question Westernhanger Company (re: ABC and LCC) 310
Answer Westernhanger Company 311
Question EVCO Company (re: Backflush Costing) 314
Answer EVO Company 316
Question WeGrow Company (re: Backflush Accounting) 320
Answer WeGrow Company 322
Question Sennelager Company (re: Throughput Accounting) 327
Answer Sennelager Company 329
Question A four-product company (re: Graphical linear programming) 334
Answer A four-product company 335
Question Marker Gardener (re: Limiting Factor Analysis) 341
Answer Market Gardener 342
Chart Break-even: Aide mémoire 345
Question A small contractor (re Relevant (or ) Costing 346
Answer A small contractor 348
Question AB Company (re: Pricing in an imperfect market) 351
Answer AB Company 352
Chart Differential calculus 356
Question Small service company (re: simulation modelling) 358
Answer Small service company 359
Question Additiv Company (re: Moving averages and the Additive and 360
Proportional methods of seasonal adjustment)
Answer Additive Company 361
Question Fruitie Company (re: Expected values, maximax, maximin and 367
minimax regret assessments)
Answer Fruitie Company 368
Question Seabrook Components Company (re: The use of the learning 374
curve to set standard costs)
Answer Seabrook Company 375
Question Vogum Company (re: Variance analysis including mix and yield 379
and which requires operating reports using both absorption
costing and marginal costing
Answer Vogum Company 380
Question Alk Company (re: Planning and Operating variance analysis) 387
Answer Alk Company 388
Question Lympne Conglomerates (re: Market volume and market share 394
variances)
Answer Lympne Conglomerates 395
Question CAS Company (re: ROI and RI measures) 396
Answer CAS Company 397
Question MAS Company (re: Transfer pricing) 400
Answer MAS Company 401

FORMULAE
Glossary of Terms
(Note: These Terms are also hyper-linked from appropriate teaching screens.)
A 405
B 405
C 406
D 407
E 408
F 409
G 410
I 410
L 410
M 411
N 412
O 412
P 413
R 414
Q 414
S 415
T 417
V 417
W 417

FORMULAE
Formulae Sheet
THIS FORMULA SHEET

IS PROVIDED IN THE
EXAM

FORMULAE
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interesting and helpful.
We anticipate that the full version will be of some help in

your studies towards your ACCA exams.
If you enjoy these Mnemonics and Charts, then perhaps

you might also enjoy the Questions and Answer practice
papers, or the Full Exam Study Textbook.
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Paper f5 Mnemonics Sample Download v2

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Mnemonics and Charts Paper F5: Performance Management

ACCA Paper F5 – Performance Management – Mnemonics and Charts

Good luck with your studies.

©Tony Surridge Online Limited, 2010 www.tonysurridge.co.uk

Fact Sheet: Backflush Accounting - Overview

Definition: Backflush accounting

The traditional method

(b) Trigger point for accounting entry

Traditional Trigger Points

Purchase Production Completion

NEXT CHART NEXT MNEMONIC

Fact Sheet: Backflush Accounting - Overview

Definition: Backflush accounting

The traditional method

(b) Trigger point for accounting entry

Traditional Trigger Points

Purchase Production Completion

NEXT CHART NEXT MNEMONIC

Fact Sheet: Conventional standard process

PROCESS 1 WORK-IN-PROCESS INVENTORY ACCOUNT

©Tony Surridge Online Limited, 2010 www.tonysurridge.co.uk 4

Fact Sheet: Backflush standard process accounting

RAW MATERIAL AND WORK-IN-PROCESS INVENTORY ACCOUNT

The ‘Finished goods

NEXT CHART NEXT MNEMONIC

©Tony Surridge Online Limited, 2010 www.tonysurridge.co.uk 5

Fact Sheet: Backflushing from the finished goods

The product is Start here

Materials (on the bill of materials) are credited to the

Standard conversion costs are credited to the Raw-

A carton label is printed

Open quality (amount still to be produced) on the

NEXT CHART NEXT MNEMONIC

Fact Sheet: Backflush Accounting: the logic

Think about the situation logically.

When inventory levels are held at a very low

So why bother to track ALL these costs through

Backflush accounting is part of modern ‘Lean Accounting’.

Yesterday is ashes; tomorrow wood.

NEXT CHART NEXT MNEMONIC

Benefits of using backflush accounting

Memory jog: the backflush accounting system simply ‘CRAMS’

NEXT CHART NEXT MNEMONIC

Limitations of backflush accounting

Memory jog: even though backflush accounting presents a number of

In the business world, everyone is paid in two coins:

NEXT CHART NEXT MNEMONIC

Fact Sheet: Throughput Accounting (TA): Overview

Definition: Throughput accounting

Aim of throughput accounting

Practice question on Backflush accounting: EVCO Company

NEXT CHART NEXT MNEMONIC

Fact Sheet: The concepts of Throughput Accounting

NEXT CHART NEXT MNEMONIC

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Fact Sheet: Throughput Accounting: A summary

- Throughput = Sales – Material costs

Total factory cost per period

NEXT CHART NEXT MNEMONIC

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Fact Sheet: Example of a bottleneck constraint in a

Example: The production of a product that moves in sequence through 4