Association of Accounting Technicians (AAT) Management Accounting Techniques (Level 3) Syllabus

Management Accounting Techniques (Level 3) syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Management Accounting Techniques (Level 3) in Association of Accounting Technicians (AAT), not a summary of it.

1. 1

   Costing Methods and Overhead Absorption

   4 topics

   • Job, batch and unit costing
   • Allocating and apportioning overheads
     • Bases of apportionment
     • Reapportioning service cost centres
   • Overhead absorption rates
     • Labour-hour and machine-hour rates
   • Over- and under-absorption of overheads
2. 2

   Marginal and Absorption Costing

   4 topics

   • Principles of marginal costing
     • Contribution per unit
   • Principles of absorption costing
   • Reconciling marginal and absorption profit
     • Effect of inventory changes
   • Decision-making using contribution
3. 3

   Short-Term Decision Making

   4 topics

   • Break-even analysis
     • Break-even point and margin of safety
     • Target profit calculations
   • Cost-volume-profit relationships
   • Limiting factor analysis
     • Contribution per limiting factor
   • Make-or-buy and special order decisions
4. 4

   Budgeting and Cash Management

   4 topics

   • Preparing budgets
     • Functional and flexed budgets
   • Variance analysis
     • Calculating and interpreting variances
   • Cash budgets and forecasts
     • Timing of receipts and payments
   • Capital investment appraisal basics
     • Payback period
     • Net present value (discounted cash flow)

Management Accounting Techniques (Level 3) flashcards for Association of Accounting Technicians (AAT)

23 of 75 cards from the Management Accounting Techniques (Level 3) deck — real questions with worked answers.

1. What is unit costing and when is it used?

   Unit costing (also called output costing) is a method of costing where a single, identical product is produced continuously. The cost per unit is found by dividing total costs by total units: $\text{Cost per unit} = \frac{\text{Total costs}}{\text{Number of units}}$. Used in industries like cement, bottling or brick-making.

2. What is job costing and what is its key feature?

   Job costing is a method where costs are collected for each individual job or order, which is unique and made to a customer's specific requirements. Each job is given a unique job number, and costs (materials, labour, overheads) are accumulated against it. Used by builders, printers and repair shops.

3. What is batch costing?

   Batch costing is a form of job costing where a quantity of identical items (a batch) is produced together as a single cost unit. Total batch cost is accumulated, then $\text{Cost per unit} = \frac{\text{Total batch cost}}{\text{Number of units in batch}}$. Used in bakeries and pharmaceutical manufacture.

4. How does cost collection differ between job/batch costing and unit (continuous) costing?

   In job and batch costing, costs are collected separately for each distinct job or batch because each is identifiable and different. In unit/continuous costing, costs are collected in total for a period and averaged over identical units, since output is homogeneous and cannot be separately identified.

5. What is the difference between direct costs and indirect costs (overheads)?

   Direct costs can be specifically and economically traced to a single cost unit (e.g. direct materials, direct labour). Indirect costs (overheads) cannot be traced to one cost unit and must be shared across many (e.g. factory rent, supervisor salaries, machine depreciation).

6. What are the three stages of dealing with production overheads in absorption costing?

   1. Allocation - assigning whole overhead items to the cost centre that incurred them. 2. Apportionment - splitting shared overheads across cost centres on a fair basis. 3. Absorption - charging cost centre overheads to individual cost units via an overhead absorption rate (OAR).

7. Define overhead allocation.

   Overhead allocation is the process of charging the whole of an overhead cost item directly to the single cost centre that wholly incurred it - for example, allocating a maintenance department's wages entirely to the maintenance cost centre.

8. Define overhead apportionment.

   Overhead apportionment is the process of sharing a common overhead cost between two or more cost centres on a fair and equitable basis, because the cost relates to more than one centre (e.g. splitting factory rent between departments by floor area).

9. Give appropriate apportionment bases for: (a) rent and rates, (b) machine depreciation, (c) canteen/personnel costs, (d) building insurance, (e) heating and lighting.

   (a) Rent and rates - floor area; (b) Machine depreciation - machine value/cost; (c) Canteen/personnel - number of employees; (d) Building insurance - floor area or building value; (e) Heating and lighting - floor area or volume (cubic capacity).

10. What is reapportionment of service (support) cost centre overheads?

    Reapportionment is sharing the overheads of service cost centres (e.g. stores, maintenance, canteen) - which do not make products - out to the production cost centres that use their services, so that all overheads end up in production centres ready to be absorbed into units.

11. What are the two main methods of reapportioning service centre costs when service centres serve each other?

    1. Direct method - ignores work done by one service centre for another; reapportions only to production centres. 2. Reciprocal method (repeated distribution or algebraic/simultaneous equations) - recognises that service centres provide services to each other as well as to production.

12. What is an overhead absorption rate (OAR) and what is the general formula?

    An OAR is the rate at which overheads are charged to cost units. It is calculated using budgeted figures: $$\text{OAR} = \frac{\text{Budgeted overheads}}{\text{Budgeted level of activity}}$$ The activity may be labour hours, machine hours, units, etc.

13. When is a machine-hour absorption rate more appropriate than a labour-hour rate?

    A machine-hour rate is more appropriate in capital-intensive (machine-intensive) cost centres where production is driven by machine time. A labour-hour rate suits labour-intensive cost centres where work is mainly manual and overheads relate to time worked by employees.

14. Why are predetermined (budgeted) overhead absorption rates used rather than actual rates?

    Predetermined rates allow product costs and selling prices to be set in advance, avoid delays waiting for actual figures at period end, and smooth out fluctuations in activity and overhead spending across the year so unit costs are stable.

15. Give the formula for absorbed (recovered) overheads.

    $$\text{Absorbed overheads} = \text{OAR} \times \text{Actual activity}$$ For example, if the OAR is $\pounds 5$ per labour hour and actual hours are $2{,}000$, absorbed overhead $= 5 \times 2{,}000 = \pounds 10{,}000$.

16. What causes over-absorption and under-absorption of overheads?

    Over- or under-absorption arises because the OAR is based on budgeted figures, but actual overheads and actual activity differ from budget. The two causes are: (1) actual overhead expenditure differing from budget, and (2) actual activity level differing from budget.

17. How do you determine whether overheads are over- or under-absorbed?

    Compare overheads absorbed with actual overheads incurred. If $\text{Absorbed} > \text{Actual}$, overheads are over-absorbed (too much charged). If $\text{Absorbed} < \text{Actual}$, overheads are under-absorbed (too little charged).

18. How are over- and under-absorbed overheads treated in the income statement?

    Over-absorbed overhead is a credit (added to profit) because too much cost was charged to production. Under-absorbed overhead is a debit (deducted from profit / an extra expense) because not enough cost was charged.

19. Worked example: OAR is $\pounds 4$ per machine hour. Budgeted overhead $\pounds 40{,}000$. Actual overhead $\pounds 43{,}000$; actual machine hours $11{,}000$. Calculate the over/under absorption.

    Absorbed $= 4 \times 11{,}000 = \pounds 44{,}000$. Actual $= \pounds 43{,}000$. Since $44{,}000 > 43{,}000$, overheads are over-absorbed by $\pounds 1{,}000$.

20. What is marginal cost?

    Marginal cost is the variable cost of producing one extra unit. It comprises direct materials, direct labour, direct expenses and variable production overheads - i.e. the costs that increase by one unit's worth when output rises by one unit.

21. What is the key principle of marginal costing regarding fixed costs?

    In marginal costing, fixed costs are treated as period costs and charged in full against the profit of the period in which they are incurred. They are NOT absorbed into unit cost or carried in inventory; only variable (marginal) costs are included in product cost.

22. Define contribution and give its formula.

    Contribution is the amount each unit/sale contributes towards covering fixed costs and then profit. $$\text{Contribution} = \text{Sales} - \text{Variable costs}$$ Per unit: $\text{Contribution per unit} = \text{Selling price} - \text{Variable cost per unit}$.

23. What is the relationship between contribution, fixed costs and profit in marginal costing?

    $$\text{Profit} = \text{Total contribution} - \text{Fixed costs}$$ where $\text{Total contribution} = (\text{Sales} - \text{Variable costs})$. Once total contribution exactly equals fixed costs, profit is zero (break-even).

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