ICAP CAF CAF-5: Management Accounting Syllabus

How does FIFO value inventory issues and closing stock during rising prices?

FIFO issues materials at the oldest (earliest) prices, so issues are cheaper and closing inventory is valued at the most recent (higher) prices, giving higher reported profit.

How is the weighted average cost (AVCO) per unit calculated under perpetual inventory?

Weighted average cost per unit = Total cost of goods available ÷ Total units available, recalculated after each new purchase (receipt).

List the inventory control levels: reorder level, minimum, maximum and reorder quantity formulas.

Reorder level = Max usage × Max lead time. Minimum level = Reorder level − (Average usage × Average lead time). Maximum level = Reorder level + Reorder qty − (Min usage × Min lead time).

State the Economic Order Quantity (EOQ) formula.

EOQ = √(2 × Co × D ÷ Ch), where Co = cost per order, D = annual demand, Ch = holding cost per unit per year. EOQ minimises total ordering plus holding costs.

Distinguish between a time-based (day rate) and a piecework labour remuneration system.

Time-based: pay = hours worked × rate per hour, regardless of output. Piecework: pay = units produced × rate per unit, linking pay directly to output. Piecework incentivises volume; day rate guarantees stable pay.

How is labour productivity (efficiency) commonly measured?

Efficiency ratio = (Standard hours for actual output ÷ Actual hours worked) × 100. Above 100% means workers are more efficient than standard.

What is a premium bonus scheme (e.g. Halsey)? Give the Halsey bonus.

A scheme paying workers a share of time saved against an allowed time. Halsey bonus = 50% × (Time allowed − Time taken) × rate per hour. Total pay = (Time taken × rate) + bonus.

State learning curve theory and the meaning of an 80% learning curve.

As cumulative output doubles, the cumulative average time per unit falls by a constant percentage. An 80% curve means each time output doubles, cumulative average time per unit is 80% of the previous average.

Give the learning curve formula.

Y = a·x^b, where Y = cumulative average time per unit, a = time for the first unit, x = cumulative number of units, and b = log(learning rate) ÷ log 2 (a negative number).

When does the learning curve effect cease to apply?

When a steady state is reached — the process becomes standardised and the workforce fully experienced, so cumulative average time per unit levels off and no further learning saving occurs.

Distinguish allocation from apportionment of overheads.

Allocation charges a whole cost item directly to one cost centre that wholly incurred it. Apportionment shares a common cost over several cost centres on a fair basis (e.g. floor area, headcount).

What is reapportionment of service cost centre overheads?

The process of sharing the costs of service (support) cost centres (e.g. canteen, maintenance) out to production cost centres so all overhead can ultimately be absorbed into products.

Name methods of reapportioning service centre costs where services are interrelated.

The repeated distribution (continuous allotment) method and the algebraic (simultaneous equation) method, used when service centres serve each other (reciprocal services).

Give common bases of apportionment for: rent, machine depreciation, and canteen costs.

Rent/heating/lighting — floor area or volume. Machine depreciation/insurance — value of machinery. Canteen/personnel costs — number of employees (headcount).

What items make up a manufacturing account, ending with cost of goods manufactured?

Opening raw materials + purchases − closing raw materials = materials consumed; + direct labour + direct expenses = prime cost; + production overheads = total manufacturing cost; ± opening/closing WIP = cost of goods manufactured.

In a manufacturing account, how is the cost of raw materials consumed calculated?

Raw materials consumed = Opening raw material inventory + Purchases (+ carriage in) − Closing raw material inventory.

Describe the flow of cost in process costing.

Costs (materials, labour, overheads) are accumulated by process. Output of one process becomes the input of the next; total process cost is divided over equivalent units to get a cost per unit transferred onward to the next process or to finished goods.

What are equivalent units in process costing?

A measure that converts partly completed units (WIP) into an equivalent number of completed units, so process costs can be spread fairly over completed output and closing WIP.

Define normal loss in process costing and its accounting treatment.

Normal loss is the expected, unavoidable loss inherent in a process. Its cost is absorbed by good output (no cost assigned to it); any scrap/sale value of normal loss reduces the process cost.

Define abnormal loss and its treatment.

Abnormal loss is loss exceeding the normal expected level. It is valued at the same cost per good unit, removed from the process account, and written off to the income statement (less any scrap value).

Define abnormal gain and its treatment.

Abnormal gain arises when actual loss is less than normal loss. It is valued at the cost per good unit, debited to the process account and credited to the income statement (net of lost scrap value of normal loss).

How is the cost per unit (for valuing good output) calculated when there is normal loss with scrap value?

Cost per unit = (Total process cost − Scrap value of normal loss) ÷ (Expected good output units = Input − Normal loss units).

What is rework in process/job costing and how is its cost treated?

Rework is correcting defective units so they can be sold. If due to normal/general causes the rework cost is treated as overhead; if due to a specific job/customer, it is charged to that job.

How are work-in-process (WIP) and finished goods valued under absorption costing?

Both are valued at full production cost — direct materials, direct labour and absorbed production overhead — applied to the equivalent/complete units on hand at the period end.

Distinguish a joint product from a by-product.

Joint products are two or more main products of significant sales value arising together from a common process. A by-product is incidental output of minor sales value produced alongside the main product.

Name the common bases for apportioning joint costs to joint products at the split-off point.

Physical units (output quantity) basis, sales value at split-off basis, and net realisable value (NRV) basis. Sales value/NRV bases relate cost to each product's ability to bear it.

How is the income from a by-product usually accounted for?

Net realisable value of the by-product is either credited to (deducted from) the joint process cost of the main products, or treated as miscellaneous income; it is not normally apportioned a share of joint cost.

What is target costing and the formula for target cost?

Target costing sets a cost ceiling from the market price and required profit. Target cost = Target selling price − Required profit margin. A cost gap (current cost − target cost) is then closed through design and process improvements.

What is a standard cost and what is variance analysis?

A standard cost is a predetermined estimate of the cost of a unit (standard material, labour and overhead rates × quantities). Variance analysis compares actual results with standard/budget and explains the differences (variances) as favourable or adverse.

Give the material price and material usage variance formulas.

Material price variance = (Standard price − Actual price) × Actual quantity purchased/used. Material usage variance = (Standard qty for actual output − Actual qty) × Standard price.

Give the labour rate and labour efficiency variance formulas.

Labour rate variance = (Standard rate − Actual rate) × Actual hours paid. Labour efficiency variance = (Standard hours for actual output − Actual hours worked) × Standard rate.

State the break-even point formulas (in units and in revenue).

Break-even (units) = Fixed costs ÷ Contribution per unit. Break-even (sales revenue) = Fixed costs ÷ Contribution/Sales (C/S) ratio. At break-even, total contribution exactly equals fixed costs (zero profit).