Performance Management
Paper F5
Course Notes
ACF5CN07(D)
l
(i)
BPP provides revision courses, question days,
mock days and specific material to assist you in
this important phase of your studies.
F5 Performance Management
Study Programme
Page
Introduction to the paper and the course (ii)

1 Costing 1.1
2a Activity based costing 2a.1
2b Target costing 2b.1
2c Life cycle costing 2c.1
2d Backflush accounting 2d.1
2e Throughput accounting 2e.1
End of Day 1 – refer to Course Companion for Home Study 
Progress test 1 
3 Limiting factor analysis 3.1
4 Pricing decisions 4.1
5 Short term decisions 5.1
6 Risk and uncertainty 6.1

• Exam technique practice
INTRODUCTION
(ii)
Introduction to Paper F5
Performance Management

Overall aim of the syllabus
To develop knowledge and skills in the application of management accounting techniques to quantitative and
qualitative information for planning, decision-making, performance evaluation, and control.
The syllabus
The broad syllabus headings are:
A Specialist cost and management accounting techniques
B Decision making techniques
C Budgeting
D Standard costing and variance analysis
E Performance Measurement and control
Main capabilities
On successful completion of this paper, candidates should be able to:
• Explain, apply, and evaluate cost accounting techniques
• Select and appropriately apply decision-making techniques to evaluate business choices and promote
efficient and effective use of scarce business resources, appreciating the risks and uncertainty inherent
in business and controlling those risks
• Apply budgeting techniques and evaluate alternative methods of budgeting, planning and control
• Use standard costing systems to measure and control business performance and to identify remedial
action
• Assess the performance of a business from both a financial and non-financial viewpoint, appreciating
the problems of controlling divisionalised businesses and the importance of allowing for external
aspects.

Links with other papers

Questions on each paper will be drawn from as many of the five syllabus areas as possible. It is likely that
they will be based on simple, realistic scenarios. The paper will be approximately 50% calculation, 50%
discussion, but it is unlikely that a fully written question will be set. Wherever possible students will first be
asked to analyse / interpret given numbers and then prepare calculations of their own.

INTRODUCTION
(iv)
Course Aims
Achieving ACCA's Study Guide Outcomes
Amended to reflect presentation in main body
A Specialist cost and management accounting techniques A1 Activity based costing Chapter 2a
A2 Target costing Chapter 2b
A3 Life cycle costing Chapter 2c
A4 Backflush accounting Chapter 2d
A5 Throughput accounting Chapter 2e

B Decision-making techniques B1 Multi-limiting factors and the use of linear programming and shadow pricing Chapter 3
B2 Pricing decisions Chapter 4
B3 Make-or-buy and other short-term decisions Chapter 5
B4 Dealing with risk and uncertainty in decision-making Chapter 6

C Budgeting
Home study
To support you with your private study BPP provides you with a Course Companion which helps you to work at
home and aims to ensure your private study time is effectively used. The Course Companion includes a Home
Study section which breaks down your home study by days, one to be covered at the end of each day of the
course. You will find clear guidance as to the time to spend on various activities and their importance.
You are also provided with progress tests and two course exams which should be submitted for marking as they
become due.
These may include questions on topics covered in class and home study.
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If you have any issues or ideas before you are given the form to complete, please raise them with the course
tutor or relevant head of centre.
If this is not possible, please email INTRODUCTION

1.1

Syllabus Guide Detailed Outcomes
Having studied this chapter you will be able to:
• Gain a broader background knowledge of areas covered in paper F2. These topics will be built upon throughout
F5
Exam Context
These topics will not be examined in their own right. However, this knowledge could be examined as part of other topics
such as ABC, pricing, etc.
Qualification Context
You will have studied these areas in F2 and will continue to build on them in your management accounting studies.
Business Context
Absorption costing is a method of apportioning all the production costs to a unit. Historically, this was a very common
costing method in the manufacturing industry.
Costing
1: COSTING
1.2
Overview

Costing
Absorption Costing
Contribution
Marginal Costing
Reconciliation of profit

18.0033.00Indirect costs: Variable overheads

2.00 Fixed overheads

3.00Full product cost

38.00

2 Calculating the cost per unit
2.1

1: COSTING
1.4
Revision Example: CD Factory
Cost Card

(3) Absorb into production

For example:
Total overheads are $20,000

Pressing

Packing

Canteen
(1) Allocate: Pressing & packing
supervisors and a chef.
$5,000 $3,000 $2,000
Apportion:
Rent based on floor space 500m
2
300m
2
200m
2

$10,000 across 1,000m
2
$5,000 $3,000 $2,000
(2) Re-apportion:
Direct method : no inter-service cost centre work
Step Method : recognise significant inter-service cost centre work
Reciprocal : recognise all inter-service cost centre work
Eg. Direct method
Total Pressing Packing Canteen

Packing = $6,800/20,000 CDs = $0.34

$1.00 → add to cost card
Absorption Costing Summary
3.2
PRODUCTION COSTS DIRECT COSTS INDIRECT COST
$5.00 per unit 1 Allocate + apportion: Pressing Packing Canteen
$10,000 $6,000 $4,000 2 Re-allocate service CCs: Pressing Packing
$13,200 $6,800 2 Absorb into production Pressing Packing
$0.66 $0.34

COST CARD
$
Direct materials 1.00
Direct labour 3.00
Direct expenses 1.00
PRIME COST 5.00
Fixed overheads absorbed 1.00

∴ DVD OAR:
$
Pressing (1hr x $0.88) 0.88
Packing (¼ hr x $1.36) 0.34
1.22
∴ CD OAR:
Pressing (1/2 hr x $0.88) 0.44
Packing (¼ hr x $1.36) 0.34
0.78
Pressing Packing
DVD 1 hr ¼ hr
CD ½ hr ¼ hr
1: COSTING
1.7
5 Under / Over Absorption
5.1
$
Actual overhead expenditure X
Amount of overhead absorbed (X)
Under/(over) absorption X/(X)

5.2 Reasons for under/over absorption:
Expenditure variance – Actual overhead expenditure differed from budgeted overhead
expenditure.
Volume variance – Actual production activity differed from expected (normal) activity
level.

Lecture example 1
Preparation question


Sales

Cost of sales:
opening inventory
Production:
variable costs
fixed costs

closing inventory
(Over)/under absorption
Gross profit
Variable selling & distribution
Fixed selling & distribution
Net profit

Workings:
Lecture example 2
Preparation question There is no opening inventory in Year 1.
Required
Complete the income statement under marginal costing principles.

Solution $ $
Sales
Variable production costs:
opening inventory
production

closing inventory

Variable selling & distribution
CONTRIBUTION

Fixed costs:
production
selling & distribution
PROFIT
Selling price per unit $10


9 Advantages and disadvantages of marginal costing
Advantages
9.1 (a) Most appropriate for decision making as it highlights contribution. (It is useful for
short-term pricing decisions or decisions on one-off or ad-hoc contracts.)
(b) Fixed costs are treated in accordance with their nature, ie as period costs.
(c) Profit depends on sales and efficiency not on production levels.
(d) Slightly simpler variance analysis.
Disadvantages
9.2 (a) There is a danger that products will be sold on an ongoing basis at a marginal
contribution which fails to cover fixed costs.
(b) Does not comply with IAS 2, thus necessitating year end adjustments for the
preparation of published accounts.
(c) Necessitates analysis of mixed costs between fixed and variable.
(d) Seasonal variations in a year can cause unnecessary profit variances.
1: COSTING
1.12
10 Effect of inventory valuation on profit


1: COSTING
1.13

Lecture example 4
Preparation question Required

costs overhead Estimated

• Marginal costing doesn’t include overheads in unit costs instead charging them to the
income statement in full
• Contribution (selling price less variable costs) is a key tool for decision making
1: COSTING
1.14
Additional Notes
It is important that you can remember the basics covered in this chapter. Complete the following
examples for the Year 2 data. (Year 1 completed earlier in the chapter.)

Lecture example 5
Preparation question Selling price per unit $10
Variable costs per unit
direct materials $2
direct labour $3
production overhead $1
selling and distribution $1
Fixed costs:
Production: budgeted $8,000
actual $8,500
Selling and distribution:
(budgeted and actual) $2,000

Activity levels: Year 1 Year 2
Units Units
Budgeted production 4,000 4,000
Lecture example 6
Preparation question There is no opening inventory in Year 1.
Required
Complete the Year 2 income statement under marginal costing principles.

Selling price per unit $10
Variable costs per unit
direct materials $2
direct labour $3
production overhead $1
selling and distribution $1
Fixed costs:
Production: budgeted $8,000
actual $8,500
Selling and distribution:
(budgeted and actual) $2,000


costing has become outdated for many businesses due to the diversity of product ranges and high level of overheads.
As such ABC is becoming a much more appropriate tool for businesses to use when costing their products.

Activity based costing