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Unit 4: Elements of Managerial Accounting

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Syllabus
Learning Outcomes Suggested Teaching Activities Resources Online Resources
Section
Absorption Students will learn what Explain the difference between direct and (Randall, 2005, chapter 30)
(Total) costing cost accounting is and why indirect cost giving as many examples as
it is important as a possible. Explain that a direct cost in one (Randall, 1996, chapter 18
management tool. They business may be an indirect cost in another exercises)
will learn how to business and vice versa. Show the students
distinguish between direct how to allocate and apportion costs and how to (Wood & Sangster, 1998,
and indirect costs, how to re-allocate the costs of service departments to chapters 17 & 18 exercises)
allocate and apportion production departments.
overhead expenditure and
how to calculate overhead Students should consider the costs which may
absorption rates. be considered direct in particular industries.
They should be asked to explain why it is
important to re-allocate the costs of service
departments to production departments. Which
circumstances give rise to (a) over-absorption,
(b) under absorption, of overhead expenditure?

Give particular attention to

• allocation and apportionment of costs
• the re-apportionment of service cost centre
costs to production cost centres
• calculation of overhead absorption rates
• the causes of over/under recovery of
overhead costs.

Job, unit and Students will learn the Ensure students understand the differences (Randall, 2005, chapter 31)
batch costs distinction between between job, unit and batch operations and how
continuous and specific the costs of each type are calculated. Contract (Randall, 1996, chapter 19
order operations, and how costing is not in the syllabus. questions)
 costing techniques are
applied to suit the nature Students should select different types of
of the operations. businesses and say which type of costing is (Wood & Sangster, 1998,
appropriate to each. May a business find it chapter 19 questions)
necessary to adopt more than one type of
costing? Students' should give examples.

Give particular attention to

• the accurate calculation of costs for each
system of production
• inclusion of clear workings with answers.

Process costing Candidates will be able to Explain the circumstances in which process (Randall, 2005, chapter 32)
prepare cost ledger costing is appropriate. Differentiate between
accounts for processes. joint products, by-products and waste products (Randall, 1996, chapter 19
They will be able to identify with examples. Explain how each is treated with questions)
and know how to treat joint numerical examples. Ensure that students can
products, by-products and prepare cost ledger accounts. (Wood & Sangster, 1998,
waste products. They will chapter 19 questions)
also be able to calculate Students should suggest businesses (local if
the cost of work in possible) which would use process costing. Do CIE paper 9706/4 June 2004
progress. the businesses produce joint products, by- Q3(a)(b)(c)(e)
products or waste products? What are those
products?

Give particular attention to

• calculation of work in progress and
equivalent units of production.

Marginal costing Students will know how to Students must be able to distinguish between (Randall, 2005, chapter 33)
make use of marginal variable and fixed expenses. Explain what is
costing techniques in meant by contribution, break even point and (Randall, 1996, chapter 20
decision making. They will margin of safety. Explain the C/S ratio and questions)
understand the terms ensure that students make use of it whenever it
marginal cost and is appropriate. (Wood & Sangster, 1998,
 contribution. They will be chapter 18 questions)
able to draw and interpret
break-even charts. Students should discuss the advantages of CIE paper 8706/02 Nov
Students will be able to marginal costing over total (absorption) costing. 2001 Q3
make the optimum use of What particular uses has marginal costing in
scarce resources. They practice.
will be able to explain
numerically how profit is Give particular attention to
sensitive to variations in • calculation of break even point and margin
prices and costs of safety; ensure that selling price and
direct costs are in unit values but fixed cost
is in total value
• neat and accurate preparation of break
even charts, clearly described and
annotated. The charts should be drawn to
as large a scale as is necessary to ensure
that accurate readings may be made from it
easily.
• uses of marginal costing, especially in the
maximisation of profit when resources are
scarce
• sensitivity of outcomes to changes in
revenue and costs

Budgeting Students will be able to Demonstrate the build up of master budgets (Randall, 2005, chapter 34)
prepare operational from operational budgets in logical sequence.
(functional) and master The operational budgets should be prepared in (Randall, 1996, chapter 21
budgets. They will be able columnar form. questions)
to identify limiting
(principle) budget factors. Students should be asked to explain how (Wood & Sangster, 1999b,
budgets differ from forecasts. What do they chapter 32 questions)
understand by the term ‘flexible budget’ and
why are these often necessary? They should (Wood & Sangster, 1998,
explain how they would flex ‘semi-variable’ chapters 20, 21 & 22
expenses. questions)
 Give particular attention to CIE papers 9706/04 June
• the necessity to read questions with care so 2003 Q3, 8427/02 May 2001
as to ascertain the required format of the Q4 & 9706/04 Nov 2004
budget. Q1(b)(c)
• correct phasing of revenue and cost
• accuracy of arithmetic. (Questions on this
topic are by nature largely arithmetical.)

Standard costing Students will be able to Teach students the main variances first; then (Randall, 2005, chapter 35)
flex budgets and to explain that these variances may be further
calculate sales, materials analysed into sub-variances (overhead (Randall, 1996, chapter 22
and labour variances. variances are not in the syllabus). Ensure that questions)
They will be able to explain the formulae are learned thoroughly. Insist that
possible causes of all variances are correctly shown in monetary (Wood & Sangster, 1998,
variances and to reconcile terms and as either favourable of adverse. chapter 24 questions)
actual and budgeted Students will gain no marks if they fail to show $
profits. signs or the state of the variance. CIE papers 9706/04 June
2001 Q4, 9706/04 June
Students should discuss the various methods of 2002 Q3, 9706/02 June
setting standards and compare them. When 2004 Q2(d) & 9706/04 Nov
may standard costs be acceptable for the 2004 Q3(b)(c)
valuation of stock to comply with current
accounting standards?

Give particular attention to

• flexing budgets
• appropriate causes of variances
• reconciliation of actual outcome with
budget.

Investment Students, using a variety Teach students how to calculate ARR, payback, (Randall, 2005, chapter 36)
appraisal of measures, will be able NPV and IRR. Explain the strengths and
to calculate the projected weaknesses of each method. Show students (Randall, 1996, chapter 23
results of choices made in how outcomes may be sensitive to variances in questions)
respect of various forms of outlay and rewards.
investment. They will Invite students to suggest occasions when (Wood & Sangster, 1998,
recognise the time value of capital expenditure may be desirable, or even chapter 14 questions)
money and its importance necessary, when the usual accounting
when considering the calculations show adverse outcomes. CIE papers 9706/04 Nov
desirability of a choice of 2003 Q2, 9706/04 June
investment. They will be Give particular attention to 2004 Q3 & 9706/04 Nov
able to measure the • sunk costs and opportunity costs 2004 Q3(a)
degree to which an • ensuring that students understand that ARR
investment is sensitive to is the only technique based on profitability,
changes in outlay and while payback, NPV and IRR are calculated
rewards. on incremental cash flows
• the irrelevance of inflation in this topic to the
concept of the time value of money
(discounting is based on the cost of capital,
not the rate of inflation)
• sensitivity of each technique to variations in
revenue and costs.