Finding the right words for the right numbers
Correct calculation is all well and good, but correct explanation is essential. Cliff Floyd presents some ideas on how to express Financial Performance concepts This article deals with written tasks in the Financial Performance (FNPF) unit of AAT Level 4 Diploma in Accounting. The FNPF examination consists of two sections. Section 1 contains 8 tasks covering numerical and short answer
questions and Section 2 contains two written tasks, task 1 covering standard costing and variance analysis and task 2 covering key performance indicators and what if analysis.
Many candidates struggle to provide a competent answer to these questions and this may be due to lack of preparation as well as the nature of these tasks. The key to success on these tasks is to undertake detailed preparation to develop knowledge and understanding, and detailed practice to apply the knowledge and understanding. The prepared student is able to score high marks on these tasks and clearly demonstrate that they have studied a range of practice questions.
TASK: Variance analysis
The task will be based upon a brief scenario including some standard costing variances and some basic information to aid the analysis of the variances. For example, the direct material price variance may be given as £10,000 adverse and it may be stated that a high quality material was purchased. The task may require the candidate to prepare a report covering all or some of the following:
REQUIREMENT:
An explanation of what the given variance means
ANSWER: The adverse material price variance means that the actual price paid was more than the budgeted price (alternate terms which will receive full credit could be expected price, planned price or standard price). The important point is to explain that the actual price was greater than the original plan.
REQUIREMENT:
Give one possible reason for each given variance
ANSWER: the variance may have been caused by the purchase of a higher quality material which was more expensive than the standard price. This is the obvious answer but any reasonable reason will receive full marks.
REQUIREMENT:
An explanation of any links between the variances
ANSWER: the variance may be linked to some or all of the other variances. The higher quality material may allow for a lower quantity to be used in each product and therefore create a favourable direct material usage variance, the better quality material may have also lead to a favourable labour efficiency variance because it allowed the labour to finish the product more quickly because it was
easier to work on (only one link is required).
REQUIREMENT:
State any action that could have been taken
ANSWER: The answer to this will depend on the data given and other variances for example if the other variances are favourable and the net effect of purchasing the higher quality material was for a saving on usage and labour efficiency which is greater than the adverse price variance the answer may be to take no action because the overall savings are greater.
Over the past few months many candidates have scored very highly on this task on the online examination and clearly many candidates are preparing themselves for this topic. One way to help the preparation is to work through previous PEV (Unit 8) papers which similar tasks in section 1.
TASK: Analysis of key performance indicators and what if analysis
The task will be based upon a brief scenario including some key performance indicators and extracts from the accounts. The requirements may include some or all of the following:
- An explanation of why the gross profit margins are different in each scenario by considering the key variables of sales price, volume, material, labour and overhead costs at the given variance means
- An explanation of why the gross profit is different between two scenarios
- An explanation of the net profit margin
- An explanation of the return on net assets
- A recommendation as to which option should be taken and why
- A recalculation of key indicators or profit based upon given information
A very common problem with this task is the confusion demonstrated by many students over the difference between the gross profit and the gross profit margin and how the variables affect one or other. It is common for a task to require the analysis of the gross profit margin by considering the variables that affect it. The following table will be used to illustrate common errors made by students.
In order to be successful at this task, candidates need to understand the mathematics of the gross profit and gross profit margin.
REQUIREMENT:
An explanation of why the gross profit margin is different between S1and S2 by considering the sales price and sales volume
ANSWER: The sales price is higher for scenario 1 which will improve the gross profit margin for S1. However, the sales volume is higher for S2, which will improve the gross profit margin for this scenario if there are fixed production costs because these costs will be spread over more units therefore increasing the gross profit per unit.
COMMON ERRORS: Many candidates simply say something like ‘the sales price is lower for scenario 2 but the volume is higher this gives a greater margin’. This answer does not really explain the effects.
REQUIREMENT: An explanation of why the gross profit margin is different between S1 and S2 by considering the material cost ANSWER: The material cost per unit is constant which therefore has not effect on the gross profit margin.
COMMON ERRORS: Many students are unable to correctly explain the relationship between the variable costs and demonstrate confusion between the gross profit and gross profit margin. Common statements include ‘the material costs increase with increased volume of production and therefore reduce the margin for S2’ this is obviously incorrect because the unit cost is constant and although the total material cost increases it increases in proportion to the sales revenue and therefore has no effect on the margin.
REQUIREMENT:
An explanation of why the gross profit margin is different between S1 and S2 by considering the fixed production cost
ANSWER: The fixed production cost is constant which means that the increased volume will reduce the fixed cost per unit. A lower fixed cost per unit will increase the gross profit margin for S2.
COMMON ERRORS: A very common incorrect response is ‘the fixed costs are constant and therefore do not effect the margin’. This is clearly incorrect but is used by many candidates.
Students again are advised to work through all the past/sample papers to practice these types of tasks.
Also, students are directed to the AAT website to review Assessment Performance Feedback Reports.
There's also some Accounting Technician articles here
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