Zhang Yutong/东亚国际讲师、管理硕士、曾在海外参加过CIMA皇家管理会计师TTT workshop

 

CAT 4 is aounting for sts. Basically, it deals with how to de, llect, calculate and analyze sts aording to its title. More than that, it builds up a framework of how to use sting information to make simple decisions. Investment appraisal is also an important part of the syllabus.  

CAT 4 is mainly divided into 4 parts, absorption sting and marginal sting, job sting, service sting and process sting, CVP analysis and decision making and, investment appraisal. The picture below gives an outlook and a relationship between different parts.

Part one: absorption sting and marginal sting (thereafter, AC and MC)

AC and MC are the re ntents of the syllabus. AC looks at how to llect sts from a finance-based view, dealing with production st and non-production st. MC focuses on variable st and fixed st to help for st analysis and decision making. 

 

For AC, students need to have a clear mind that production st is made up with four elements:

Direct material

Direct labour

Direct expenses and,

Absorbed overhead sts.

 

AC gives great attention on how to absorb overhead sts into st unit. Although the four steps, allocation, apportionment, reapportionment and absorbing are all included in CAT 2 syllabus, CAT 4 specially examines students’ understanding on the whole absorbing process giving mputation questions on, apportionment process, step-down method of reapportionment, and absorbing overheads into st unit. Along with the whole process, students are expected to know the arbitrary feature of overhead apportionment which may result in distorted profit per unit and mislead decision making process.

 

Apart from the basic mputations, paper 4 tests students understanding on over-/under-absorption of overheads, which is resulted from the difference between actual and budget overhead sts, or actual and budget activity level, and or both sts and activity levels are different between actual and the budget. Students are expected to know the reasons above. To calculate over-/under-estimated overhead sts, structure below may help your thinking:

 

Absorbed overhead sts   (absorption rate × actual activity production level)

Actual overhead sts

Over-/(under-)absorption* (difference between the above two elements)

 

*when absorbed overheads is bigger than the actual, Over-absorption

 when absorbed overheads is smaller than the actual, Under-absorption

 

Effects on profit of over-/under-absorption should be fully ncerned. For over-absorption, as there is not that much overhead sts in actual, it should be added up into inme statement to reach a reasonable profit figure. Under-absorption has the oppo effect on profit and is dcted from profit.

 

MC nsiderates variable sts (thereafter VC) and fixed sts (thereafter FC)  as more than usual, VC is relevant sts to decisions, while FC is not ncerned relevant in a short term except it is specially mentioned in exam questions. A simple structure of MC is below:

Sales

Minus: VC

ntribution

Minus: FC

Profit

 

Worth to know, VC includes both production st and non-production st. And the same happens to FC which is treated in total as period st.

 

MC looks at max-ntribution to maximize profit as FC is ncerned nstant unless being told.

 

Relationship between AC and MC is mainly tested with the profit renciliation under two methods. Students need to be able to describe the reasons of different profits and the way to do renciliations.

 

AC profit

Adjustment:

+ overheads in opening stock

- overheads in closing stock

MC profit

Job sting tests students understanding of customer-focused production. It is possible to finish the job in one aounting period. st unit of job sting is the job. As it specially follows customer expectations, products of job sting is likely to be heterogeneous. Small builders and plumbers can be examples for job sting.

 

llecting job sts using below structure:

Direct material

Direct labour

Direct expenses

Absorbed overheads

Other overheads

Total job st

 

Service sting is used when products are intangible, and where direct materials are relatively less than manufacturing business, while labour and overhead sts are respectively high. Service sting does not specifically deal with inventories as the service provided is the st unit which cannot be stored.

 

Service sting questions can be mplicating with mprehend details and mpo st units. Students are suggested to start from simplifying the requirements. For example, by translating requirements into $st/km so that you know you need to find total sts and total kms to meet the target. Generally, activity level is easy to be found. While total sts need to be carefully and patiently llected following the sequence from the questions. Mind yourself with VC and FC as VC need to vary with the specific activity level, and FC may require you to multiply the length of the period or the number of quantity.  

 

Process sting is used for ntinuous production with homogeneous products. Food production and oil refining can be examples for this sting method. Key points for process sting are treatments for losses (normal loss, abnormal loss and abnormal gain), sting for closing WIP and FG, joint st splitting and further processing decisions.

 

Normal loss does not have a st, but its scrap value is dcted from total input st.

Abnormal loss/gain share a st with normal output, which means they have the same unit st with finished goods. When there is no closing WIP,

 

Unit st of FG =

 

If there is closing WIP, sting for losses is not tested under CAT4 syllabus. However, how to split production st between closing WIP and FG using equivalent unit bemes a key testing point. Mind yourself, material and nversion st may have different mplete degree. When calculating EU for closing WIP, different st elements should be listed separately so that different EU can be found. See the below example to help your understanding:

 

 

Unit st of FG = $(10+4+20) = $34

st of FG = $34 × 800 = $27200

st of WIP = $10×200 + $4×200 + $20×60 = $ 4000

 

Joint st splitting has three different ways: weighting (quantity), sales value, realizable value. It apportions joint sts into different st unit so that price can be decided aording to sts already incurred.

 

Further processing decisions is made aording to incremental profit figure. If it is positive, from the finance-based view, further processing should be carried out, vice versa.

Incremental sales

Incremental sts (further processing sts, both VC & FC)

Incremental profit

 

*always deals with incremental for decisions.

CVP analysis is under MC philosophy. Key testing points are BEP, MOS, sales volume or value for a target profit, and P/V chart and nventional BEP chart.

 

Decision making may test students understanding on pricing, further processing decision, relevant sts, limiting factor analysis and make-or-buy decisions. Read the revision kit carefully and recall the key points before sitting in your exams.

This is the last part for CAT4. It focuses on time value of capital, investment payback period, disunted cash flow, NPV analysis and the IRR of an investment. Students are required to describe each ncept in detail and be able to pe with simple mputations. 

 

Paper 4 is not a difficult paper if you follow up the key testing points and effort on grasping what is expected. Each part listed above is equally important. Students are suggested to practice past exam papers repetitively, especially rrect mistakes until you reach a satisfying answer independently. When sitting in the exam, it is better to start from the requirements then move on to think what is needed in mind before you finally start to read long questions. You may feel it is easier to write down what is in your mind as it keeps a light for your solutions. You are strongly advised to practice this method during your study time.

 

Mind your time in the exam as CAT4 is time challenging. Do not waste too much time on questions that you feel struggling. me back to it after you have done all that you have nfidence with.

 

Avoid mistakes of carelessness. Do use your calculators smartly. It saves time and helps you for certain auracy as long as you use it in a right way.

 

Once again, practice makes perfect and learning from mistakes. Find the mistakes, rrect it, reinforce the learning outmes, and be easy and happy with your effort before your exam.

 

Good luck and all the best.