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Hello and welcome to this ACCA
F5 question debrief. Today's session
will be looking at the December 2012
paper. Specifically at question
number one which is about multi
product break-even. I'll be your host for this question
and I'm going to run you through the question and how to answer it.
Let's just first remind ourselves
exactly how the exam works. The ACCA F5 paper then
is made up of 5 20 mark questions.
All of these questions are compulsory and we do recommend that you attempt
all of these questions in order to be able to get that 50%
pass mark. All the questions you'll see
on the paper are based around scenarios and we'll have a short scenario that we'll
run through
for today's question. One of the most important things
to remember in the F5 exam when you attempt it
is to keep a very close watch
on the time. We recommend that you spend about
1.8 minutes per mark. So in a question
of this magnitude, you should be spending 36 minutes
in total. Not a minute more and hopefully
not a minute less. In terms of getting the most
out of this presentation we would recommend that you have a copy
of the December 2012 paper in front of you. That you can download
from the ACCA website. We've got three main
objectives when it comes to the video today. We're going to show you how to approach
multi-product break-even questions when you're faced
with one of those in the exam. We'll be giving you some general hints
around how to attempt these questions but really the best way
to attempt one of these subject areas
is to attempt a question specifically in that area. So we will,
as I say, be looking at the December 2012 paper
question number 1. We'll also give you some tips
around exam technique. We'll talk about proformas,
we'll talk about your workings and we'll talk about how you should
lay out your approach to a question like this.
Let's just remind ourselves what the main
syllabus areas are when it comes to
multi product break-even. There are six areas
spanning from a) which includes an explanation
of Cost Volume Profit analysis through to
b) calculation of some break-even points and margin of safeties
c) which looks at calculating the contribution
to sales ratio and this is a specific measure that we'll
actually need in this question and we'll look at the weighted
contribution to sales ratio. It's not just about calculation though
it's also about explanation so all of these calculations will
also require explanation. And in the final parts
of this video in requirement d) you will be
asked to explain some of your calculations so you'll see these
falling through into you answer. A couple more
syllabus aims then. You may be asked to prepare
a break-even chart and we will actually see in this question
you being asked to prepare a graph for a around about 9 marks.
So a very important part of this question. We'll also need to remember some
of the limitations
of Cost Volume Profit analysis. These aren't mentioned
specifically in this question but some of the general limitations to
remember include the fact that sales prices are fixed,
variable costs are fixed, fixed costs
don't change. We know in real life most of those limitations won't
actually occur. Let's just think about some general points
about how to prepare for the exam before we look specifically
at the next question. Make sure
that you've covered those 6 syllabus areas
in your revision. Don't ignore one just because you don't like it.
All six could come up and at this point for the next exam you don't know what is
going to come up.
We don't know if we're going to get a question like this one. We could get
an entirely different question altogether.
Make sure that you're very comfortable with multi-product breakeven.
Multi-product breakeven is worth an awful lot more marks
than a single product breakeven. In this question
you'll see that it's worth about 17 marks of the question.
Make sure that you're confident with the calculations. Make sure you can draw graphs
quickly and efficiently.
And you can tell me and you can tell the examiner exactly what
that graph means.
Remember in F5 interpretation of
the numerical results is just as important as the numbers themselves.
And finally please make sure that you practise
lots of questions. Unfortunately this is quite a new syllabus area so there
aren't that many questions out there
so please make sure that this question that we're going to look at next
you look at very thoroughly.
So let's have a look now at question 1
from the December 2012 paper.
If you haven't got the paper, I'd recommend now just pull it up on the screen
and make sure you have a quick read of it.
OK this question then consists
of four main requirements but before we move on to the question
specifically
let's talk about some general answer strategy.
When it comes to any question in this F5 exam
The first thing you should always do is make sure that you stick
to those timings. Watch the clock; 36 minutes
and break it down to 1.8 minutes her mark.
Make sure you first read the requirements.
In terms of how the question is presented
you'll see the scenario first on the page, at the top of the page.
At the bottom of the page you'll see the requirements.
Please skip over the scenario and go straight to the requirements.
These will inform you about what information from the scenario
you'll need to use. Make a note
of how long each requirement should take, especially
if you're not very good at managing your time. For example
a 2 mark requirement you should be spending around about 3 to 4 minutes on.
Then go ahead and read the scenario. As you go the scenario
make sure you make a note of the key numbers and information from it.
Perhaps use a highlighter, perhaps ring the numbers.
And you can do quite a lot of this in the planning time
before the actual exam starts.
Also consider the layout of your answer. It's very important that you have a well
structured answer especially if the requirement is worth
a high number of marks. A 2 mark requirement
won't really require that much structure. A 9 or 10 mark requirement, which we will see in this
question does.
Finally then make sure you work efficiently
and neatly. The examiner and the marker does not want to see a script
that's very messy. Also, don't dwell too long
on your favourite bit or you could actually run out of time
So in this question, in question number 1
there were four main requirements.
The first requirement, requirement a), asked us to calculate
the weighted contribution to sales ratio
for Hair Co. This is the company that we're looking at
That was worth 6 marks so that should be taking you around about
11 minutes. The second requirement
was a bit easier, just for 2 marks. Here we want you to calculate
the break-even sales revenue.
Both of these requirements should start to tell you that we're actually looking
at a multi-product break-even scenario just by the
figures that they've aske dyou for. The largest requirement then in this
question was requirement c).
This asked us to draw a multi-product break-even chart
and specifically asked us to mark two things
on the chart. Firstly it asked us to mark
the products being sold at the most profitable first
with the highest contribution to sales ratio.
The second requirement on the graph was to draw in a line
that represented the products being sold
in a constant mix.
The final requirement then was to comment on your findings
in c). You'll see this in every question in an F5 paper - there will
always be some explanation of your findings
required. So let's take a look first
at the first requirement, requirement a).
What we should be doing now is racking our brains for the contribution to sales
ratio - the weighted
contribution to sales ratio. We will need to remember
that formula to calculate the answer.
This formula isn't given to you on
the formula sheet, so please make sure you've got it
memorised. In terms of the ratio then
on the top you'll require the total contribution
for all products. In this question there were three products,
C, S and D. On the bottom of the formula
you'll require the total sales revenue, again
for all three products in this question.
Before we start to calculate the final formula
we'll need to first work out the unit contribution
for each of the three products. Let's remind ourselves contribution
is given as the selling price less
the variable costs. In this question
the variable cost consisted of materials M1,
material M2, skilled labour
and unskilled labour so when we're calculating
the unit contribution for c) we will need to take
all of these values away from the selling price
of $110. This gives us
unit contribution for product c)
of $60. We then do a similar calculation
for S. This gives us a unit contribution of $56,
and finally for product D, the unit contribution
is $28.
We need to take these three figures then and work out the total
contribution. Just take each of these figures
and multiply it by the sales volume
for C, S and D.
We can see here that the sales volume is 20,000 for C,
22,000 for S and 26,000 for D
leading to a total contribution
of $3.16 million.
That's our figure on the top line of the formula.
What about the bottom line then? Well that was total sales.
We do a similar calculation again for C, S and D,
this time using the selling prices of $110
$160 and $120.
Once we've got the total there of about $8.84 million
we combine the two figures together
in our original formula and this gives us
a contribution to sales ratio of
0.3575.
Remember to check that requirement. The requirement specifically
asks you to calculate this to two
decimal places so rounding our answer here then
we get a ratio of 0.36.
Moving on now
to the second requirement, b) but not forgetting
what we've worked out in part a). We've worked out the weighted
contribution to sales ratio and we'll need that
to work out the break-even sales revenue.
To work at the break-even sales revenue we'll need to take
the fixed costs in the question and divide it by
that raio that we calculated in part a).
A quick scan of the question then will reveal that fixed costs
are $640,000. Dividing that then
by our ratio of 0.36 gives us
break-even sales revenue of
$1.78 million.
Again making sure we round this
to two decimal places.
OK that's about 8 marks into the question and we're almost
about half way. Again remember to check your time.
Make sure you've left yourself enough time to calculate the biggest part
of the question
which comes next, part c).
This part then is worth 9 marks
so we'll be looking at around about
16 minutes to complete this part.
Again, make sure as you go through the question
that you re-read the requirements It's very hard
to remember all of the requirements from the beginning
and we'll want to make sure that we're kind of on track and we're answering
the requirements that have been asked for.
So c) then asked us to prepare a graph.
Now you will be given graph paper in the exam
and you do need to make sure that you use that to prepare a neat
and well prepared graph.
This requirement specifically asked us for a profit
volume chart showing first
that the products are sold with the highest contribution are
sold first and then that they're sold
in a constant mix. 9 marks here so we need to make sure
that we're aware of our approach. It's quite hard to just jump into this
question
without planning what we're going to do. We've got three main steps
in our approach here. Firstly we're going to calculate
the contribution to sales ratio for each
individual product. In part a)
we looked at the overall ratio. Please don't use it this ratio.
We want an individual calculation for C,
S and D. Once we've got those
we'll then need to pull together a cumulative sales
and cumulative profit table.
This table is key. It will help us
in our third step to draw the graph.
And you should always attempt these types of questions
in this order. Remember to work through steps 1 and 2
slowly and carefully and if you run out of time in step 3, which takes the
longest
pleae do stop. Moving to step 1 then
contribution to sales ratio. A small table
could be required. This will make your calculation easy to read
for the examiner. All we need to do here then
is to take that unit contribution and divide it by the selling price.
For example here for C, we've got 60
as our contribution divided by of selling price
of 110. Then
we'll also do the same for S and D. This leads us
to ratios of 0.55
for C, 0.35 for S
and 0.23 for D.
The next step in this table then is to rank them. We need to rank them from
the highest
to the lowest and it just so turns out in this question
that they coincide with the order for products.
So C is ranked first, S
is ranked second and D is ranked
third. Once we've got these rankings
we'll then move on to our cumulative sales and cumulative profit
table. In terms of this table
you're going to need four columns. The first column
is where you're going to enter your rankings from the last part.
So you'll start with C then S then D.
The third column we're going to map out the cumulative sales figure.
Make sure that you note that this is cumulative sales.
So we will start in a second at zero and move
up through each product one at a time
adding on their sales to this figure.
The final column is the cumulative profit
and loss and this is really where we start
with our table. The first figure
to enter into our table in the cumulative profit and loss column
is the fixed costs. If we look back to part b)
or to the scenario, we can remember that fixed costs
was $640,000. We need to start our table then
at a loss of $640,000
and that forms the first row
with a zero, as I said earlier for cumulative sales.
From here we then start to go through the products one at a time.
First, start with product C.
This sells at a volume of
20,000; it has a selling price of $110
and generates contribution of $60.
Working through these calculations, we end up with a cumulative sales figure
of $2.2 million and adding on
the contribution for C onto
the original loss so far, we have a profit of
$560,000. We then do a similar calculation
for S this time with
a selling price of $160 and contribution of $56
then finally we do the same for D.
This leads to an overall sales figure
once we've added the sales of all three products together
of about $8.8 million and a cumulative profit and loss figure
of $2.5 million.
The figures in the last two columns
of this table are absolutely crucial
when it comes to drawing our graph.
So please make sure that you've got these 8
figures to hand when we now move on
2 draw the graph.
In terms of the graph
vertical axis is going to represent the cumulative profit or loss.
That you can see in the last column of the table.
The horizontal axis will
demonstrate the cumulative sales figure so please
note the range of these figures. Sales goes from 0
to 8.8 million; cumulative profit and loss
goes from a loss of 640,000 through to a profit
2.5 million. So these are the figures you'll need
to sketch out your graph and plot the points.
First off then, start by drawing out the axes
but before you do that please don't
run out of time. It's very very
easy for students to spend a great deal of time
plotting the most perfect and neat graph.
Keep an eye on that clock because time will be ticking away.
Please do not run out of time.
Starting with our graph and the axes
you can see the basic graph drawn out here.
Note then that the horizontal line intersects
neither a profit or loss. A profit or loss
of zero. Once you've marked on
the scale of the axes, you then should label each of the axes.
As we said before the vertical axis denotes profit
in thousands and the horizontal axis
denotes sales revenue in thousands.
Once you've done this then you can start to draw on
your lines. Remember, we start with our first product, C.
C will start at a loss of 640,000
where sales revenue is zero. You then need to join this
to the second two points in our graph.
The cumulative profit and loss after
the sales of C and the cumulative sales revenue
after the sales of C. Mark this first part of the line
with a C. Then repeat the same
for S, marking the cumulative sales
and the cumulative profit. This will lead to around about
5.8 million of sales
and around about 1.8 million of profit.
Finally we do the same thing for D and we should hopefully
have a line that is steeper at the beginning
and more shallow at the end.
Once you've done that, that represents the first
part of the requirement - selling the most profitable
products first and this is denoted by that steeper
curve at the beginning. The second part of the requirement
asked us to assume that the products were sold
in a constant mix. Do this by joining
the start of the graph at C
where we had a loss of 640,000
to the end of the graph for D where we had
overall profit and sales revenue. Label this line
the Constant Mix. Once you've done this,
you will have completed the requirements for part c).
All we've got left to do now is the final part
of this question - requirement d). And really this is one of the most
easy requirements in the question. Even if you haven't had chance
to draw out the graph, just make some general points.
Assume a normal multi-product
break-even graph. Make some general points about that.
You've got 3 marks here so this should take you around about 5 minutes
and remember interpretation in F5
is key to understanding and demonstrating to the examiner
that you're confident with the material. So what are some of the points we could have made
about our graph?
Well what we could have sold then is that the products are sold
in the most profitable ranking first. This would lead to
a break-even sales revenue of $1.2 million.
And how do we know this? Well this is the point
where the line C crosses the horizontal axis
and represents the sales revenue at that point
when we have neither a profit or a loss.
We can see here that C contributes most
to fixed costs. We can see this because
the line for C is the steepest and also it has the highest
unit contribution.
If looking at the products in a constant mix, we can actually see that the break-even
sales revenue
is slightly higher at $1.8 million.
We know actually in real life that neither of these scenarios is likely.
We're not likely to sell a perfect mix
of product C, S and D. We're neither likely to sell
all of our most profitable products first so just be aware of that.
So to conclude on this question, what is it that I need you
to take away from this presentation?
Please don't be scared by the fact that it's a new syllabus
area. The examiner doesn't have a big
bank of questions for you to practise on so
take things slowly and just practise a few questions
very thoroughly. As we saw this time the question wasn't too tricky.
New syllabus areas aren't normally the hardest
areas on the paper.
The first time it was tested in December so expect next time to perhaps see a
slightly different question
that will test further syllabus areas that weren't
tested this time.
Remember a question of this type will often be weighted
towards the numbers, especially if
a graph is required. This question
only had 3 out of 20 marks available
for words. That means that later on in the paper you're likely to see
far more written questions. Make sure that you remember
those formulas. We saw in this question the weighted contribution to sales ratio,
we saw the break-even sales revenue.
We also saw the contribution to sales ratio. All of those
are formulas that you won't be given in this exam
and you will need to commit to memory.
Finally do not waste time on
the graph. It is very very easy to spend
20, 30 minutes there perfecting your graph.
Just to finish off then I'd like to wish you the best of luck
in all your future studies. I hope you found
this presentation useful today and I hope to see you again soon.