Hi everyone…welcome to the latest Q&A Session…hoping for a really interactive and useful event tonight. Thanks as ever to Natasha Everardfor setting this up. It tends to get a bit manic at times, so if I miss you out it’s nothing personal – just remind me and I’ll make sure I get to you asap!
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11You, Sarah Foxwell, Rose Crockett and 8 others
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Natasha Everard Hi thanks for this. I always get confused with efficiency and capacity variances…any help?
Neil Arnott Probably the most common confusion in this unit. Capacity is about how many hours we actually worked, against how many we budgeted for. Ask any business owner and they will want you to work more hours if possible – so if the actual is greater than the budgeted this is a good thing, and Favourable. Efficiency measures how productively we worked in all those hours – it’s perfectly possible to work more hours but to be less productive than planned. And remember the formula is exactly the same for Fixed OH efficiency as for Direct Labour efficiency – except you multiply by BOAR per hour rather than labour rate
Natasha Everard Is there anyway to get your head round variances?
Hayley Smith I remember them as should and good…. efficiency they should of taken x long. … or capacity could of used these many hours.
Paul Marshall Yes should and did.
Neil Arnott Paul – a man after my own heart…Should cost, Did cost!!
Paul Marshall Haha been revising it today. Struggling on some chapter but somehow I get these variances.
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Tracey Hunter I get confused on how to work out roc and any other variance that includes capital – how do I remember these
Karlene Clissold Hi Neil, would you be able to explain about gearing ratio and gearing debt to equity ration? Thank you in advance!
Neil Arnott Hi Karlene – gearing is about how a company is financed. To make it simpler, compare it to personal life – everything we own is either the result of our previous earnings (eg from salaries, interest etc) OR from loans (eg a mortgage). It’s the same for companies. The greater the proprtion of it’s assets which are financed from loans (rather than equity) the higher its gearing ratio is
Karlene Clissold Thank you Neil – that is really helpful.
Neil Arnott Thanks Karlene – glad it helped!
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Neil Arnott Remember – debt is anything borrowed from outside sources. Equity s predominantly share capital and other reserves – the main one of which is usually retained earnings from over the business’s life
Paula Rutter hello
starting level 4 later this year
could u suggest the best way to approach this module please it looks horrendous by the results above 🙈
Neil Arnott Tracey – no easy shortcuts I’m afraid. Understanding what each ratio shows is a good start, rather than just parrot learning. Each ratio is just a tool which helps to paint a picture – in isolation most ratios are misleading or useless
Dawn Brierley The written part of the exam is what’s making me particularly nervous, apart from more practice is there any points we can remember to get the marks needed?
Neil Arnott Hi Paula…approach with caution! Learn the variances first as these are guaranteed to come up in every exam, and in more than one task. Once you have nailed those the rest should hopefully fall into place
Neil Arnott Dawn – the written tasks ALWAYS score badly for most students (see graph) – especially Task 10. Best advice is read the question carefully, don’t assume the examiner knows anything so be prepared to state what may seem like the obvious, and make sure you answer the specific question being set.
Stacey Hampton Bebb I have my exam one week and I’m feeling very unprepared! I have about 2-3hrs on an evening to revise, how can I make the most out of this time. What should I prioritise?
Neil Arnott There is some brilliant advice on how to tackle EVERY task on the AAT website in the performance report. Here’s the link:https://www.aat.org.uk/…/L4-Diploma-Accounting-FPFM.pdf
Neil Arnott Variances variances variances. Once you have these make sure you are really comfortable with marginal costing from Level 3 – breakeven analysis, contribution etc. This comes up in Task 8 and is generally no harder than a level 3 question yet is the second worst task for students (see below)
Neil Arnott Decision Making This is the task with the second lowest percentage success rate and a number of students achieved very few marks. This task requires students to use one or more of the key topics of decision making, break even analysis margin of safety, limiting factor decisions, make or buy decisions and special orders. For students to be competent in this task they must have a mastery of contribution theory and understand cost behaviour. It is scarcely credible that a student can pass the level 3 costing paper and arrive at level 4 and not be able to calculate the contribution per unit of a product. Often students include a fixed cost element in the calculation. Those who can calculate contribution per unit are then unable to convert this to the contribution per limiting factor. Again a key topic examined at level 3. Often students are unable to apply the break even calculations to find the break-even point, margin of safety and margin of safety percentage. If they correctly calculate the break-even point and margin of safety often the margin of safety percentage is calculated by taking the margin of safety in units and dividing by the break-even point not the actual sales volume.
Neil Arnott The excerpt above is from the document on the AAT website linked above
Neil Arnott Here is the guidance for Task 10 (generally the worst-answered task in the exam): Task 10 Report on performance indicators and scenario planning (what if analysis) This is the task with the poorest performance. It requires students to write a report analysing information which could include the gross profit margin, profit margin, and key changes in the business. Students may also be asked to consider the stages of the product lifecycle and comment on the cost behaviour for different stages of the cycle and how the organisation may change as the product moves through the cycle. Students will often be given two scenarios where there is a difference in the two gross profit margins and asked to analyse the differences by considering the variables of sales price, sales volume, direct materials, direct labour and fixed overheads. Many students struggle with this analysis and are not able to articulate the reason for the differences. Students should also be able to write about contribution theory, margin of safety and break-even analysis in this task.
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.
A very common incorrect response is ‘the fixed costs are constant and therefore do not affect the margin’. This is clearly incorrect but is used by many students. Clearly there is a fundamental lack of understanding that if fixed costs are constant in total the greater volume of production and sales will reduce the fixed cost per unit and therefore improve the margin.
Natasha Everard What are the common mistakes students make when taking their live exam?
Tracey Hunter can you explain ROCE in laymans terms please
Neil Arnott Probably the same as any exam…spending too long on tasks in the early part of the exam so running out of time; not reading the question properly,; panicking; not answering the question set, but instead answering the one they took as a mock and hoped would come up again
Donna Woodward I failed to take this exam before I went on maternity leave. Would it be best to reread the material or are there sufficient study notes to assist recapping? I thought starting a fresh would be a good approach so went on to FS but following the Q&A last week I think I probably should be comfortable with FPFM.
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Suzanna Rich What if any are the connections between Financial Performance and Financial Statements. Does one follow onto the other?
Neil Arnott Tracey: If I gave you £100 and told you to take it away and bring me the profits, you could do many things…invest it, gamble it, shove it under your bed. It’s the same with companies – they have assets which they can use in different ways. ROCE is a measure of how well they use the assets at their disposal…the higher the ROCE, the better they are doing (ie the more profits they are making per £1 of assets)
Neil Arnott Donna – I wouldn’t take either FS or FPFM lightly – they both have a lot of material and really need to be known inside out and upside down. I guess it depends on how well you felt you knew the stuff before your break, how long ago it was etc. You could try the mock exam ono the AAT website as an assessment of your readiness??
Neil Arnott Suzanna – FPFM really follows on from Budgeting. Budgeting is about planning (ie looking forward) whilst FPFM is about looking backwards (ie did we achieve our plans?).Both these are management accounting disciplines, and there is a good deal of crossover. Having said that, the ratios studied in FS also appear (more or less identically) in FPFM – so that can be a help!
Donna Woodward 1 and a half years ago. I’ve found study particularly challenging this side of things so I’m not comfortable with either
Neil Arnott In that case Donna Woodward I’d recommend printing out the standards (fdrom the AAT study zone) and then going through them – HONESTLY judge how well you remember each of the requirements (use smiley or grumpy faces!) – this will help you judge what you need to do to get back on track
Natasha Everard would you suggest refreshing Cost & Revenues before starting this unit?
Paula Rutter finish level 3 on cost revenues
then budgeting
then this one then ?
Natasha Everard That sound like a plan smile emoticon
Neil Arnott That could work (see comment below). I think many students start Level 4 with Financial Statements, but doing Budgeting and FPFM as soon after costing could certainly work
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Neil Arnott Absolutely – especially the sections on marginal costing / breakeven analysis. Many students struggle at CR but manage to get through it without really FULLY understanding key concepts – then get found out at Budgeting or (particularly) FPFM
Dawn Brierley I was advised to study financial performance before budgeting, will this impact upon how I’m grasping the content, and how ill tackle budgeting, or will it not really make a difference?
Tracey Hunter Whats the best way to work out capital employed
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Neil Arnott That would be unusual advice – I’d always advise Budgeting first as it sets the scene for FPFM. Some of the content is duplicated, but Budgeting is generally thought of as the easier of the two and therefore it makes sense to do them that way round
Dawn Brierley I always thought I should have done budgeting first but listened to my learning provider 😩 might get budgeting books out and get that out the way as I’ve seen advised lots of times. Thank you smile emoticon
Neil Arnott If you think about the Balance Sheet, Capital Employed is basically equity (ie share capital and reserves) plus preference shares (very very unusual in AAT so you can practically ignore them here) plus non-current liabilities (ie long term debt). So it’s everything that belongs to shareholders plus anything owed to banks and other lenders. This is exactly the same figure as the company’s net assets; ie its fixed assets plus current assets minus current liabilities
Neil Arnott Works for most students Dawn Brierley…at the end of the day you have to pass them both but I’m a big believer in winning easier battles first and moving on to harder challenges later
Natasha Everard Can you explain in simple terms about ABC costing smile emoticon
Neil Arnott The best learning / revision you can do for this unit is to read the AAT feedback at https://www.aat.org.uk/…/L4-Diploma-Accounting-FPFM.pdfSorry if I keep banging on about it but it is the most useful document…its a few pages long but tells you what AAT are looking for in each and every task!
Katie Lowen Bookkeeper I’ve found the AAT feedback documents really useful in other units as it tells you what students trip up on so you don’t make the same mistakes or advise as to revising a particular topic a bit more to boost your mark
Neil Arnott Absolutely Katie,,,an incredibly valuable resource yet many students are unaware of it!
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Neil Arnott ABC is a development from the 1980s – it recognises that modern manufacture is totally different to ‘traditional’ manufacturing where absorption costing was sufficient. This is because direct costs make up a far smaller proportion of the total costs of a business – far more now is made up of fixed overheads – mainly due to the reduction in direct labour brought about by automation. So instead of simply dividing Fixed Overheads by hours, ABC looks more closely at what CAUSES costs to be incurred (ie cost drivers) and uses these as a basis for sharing out overhead costs between different products – it can cause quite significant differences in product costs compared to traditional absorption costing – particularly increasing the cost of products produces in relatively short production runs
Katie Lowen Bookkeeper ABC costing is covered in budgeting too so if you learn it well once you have to just revise it for the other subject
Neil Arnott Spot on Katie…there is a good bit of cross over between the two units – just with a different focus
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Natasha Everard Is it normal for students to feel overwhelmed by this unit?
Neil Arnott Yes, I think so. I think many students are put off by the variances…they are more complicated than they seem. However, they are now included in more depth in Budgeting than before, so they shouldn’t be completely new. Overall, though, pass rates nationally are fairly low, so yes it is fair to say it’s one students struggle with
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Neil Arnott Re Capacity and Efficiency: Imagine an AAT Student – their tutor asks them to revise in the next week by doing three past papers which should take 2 hours each. The budgeted hours is therefore 6 hours. A week later the student comes in and says they’ve worked for 8 hours – this is good because they’ve worked for more hours than budgeted (CAPACITY = FAV). However, they only did two past papers (instead of 3). This is EFFICIENCY = ADV) – they may have worked more hours, but they weren’t as efficient during that time as they should have been
Natasha Everard Is there a easier way of calculating overheard variances?
Neil Arnott An easier way than what????
Neil Arnott I usually give students a pro-forma which helps gather all the information you need from the question before you start with the calculations – I can let you have a copy and you can post it for students if that would help Natasha Everard
Natasha Everard Yes please.
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Neil Arnott Don’t forget as well – at level 4 there is an expectation you will read around the subject – don’t just be constrained by your text books (whichever version you are using)
Paula Rutter can u recommended reading material please
Neil Arnott All three publishers (Kaplan BPP and Osborne) produce texts specifically for AAT. I’m a big fan of Colin Drury although they are designed for a slightly higher level there is some really good stuff. And don’t forget articles in the AAT technician Magazine, PQ Magazine etc
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Stacey Hampton Bebb I also struggle with overhead variances do you have any ‘real life’ scenarios to bring them to life/explain them better?
Karlene Clissold Is there a lot of written tasks in this exam?
Paul Marshall If I remember correctly there’s 2 written questions.
Karlene Clissold Thanks Paul for that.
Neil Arnott Hi Karlene/Paul – that’s right; two written tasks (human marked)
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Tracey Hunter for future students how can you make this module not so scary
Paula Rutter cancel it 😊
Neil Arnott Paula…tut tut!!See translation
Paula Rutter sorry Sir 😇😣
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Neil Arnott All companies will have variances because budgeting is not an exact science. It helps to remember (from Level 3) that the Budgeted Overhead Absorption Rate (BOAR) is calculated by estimating both the fixed overheads and the activity level (in terms of both units and hours). If any of these guesses is wrong (which they will be) there will be a variance – if the estimated overheads are wrong there will be an expenditure variance; if the estimated units or hours are wrong there will be a volume variance (which can be sub-divided into efficiency and capacity as above)
Neil Arnott Tracey Hunter play nice music when revising, treat yourself to chocolate / wine when something has gone in, and remember that your tutor will support you through any difficulties you are having. How’s that?
Tracey Hunter Perfect 👌
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Neil Arnott Have I missed anybody???
Selina Hatice I have failed this module and now revising which is boring . The area failed me was written tasks as they have the higher marks . I was confident that I had given enough information . Is there a points that we can follow the points ??
Neil Arnott Selina – there is no ‘easy’ answer to that. It is really important to read the question carefully, and to remember that there will be marks available for stating things which might seem obvious. Read the AAT feedback (the link is above) – this gives really good advice on tackling written tasks
Natasha Everard Okay thank you for everyone who made this Q &A great as always. thank you to Neil Arnott for his expert answering again. Really appreciate it. Thank you all smile emoticon
Katie Lowen Bookkeeper Very informative, thank you
Selina Hatice Thanks a lot Neil Arnott Natasha Everard
Paul Marshall I failed this unit and only discovered the feedback on AAT to near to my exam but have been using it now and it is really useful. Should you answer the written sections in bullet points rather than sentences/paragraphs where possible?
Karlene Clissold Thank you to you both – this has been really helpful! kiki emoticon
Neil Arnott Paul Marshall – time permitting go for sentences – but keep them simple and to the point. Avoid long rambling sentences like the plague! If time is tight bullet points are better
Tracey Hunter 👍👍👍👍👏👏👏👏
Given me a bit more of a positive attitude towards this module now…See more
Paul Marshall Thanks Neil for all your help.
Neil Arnott Thanks all…I’m just off to talk to a student about ISYS but if you think of any more questions post them and I’ll reply when I get chance
Stacey Hampton Bebb Thank you Neil Arnott and Natasha Everard!
Dawn Brierley Thanks Neil smile emoticon
Steph Shaw Thanks Neil Arnott. Feel abit more positive to re sit the exam now! unsure emoticon
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