Tackling CAT T7

Some people will find this paper easy and some will find it very difficult. This paper covers the basic performance management knowledge that needs to be understood by an accountant including costing, forecasting, budgeting, variance analysis and performance measurement. The syllabus of this paper is quite big but without difficult knowledge. Theories are too important to pass this exam, examiner will try to examine 60% calculations and 40% theories. Examiner will also focus on the key areas of the syllabus so be sure you check the study guide. Here are some advices for each syllabus area.

1. Principle of cost accounting
This covers absorption costing (AC), marginal costing (MC) and activity-based costing (ABC). The knowledge of AC and MC are covered in detailed in T4, so in T7, they are not likely to be examined as a more than 10 marks question, the main focus is on ABC which is new. To do ABC comfortably, think the cost driver rate as similar to overhead absorption rate (OAR) but it divides the cost driver instead of budgeted activity level, keep an eye on the activity consumed by the product, then you should have no problem getting the accurate answer.

2. Collection of information
This gives you some general knowledge of where to get the information, sampling will be more important in this area. There are many types of sampling techniques but probably you might have difficulties in differentiating multi-stage sampling and cluster sampling, the only difference is that multi-stage sampling still involve some random in picking the sample at the end but for cluster sampling, every items in the final sub-population will be investigated. You must make sure that you can explain the sampling techniques in your own words and understand when each of them is suitable (since each has some limitations).

3. Analysis of information
Presenting information through graphs, tables or diagrams would be less common, but you may be required to write a report with your position as an accounting technician, therefore you must know the format of the report which can help you earn marks and be able to interpret information with common sense. It is important as well to know how to calculate Laspeyres' and Paasche indices, base year and current year are the key to differentiate them. This might help:
(a) Laspeyre price index - weighted by base year quantities.
(b) Paasche price index - weighted by current year quantities.
(c) Laspeyre quantity index - weighted by based year price.
(d) Paasche quantity index - weighted by current year price.
Therefore, if you know one, you can do the rest, they normally appear in MCQ.

4. Forecasting
Common exam questions on this area will focus on high-low method, time series analysis and adjusting historical data using index numbers. People who find difficulties in this area are probably because of not enough understanding because forecasting in T7 is one of the easiest topics. When you apply time series analysis, a trend is needed and you will be given the linear equation for trend, so just solve the equation to get trend, seasonal variations will also be given, so the information needed to forecast sales is normally easy to find in exam question, forecast sales = trend +/x seasonal variation (if additive model is used, then "+"; if multiplicative model is used, then "x"). If you are not told what model to use, you can see from the seasonal variations given, if you saw "+40%", definitely multiplicative model should be used. Adjusting historical data to a forecast data using index number is very straightforward, no issue here.

5. Budgetary planning
Preparing budgets are common in T7, you may be asked to prepare sales budget, production budget, material usage budget, material purchase budget or labour budget, there is nothing difficult as you can do it by understanding the information given. Sometime, time series analysis can be examined together with sales budget. The theories of budgeting such as incremental budgeting, zero-based budgeting (ZBB) and rolling budget have to be understood and you should be able to explain in your own words in exam.

6. Budgetary control
You are already familiar with responsibility accounting, here you will see it again, this is very important in practice, therefore you will also see it in ACCA F5, just understand it. You should understand why we use flexible budgets for control purpose instead of fixed budgets. You may be required to prepare flexible budgets for three level of activities and later flexed the budget, variances from comparing flexed budget and actual result are useful to managers. You should also have some ideas of behavioural aspects of budgeting (how budget affects behaviour of people) which include knowledge about participative and top-down approach to budgeting, he meaning of goal congruence and dysfunctional decision making.

7. Variance analysis
This topic is also one of the easiest topics in T7. There are many ways of calculating variances, you should learn the way that is suitable to you, there are three ways that I have observed so far:
(a) Formula approach
(b) Common sense approach (which I used)
(c) Systematic approach (which examiner used)
I develop common sense approach by looking at how the variances are calculated, this approach is suitable if you think other approaches are not easy. Beside knowing how to calculate variances and do reconciliation, you must interpret them and give possible causes. Factors to consider before investigating the variances are quite common sense and you should learn about control chart. Examiner has wrote 4 articles related to standard costing and variance analysis, I will suggest you to read "understanding the causes of variances" and "variance investigation".

8. Performance measurement
This is very important, there are many invaluable key performance indicators (KPIs) knowledge to learn. In general, you should be able to do ratio analysis, use balanced scorecard, use value for money (VFM) and also calculate control ratios to measure the performance of the business.
For ratio analysis, you may need to compare the ratio of the company with last year ratio, other company or industry averages and comment on the performance, you should be familiar with ratio analysis already.
To use balanced scorecard, you must understand what each perspective means and to identify KPIs more specifically, you have to figure out the critical success factors (CSFs), KPIs will be based on CSFs.
Value for money means providing a service in a way which is economical, efficient and effective (3 Es), you should understand what 3 Es mean.
Control ratios include efficiency, capacity and activity ratio which you learnt in T2 and T4.
In divisional performance measurement, you should remember what responsibility accounting taught us, ie. manager is responsible for what he can control. Therefore, do not measure the performance of the manager by looking at the total division's cost or profit!
Performance measurement is a huge and important area which directly helped you in ACCA F5, so I will suggest you to read the examiner article titled "performance measurement", it is a great one.

9. Pricing
This is a very simple area and normally come out as part of ABC where you are required to mark-up the cost. However the theories such as factors influencing pricing, advantages and disadvantages of cost-plus pricing or fixed price quotations and tenders must not be ignored as there might be significant easy marks to earn in exam.

10. Cost management
This covers total quality management (TQM), cost reduction, value analysis, life cycle costing and target costing, mostly theories. In TQM, you must be able to explain each of the cost of quality (there are 4), it is easier to learn using own words. You must be able to differentiate cost reduction and cost control and suggest some cost reduction methods suitable for the given scenario. For value analysis it is just about explaining so just understand it. There are only theories for life cycle costing so you should be able to describe the 4 or 5 stages of product life cycle. In target costing, you should understand that it is an opposite way of doing things, ie. from selling price to cost instead of cost to selling price. As you know there is sometime a cost gap (target cost is different from current cost) and we need to close the cost gap, value engineering/value analysis is suitable to be used and also other cost reduction methods.

In summary, to pass T7:
1. Focus on the key areas (forecasting, budget preparation, flexible budgets, variance computation and interpretation, performance indicators, cost reduction and value enhancement).
2. For something not understood, take time to read and read until you get what it means.
3. Don't learn the way of doing the questions, learn 'why' the way is used.
4. Practice some past year questions, if you cannot understand something, try to read examiner's report where examiner may provide some guidance on it.
5. Do not ignore theories which constitute you about 40% in exam, explaining or giving advantages/disadvantages are very common.
6. In exam, start from the easy question. Use the reading time effectively by at least go through all 4 questions in section B, start from your strong area.