Study tips: Balancing a trial balance and correcting errors with journals – Part 2

Posted by & filed under Foundation Certificate, Students.

This series focuses on balancing a trial balance, and correcting errors with journals, for AAT students working on the AAT Foundation Certificate in Accounting.

Study tips: Trial balance and correcting errors series

In part one of this article we looked at the context of account categories linking it to the picture on the box lid of a jigsaw.

We built up an image of the five account types with their expected account balances. We then made the connection between the expected balance and the posting required to increase that category of account, noting that once we’d learnt how to increase then we automatically knew how to decrease, as it’s just the opposite.

We also saw that the account categories work as pairs and opposites, so we only needed to learn half of them to know them all.

Finally, we completed the wider context by relating the categories to financial statements.

A business’s transaction must legally be accounted for and this is done through accounting systems which organise each transaction into an account in the general ledger.

Because each account can be categorised into one of the five, and then all the income and expenditure goes on the Statement of Profit and Loss (SPL), everything else must go on the Statement of Financial Position (SFP). 

Here is a visual reminder.

Remember, we said that drawings and capital are technically within the equity category.  Drawings reduce capital which is the amount owed by the business to its owner(s).  They are posted into separate accounts so work as an opposite and pair.

If that doesn’t ring bells with you, then it’d be a good idea to look over the first article before continuing, as we’re going to use this context to look at an imbalanced trial balance (TB), then see what thought process we need to use to find out why, and what is required to correct it.

Imbalanced trial balance scenario

The TB is for a small VAT registered company called E&J Consultancy and the debit column totalled £568,453 whilst the credit column totalled £568,459.

As the TB needs to balance, we have to open a suspense account. However, it doesn’t fit into any of our six categories, as a suspense account just acts as a temporary ‘holding’ account. 

It must end up with a nil balance once we’ve made our corrections, so therefore has no balance to go on either of the financial statements.

This means it doesn’t have an expected balance, so we just need to post the value of the difference between the TB columns to the side which is the same as the smaller column total. In this case that’s £6 on the debit side, like this:

The source of the trial balance imbalance

After some investigation, the imbalance in the TB has been traced to an error in the cash-book where the VAT column has been incorrectly totalled.

Note: the analysis columns are just shown on the credit side of the cash-book and explain what the expenditure was for.

Our thought process here is based on three questions:

  1. What’s happened?
  2. What should have happened?
  3. What correction(s) are needed?

Understanding the trial imbalance

Using our understanding of account categories, we can work out what’s happened, even though we already know some of it will be wrong.

Capture

Note: it may be helpful to read Understanding the cash-book or Posting the cash-book if you need to brush up your knowledge.

Now let’s look at what should have happened.

By comparing the two we can see what corrections we need…

If we need to show our corrections as journals we can easily now take the information from our ‘T’ account workings.

Ensure the journal balances and the total debits match the total credits.

In summary

Correcting errors is a challenging area to work in as we can be dealing with anything, mistakes are mistakes after all. Therefore, understanding the account categories and using a strategic thought process to tackle them, gives us the context and manageable steps to pretend we’re doing a jigsaw instead.

Note: Drawings are technically within the capital category as they reduce to amount owed by the business to its owner(s) but are posted into a separate account and work as the opposite and pair to capital.

Read more study tips from AAT:

Study tips: Balancing a trial balance and correcting errors with journals – Part 1

Posted by & filed under Foundation Certificate, Students.

This series focuses on balancing a trial balance, and correcting errors with journals, for AAT students working on the AAT Foundation Certificate in Accounting.

Study tips: Balancing a trial balance and correcting errors with journals series

It struck me the other day, whilst helping my four-year-old put together a jigsaw, just how important context is.

He attempted to dive into the pile of pieces hoping to make the right connections and whilst this approach worked briefly, he soon became frustrated and gave up, informing me that it was boring.

How often have you been told that accounting is boring? I like to switch the word boring for difficult, as this is often what we actually mean. However, when we place things in context and break them down into manageable tasks, they become more accessible, less difficult and not boring.

I persuaded Charlie to have a look at the picture on the box and that way he knew what he was trying to achieve. We looked at the pieces he had managed to fit together and matched them on the overall image. Then, by comparing individual pieces to the surrounding areas of the final picture on the box lid, he gradually built up his jigsaw – a floor sized dinosaur, in case you were wondering.

So, how does a dinosaur jigsaw relate to study tips for balancing a trial balance and correcting errors with journals?

Underpinning knowledge

This is the first of a two-part series and it’s about placing the bookkeeping that we learn at Level 2 in the wider context of the accounting that you’ll continue to study at Level 3 and beyond. 

You could just run down the accounts guessing which should be in the debit column and which in the credit column. You may get lucky and not have to move too many figures around to get your column totals to balance. 

Accounting students are good at maths, right?

So it shouldn’t be too difficult. Alternatively, you could learn what the picture on the box lid looks like.

Five categories of accounts

The first things to take note of are the five categories of accounts that make up any accounting system; expenses, income, assets, liabilities and equity.  Equity is made up of the accounts that record amounts to do with the owner(s) and, for the purposes of this illustration, is shown as drawings and capital:

Capture

All accounting transactions can be classified as one of these five categories. The debits and credits show the expected account balance for each category, plus they indicate the posting that would be needed to increase the balance of that type of account.

I use the word expected as a couple of accounts such as the bank/cash-book and VAT control account can have either a debit or credit balance. So even though we’d always like our bank account to be an asset, if it’s overdrawn it will have a credit balance and therefore will be categorised as a liability.

How it works

A utility bill is categorised as an expense, therefore we’d expect to see a debit balance on the electricity account. When we pay our bill we’ll need to debit the electricity to increase the account balance.

Obviously, this debit requires an equal, opposite and balancing credit. That will be posted to the bank account which, as long as we’re not overdrawn, is an asset.

Assets have debit balances so would be debited to increase them. 

Therefore, to decrease them, we just need to do the opposite i.e. post on the credit side.

Using opposites in this way works well for these categories as they also work in pairs (colour co-ordinated below). Therefore, you only need to learn half of them to know them all.

Be careful of returns. Sales returns will have a debit balance because they are the opposite of sales not because they are an expense. Purchase returns work in the same way. They’re still categorised as an expense, but they reduce the value of the purchases so will have a credit balance.

Drawings and capital don’t have examples as they can only be drawings and capital accounts. They work as a pair as they are both equity accounts that specifically relate to the owner(s) of the business.

Financial statements 

The final piece of our jigsaw completes our context as it shows us that two of the account categories will eventually make up the Statement of Profit and Loss (SPL) and the other four the Statement of Financial Position (SFP).

The SPL simply deducts expenses from income to calculate whether a business has made a profit or a loss. It’s a historical statement that covers a financial period, usually the accounting year.

The SoFP is an expanded version of the accounting equation, as it shows what the business owns in the way of assets less what it owes in liabilities. The difference between the two is the capital and can be shown as: A – L = C.

The SFP has a balancing section at the bottom which explains the closing capital figure, which is opening capital (closing capital from the previous year) plus this year’s profit or loss (from the SPL) less drawings.

The SFP just shows us the value of the business on the day it was produced.

In summary

Whilst you don’t need to use this final bit of information at Level 2, it gives you the context of where you’re heading.

In part two we’ll use this ‘box lid’ image to help us work out what has caused a trial balance to be imbalanced and what journal entries are needed to correct it.

Read more on studying AAT: 

Browse the full range of AAT study support resources here

Study tips: applying the Level 2 Certificate in Accounting to a business scenario (part 2)

Posted by & filed under Foundation Certificate, Students.

This is the second in a series of articles where we are exploring some of the trickiest areas at Level 2. 

Study tips: Applying the AAT Level 1 Certificate to a business scenario series

We are working through a business scenario to illustrate how the AAT Level 2 in Accounting can be applied, in practice, to the typical day-to-day tasks of an accounts assistant.

Let’s re-join Zairah at the end of November when she is making the final entries to the sales ledger control account (SLCA) so that she can reconcile it as part of JDB Supplies’ month end processes.

As the SLCA is an asset account, Zairah knows it should have a debit balance. She also knows that transactions that increase the balance should be entered on the debit side and transactions that decrease the balance should be entered on the credit side. The first entry she needs to make is from the sales daybook (SDB):

She needs to ask herself:

  • Q – Which is the right figure to use from the SDB extract?
  • A – The total because it includes the VAT and that’s the figure customers will pay.
  • Q – Will the transaction increase or decrease the SLCA?
  • A – Increase as the SDB lists credit sales invoices and the SLCA records how much the credit customers owe JDB Supplies.

Therefore £47,603 should be debited to the SLCA. Zairah has made the entry from the SDB and now needs to make another from the sales returns daybook (SRDB)

The same questions apply:

  • Q – Which is the right figure to use from the SRDB extract?
  • A – The total because it includes the VAT. Customers will have been invoiced for a VAT inclusive figure so any credit notes must refund the VAT.
  • Q – Will the transaction increase or decrease the SLCA?
  • A – Decrease as the SRDB lists the credit notes that have been issued to credit customers when they return goods and this reduces the amount that is owed to JDB Supplies.

Therefore £918 should be credited to the SLCA.

Updating the SLCA

Having posted both daybooks, Zairah now needs to update the SLCA for the bank receipts. Bank receipts are entered in the debit side of the cash book as they increase the cash book balance.

Zairah is aware that a common mistake when posting entries to control accounts is to enter them on the wrong side. However, she knows that double entry accounting is based on the fundamental principle that total debits equal total credits.

Therefore, as £60,357 has been debited to the cash book then the same amount must be entered in the credit side of the SLCA. She can double check her thought process by thinking through the purpose of the transactions – the money was received from credit customers to pay the invoices that were originally listed in the SDB and posted to the debit side of the SLCA. Customers no longer owe that money so the entry in the SLCA needs to decrease its balance and that means posting it to the credit side.

Zairah is now in a position to balance the SLCA:

Her next task is to reconcile the sales ledger with the SCLA. As the SCLA has a debit balance, Zairah expects the individual customer accounts in the sales ledger will have debit balances as well, although she is aware that credit balances are possible.

Zairah totals the debit balances and then deducts the credit balances to calculate the correct ledger figure.

When things don’t add up

The total of the sales ledger balance is £44,280 which is £501 lower than the balance on the SLCA. Zairah knows they should be the same.

JDB Supplies has a policy that all control account discrepancies should be investigated and then reported to the finance team manager. Zairah knows there could be a number of possible reasons why the amounts don’t match so she tries to work out what might result in the SLCA balance being more than the sales ledger total.

Some possible explanations are:

  • Omissions
    • An omission of a posting from the credit side of the SLCA
    • An omission of a posting from the debit side of the sales ledger
  • Duplication
    • If a transaction had been posted twice to the debit side of the SLCA
    • If a transaction had been posted twice to the credit side of the sales ledger
  • Entered on the wrong side
    • Correctly entering a transaction on the debit side of the SLCA but then incorrectly posting it to the credit side of the sales ledger

Explaining an account discrepancy

Zairah found the cause of the difference eventually and emailed Ian her manager:

Hi Ian,

I found a £501 discrepancy when I reconciled the SLCA with the sales ledger today. The control account balance is more than the sales ledger total, so I thought there might be an omission, duplication or transaction entered on the wrong side somewhere.

I started looking for these kinds of transactions and noticed that a £501 sales invoice had been correctly posted to the debit side of the SLCA but that it has not been entered into JU Weavers’ account in the sales ledger. Once this omission is corrected and the individual customer account has been updated, the SLCA and sales ledger will agree.

If you require any more details then please do not hesitate to contact me.

Zairah proof-read her email before she sent it, correcting spelling mistakes and amending some of her wording to ensure the information was accurate, technically correct and free from spelling and grammatical errors.

In summary

Zairah has dealt with some of the areas many struggle with at level 2.

Read the next article of this series, where we’ll see how Zairah uses double entry techniques and journals to correct the error she found.

Read more on the Level 2 Certificate in Accounting qualification;

Browse the full range of AAT study support resources here

10 principles for good spreadsheet practice – Part 1

Posted by & filed under Accountancy resources, Excel tips.

This two-part series is based on an ICAEW guide, 20 Principles for Good Spreadsheet Practice, which can be downloaded from this page.

We start by considering the overall standards and approach your business should use in order to minimise mistakes and avoid wasting time.

1. Determine what role spreadsheets play in your business, and plan your spreadsheet standards and processes accordingly

If you have spreadsheets that play a key or critical role in your organisation, ensure that they’re developed and tested, managed and monitored to an appropriate level. Spreadsheets that form part of an organisation’s key business processes will need to be managed differently from ad hoc spreadsheets for short-term use by an individual.

2. Adopt a standard for your organisation and stick to it

This might be one that’s developed in-house, or adopted from outside and shared with other organisations. A common standard within an organisation facilitates collaboration, aids understanding and saves development time.

The standard should include, among other things, consistent conventions on use of cell formatting. This may be achieved by using the ‘cell styles’ feature as illustrated below.

3. Ensure that everyone involved in the creation or use of spreadsheets has an appropriate level of knowledge and competence

For anyone designing, developing or maintaining (as distinct from just using) a spreadsheet, this will include:

  • awareness of the range of functions available
  • clear understanding of such basic concepts as relative and absolute cell references
  • and an appreciation of the importance of carefully checking the results of functions.

4. Work collaboratively, share ownership, peer review

The extent of collaboration and review needed will depend on the size and complexity of your organisation and of each project.

5. Before starting, satisfy yourself that a spreadsheet is the appropriate tool for the job

Spreadsheets are not the answer to every problem. A lot of time can be wasted, and errors caused, by using a spreadsheet when some other application would be more appropriate.

Very often the more appropriate tool might be:

  • a word processor (if it’s a table of text)
  • a database (if it’s processing large quantities of similar data items)
  • or an existing software package (if it’s to undertake well-established processes, such as bookkeeping, for which specialist packages are readily available).

Even if a spreadsheet is still the right answer it’s worth looking for existing templates before starting a new one from scratch.

6. Identify the audience. If a spreadsheet is intended to be understood and used by others, the design should facilitate this

If the only ‘audience’ envisaged is yourself, you might perhaps justify less explanation and help. Even so, good documentation is helpful if you come back to a spreadsheet a while after you created it; and many spreadsheets come to have a much wider audience than originally intended.

Ensure that adequate instructions, validation and help are included to promote ease of use and avoid input errors. Even if parts of a spreadsheet are ‘locked’, keep calculations visible.

7. Include an ‘About’ or ‘Welcome’ sheet to document the spreadsheet

This should give such basic information as author, purpose, version number, and description of general approach. Also include explanations of colour codes and other formatting conventions, any sources of input data (with, where appropriate, hyperlinks to the original data), and any macros and what they do.

The more complex the workbook, or the more it needs to be shared, the greater the requirement for good documentation.

Conversely, a simple spreadsheet to be used only by the person who designs it might require less rigorous documentation.

8. Design for longevity

Design spreadsheets to adapt to any reasonably foreseeable future changes in values (tax rates, etc) or volume (eg, items in a data set) of data used in calculations.

However, the need for adaptability should be balanced against following the Agile principle of ‘The simplest thing that could possibly work’.

In the first example above, if an organisation were to add a new department, a new worksheet could be added anywhere between DeptA and DeptD (DeptC1, for instance), and there would be no need to change the formula as the new worksheet would automatically be picked up by the formula. In the second example above, the formula would need to be changed every time a new worksheet is added.

9. Focus on the required outputs

Work backwards: be clear about the purpose of the spreadsheet, what outputs achieve that purpose and therefore what inputs and logic are required to derive the outputs.

10. Separate and clearly identify inputs, workings and outputs

A properly structured spreadsheet will be easier to understand and to maintain. If pivot tables are used, it may be possible to relax this principle, but clarity remains crucial. Design to ensure that any input should be entered only once.

Read part 2 now for more essential principles for good spreadsheets.

Browse the full range of AAT study support resources

How BHP are revolutionising audit with data analytics

Posted by & filed under Data analytics, Members.

From AAT Apprentice to Data Analytics Manager, Ellie Dignam gives us an insight into the pioneering use of data analytics in audit at BHP.

“Data Analytics is fast becoming a buzz word in the industry, and over the last year I’ve definitely noticed more of our apprentices are aware of data analytics and what it means in the accounting world,” Dignam says.

BHP’s apprentices are a key part of the business, and get involved in data analytics as soon as they start their training contract, says Paul Winwood, Head of Audit at BHP.

“Our apprentices are normally at the coal face of auditing; they’re onsite with clients and have significantly helped us drive this change in working and audit methodology,” he notes.

“They bring fresh, new ideas to BHP and we always encourage them to consider different ways of working.”

Learning on the job

Ellie Dignam went down the accounting apprenticeship route herself, bypassing a university degree altogether. She joined BHP accountancy firm as an apprentice 7 years ago and studied AAT level 3 and level 4, and is now a Chartered Accountant.

Dignam thoroughly enjoyed her apprenticeship. “I really loved learning on the job, and the challenge of maintaining a full-time role whilst studying really suited me,” she says.

“No two days were ever the same and I was able to work in different locations, at various types of business, including PIE’s, charities and academies, whilst I studied.”

Dignam’s role has grown significantly alongside BHP’s growth, and she’s now responsible for training the firm’s apprentices in data analytics within audit and introducing them to Inflo software.

Evolving role of data analytics

“I report to the audit partner group and work with them to embed data analytics into the firm’s methodology and processes,” she says. “I manage the data analytics across all audit staff, spread over five offices.”

So what does a Data Analytics Manager do? Dignam’s responsibilities include:

  • liaising with clients
  • training new staff and apprentices
  • resolving data integrity issues
  • contributing to tenders and pitches
  • and providing insights and special reports.

Dignam also co-leads BHP’s internal Innovation Team and in 2019 they embarked on a further 20 projects.

Why Inflo for data analytics?

It takes things to a new level. The key benefit of using data analytical tools in auditing is the way it helps us track and identify unusual activity, trends and outliers, along with any risky transactions, Winwood says.

“This means our clients get greater assurance over their financial processes and improved audit quality, because the audit is focussed on key areas of risk.”

Winwood says the Inflo data analytical software they’ve invested in has been incorporated into their audit methodology at every level. “It helps provide us with bespoke insights for clients, which add value to the overall audit process,” he notes.

One of the major issues for any data analytics platform is getting the financial data from the clients’ accounting system into the data analytical tool.  “But a key benefit of Inflo is the ability to extract this data across an extensive range of accounting packages in a flexible and easy manner.”

Once the financial data is obtained, they can then transform it into usable formats for the audit team to use, which also saves the clients time by not having to provide numerous reports.

“In addition to aiding our testing of management override, we use the software as part of our revenue testing to understand what transactions are impacting revenue outside of the normal recognition path (sales, debtors, VAT and cash),” says Winwood.

They can then offer key performance indicators and benchmark it against other similar businesses in their industry and region.

What’s next for data analytics?

“Going forward, we see audit becoming more of a specialised service because of the pressure to adopt evolving technologies like artificial intelligence, blockchain and robotic process automation,” Winwood says.

“Data analytics is the first real step on the the path towards a more technology-centric industry. And with the exploding growth in data being collected, through ever-increasing connectivity across platforms, there will be more and more opportunities to expand the range of data analytical tools in the future.”

In summary

AAT graduate, Ellie Dignam, has risen through the ranks at BHP since her apprenticeship. And as Data Analytics Manager, she’s now at the forefront of BHP’s move towards a more future-focussed initiative.

Bucking the trend, BHP are even recruiting more, as their integration with technology increases. Apprentices are brought on-board with data analytics from the get-go so they’re hitting the ground running.

BHP are making it look easy; are you ready?

Further reading:

Study tips: applying the Level 2 Certificate in Accounting to a business scenario (part 1)

Posted by & filed under Foundation Certificate, Students.

This is the first in a series of articles in which we will explore some of the trickiest areas at AAT level 2. 

Study tips: Applying the AAT Level 2 Certificate to a business scenario series

We’re going to work through a business scenario to illustrate how the AAT Level 2 Certificate in Accounting can be applied, in practice, to the typical day-to-day tasks of an accounts assistant.Let’s join Zairah at 9am on a Tuesday. She has just arrived at the accounts office where she works as a member of the finance team for JDB Supplies. The company works in a four-week cycle to match their financial periods. Zairah has to plan her work to include a number of set tasks each day. These can occur on a daily, weekly or monthly basis. She also has to accommodate non-routine tasks, her attendance at College and lunch breaks.The team member who normally completes the cash book was ill yesterday so Zairah was asked to do it instead. The deadline is 10am today. She didn’t have enough time to accommodate it yesterday but was able to schedule it to start at 9am this morning so that it will be completed by 10am as required.Zairah’s colleague is still ill but his work needs to be completed. Zairah has been asked if she could accommodate an hour of processing invoices that needs to be done by 2pm.Looking at her plan for today she can easily see that she has a spare hour. However, the invoices need to be processed by 2pm, so the available slot between 3pm and 4pm is too late. Therefore Zairah needs to see if any time can be made earlier in the day without affect her other deadlines.
  • She already knows that the cash book task can’t be moved.
  • The cheques need to be in the post by 11am so there’s no flexibility there either.
  • She will finish reconciling the statements by 12 noon though and the deadline isn’t until 1pm. However, her lunch break is fixed so if she processes the invoices instead of reconciling the statements, she will have missed the statements’ deadline when she gets back from lunch.
  • Cost coding is Zairah’s last task and unlike all her other tasks for today, it is a monthly one. The schedule shows it has to be done on Tuesdays and that it takes two hours, but it doesn’t have a time deadline.
Therefore, if Zairah moves the code coding to between 2pm and 4pm then she’ll be able to start processing the invoices at 1pm and have the task complete by the 2pm deadline.Now that her day is set, Zairah starts updating the cash book, which is analysed and treated as part of the company’s double entry system i.e. integrated.

Updating the cash book

JDB Supplies are VAT registered and deal with both cash and credit transactions. When Zairah looks at the cash book she finds that all the credit transactions have been posted, as shown below, and that only the cash sales and purchases are outstanding.There is a cash purchases to enter for £231.12 which was paid to Sunil Ltd. The invoice is marked as VAT inclusive and was paid directly out of the bank.Zairah needs to ask herself a number of questions to help her ensure she enters the figures correctly into the cash book:
  • Is the transaction increasing or decreasing the cash book balance?
    • Decreasing as it is a payment so it needs to be entered into the credit side.
  • What was the method of payment?
    • It was paid directly out of the bank so the Bank column should be used.
  • Was it a cash or credit transaction?
    • It was a cash transaction, which means it’s the first time it has entered the accounting system and needs to be separated into the Net value of the purchase and the VAT.
VAT terms have always confused Zairah, so she checks with another member of the finance team, who tells her:
  • VAT inclusive means the figure includes the VAT, in other words it is the Total amount and is sometimes refer to as the Gross.
  • VAT exclusive means the figure excludes the VAT. This is also known as the Net amount.
Zairah knows it’s really important that she understands these terms so she can correctly identify which type of figure she is working with because the calculation for each is different.As this is a VAT inclusive figure, the calculation she needs is:
  •                 Inclusive amount ÷ 120 x 100 = Net amount         £231.12 ÷ 120 x 100 = £192.60
  •                 Inclusive amount – Net amount = VAT                     £231.12 – £192.60 = £38.52
Now she has the figures, she just needs to ask one more question:
  • How should the transaction be analysed?
    • As this is a cash purchase it needs to be analysed to both the VAT and cash purchases columns.
Here is the cash book after the posting has been made. The analysis columns have been highlighted.

In summary

Zairah has a busy day ahead and in this first hour she has dealt with some of the areas many of us struggle with at Foundation level.More detailed articles are available on how to calculate VAT as well as understanding the cash book and how to correctly post cash books.In the next article of this series we’ll see what Zairah needs to do to reconcile JDB Supplies’ sales ledger control account to the sales ledger and write an appropriate email to her manager.Dive into more AAT Level 2 topics here;

Study tips: What actually is standard costing?

Posted by & filed under Professional Diploma, Students.

We dive into the topic of standard costing for AAT Professional Diploma in Accounting students, and look at using standard costing to create a budget, and monitor it.

Standard costing is used by organisations to calculate the standard cost of products and forms the basis of selling prices and budgets. However, it differs from general budget setting because it concentrates on cost units, in other words the cost of individual products, as opposed to the costs of the business’s sections or departments.

Elements of standard costing are included in all the AAT management accounting units at all levels, although they’re not named as such until professional level, because standard costing is used in all stages of the budgetary process; planning, decision making, monitoring and control.

Standard costing at each AAT level

Let’s think about manufacturing a pair of shoes. At foundation level we would have considered the three elements of cost: materials, labour and overheads, classified them into direct and indirect costs, and categorised them as fixed, variable or semi-variable.

If our shoes require half a metre of leather and two soles per pair, then these are the raw materials and will vary in direct proportion to production. Labour cost can be both direct and indirect, for example, production workers and supervisors. Rent and rates for our premises are examples of fixed costs which are either recovered via an overhead absorption rate if we are using absorption costing or covered by product contribution if we are using marginal costing.

By combining our understanding of cost behaviour, the costs/rates and a detailed understanding of the quantities required for production, we can create a cost card, in this case using marginal costing:

Because all the elements shown are variable costs, the rates are multiplied by the quantities required to calculate the total cost of each element.  These are combined to give the total marginal cost of making a pair of shoes.

This is the standard cost of one unit and is the fundamental basis of budgetary planning. For example, if we are planning to manufacture 500 pairs of shoes then it is easy to use the cost card to calculate that the marginal cost will be £9,625 in total (500 x £19.25).

However, in order for a budget to be accurate, the costs and rates must be up to date and the production quantities and times accurate. There will obviously be discrepancies if a machine breaks down and our workers are idle for a period of time or there is a shortage of materials and we have to use lower grade leather that results in higher than normal wastage.

Four standard types for variation

There are four types of standard that allow for some variation, so it’s important to be clear which is being used:

  1. Ideal – assumes full labour efficiency with no wastage of raw material
  2. Normal – is the current expected cost of a product and allows for a degree of wastage and inefficiency
  3. Target – allows for normal working conditions, with allowances made for waste and inefficiency, but is set at a level an organisation wishes to achieve
  4. Basic – is based on historical information so enables comparisons over time

Let’s say that our standard is ‘normal’ and was used to set a budget for the manufacture of 500 pairs of shoes. This means that in our planning we have allowed for some expected waste and inefficiency:

Monitoring budgets is the next stage and this is done by comparing the budget to the actuals using variance analysis. 

Monitoring budgets

If actual production was 600 units, then 100 more pairs of shoes were produced than planned, this will result in higher total variable costs but will not affect any budgeted fixed costs due to the costs’ behaviour.

At advanced level we learned how to flex budgets, in order to remove the effect of changes in production volume so that these predictable variations do not obscure other differences, and to calculate basic variances:

The key objective of monitoring budgets is to understand why the actuals are different to the flexed budget so that decisions can be made to control costs that vary significantly from the standard and bring them back on track.

Understanding the variance

The variance for leather is £200 adverse, meaning that the spend on this material was more than planned. The question though is why. Has more been used, or wasted, than expected, or did it cost more per metre than planned?

Standard costing allows variance analysis to drill down into usage and price variances for materials and efficiency and rate variances for labour and the idle time variance to provide better explanations of the differences. Maybe there was a shortage of materials and we used different leather from planned, which was harder to work with, so took more time and resulted in more rejects. This could also explain the adverse labour variance.

Acting on the variance

Let’s assume this was the case. First, we need to decide if this is a significant variance or is within the ‘normal’ standard’s tolerances. If it’s deemed significant, we then need to know if the situation is temporary or permanent. If the issue is now resolved, no action will be required.  However, if it isn’t, we might need to look for a new supplier or new materials.

Maybe production processes will have to be amended so they are more suited to the different grade material and training put in place for production staff.

Finally, we should review the standard. If a permanent change is made to a cost or quantity on a product’s cost card, it should be reflected in the normal standard to ensure it’s relevant and accurate, bearing in mind it is the benchmark to which our actuals are compared.

Read more study tips for AAT level 4:

Browse the full range of AAT study support resources

Study tips: Limiting factors – using standard costing to plan for production constraints

Posted by & filed under Professional Diploma, Students.

Many manufacturing organisations use standard costing to calculate the expected costs of products. Standard costing is different from general budgeting as it focusses on cost units. In other words, the cost of what the business produces, as opposed to the costs of the business’s sections or departments.

Standard costing can be used in all stages of the budgetary process; planning, decision-making, monitoring and control. In this article we consider how it can be used to help plan production when resources are limited.

Limiting factors when planning production

A limiting factor is anything that restricts an organisation’s ability to maximise its sales due to constraints in demand or the availability of production resources. Strategically, the most significant limiting factor for any organisation is money. But practically, day to day capacity constraints are usually the result of shortages in labour, machine hours or materials.

Using standard costing alongside budgeting

Let’s suppose we’re the budget accountant for a company that manufactures specialist windscreen wipers. Standard costing is used alongside budgeting because the components for its products are identical and the manufacturing process is repetitive. The company makes a product coded WR450 and one unit requires:

  • direct materials – 0.75kg at £5.44 per kilo
  • direct labour – 30 minutes paid at £15 per hour
  • fixed overheads – absorbed at £20 per direct labour hour

Standard costing establishes, in detail, the standard cost of each component of a product and then calculates its total standard cost. For WR450 that is:

The information on the cost card can be used in the preparation of budgets, and simplifies the calculations required. For example, planned production of 1,000 units will cost £21,580 (1,000 x £21.58).

Now let’s consider another product, PT620.  According to its standard cost card, each unit requires:

  • 0.5kg of materials
  • 20 minutes of direct labour
  • 5 minutes of machine time

The budgets have been approved and show:

  • Maximum sales demand is 5,600 units
  • 2,500 kg of materials is available
  • 1,600 hours of direct labour time is available without using overtime
  • 500 machine hours are available

The standard costing data can be used to calculate the resources needed in order to fulfil the sales demand.  The requirements are:

  • 2,800kg of materials
    • 5,600 units x 0.5kg
  • 1,867 labour hours
    • 5,600 units x 20 minutes ÷ 60 minutes*
  • 467 machine hours
    • 5,600 units x 5 minutes ÷ 60 minutes*

Free Excel webinar

Learn how to present effectively in Excel from expert Deborah Ashby. To view the recorded webinar please register your details below

View webinar

Breaking down the limiting factors

We said at the start of this article that a limiting factor is anything that restricts an organisation’s ability to maximise its sales due to constraints in demand or the availability of production resources. We can easily see, by comparing the resources from the budgets to the standard requirements, that both the amount of materials and labour hours available are insufficient for production levels that will meet the sales achievable.

So, what production levels are possible?

  • There’s enough material available to make 5,000 units
    • 2,500kg ÷ 0.5kg
  • There are enough labour hours to make 4,800 units without the need to use overtime
    • 1,600 hours x 60 minutes ÷ 20 minutes
  • The machine hours available are sufficient to make 6,000 units
    • 500 hours x 60 minutes ÷ 5 minutes

The calculations show production levels ranging from 4,800 to 6,000 units when each component is viewed in isolation. However, we need to decide how many units can actually be produced and consequently sold, given the overall circumstances.

So how much can we produce and sell?

There are enough machine hours to make 6,000 units. However, there’s not enough material or labour for that production level and even if there was, there would be no point making more than the 5,600 units which we can actually sell. 

That leaves three production constraints; the materials, labour hours and sales demand. Production is constrained the most by the availability of labour because there are only sufficient hours to make 4,800 units. Unless circumstances change, 4,800 units is the maximum sales volume possible.

If overtime hours can be utilised the situation will change, and sales are then constrained by materials. The sales achievable would increase to 5,000 units.

In summary

The results of this limited factor analysis will enable management to make well-informed decisions. It could be that there’s nothing they can do, and the loss of sales and consequent profit is accepted. Or they may be able to authorise some overtime and source some extra raw materials. Whilst these factors are unknown in our scenario, they’re representative of decisions taken regularly in the work place where calculations with respect to limiting factors are common-place.

* rounded up to the nearest whole hour.

Read more study tips for AAT level 4:

Browse the full range of AAT study support resources here.

AAT Tutors going the extra mile

Posted by & filed under Training provider conference, Training providers.

With the Training Provider Conference 2020 fast approaching, we met with Tutor of the Year 2019, Karen Walker to find out what makes a great AAT tutor.

I’ve been teaching for 15 years and I can’t see myself doing anything else. I began as a student on an AAT course in 2002, and now teach all units for AAT Levels 2, 3 and 4. It’s a really lovely environment to be in. The students are hard-working and dedicated.

What do you do differently as an AAT tutor?

Some of our learners are returning to work after having a family, or wish to change career. This can be an anxious time.

The environment and course flexibility we offer at Abingdon and Witney College enable our students to be successful and confident. They soon realise their full potential to become the best they can be and strive for distinctions.

We have great contacts and opportunities for students that want to gain work experience, especially if they’re unsure if they want to work in industry or in practice.

We advertise jobs internally in the classroom and students have contacts too. Student Services at the college is brilliant and will help them with CV writing and interview prep to make sure they’re really ready to apply.

What makes you stand out?

I love to teach, and work with students to ensure they understand, not only the concepts but practical applications as well. This means they go into a work situation confident that they can apply their new skills.

I feel like I’m giving something back through teaching. I’m really motivated and the learners are too.

What are your main goals with students?

To provide an enjoyable and challenging environment with excellent support and motivation.

It can be an emotional time when they finish. We hold an awards ceremony every year for all AAT students; this will be the 10th year we’ve done it and this year we’ll have 120 attendeees.

Some will be celebrating their first-ever academic qualification.

We take lots of pictures and make them feel really special which is how I want them to feel.

I keep in touch with so many of them and they come back to do inspirational talks to the current learners so that they can see the success that the qualifications can give you.

What do you think makes a great tutor and training provider?

Giving a lot of support. In education, what makes all the difference is looking at each individual. It’s easy to teach a subject but students have so many other things happening, especially adult learners. They work and have their own families so it’s knowing what they have going on outside of the classroom and supporting them through that too. They really thrive with kindness and understanding.

Most students are going to be studying over the weekend, particularly if it’s before an exam, so they want reassurance that they can speak to someone if they need to.

We have a virtual learning platform (The Hub), which students can access 24/7 and I also provide students with support face-to-face or by email as they often have questions. We give 1-2-1 tutorials on a regular basis, some have more than others depending on their needs.

We have lots of varied courses (daytime and evening) so if they’ve missed a session they can come in to catch up or for an extra session.

They do the course because they really want the qualification. We also offer blended learning (on-campus and online) which started in the last couple of years. We listen to students and what they want and make the changes.

What do you love about the AAT Training Provider conference?

I love the interactive workshops they put together and it’s amazing for networking.

You can talk about the changes you’ve made and the new things you’ve done. It’s great to get some new knowledge too, especially when there have been changes and you’ve got that chance for a two-way conversation so you can ask questions.

It’s a great time to celebrate everyone’s hard work and dedication to the AAT qualification.

The AAT Training Provider Conference

The AAT Training Provider Conference 2020 provides a great opportunity for training providers, apprentices and students to get involved in their AAT community. And most importantly, reward yourself for your year so far.

At this year’s conference, on Thursday 4th and Friday 5th June in Stratford-upon-Avon, we’ll be hosting talks from a range of speakers, and will also be giving you an insight into AQ2021, and how you can deliver this exciting new syllabus.

Book your place at the Training Provider Conference, June 2020

Further reading on AAT tutors leading the way;

Variety is the secret sauce for this AAT training provider

Posted by & filed under Training provider conference, Training providers.

In the countdown to the Training Provider Conference in June 2020, we met with previous winner Angela Renshaw of The Apprentice Academy, to hear what makes them such a success, and what’s on the cards for this year’s conference.

Angela Renshaw is a Programme Manager for The Apprentice Academy in Manchester, winner of the Apprenticeship Training Provider of the Year 2019.

Angela first became an AAT Assessor back in 2005 for a small training provider, which she grew to around 120 learners. They went on to win Small Training Provider Of The Year in 2016.

Looking for a new challenge, she joined The Apprentice Academy in 2017, initially to help set up the apprenticeship standard. They only had 8 AAT learners and subcontracted the AAT delivery at the time.

Angela helped grow the programme, before eventually becoming Programme Manager and redesigning the course as a whole. They now have around 160 learners and won Apprenticeship Training Provider Of The Year 2019.

What you do differently with your training?

We like using games and a lot of peer-to-peer interaction. We focus on keeping sessions interesting, interactive and innovative.

The learners attend for half a day each week but, before they start, we get them hooked with a two-day boot camp. This has theory on the first day and an ‘Apprentice-style’ challenge on the second.

For example, for accounting standards we’ll split them into groups, give them some headline acts of what to research and ask them to present back. Then we give the class an exam-style question based on the standard they’ve learnt.

This works especially well for Level 4 Professional Diploma in Accounting students who tend to hate the written work (they’re there for the numbers!). We’ve definitely noticed they can switch off if you start regurgitating legal info.

We also play Kahoot! quizzes with the fastest finger on the phone.

Everyone gets really involved and we give out prizes for the winners. This gets really competitive and creates a great atmosphere in the classroom. 

Next up, I’m trying to develop an app which will tie in with Ofsted’s love of building blocks and memory recall. The learners will receive questions during the week about the week they’ve just completed and also prompt them to revisit lessons from previous weeks. We do it via email/weekly webinars at the moment but an app would be better.

What makes you stand out as an AAT Training Provider?

I like to home-grow staff. I take people from industry and teach them how to engage learners.

I feel it’s harder to unpick bad habits than take someone who’s a blank canvas. People from industry are quite forthcoming and enthusiastic, and we run together.

I have six people on my team and one person even came through as a learner to Assessor, and will be Quality Lead soon. I like to see learners and staff progress. Our staff rarely leave as they know we’re buying into them.

As a training provider, we really care about the learners. They all get an individual learning plan. Online students have weekly webinars and we follow up each webinar with a personalised phone call so we can help them with anything they’re struggling with.

If learners in the classroom need extra help, they’ll be invited to a 1-2-1 with the tutor or coach (I do these too) or invited to a drop-in class where they have access to a tutor who will work through their weaker areas.

We also have an onsite counsellor to help the learners with getting back on track if they have personal problems or mental health issues.

I’m always coming up with new ideas and ways of doing things. The Apprentice Academy gives me the autonomy to do that and is willing to invest. I love working here.

What are your main goals with students?

The key thing for me is the change from the apprenticeship framework to standard.

On the framework there was little differentiation between someone who did an AAT qualification on its own, or as part of an apprenticeship. They both passed the exams and the apprentices just had to do an Employment Rights and Responsibilities workbook.

Now for the apprenticeship standard, they have to understand why they’re doing their job. It’s broken into knowledge, skills and behaviours. For skills and behaviours, they have to complete a portfolio. They don’t just know the process, I want them to know why they’re doing a process. They’re coming out as better accountants.

It’s a massive confidence builder. They have to have an hour-long discussion with the AAT at the end as well. We conduct professional discussions all the way through to prepare them up for these, which really builds their confidence for something that seems daunting initially.

It’s great to see the confidence growth from beginning to end. They go from being shy and reserved to talking directly to the AAT.

What do you think makes a great tutor and training provider?

Those that care – not just turn up, teach and go home.

We do what we say we will, and commit to the learners. We also make ourselves available outside of work hours and take each student on an individual basis.

What do you love about the AAT Training Provider conference?

The conference workshops are really informative and it provides a great opportunity to network with other people and share best practice.

You get so much out of the breaks from talking to other training providers. You’ll get chatting to people that you wouldn’t normally cross paths with, because we’re spread out all over the country. It’s also a lot of fun.

I’m running a couple of workshops at the conference on Preparing Students for EPA (Levels 3 & 4), so make sure you book in for those.

The AAT Training Provider Conference

The AAT Training Provider Conference 2020 provides a great opportunity for training providers, apprentices and students to get involved in their AAT community. And most importantly, reward yourself for your year so far.

At this year’s conference, on Thursday 4th and Friday 5th June in Stratford-upon-Avon, we’ll be hosting talks from a range of speakers, and will also be giving you an insight into AQ2021, and how you can deliver this exciting new syllabus.

Book your place at the Training Provider Awards June 2020

Further reading on inspiring AAT tutors: