Download the What is a Budget podcast here.

AAT will also be releasing their Budget podcast on Wednesday 23 June on CPD Interactive. The budget podcast will be available here.

All you need to provide for this membership benefit is a MP3 player or a computer with Windows Media Player, Quicktime, iTunes or Real Player installed.

To download each podcast, right click each link and save them to your target location such as your computer’s hard drive or direct to a portable MP3 player, or just left click the link and the player will open and start to play the file on your computer straight away. The length of each chapter or download is included in brackets.

Opinions and comments expressed within CPD Interactive are those of their authors alone, and do not necessarily reflect the opinions of the AAT or any AAT employee. The AAT is not responsible for the content of such opinions and comments.

The Association of Accounting Technicians (AAT) provides CPD Interactive to facilitate its members’ free discussion of accounting issues. Persons using CPD Interactive must not post offensive or defamatory material. Breach of this condition may result in disciplinary or legal action. If you are in doubt as to whether material is suitable for posting, please telephone the number below to discuss this with a member of AAT staff, or raise your query by email.

The AAT is unable to monitor material prior to its posting but monitors the content of this site daily and will remove any offensive or defamatory material when it is identified. However, there is potential for such material to be displayed for some time before it is discovered by the AAT. If you see any material that you think may be offensive or defamatory, please bring it to the attention of the AAT by telephoning the number or emailing the address below.

For assistance, please telephone 0845 863 0794 or email cpdinfo@aat.org.uk.

This is a small example of the material available to support you in your career as a full or fellow member of the AAT through your MyAAT account.

What you need to know: Basics of VAT (18.20)

The AAT are also running a series of related mastercourses this Spring that you or your staff may like to attend. A full list of the events can be found below and you can click on the event that interests you for further information and to book.

If you would like further information and to book your place on the Advanced VAT course and other VAT related events please click on the event below.

Advanced VAT, Southampton – 17 March
VAT matters – what you need to know, Birmingham – 24 March
Advanced VAT, York – 17 May
Topical VAT issues, London – 30 June

You may also be interested in:

Podcast: What you need to know – Independent Examinations
Podcast: Advanced VAT
VAT rate reversion

All you need to provide for this membership benefit is a MP3 player or a computer with Windows Media Player, Quicktime, iTunes or Real Player installed.

To download each podcast, right click each link and save them to your target location such as your computer’s hard drive or direct to a portable MP3 player, or just left click the link and the player will open and start to play the file on your computer straight away. The length of each chapter or download is included in brackets.

Opinions and comments expressed within CPD Interactive are those of their authors alone, and do not necessarily reflect the opinions of the AAT or any AAT employee. The AAT is not responsible for the content of such opinions and comments.

The Association of Accounting Technicians (AAT) provides CPD Interactive to facilitate its members’ free discussion of accounting issues. Persons using CPD Interactive must not post offensive or defamatory material. Breach of this condition may result in disciplinary or legal action. If you are in doubt as to whether material is suitable for posting, please telephone the number below to discuss this with a member of AAT staff, or raise your query by email.

The AAT is unable to monitor material prior to its posting but monitors the content of this site daily and will remove any offensive or defamatory material when it is identified. However, there is potential for such material to be displayed for some time before it is discovered by the AAT. If you see any material that you think may be offensive or defamatory, please bring it to the attention of the AAT by telephoning the number or emailing the address below.

For assistance, please telephone 0845 863 0794 or email cpdinfo@aat.org.uk.

What you need to know: Independent Examinations (7.00)

If you would like further information and to book your place on the Independent Examination and Charity accounting mastercourse please click on the event below.

Independent Examination and Charity accounting, London 26 June

You may also be interested in:

Podcast: What you need to know – Basics of VAT

All you need to provide for this membership benefit is a MP3 player or a computer with Windows Media Player, Quicktime, iTunes or Real Player installed.

To download each podcast, right click each link and save them to your target location such as your computer’s hard drive or direct to a portable MP3 player, or just left click the link and the player will open and start to play the file on your computer straight away. The length of each chapter or download is included in brackets.

Opinions and comments expressed within CPD Interactive are those of their authors alone, and do not necessarily reflect the opinions of the AAT or any AAT employee. The AAT is not responsible for the content of such opinions and comments.

The Association of Accounting Technicians (AAT) provides CPD Interactive to facilitate its members’ free discussion of accounting issues. Persons using CPD Interactive must not post offensive or defamatory material. Breach of this condition may result in disciplinary or legal action. If you are in doubt as to whether material is suitable for posting, please telephone the number below to discuss this with a member of AAT staff, or raise your query by email.

The AAT is unable to monitor material prior to its posting but monitors the content of this site daily and will remove any offensive or defamatory material when it is identified. However, there is potential for such material to be displayed for some time before it is discovered by the AAT. If you see any material that you think may be offensive or defamatory, please bring it to the attention of the AAT by telephoning the number or emailing the address below.

For assistance, please telephone 0845 863 0794 or email cpdinfo@aat.org.uk.

The amount that a company’s production department charges internally for overheads is not necessarily the same as the company actually paid suppliers for those overheads. This difference is called the under- or over-absorption of overhead.

We have already looked at how Budgeted indirect costs and budgeted production are used to calculate the overhead costs for the goods produced. Overhead costs are an important part of the cost of producing a product. These costs can affect pricing decisions and profit. All the information we need to calculate overhead absorption rates comes from budgeted figures which allows for accurate calculation of prices.

Working out Budgeted Overhead Absorption Rates
To start recording overhead costs in our accounting system, we don’t need the budgeted costs or the budgeted hours. We do need the budgeted overhead absorption rates (OARs). These will be used in the accounting system.

In the skills test and in the exam the data provided needs to spell out clearly whether the figures are budgeted costs or actual costs.

How do I calculate the absorption rates?
Tip: If you look at the Isted Pottery scenario you can see:

The overhead absorption rates are:

• For Moulding £16,800 divided by 4,000 labour hours = £4.20 per labour hour.
• For Glazing £21,600 divided by 6,000 machine hours = £3.60 per machine hour.

In that example we would assume that those rates were worked out based on the previous month’s figures. We are now at the end of the month and are trying to record the appropriate transactions in the accounts.
This information will help us to complete calculations later:

Monthly Costs Required to Calculate Absorption Rates

1.    In the Moulding department, the payroll clerks have told us that 4,200 direct labour hours have been worked.
2.    In the Glazing Department, the works manager has told us that 5,600 machine hours have been worked.
3.    The accounting system has recorded the production overhead charged (debited) to each of the departments, which would cover costs like rent, insurance and power. These are as follows:
a.    Production overhead control account – Moulding Centre: £17,200
b.    Production overhead control account – Glazing Centre: £20,850

Tip:  Overheads are absorbed on the basis of the actual hours worked

In the Moulding Centre
4,200 direct labour hours were worked.

Remember the overhead absorption rate we calculated before the accounting period started? It was £4.20 per direct labour hour.

We calculate the overhead like this:

Direct labour hours x overhead absorption rate = production overhead absorption

4,200 hrs x £4.20 per hr = £17,640

We record £17,640 as absorbed into the Moulding Centre.

In the Glazing Centre
5,600 machine hours were worked.

We use the overhead absorption rate we calculated before the accounting period started: £3.60 per machine hour.

We calculate the overhead as above:

5,600 hrs x £3.60 per hr = £20,160

We record £17,640 as absorbed into the Moulding Centre.

How do I record these costs?

The T-account transactions would be as follows.

Under- and Over-absorbed Production Overhead

We need to find:

1. How much production overhead each department absorbed into production – how much they of the overheads costs they decided were part of the production costs.
2. Is there production overhead left over to be absorbed into the accounts? This amount would be called under-absorbed. Have more production overheads than the original budgeted production costs been absorbed? Have the overheads been over-absorbed?

We now have two amounts in our Production overhead control accounts:

a.    The absorbed overhead we have just entered.
b.    The actual overhead that was incurred (see Monthly Costs Required to Calculate Absorption Rates).

Writing them in this order makes it easier to identify if they are under- or over-absorbed.

Subtract the actual cost from the absorbed cost.

If absorbed cost less actual cost gives a + answer (more absorbed than actual) we have over absorbed the overhead.

If absorbed less actual gives a – answer (more actual than absorbed) we have under absorbed the overhead.

Compare the two departments:

The T-account transactions would be as follows.

The £440 over-absorbed by the Moulding Cost Centre has been credited to the under/over absorbed account for Moulding as an entry for the accounting period. This notes the difference as being separate from the production of moulded clay.  Accounting the costs this way can help in control.

The £440 will eventually be debited in the Under-/Over-Absorbed Overhead Account and then credited to the Profit and Loss account. Therefore it effectively increases the profit for the period by £440.

The £690 under-absorbed by the Glazing Cost Centre has been debited to the under/over absorbed account for Glazing as an entry for the accounting period. This keeps the difference separate from the glazing of clay products and can help in control.

The £6900 will eventually be credited in the Under-/Over-Absorbed Overhead Account and debited to the Profit and Loss account effectively decreasing the profit for the period by £690.

What will I see in the exam and the simulation?

This example is based on the June 2009 ECR exam. The exam doesn’t always test under/over absorption.

Example Question 1
At the end of the quarter (to 30 September) the actual overheads incurred in the Ingredients mixing department were found to be £450,060, and the actual machine hours operated were 6,800 hours.  The budgeted overhead recovery (absorption) rate was £62.95 per machine hour

Task 1: (14 minutes)

(a)    Using your budgeted overhead recovery (absorption) rate and the above data, calculate the under/over absorption for the quarter (to 30 September). Clearly state whether the overheads were under or over absorbed during the quarter.

Task 2:

(b)    Complete the following table to show the journal entries for the absorption of overheads in the quarter (to 30 September).

Tip: 2009 was the first time the current examiner tested journal entries in the context of under-/over- absorption of overhead. Where it says “Overhead absorbed” this refers to the overhead that is absorbed into the work-in-progress account.

Example Question 2
This is an older past exam question.

Cutting department fixed overheads are absorbed on the basis of budgeted machine hours.  Stitching department fixed overheads are absorbed on the basis of budgeted direct labour hours.  The following information relates to the cutting and stitching departments for May:

Task 1: Calculate the production overhead absorbed for May in:

(i)    the cutting department
(ii)    the stitching department

Task 2: Calculate the under or over absorbed production overheads for May, indicating clearly whether the overheads are under or over absorbed for:
(ii)    the cutting department
(ii)    the stitching department

Task 3: Use the above information to prepare the journal entry for the absorption of fixed overheads in the cutting department and finishing department for May.

The tasks in skills tests for the under-/over- absorption of overheads are quite similar to the exam.

Skills tests often add narrative tasks, so it is worth considering what sort of thing you might be asked to write about.

If you refer back to Isted Pottery, the Glazing department had an under-absorbed overhead value of £690.

If the owner of the business was concerned about this under-absorption he or she might say:

“I think that the machine hour rate of absorption rate is the cause of the under-absorption of overheads in recent months. It might be better to use a direct labour hour rate there? The Moulding department does not have the same problem”.

Tip: Don’t be convinced by what seems to be a logical argument. It is true that Moulding uses labour hours. It is also true that Moulding over-absorbed overhead. It is not true, that Moulding over-absorbed because Moulding uses labour hours.

Stick to basic principles of what type of absorption rate to use:

• If a department is labour intensive – then direct labour hours are appropriate. When labour time is the crucial for the running of the department, and most of the department’s costs are for labour, then most of the overheads may be incurred there too.
• If a department is capital intensive – then machine hours are appropriate. The machine hours are the key to the running of the department and a good guide to where the overhead is being incurred.

I will leave any discussion of the arbitrary nature of overheads to the discussion that follows from the blog.

This blog picked up the budgeted overhead absorption rates calculated before the accounting period started.

These rates were multiplied by the hours worked in the appropriate cost centres to give the overhead absorbed.

Actual overhead costs were found.

The difference was calculated. Under or over absorbed overhead was identified.

The appropriate book-keeping entries were then made.

This is part of Unit 6, Evaluating Costs and Revenues (ECR).  It will look at Overheads, Allocated Costs and Apportioned Costs.

We have already covered Stock – understanding materials costs, valuing stock, and the First-in, First-out rule. After that, we looked at AVCO or Weighted Average Cost and LIFO, the Last-In, First-Out rule. We also looked at labour costs.

What are overheads?

Direct costs are obviously – or ‘directly’ – linked to products. They are needed to make the product, like materials.  Indirect costs can be more difficult to identify, but they are essential for the business to operate.  Indirect costs are also called Overheads.

Overheads often don’t relate to specific jobs. They could include electricity, heating, and depreciation of equipment.

Example of Overheads

For example, when my car is repaired at the garage, they tell me that the car needs a new distributor.  This part is essential, and so it is a direct cost of fixing my car.

Direct versus Indirect Costs

When my car is fixed the garage owner had to pay rent for the premises, put toner in the printer and take account of the depreciation of equipment. These costs are overheads.

I am charged £70 per hour for labour plus parts by the garage, although the actual mechanic may only earn £10 per hour. Where do the other costs come from?  They will include overheads as well as other operating costs.

In the garage office they have decided to include overheads as part of each Labour Hour, or hour of work done.  They also add profit on top of their costs.

This table explains how they calculate the job cost and then charge £70 per hour:

Calculating Costs including Labour and Overheads

Why do we need to identify overhead costs?

As cost accountants we want to code, or allocate expenses correctly. To do this, we need to know what the expenditure paid for, and then we need to code it to the correct centre so to show who is responsible for the expenditure.  This identifies where money is spent, and helps to calculate future budgets.

Budgeted indirect costs and budgeted production are used to calculate the overhead costs for the goods produced. Overhead costs are an important part of the cost of producing a product. These costs can affect pricing decisions and profit.

How do we use overhead costs?

We take budgeted indirect production expenses and turn them into a series of costs.  These costs can be matched to cost centres (or departments) within the production.

Once we have budgeted costs on a cost centre by cost centre basis, then we look at producing absorption rates to work out production overhead costs.  These production overhead costs can be included in product costs.

For example, we looked at overtime premium [link opens PDF] in the labour cost blog.  We saw that often firms treat this as an indirect labour cost.  This is also known as the production overhead and has to be factored into budgets and pricing decisions.

What will I see in the exam and the simulation?

In the AAT simulation, you will often be given documents which you have to read them to find the data you need. These could be letters outlining future rents or service contracts from suppliers.

In the AAT exam the budgeted overhead cost information is usually provided in a simpler format, sometimes as two tables of data plus supplementary information.

Tip: In other exam sections, such as the direct cost questions, the examiner may have inserted errors as part of the test. This does not normally happen in Overheads questions.

Sample exam question on Isted Pottery

Details – company information:

This general information helps you to build a picture of the company to help you to answer the questions.

Isted Pottery is a small company that makes pottery. Their manufacturing department takes up 5,000 square metres of floor space, divided into four separate departments.  Each department is also a cost centre:

Cost Centres in Isted Pottery

These details are important, as some of the overhead costs for the whole of the manufacturing department will need to be divided up between the 4 cost centres – Moulding, Glazing, Facilities, and Canteen – and coded correctly.

Tip: The amount of floor space each cost centre takes up could be a possible basis for dividing up those overhead costs.

What factors can be used to divide up overhead costs?

This table shows five factors that could each be used as a basis for dividing up overhead costs:

Possible bases for dividing overheads between cost centres

Tip: In the exam, you may not be given the total floor space.  One of the purposes of the test or exam could be to see whether you understand that you need it.

This particular question is comparatively easy, as the money value of the expenses used in each department is given for most of the costs.

Detail: Total Budgeted Overheads

This information is for all of the manufacturing departments, which includes all four cost centres.

Total Budgeted Overheads

Now we have to divide these total cost values appropriately across the four cost centres, Moulding, Glazing, Facilities and Canteen. We divide them into Allocated Costs and Apportioned Costs.

Allocated Costs and Apportioned Costs

Allocated costs require no further calculations. These are costs that the accounting system can divide up for us.

Tip: When we produce labour cost calculations we often note both the cost centre and expenditure code so that they are posted appropriately.

Isted Pottery have budgeted £8,910 for indirect labour costs.  This could include training, overtime premiums, and cleaning. This budgeted total has already been broken down as below, so the total cost has been allocated across the four cost centres.

Notes on Isted Pottery’s Allocated Overheads:

i.    Indirect materials will all be used in the glazing department, so we allocate all £1,140 to glazing.

ii.    Power costs have been specified on a cost centre basis, based on how much power they use.

iii.    Machine depreciation has also been stated.

Apportioned costs are those costs which we have to divide up ourselves.

How to apportion Costs – Rent Costs

1.    Look for a suitable basis for apportioning a cost. In this case rent and other property costs need to be apportioned. Five possible options were given in the table called Possible bases for dividing overheads between cost centres.

We need to decide which of those five bases is likely to give us the most accurate figures for how much each cost centre will cost the company in property related expenditure.

In this case, we chose floor space as the basis for apportioning costs.

2.    There are several ways of carrying out the next step. Here is a quick method:

a.    Find the total of the basis. We are using total floor space as the basis (check the detail information at the beginning of the question)

3,000 + 1,000 + 500 + 500 = 5,000 square metres, or 5000 total floor space

b.    Find the total budget cost for rent in the Total Budgeted Overheads table.

Divide the total rent cost by the total floor space to get the charge per square metre

£15,000 ÷ 5,000 = £3.00 per square metre

c.    If you use a normal (non-scientific) calculator you can press the x button twice to create a constant in the calculator memory.

Then simply type in the square metres in each department and press = to find the rent cost to apportion.

If you don’t have a calculator, multiply the amount of square metres by the cost per metre to get the apportioned cost.

3000 = gives us £9,000, 1000 = gives us £3,000, and 500 = £1,500

d.    Enter the amounts on the overhead analysis table.  This shows the apportioned costs for each cost centre.  Note that we will not be able to complete the Canteen Row yet.

Overhead analysis table

3.    Add up the columns for each cost centre. Double check your arithmetic to see if the sum of the totals is equal to the £38,400 in the total column. Remember, we haven’t got onto the Canteen row yet.

4.    We already know that the manufacturing department has four cost centres.

Moulding and Glazing can be called “production cost centres” where the pottery is actually produced.

Facilities and the Canteen cost centres are “service cost centres” – they provide a service to the Moulding and Glazing which is not directly related to manufacturing the pottery products.

One of the reasons that we apportion overheads to different cost centres is to find an overhead amount that to include in product costs. We should not apportion expenses from Facilities and the Canteen to working out the cost of manufacturing the product.

It is easy to identify the overheads incurred by the production cost centres, Moulding and Glazing, to include this in product costs. It is harder to work out the work out the overheads for the service departments.   It is best to apportion their total overhead using the same factor that you used to apportion the rent costs – we used floor space.

How can I check if I have apportioned the costs correctly?

You can use a direct approach, or a step-down approach. Direct means that expenses from the service cost centres are charged directly to the production cost centres. For example, Isted Pottery could take the total cost of the Canteen and using a suitable basis, divide up the cost between Moulding and Glazing. Then they would repeat the process with the Facilities total cost.

Here we use the step-down approach. Identify whether one Service cost centre, such as the Canteen, provides services to another department and reapportion that cost before any others.

1.    First, we reapportion the Canteen Costs:

The Canteen column total in the Overhead Analysis table was £3,800. (We assume that all the employees will use the Canteen)

Divide the total by expenditure by the total number of employees (38). So the Canteen costs £100 per employee, and using the x x approach, I apportion £2,600 to Moulding, £800 to Glazing and £400 to Facilities, and minus £3,800 to Canteen. The Canteen costs have now been re-apportioned.

2.    Next we reapportion the Facilities Costs:

When re-apportioning Facilities costs under the step-down approach you need to be clear precisely how much has to be re-apportioned. In the initial analysis [link back to original table] I found the total overhead costs for Facilities were £5,550. Since then we have apportioned £400 of the Canteen costs to the Facilities cost centre. as well. Now the total of £5,950 needs to be re-apportioned.

The Facilities department records for the period show that they typically spend 80% of their time working in the Moulding department, and 20% of their time working in Glazing department.

So on the basis that 80% of the work of the Facilities work is for the benefit of glazing, then 80% of the £5,950 is reapportioned there, and as 20% of the work benefits moulding £1,190 is re-apportioned to moulding.

3.    Total the production cost centre columns and check that the sum of these adds up to the overall total.

4.

Tip: Knowing the budgeted overheads on a cost centre basis is useful, but to be able to find how much overhead to charge to each product requires the calculation of an overhead absorption rate.

Can overheads be absorbed in other ways?

There are two methods of absorbing overheads in the AAT unit standards, and these tend to be the most popular ones used by the examiner. They are not the only ones, and certain questions set in service industries require alternatives.

You can also absorb overheads by calculating them on the production bases.  You would use the machine hours or the direct labour hours to do this. You have probably realised from looking at the Isted Pottery data that there are far more labour hours than machine hours needed in moulding the clay, but more machine hours than labour hours needed in Glazing.

The budgeted labour hours for moulding are 4,000

The budgeted machine hours for glazing are 6,000

5.    The overhead absorption rates are calculated by dividing the total budgeted overhead cost for each cost centre (found in your completed Overhead Analysis Table) by the budgeted number of hours and are expressed in terms of either labour or machine hours.

For Moulding £16,800 divided by 4,000 labour hours = £4.20 per labour hour.

For Glazing £21,600 divided by 6,000 machine hours = £3.60 per machine hour.

Doing a Job Cost Calculation

Isted Pottery has to fulfil an order for Amber Ceramics and we know the following information:

Materials cost –             £35

Direct labour costs – Moulding,    8 hrs at £7.50 per hour

Direct labour costs – Glazing    4 hrs at £8.00 per hour

Machine hours – Glazing        5 machine hours

Job cost calculation for Amber Ceramics

The absorbed overheads absorbed are added to the direct costs of material and labour. We can describe them as being absorbed because the order ‘absorbs’ or incorporates the overhead absorption rate per hour, on the basis of the number of hours used to make the order.

Here 8 labour hours will be needed in moulding so the £4.20 per labour hour is multiplied by the 8 hours. Similarly the £3.60 per machine hour is multiplied by the 5 hours of machine time needed in glazing to find how much is absorbed there.

We add the direct labour charges to the overheads and materials to get an accurate job cost calculation.

In the last post took a detailed looked at stock in both the simulation and the exam. This post will cover labour cost. To download the full article simply click on the link below and you will be able to access the PDf version for your convenience.

Labour cost full article

Opinions and comments expressed within CPD Interactive are those of their authors alone, and do not necessarily reflect the opinions of the AAT or any AAT employee. The AAT is not responsible for the content of such opinions and comments.

The Association of Accounting Technicians (AAT) provides CPD Interactive to facilitate its members’ free discussion of accounting issues. Persons using CPD Interactive must not post offensive or defamatory material. Breach of this condition may result in disciplinary or legal action. If you are in doubt as to whether material is suitable for posting, please telephone the number below to discuss this with a member of AAT staff, or raise your query by email.

The AAT is unable to monitor material prior to its posting but monitors the content of this site daily and will remove any offensive or defamatory material when it is identified. However, there is potential for such material to be displayed for some time before it is discovered by the AAT. If you see any material that you think may be offensive or defamatory, please bring it to the attention of the AAT by telephoning the number or emailing the address below.

For assistance, please telephone 0845 863 0801 or email studentservices@aat.org.uk.

All you need to provide for this membership benefit is a MP3 player or a computer with Windows Media Player, Quicktime, iTunes or Real Player installed.

To download individual chapters of the podcast, right click each link and save them to your target location such as your computer’s hard drive or direct to a portable MP3 player, or just left click the link and the player will open and start to play the file on your computer straight away.

Unit 5 – Chief Assessor Report

Follow along with the speaker using a transcript of this Podcast.

Note, you may require a program such as Winzip to unzip this file. Get Winzip here.

Opinions and comments expressed within CPD Interactive are those of their authors alone, and do not necessarily reflect the opinions of the AAT or any AAT employee. The AAT is not responsible for the content of such opinions and comments.

The Association of Accounting Technicians (AAT) provides CPD Interactive to facilitate its members’ free discussion of accounting issues. Persons using CPD Interactive must not post offensive or defamatory material. Breach of this condition may result in disciplinary or legal action. If you are in doubt as to whether material is suitable for posting, please telephone the number below to discuss this with a member of AAT staff, or raise your query by email.

The AAT is unable to monitor material prior to its posting but monitors the content of this site daily and will remove any offensive or defamatory material when it is identified. However, there is potential for such material to be displayed for some time before it is discovered by the AAT. If you see any material that you think may be offensive or defamatory, please bring it to the attention of the AAT by telephoning the number or emailing the address below.

For assistance, please telephone 0845 863 0801 or email studentservices@aat.org.uk.

In my earlier posts I looked at getting started on unit 10  finding an assessor, then deciding whether to complete the report on your workplace, or use an AAT written Case Study.

This time I’ll discuss in more detail

• the aims and objectives of unit 10, to give you a big picture view of what you are trying to achieve – always helpful!
• the assessment process.

NB: It’s very important to understand that the assessment process is not just a case of writing 4,000 words and submitting it to your assessor.

The final submission of an assessor approved copy is only the beginning of the final assessment stage. There are certain requirements to consider throughout the process, and they take time. Too many students leave this unit until the last minute, then get frustrated when they miss key deadlines. But we’ll look at how to avoid this later on in this post.

THE AIMS AND OBJECTIVES OF UNIT 10

Which skills will they help you to develop?

1. First skill: the ability to analyse the workplace and make recommendations to improve it.

How often have you questioned why a company or department does something a particular way, and received the answer “because we always have!”? I have – too often.

It is all too easy to complete workplace tasks in the same way day in day out, month by month and year by year. But, while continuity is important (and nobody likes change), this approach can stifle innovation and lead to inefficiencies.

NB: In this project you are not being asked to recommend entire changes to how your organisation operates, or fundamentally change the organisation in some way. Instead we ask you to open your mind, analyse some key processes and procedures, and see if you could improve

• increasing efficiency.
• managing staff better.
• creating better controls.

Often small changes can have a big affect.

These changes do not have to actually be implemented – this used to be a requirement of the standards but these requirements changed recently.

You just need to recommend these changes. I often find that employers value this in the students’ final report.

2. Second skill: developing your professional report writing skills.

Although this is not specifically laid out in the standards, you will need to develop professional report writing skills to complete this project.

Your report must be laid out properly and written in professional English (no text speak or slang please!) to meet AAT standards.

Any employer recruiting MAAT qualified accounting technicians will expect you to and understand how to structure and lay out this sort of report.

Sections such as the Executive Summary and Terms of Reference are required in many management reports – I often include them in reports I write for my own role.

So in this unit you’ll develop these professional report writing skills – they are skills for life, and makes completing the report more meaningful and relevant.

Good business English.

Many students completing this report won’t speak English as their first language, and this can be a challenge when completing the report in professional, business English, according to AAT assessors’ requirements.

If you think you may struggle, we recommend finding a mentor with a good command of business English to advise you as you write the report. If the finished report is not professionally written, your assessor cannot assess it as competent, proof-read or rewrite your work for you.

3. Third skill: learning about managing people in the workplace, the effectiveness of accounting systems, how to plan for contingencies, and the importance of putting in place controls to prevent the risk of fraud.

These are all important areas for any accounting technician: especially one who may manage staff in the future.

By using your questioning skills, investigating how all of the above operate in your organisation, and making recommendations to improve them, you are gaining valuable skills and knowledge about how to improve an organisation, motivate staff and increase efficiencies and controls.

Okay, so that is why you are completing this unit. Hopefully all of the above makes you feel that it is very worthwhile.

THE ASSESSMENT PROCESS.

It’s important to understand what is required and when it’s required, so you can complete the work appropriately, and in appropriate timescales.

You should write your report in stages, and send each draft to your assessor.

As part of the final assessment process your assessor is required to authenticate that your work is your own and that you have completed it unaided. In order to do this, your assessor needs to see drafts as you complete it, and provide you with advice and support as you go.

If you roll up off the street and hand your assessor a fully completed, competent report they are likely to be a little suspicious about how you came to complete it – well, wouldn’t you be?

I have been involved in a (thankfully small) number of situations where students have submitted the work of someone else – the most dramatic one being a project that was for sale of eBay! In all these circumstances the students were reported to the AAT Conduct and Compliance team and investigated with action taken.

This could result in the ultimate sanction – being struck off as a student member – so don’t try to cheat this unit, or your assessor.

The stages start with a project proposal. In this you should either document or discuss with your assessor how you are going to complete the report and your thoughts on the various required sections. A key one here is which part of the accounting system you are going to base your research and recommendations around.

I ask students to write this into a formal proposal document so that I can add written advice and feedback, but other assessors may document a one to one discussion with their students for evidence. Either is fine as long as something takes place – after all it would be terrible to write the report only to find it is inappropriate in some way!

After the proposal agreement your assessor should review drafts of your work as you go. I always ask students to write one of the key 4 sections and submit it. There are certain requirements as to how the report is written (more on these in a later blog post, but mainly ensure you write the whole report in the third person and keep it impersonal with no names of staff). Again,  and it would be less than ideal to write 4,000 words then find they all need correcting.

With drafts, the assessor can ensure that you full grasps the format and layout requirements, and helps to prove to the assessor that your work is your own.

I then continue this process with my students, asking them to submit drafts until I am happy they have a finished, competent report.

Next I ask them to submit a final copy for assessment. There are strict requirements around this but I will focus on these in more detail in a later blog post.

The main point to appreciate here is that the final submission should ensure the report is presented professionally, and you must sign and date a statement that this is your own unaided work. Also, if your report is on your own workplace, this is where you must submit a similar statement from your employer, on company headed paper.

Once I have the final submission, I then have to ensure the work is

• fully mapped by page and paragraph number to the unit standards.
• written in good business English.
• laid properly as required by the AAT.

Hopefully if I have performed the role of assessor well up to this point, by giving good advice and feedback to the student, then this will be a straightforward task.

Next I must then conduct a final interview with the student, usually face to face. In this interview I ask about their completed work and discuss the outcomes of their research.

The reason for this is twofold.

• It helps me gauge whether the work is authentic.
• it allows me to test any areas of the standards that I might feel were a little weak in the final report.

Once the interview is complete, fully documented and authenticated I submit the work for internal verification. An internal verifier is part of the quality assurance process and works like an auditor, sampling an assessor’s work to ensure it is competent and that the assessment process is fully documented.

This is important to maintain the standards of assessment, so that the AAT has confidence in their assessment centres. Only once the work has passed internal verification can it be reported as competent to the AAT.

I am sure you can appreciate that all the above takes time, therefore as an assessor (and I am also an Internal Verifier!) I ask you to respect this process. All too often students submit a project to us on the last possible day to meet a deadline, be it internal (a pay review for example) or external (such as exemption deadlines for a chartered qualification) and get frustrated when their results can not be reported immediately to the AAT.

If you must meet specific deadlines, you must consider ensuring your final submission goes to your assessor approximately 4 weeks before that date.

Some may need longer and you should check with your assessor if it applies to you. Also please appreciate that when I say your final submission I mean your assessor agreed final submission – not your first draft!

I hope all of the above makes sense, I’ve got to go now as my train is due into the station shortly.

In the next post I will start to go through the requirements of each section of the report in a little more detail.

Bye for now!

There are two types of pension which you need to be comfortable dealing with.  The first type is an approved occupational pension scheme. This is normally operated alongside the payroll system by an employer and is usually deducted before the application of PAYE to the employee’s income.  Therefore the pension contribution is deducted from the gross salary to give the amount taxed under PAYE and this is how tax relief is obtained on these types of pensions.  This lower amount will then appear on a P45 or P60 which in turn is then used on the employment pages of the tax returnJust as a quick example – Sam’s annual gross salary is £18,000 and he makes a contribution of 5% into an approved occupational pension scheme.  His income for PAYE purposes is:

*£18,000 x 5% = £900 per year pension contribution.

£17,100 will appear on Sam’s P60 for the tax year and is the figure he would use in box 1 on the employment pages of the tax return.

The second type of pension you need to be aware of is a Personal Pension Plan sometimes referred to as a PPP.  These are set up by individuals, not by employers.  You need to be able to distinguish between the two as they have different treatment for tax purposes. 

Contributions to a PPP are made as net amounts i.e. after 20% relief has been deducted from the gross amount.  So if a tax payer, Alfie, wanted to make contributions to a PPP of £3,000 per year, he would make payments of £2,400 (£3,000 x 80%) to his pension provider.  The balance needed to make the contribution up to £3,000 per year i.e. £600 (20% tax) would be reclaimed by the pension provider who then uses the £3,000 for investment as instructed by Alfie when he opened the plan.

The implications of such a plan mean that the basic rate tax bracket is extended by the gross amount of the contribution i.e. the full £3,000.  So instead of £34,800 being taxed at 20%, £37,800 can now be included in this tax bracket.  Potentially, this could mean if Alfie is a higher rate tax payer, he will obtain relief of 20% (the higher rate of 40% less the basic rate of 20%) on the £3,000 extension of the tax bracket.  

Let’s use this as an example to make this clear.  Let’s say Alfie earns £28,000 a year.  He does not enter the higher rate tax bracket and so there is no other relief available to Alfie other than the 20% which is reclaimed by his pension provider to top his contribution up to the gross amount.

However if he earned £40,000 a year, he is now a higher rate tax payer.  Instead of the normal £34,800 being taxed at 20% and the remainder at 40%, £37,800 is now taxed at 20% and the remainder at 40%.  This is a further tax saving for the higher rate tax payers when they contribute to a PPP. 

The pension details are entered on page 4 of the tax return under the tax reliefs section.  This is a form which you should already be familiar with.  The gross amount i.e. the pension contribution from the individual plus the 20% relief from the provider is entered in box 1.  Be careful if you are using an older version of the tax return.  Make sure you are using the up to date version of the forms.  If you are not sure, you can check on the HMRC web-site for the up to date returns.

Gift aid is a scheme by which a taxpayer can make donations to charities and obtain tax relief on such payments.  The charity to which the payment is made can then reclaim 20% tax direct from HMRC.  So if I wanted a charity to receive £200, I could donate £160 (£200 x 80%) as the charity would then receive the remaining 20% – £40 from HMRC. 

Further tax relief could be obtained if I was a higher rate tax payer, as again, the basic rate band is extended by the gross amount of the donation, in this case £200.  However if I were a basic rate tax payer, the relief is obtained by making the net donation to the charity, with HMRC making up the difference.

Gift aid payments are shown in the charitable giving section on page 4 of the tax return.  The net amounts i.e. the amounts actually paid by the individual to the charity are given in box 5.  Be careful as this is different to PPP’s which are shown gross.  If any donations are one off payments which are not expected to be recurring donations, details of these should be given in box 6.

I find many of my students struggle to grasp the concept behind extending the band for gift aid and PPP contributions as well as using the correct treatment for the two different types of pensions.  You have to be comfortable with grossing up figures from net to gross.  If you are grossing up a figure for the basic rate of tax, you take your figure, say £80.  This is the net figure after 20% tax is deducted and so represents 80%.  So divide your figure of £80 by 80% and multiply up by 100% to give the full gross figure (£80 / 80 x 100).  It is the gross figure which extends the basic rate bracket for tax relief for higher rate tax payers.  If the taxpayer falls into the basic rate tax bracket only, then this extension is not necessary and the relief is granted through making payments net of 20% tax. 

One final tip, spend some time reading the actual returns you could be asked to complete.  The forms themselves actually tell you what figures are needed in what boxes and on some of the boxes where the sum of several boxes is needed, it tells you which ones to add up or subtract.  When I have marked homework from students where they have completed a return, it is surprising how many of them miss the easier marks, by simply not taking the time to go through the return and fill in the appropriate boxes.  The same applies in your exam, you have plenty of time to go through the forms (if required in the exam) and check you have filled in all the details you need to.  Read the forms and maximise your marks.

Opinions and comments expressed within CPD Interactive are those of their authors alone, and do not necessarily reflect the opinions of the AAT or any AAT employee. The AAT is not responsible for the content of such opinions and comments.

The Association of Accounting Technicians (AAT) provides CPD Interactive to facilitate its members’ free discussion of accounting issues. Persons using CPD Interactive must not post offensive or defamatory material. Breach of this condition may result in disciplinary or legal action. If you are in doubt as to whether material is suitable for posting, please telephone the number below to discuss this with a member of AAT staff, or raise your query by email.

The AAT is unable to monitor material prior to its posting but monitors the content of this site daily and will remove any offensive or defamatory material when it is identified. However, there is potential for such material to be displayed for some time before it is discovered by the AAT. If you see any material that you think may be offensive or defamatory, please bring it to the attention of the AAT by telephoning the number or emailing the address below.

For assistance, please telephone 0845 863 0801 or email studentservices@aat.org.uk.

• The formation of a new partnership
• A new partner joins an existing partnership
• A partner leaves an existing partnership
• A change in the profit sharing ratio

To be able to tackle a partnership question, you need to ensure you have a solid understanding of partnership accounting, which you will have been introduced to at Intermediate level during unit 5.  Make sure you are comfortable with allocating salaries, applying interest on capital, deducting interest on drawings etc.  If you are not sure, it wouldn’t hurt to spend a little time covering these issues again, just to make sure you are ready to go into partnerships in more detail.

So before we go through some of the more complex partnership issues, to start with we will go through some of the basics.  The first place to start is the profit sharing ratio which can be found in the partnership agreement.  This will have been decided when the partnership was formed and is simply the way in which the profits are going to be shared between the partners.  It can be given in the form of percentages e.g. 20%, 30% and 50% or ratios e.g. 2:3:5.  To calculate each partner’s share of the profits, apply this information to the profits.  Let’s use £100,000 of profits to share out.  Using the earlier ratios, the partners would get £20,000, £30,000 and £50,000 respectively.  Simply take the sum of the ratios (2+3+5 = 10) and divide the profits by this figure to give a tenth of the profits (£100,000 / 10 = £10,000).  Each partner then receives their portion, i.e. multiply this by their share of the ratio, in this case 2, 3 or 5.  Of course, it is always worth taking a minute to check your profits shared out add back to the total you started with, just in case! 

This is fairly straight forward but can be made more complicated where the partners have salaries or are to be paid interest on the capital they have invested in the partnership.  Adjustments such as this have featured on recent business taxation exams and students do not appear to have been prepared to deal with such issues as salaries within partnerships so it is worth taking the time to make sure you are 100% sure of how to deal with these topics.

Let’s look at an example of a partnership scenario with salaries and interest on capital for John and Joshua.  Here is the basic information you will need for this scenario.

The partnership had adjusted profits (after capital allowances) of £80,000

Personally, I think the easiest way to approach these scenarios is to use a table and use the profits as a running balance. 

Again, check your arithmetic, the sum of the totals for John and Joshua should add back to the adjusted profits figure which you started with.  It is always worth double checking.

I always say to my students, the salaries and interest on capital are paid out of profits, and this is all you are doing here.

So once you have mastered the basics of profit sharing and allocating salaries and interest on capital, you then need to apply the theory of these topics to scenarios where circumstances within the partnership have changed.  Where a new partnership has been formed and it is the first year of trading, remember to watch out for time apportioning the information if the first period is not 12 months.  If the salary figure and interest on capital rates are given for the year, you will need to time apportion these for the correct number of months.  Watch out for the wording here, you could be given per annum figures or figures for the stated period.  Attention to detail is a key factor in gaining high marks.

When a new partner joins an existing partnership it could coincide with the start of a new period, in which case, you simply share the profits in the new ratio for the year after allocating salaries and interest on capital as instructed.  However if the new partner joins part way through the year, you will need to first time apportion the adjusted profits into the period before and after the new partner joins.  Then apply the salaries and interest on capital respectively (scaled down for short periods).  Then the final step is to share out the remaining profits.  I always recommend to my students that they treat this as two different periods, do two separate sets of calculations.  Then at the end of the question, bring together the information for each partner to give the assessable income for the year.

E.g. Steve and Bob were in partnership for many years sharing profits and losses equally.  The accounts were made up to 31 December each year.  On 1 October they were joined by Graham.  The profit sharing ratio remained the same, profits and losses were to be shared equally between all partners.  The partnership made profits of £120,000 for year ended 31 December 2007.

The £120,000 needs to be time apportioned into the parts either side of 1 October.  £120,000 over a year gives £10,000 per month.  1 January to 30 September is 9 months so the profits for this period were £90,000 and Steve and Bob would each receive £45,000.  1 October to 31 December is 3 months so the profits for this period were £30,000.  Steve, Bob and Graham would therefore each receive £10,000 for this period.  So over the 12 month period Steve and Bob would each have £55,000 of assessable profits and Graham would have £10,000. 

If the partners were to receive salaries or interest on capital in this period, then the same principle would be applied as earlier, deduct the salary and interest on capital from the adjusted profits (after you have time apportioned them), allocate the salaries and interest on capital to the correct partners, then share the remaining profits in the given profit sharing ratio.  Do not forget though, if it is not a complete year, the salary and interest on capital should be time apportioned if you are given the figures for the year.  It would be practical to prepare two tables in this case so you ensure you are time apportioning correctly, but remember to bring the figures together for the two time periods if the question asks for the assessable income for each partner.

Once you have mastered the thinking behind a new partner joining a partnership part way through the year, you will guess the workings needed for a partner leaving part way through the year.  Yes, you guessed it.  Time apportion the adjusted profits to before and after the date of change.  Apportion the profits (after deducting any salary and interest on capital) between the partners in the profit sharing ratio for before and after the change.  If the partner who is leaving the partnership has any overlap profits brought forward from the start of the partnership (under the basis of assessment rules), these can be deducted from their final assessable profits here. 

Again, the principle is repeated for a change in the profit sharing ratio.  If it is done at the start of the period, just apply the new profit sharing ratio for that year.  If it is part way through the year, time apportion the profits into profits before the change and apply the old profit sharing ratios.  Apply the new profit sharing ratios to the profits for the period after the change.  Add each partners profits together and there’s your answer!  Again this could be more complicated if the partners receive salaries or interest on capital, but apply the same working as before.  Take the salary and interest on capital from the adjusted profits and share out what is left for each period.

Partnerships do not have to be complicated from a tax point of view.  You just need to make sure you have a good set of workings and a solid understanding of the order in which you make the adjustments.  Practice some different partnership questions applying this way of thinking and see if it works for you.  Remember, different tutors use different approaches, I personally like to use the table mentioned earlier as it is clear, concise and isn’t too over complicated.  Get the order of the calculations correct and be careful with short periods when you need to time apportion and the rest is maths!

Opinions and comments expressed within CPD Interactive are those of their authors alone, and do not necessarily reflect the opinions of the AAT or any AAT employee. The AAT is not responsible for the content of such opinions and comments.

The Association of Accounting Technicians (AAT) provides CPD Interactive to facilitate its members’ free discussion of accounting issues. Persons using CPD Interactive must not post offensive or defamatory material. Breach of this condition may result in disciplinary or legal action. If you are in doubt as to whether material is suitable for posting, please telephone the number below to discuss this with a member of AAT staff, or raise your query by email.

The AAT is unable to monitor material prior to its posting but monitors the content of this site daily and will remove any offensive or defamatory material when it is identified. However, there is potential for such material to be displayed for some time before it is discovered by the AAT. If you see any material that you think may be offensive or defamatory, please bring it to the attention of the AAT by telephoning the number or emailing the address below.

For assistance, please telephone 0845 863 0801 or email studentservices@aat.org.uk.