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AC206 LSE Exam Notes
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truggling with AC206? Get high-quality, exam-focused notes covering all readings, weekly lecture content, and key concepts in one place. These notes provide clear, structured summaries of essential topics, helping you revise efficiently and boost your grades. Complete reading summaries – Save...

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  • February 9, 2025
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Course: AC206 Topic: Exam Revision Guide (All Theories and Academic reading

Admin Notes:
 *To clarify, this document only contains all the necessary readings and theories that are mandatory fo
course. Notes related to calculations will not be provided in this document.
 *The notes for calculations will be provided separately as a bundle to this document at no extra cost. The
calculation notes will be separate for each weeks from week 1 to 11.


Week 1 (Decision Relevance):
 To start off with the generic differences between Management Accounting (MA) and Financial Accounting (FA)
o MA is more forward looking whilst FA involves working with past data and information.
o Importantly, MA assists in decision making – which is the primary focus of this year’s course.
 For an information to be decision relevant, the following criteria should be met:
o 1) Objectivity – represent the current conditions of the firm.
o 2) Strategy – information should not only consider the status quote (as objectivity) but also future-relat
strategic aspects.
o 3) Balance – there shouldn’t be an information overload, meaning that data should be manageable and
comprehensible.
o 4) Robustness – essentially the information should not be context dependent and mean the same rega
of the context.
o 5) Timeliness – the information should be quickly accessible.
o Often times in MA timeliness is more important than for example Robustness. Moreover, factors such as
Objectivity are more relevant for FA.
 There are challenges that must be tackled for MA relevance:
o 1) The use of qualitative data such as employee morale, customer preferences, environmental impact
competition, etc. It’s difficult to put a price tag on those factors, which makes it hard for accounting syst
use these data adequately.
o 2) As for the financial data, the cost structures may be difficult to be designed for products with shorter
cycles and with high product diversification.
 Relevant costs and revenues:

,Course: AC206 Topic: Exam Revision Guide (All Theories and Academic reading

 1) Systematic upward bias:
 In competitive pricing situations, managers may be tempted to set the prices low or grant excess
discounts to reach revenue targets.
 2) Systematic downward bias:
 Firms using target costing set cost standards based on what an item should cost to be able to com
 3) Low sophistication:
 Firms keep the number of cost pools low to focus on only on a few – cost drivers
 As a result, some costs will not be correctly allocated.


Week 1 Readings:

Article 1: "The Information Executives Truly Need"

Author: Drucker

 Evolving Role of Information in Organizations:
o Historical over- and underestimation of information tools' potential.
o Modern tools shift the focus from operational data to strategic insights.
 Activity-Based Costing (ABC):
o ABC is a shift from traditional costing (first used by GM). Traditional costs postulates that total manufact
costs is the sum of the costs of individual operations.
o ABC emphasizes process integration and total system costs.
o Tracks both direct costs and the costs of inefficiencies (e.g. machine downtime costs, defective parts).
o Particularly transformative for service industries – because these fields have no cost information.
 Economic Chain Costing:
o Shift from organizational-level costs to entire economic chain costs (e.g., suppliers, distributors). In this
process, even the biggest companies are just one link.
o Pioneered by firms like Toyota to manage costs and yields across processes.
 Focus on Value Creation:
o Traditional accounting systems focus on costs.
o Modern systems emphasize wealth creation and economic value-added (EVA).

,Course: AC206 Topic: Exam Revision Guide (All Theories and Academic reading


Article 2: "Measure Costs Less Accurately"

Author: Merchant & Shields

1. Cost Accuracy vs. Decision-Making Efficiency:
o Accurate cost systems may not always be beneficial; deliberate biases or imprecision can improve decisio
making and behaviour.
o Cost accuracy includes two dimensions: precision and freedom from bias.
2. Types of Less Accurate Cost Systems:
o Upwardly Biased Costs:
 Competitive pricing situations where managers are tempted to offer extensive discounts to reach rev
targets.
o Downwardly Biased Costs:
 Encourages innovation and usage by using target costing.
o Lower Precision Costs:
 Simplified systems can focus attention on strategically important areas (e.g., Tektronix reducing part
numbers for competitive advantage).
 Firms keep the number of cost pools low to focus on only on a few – cost drivers

3. Behavioural Benefits:
o Biases and imprecision can positively influence behaviour by focusing employee attention on critical facto
encouraging desirable practices.
4. Limits and Situations for Accurate Systems:
o Accurate systems are necessary for strategy formulation, cost-based pricing, or industries with complex
production processes (e.g., General Motors using high-precision cost systems for make-or-buy decisions).
o Less accurate systems are more effective in implementing already-defined strategies.
5. Strategic Alignment:
o Cost systems should align with competitive strategy and emphasize learning, motivation, and efficient de
making.

, Course: AC206 Topic: Exam Revision Guide (All Theories and Academic reading

Week 2 (Cost-Volume Analysis):
 The key topics in this lecture are:
o Routine decisions:
 CVP analysis
o Non-Routine decisions:
 Whether to accept special pricing
 Product mix decisions
 Whether or not to outsource
 If a product should be discontinued
 When deciding on special priced one-off orders:
o The prices are usually charged lower than the market rate, however remember the rule of “relevant cost
from week 1.
o Typically we only accept special orders if we have excess capacity. Thus, some costs are not applied to s
orders, e.g. Fixed MoH, Marketing, etc. As a result, we can substantially increase our profits by accepting
special orders, given that the prices are feasible.
o Importantly, and that’s where it’s easy to lose markets: focus on the qualitative factors of accepting o
special priced orders:
 It’s important to look beyond numbers and evaluate with context. Note: we need to refer to lecture s
case studies and academic papers for the relevant weeks when it comes to qualitative solutions.
 Firstly, we need to consider whether taking one-off orders will affect the prevailing market prices.
 Moreover, we need to consider the broader context of reputation of the firms – if loyal long-term buy
learn about the discounted pricing it may affect the relationship.
 On that note, if last minute orders from usual customers likely than selling at a decreased price may
ideal if we consider the opportunity costs.
 Repeated last minute orders should no longer be considered as one-off orders and should be evaluat
chain of things. This is because taking one-off orders regularly will increase long-term fixed costs an
complexity (customization of products).
 Note that the above mentioned points are just brief, in the exam these points need to be extended t
feasible conclusions, i.e. as a result, long-term buys may also demand lower prices, etc.

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