November 2006 Examinations
Managerial Level
Paper P1 – Management Accounting – Performance Evaluation
Question Paper
2
Examiner’s Brief Guide to the Paper
22
Examiner’s Answers
23
The answers published here have been written by the Examiner and should provide a helpful
guide for both tutors and students.
Published separately on the CIMA website (www.cimaglobal.com/students) from mid-February
2007 is a Post Examination Guide for this paper, which provides much valuable and
complementary material including indicative mark information.
 2006 The Chartered Institute of Management Accountants. All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recorded or otherwise, without the written permission of the publisher.
 The Chartered Institute of Management Accountants 2006
Managerial Level Paper
P1 – Management Accounting –
Performance Evaluation
21 November 2006 – Tuesday Morning Session
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper, and if you wish, make
annotations on the question paper. However, you will not be allowed, under
any circumstances, to open the answer book and start writing or use your
calculator during this reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is, all parts and/or subquestions). The requirements for the questions in Section C are contained in
a dotted box.
Answer the ONE compulsory question in Section A. This has 18 subquestions and is on pages 2 to 10.
Answer ALL SIX compulsory sub-questions in Section B on pages 11 and 12.
Answer ONE of the two questions in Section C on pages 13 to 15.
Maths Tables and Formulae are provided on pages 16 to 20.
Write your full examination number, paper number and the examination
subject title in the spaces provided on the front of the examination answer
book. Also write your contact ID and name in the space provided in the right
hand margin and seal to close.
P1 – Performance Evaluation
Management Accounting Pillar
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.
P1
2
November 2006
SECTION A – 50 MARKS
[the indicative time for answering this section is 90 minutes]
ANSWER ALL EIGHTEEN SUB-QUESTIONS
Instructions for answering Section A:
The answers to the eighteen sub-questions in Section A should ALL be written in
your answer book.
Your answers should be clearly numbered with the sub-question number then ruled
off, so that the markers know which sub-question you are answering. For multiple
choice questions, you need only write the sub-question number and the letter
of the answer option you have chosen. You do not need to start a new page for
each sub-question.
For sub-questions 1.11 to 1.18 you should show your workings as marks are
available for the method you use to answer these sub-questions.
Question One
The following data are given for sub-questions 1.1 to 1.3 below
A company uses standard absorption costing. The following information was recorded by the
company for October:
Output and sales (units)
Selling price per unit
Variable cost per unit
Total fixed overheads
1.1
The sales price variance for October was
A
£38,500 favourable
B
£41,000 favourable
C
£41,000 adverse
D
£65,600 adverse
Budget
8,700
£26
£10
£34,800
Actual
8,200
£31
£10
£37,000
(2 marks)
November 2006
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P1
1.2
The sales volume profit variance for October was
A
£6,000 adverse
B
£6,000 favourable
C
£8,000 adverse
D
£8,000 favourable
(2 marks)
1.3
The fixed overhead volume variance for October was
A
£2,000 adverse
B
£2,200 adverse
C
£2,200 favourable
D
£4,200 adverse
(2 marks)
1.4
A master budget comprises the
A
budgeted income statement and budgeted cash flow only.
B
budgeted income statement and budgeted balance sheet only.
C
budgeted income statement and budgeted capital expenditure only.
D
budgeted income statement, budgeted balance sheet and budgeted cash flow only.
(2 marks)
P1
4
November 2006
The following data are given for sub-questions 1.5 and 1.6 below
The annual operating statement for a company is shown below:
£000
800
390
410
90
20
300
Sales revenue
Less variable costs
Contribution
Less fixed costs
Less depreciation
Net income
Assets
£6·75m
The cost of capital is 13% per annum.
1.5
The return on investment (ROI) for the company is closest to
A
4·44%
B
4·74%
C
5·77%
D
6·07%
(2 marks)
1.6
The residual income (RI) for the company is closest to
£000
A
(467)
B
(487)
C
(557)
D
(577)
(2 marks)
November 2006
5
P1
1.7
A company has reported annual operating profits for the year of £89·2m after charging
£9·6m for the full development costs of a new product that is expected to last for the
current year and two further years. The cost of capital is 13% per annum. The balance
sheet for the company shows fixed assets with a historical cost of £120m. A note to the
balance sheet estimates that the replacement cost of these fixed assets at the beginning
of the year is £168m. The assets have been depreciated at 20% per year.
The company has a working capital of £27·2m.
Ignore the effects of taxation.
The Economic Value Added® (EVA) of the company is closest to
A
£64·16m
B
£70·56m
C
£83·36m
D
£100·96m
(2 marks)
1.8
Which of the following definitions are correct?
(i)
Just-in-time (JIT) systems are designed to produce or procure products or
components as they are required for a customer or for use, rather than for
inventory;
(ii)
Flexible manufacturing systems (FMS) are integrated, computer-controlled
production systems, capable of producing any of a range of parts and of switching
quickly and economically between them;
(iii)
Material requirements planning (MRP) systems are computer based systems that
integrate all aspects of a business so that the planning and scheduling of
production ensures components are available when needed.
A
(i) only
B
(i) and (ii) only
C
(i) and (iii) only
D
(ii) and (iii) only
(2 marks)
P1
6
November 2006
1.9
RJD Ltd operates a standard absorption costing system. The following fixed production
overhead data is available for one month:
Budgeted output
Budgeted fixed production overhead
Actual fixed production overhead
Total fixed production overhead variance
200,000
£1,000,000
£1,300,000
£100,000
units
Adverse
The actual level of production was
A
180,000 units.
B
240,000 units.
C
270,000 units.
D
280,000 units.
(2 marks)
1.10 WTD Ltd produces a single product. The management currently uses marginal costing
but is considering using absorption costing in the future.
The budgeted fixed production overheads for the period are £500,000. The budgeted
output for the period is 2,000 units. There were 800 units of opening inventory at the
beginning of the period and 500 units of closing inventory at the end of the period.
If absorption costing principles were applied, the profit for the period compared to the
marginal costing profit would be
A
£75,000 higher.
B
£75,000 lower.
C
£125,000 higher.
D
£125,000 lower.
(2 marks)
November 2006
7
P1
1.11 JJ Ltd manufactures three products: W, X and Y. The products use a series of different
machines but there is a common machine that is a bottleneck.
The standard selling price and standard cost per unit for each product for the forthcoming
period are as follows:
W
£
200
X
£
150
Y
£
150
Cost
Direct materials
Labour
Overheads
Profit
41
30
60
69
20
20
40
70
30
36
50
34
Bottleneck machine
– minutes per unit
9
10
7
Selling price
40% of the overhead cost is classified as variable
Using a throughput accounting approach, what would be the ranking of the products for
best use of the bottleneck?
(3 marks)
1.12 X Ltd has two production departments, Assembly and Finishing, and two service
departments, Stores and Maintenance.
Stores provides the following service to the production departments: 60% to Assembly
and 40% to Finishing.
Maintenance provides the following service to the production and service departments:
40% to Assembly, 45% to Finishing and 15% to Stores.
The budgeted information for the year is as follows:
Budgeted fixed production overheads
Assembly
Finishing
Stores
Maintenance
£100,000
£150,000
£ 50,000
£ 40,000
Budgeted output
100,000 units
At the end of the year after apportioning the service department overheads, the total fixed
production overheads debited to the Assembly department’s fixed production overhead
control account were £180,000.
The actual output achieved was 120,000 units.
Calculate the under/over absorption of fixed production overheads for the Assembly
department.
(4 marks)
P1
8
November 2006
1.13 A company simultaneously produces three products (X, Y and Z) from a single process.
X and Y are processed further before they can be sold; Z is a by-product that is sold
immediately for $6 per unit without incurring any further costs. The sales prices of X and
Y after further processing are $50 per unit and $60 per unit respectively.
Data for October are as follows:
$
140,000
Joint production costs that produced 2,500 units of X, 3,500 units of Y
and 3,000 units of Z
Further processing costs for 2,500 units of X
Further processing costs for 3,500 units of Y
24,000
46,000
Joint costs are apportioned using the final sales value method.
Calculate the total cost of the production of X for October.
(3 marks)
1.14
ZP Plc operates two subsidiaries, X and Y. X is a component manufacturing subsidiary
and Y is an assembly and final product subsidiary. Both subsidiaries produce one type
of output only. Subsidiary Y needs one component from subsidiary X for every unit of
Product W produced. Subsidiary X transfers to Subsidiary Y all of the components
needed to produce Product W. Subsidiary X also sells components on the external
market.
The following budgeted information is available for each subsidiary:
X
$800
Market price per component
Market price per unit of W
Production costs per component
Assembly costs per unit of W
Non production fixed costs
Y
$1,200
$600
$1·5m
External demand
Capacity
$400
$1·3m
10,000 units
22,000 units
12,000 units
25%
30%
Taxation rates
The production cost per component is 60% variable. The fixed production costs are
absorbed based on budgeted output.
X sets a transfer price at marginal cost plus 70%.
Calculate the post tax profit generated by each subsidiary.
(4 marks)
November 2006
9
P1
1.15 PP Ltd operates a standard absorption costing system. The following information has
been extracted from the standard cost card for one of its products:
Budgeted production
Direct material cost: 7 kg x £4·10
1,500 units
£28·70 per unit
Actual results for the period were as follows:
Production
Direct material (purchased and used): 12,000 kg
1,600 units
£52,200
It has subsequently been noted that due to a change in economic conditions the best
price that the material could have been purchased for was £4·50 per kg during the
period.
(i)
Calculate the material price planning variance.
(ii)
Calculate the operational material usage variance.
(4 marks)
1.16 CJD Ltd manufactures plastic components for the car industry. The following budgeted
information is available for three of their key plastic components:
Selling price
Direct material
Direct labour
Units produced and sold
W
£ per unit
200
50
30
X
£ per unit
183
40
35
Y
£ per unit
175
35
30
10,000
15,000
18,000
The total number of activities for each of the three products for the period is as follows:
Number of purchase requisitions
Number of set ups
1,200
240
1,800
260
2,000
300
Overhead costs have been analysed as follows:
Receiving/inspecting quality assurance
Production scheduling/machine set up
£1,400,000
£1,200,000
Calculate the budgeted profit per unit for each of the three products using activity based
budgeting.
(4 marks)
P1
10
November 2006
1.17
CW Ltd makes one product in a single process. The details of the process for period 2
were as follows:
There were 800 units of opening work in progress valued as follows:
Material
Labour
Production overheads
£98,000
£46,000
£7,600
During the period 1,800 units were added to the process and the following costs were
incurred:
Material
Labour
Production overheads
£387,800
£276,320
£149,280
There were 500 units of closing work in progress, which were 100% complete for material,
90% complete for labour and 40% complete for production overheads.
A normal loss equal to 10% of new material input during the period was expected. The
actual loss amounted to 180 units. Each unit of loss was sold for £10 per unit.
CW Ltd uses weighted average costing.
Calculate the cost of the output for the period.
(4 marks)
1.18 SS Ltd operates a standard marginal costing system. An extract from the standard cost
card for the labour costs of one of its products is as follows:
Labour Cost
5 hours x £12
£60
Actual results for the period were as follows:
Production
Labour rate variance
Labour efficiency variance
11,500 units
£45,000 adverse
£30,000 adverse
Calculate the actual rate paid per direct labour hour.
(4 marks)
(Total for Section A = 50 marks)
End of Section A
Section B starts on page 11
November 2006
11
P1
SECTION B – 30 MARKS
[the indicative time for answering this section is 54 minutes]
ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5
MARKS
Question Two
The following scenario is given for sub-questions (a) to (f) opposite
X Plc manufactures specialist insulating products that are used in both residential and
commercial buildings. One of the products, Product W, is made using two different raw
materials and two types of labour. The company operates a standard absorption costing system
and is now preparing its budgets for the next four quarters. The following information has been
identified for Product W:
Sales
Selling price
£220 per unit
Sales demand
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Quarter 5
Quarter 6
2,250 units
2,050 units
1,650 units
2,050 units
1,250 units
2,050 units
Costs
Materials
A
B
5 kgs per unit @ £4 per kg
3 kgs per unit @ £7 per kg
Labour
Skilled
Semi-skilled
4 hours per unit @ £15 per hour
6 hours per unit @ £9 per hour
Annual overheads
Inventory holding policy
Closing inventory of finished goods
Closing inventory of materials
£280,000
40% of these overheads are fixed and the
remainder varies with total labour hours. Fixed
overheads are absorbed on a unit basis.
30% of the following quarter’s sales demand
45% of the following quarter’s materials usage
The management team are concerned that X Plc has recently faced increasing competition in
the market place for Product W. As a consequence there have been issues concerning the
availability and costs of the specialised materials and employees needed to manufacture
Product W, and there is concern that these might cause problems in the current budget setting
process.
P1
12
November 2006
(a)
Prepare the following budgets for each quarter for X Plc:
(i)
Production budget in units;
(ii)
Raw material purchases budget in kgs and value for Material B.
(5 Marks)
(b)
X Plc has just been informed that Material A may be in short supply during the year for
which it is preparing budgets. Discuss the impact this will have on budget preparation
and other areas of X Plc.
(5 Marks)
(c)
Assuming that the budgeted production of Product W was 7,700 units and that the
following actual results were incurred for labour and overheads in the year:
Actual production
Actual overheads
Variable
Fixed
Actual labour costs
Skilled - £16·25 per hour
Semi-skilled - £8 per hour
7,250 units
£185,000
£105,000
£568,750
£332,400
Prepare a flexible budget statement for X Plc showing the total variances that have
occurred for the above four costs only.
(5 Marks)
(d)
X Plc currently uses incremental budgeting. Explain how Zero Based Budgeting could
overcome the problems that might be faced as a result of the continued use of the current
system.
(5 Marks)
(e)
Explain how rolling budgets are used and why they would be suitable for X Plc.
(5 Marks)
(f)
Briefly explain how linear regression analysis can be used to forecast sales and briefly
discuss whether it would be a suitable method for X Plc to use.
(5 marks)
(Total for Question Two = 30 marks)
(Total for Section B = 30 marks)
End of Section B
Section C starts on page 13
November 2006
13
P1
SECTION C – 20 MARKS
[the indicative time for answering this section is 36 minutes]
ANSWER ONE OF THE TWO QUESTIONS
Question Three
X Ltd uses an automated manufacturing process to produce an industrial chemical, Product P.
X Ltd operates a standard marginal costing system. The standard cost data for Product P is as
follows:
Standard cost per unit of Product P
Materials
A
10 kgs @ £15 per kilo
£150
B
8 kgs @ £8 per kilo
£64
C
5 kgs @ £4 per kilo
£20
23 kgs
Total standard marginal cost
£234
Budgeted fixed production overheads
£350,000
In order to arrive at the budgeted selling price for Product P the company adds 80% mark-up to
the standard marginal cost. The company budgeted to produce and sell 5,000 units of Product
P in the period. There were no budgeted inventories of Product P.
The actual results for the period were as follows:
Actual production and sales
Actual sales price
Material usage and cost
A
B
C
5,450 units
£445 per unit
43,000 kgs
37,000 kgs
23,500 kgs
103,500 kgs
Fixed production overheads
£688,000
£277,500
£99,875
£385,000
Required:
(a)
Prepare an operating statement which reconciles the budgeted profit to the actual
profit for the period. (The statement should include the material mix and material
yield variances).
(12 marks)
(b)
The Production Manager of X Ltd is new to the job and has very little experience of
management information. Write a brief report to the Production Manager of X Ltd
that
(i)
(ii)
interprets the material price, mix and yield variances;
discusses the merits, or otherwise, of calculating the materials mix and
yield variances for X Ltd.
(8 marks)
(Total for Question Three = 20 marks)
P1
14
November 2006
Question Four
The ZZ Group has two divisions, X and Y. Each division produces only one type of product: X
produces a component (C) and Y produces a finished product (FP). Each FP needs one C. It is
the current policy of the group for C to be transferred to Division Y at the marginal cost of £10
per component and that Y must buy all the components it needs from X.
The markets for the component and the finished product are competitive and price sensitive.
Component C is produced by many other companies but it is thought that the external demand
for the next year could increase to 1,000 units more than the sales volume shown in the current
budget for Division X.
Budgeted data, taken from the ZZ Group Internal Information System, for the divisions for the
next year is as follows:
Division X
Income statement
Sales
Cost of sales
Variable costs
Contribution
Fixed costs (controllable)
Profit
£50,000
£20,000
£15,000
£ 5,000
Production/Sales (units)
External demand (units)
Capacity (units)
External market price per unit
5,000
3,000
5,000
£20
Balance sheet extract
Capital employed
£60,000
Other information
Cost of capital charge
10%
£70,000
(3,000 of which are transferred to Division Y)
(Only 2,000 of which can be currently satisfied)
Division Y
Income statement
Sales
Cost of sales
Variable costs
Contribution
Fixed costs (controllable)
Profit
£114,000
£156,000
£100,000
£ 56,000
Production/Sales (units)
Capacity (units)
Market price per unit
3,000
7,000
£90
Balance sheet extract
Capital employed
£110,000
Other information
Cost of capital charge
10%
November 2006
£270,000
15
P1
Four measures are used to evaluate the performance of the Divisional Managers. Based on the
data above, the budgeted performance measures for the two divisions are as follows:
Division X
(£1,000)
8·33%
7·14%
1·17
Residual income
Return on capital employed
Operating profit margin
Asset turnover
Division Y
£45,000
50·91%
20·74%
2·46
Current policy
It is the current policy of the group for C to be transferred to Division Y at the marginal cost of
£10 per component and that Y must buy all the components that it needs from X.
Proposed policy
ZZ Group is thinking of giving the Divisional Managers the freedom to set their own transfer
price and to buy the components from external suppliers but there are concerns about problems
that could arise by granting such autonomy.
Required:
(a)
If the transfer price of the component is set by the Manager of Division X at the
current market price (£20 per component), recalculate the budgeted
performance measures for each division.
(8 marks)
(b)
Discuss the changes to the performance measures of the divisions that would
arise as a result of altering the transfer price to £20 per component.
(6 marks)
(c)
(i)
Explain the problems that could arise for each of the Divisional Managers
and for ZZ Group as a whole as a result of giving full autonomy to the
Divisional Managers.
(ii)
Discuss how the problems you have explained could be resolved without
resorting to a policy of imposed transfer prices.
(6 marks)
(Total for Question Four = 20 marks)
(Total for Section C = 20 marks)
End of question paper
Maths Tables and Formulae are on pages 16 to 20
P1
16
November 2006
November 2006
17
P1
PRESENT VALUE TABLE
Present value of $1, that is (1+ r )
payment or receipt.
−n
where r = interest rate; n = number of periods until
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
Interest rates (r)
5%
6%
0.952
0.943
0.907
0.890
0.864
0.840
0.823
0.792
0.784
0.747
0.746
0705
0.711
0.665
0.677
0.627
0.645
0.592
0.614
0.558
0.585
0.527
0.557
0.497
0.530
0.469
0.505
0.442
0.481
0.417
0.458
0.394
0.436
0.371
0.416
0.350
0.396
0.331
0.377
0.312
7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
Interest rates (r)
15%
16%
0.870
0.862
0.756
0.743
0.658
0.641
0.572
0.552
0.497
0.476
0.432
0.410
0.376
0.354
0.327
0.305
0.284
0.263
0.247
0.227
0.215
0.195
0.187
0.168
0.163
0.145
0.141
0.125
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.070
0.060
0.061
0.051
17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031
20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
P1
18
November 2006
Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n
years
1− (1+ r ) − n
r
Periods
(n)
1
2
3
4
5
1%
0.990
1.970
2.941
3.902
4.853
2%
0.980
1.942
2.884
3.808
4.713
3%
0.971
1.913
2.829
3.717
4.580
4%
0.962
1.886
2.775
3.630
4.452
Interest rates (r)
5%
6%
0.952
0.943
1.859
1.833
2.723
2.673
3.546
3.465
4.329
4.212
7%
0.935
1.808
2.624
3.387
4.100
8%
0.926
1.783
2.577
3.312
3.993
9%
0.917
1.759
2.531
3.240
3.890
10%
0.909
1.736
2.487
3.170
3.791
6
7
8
9
10
5.795
6.728
7.652
8.566
9.471
5.601
6.472
7.325
8.162
8.983
5.417
6.230
7.020
7.786
8.530
5.242
6.002
6.733
7.435
8.111
5.076
5.786
6.463
7.108
7.722
4.917
5.582
6.210
6.802
7.360
4.767
5.389
5.971
6.515
7.024
4.623
5.206
5.747
6.247
6.710
4.486
5.033
5.535
5.995
6.418
4.355
4.868
5.335
5.759
6.145
11
12
13
14
15
10.368
11.255
12.134
13.004
13.865
9.787
10.575
11.348
12.106
12.849
9.253
9.954
10.635
11.296
11.938
8.760
9.385
9.986
10.563
11.118
8.306
8.863
9.394
9.899
10.380
7.887
8.384
8.853
9.295
9.712
7.499
7.943
8.358
8.745
9.108
7.139
7.536
7.904
8.244
8.559
6.805
7.161
7.487
7.786
8.061
6.495
6.814
7.103
7.367
7.606
16
17
18
19
20
14.718
15.562
16.398
17.226
18.046
13.578
14.292
14.992
15.679
16.351
12.561
13.166
13.754
14.324
14.878
11.652
12.166
12.659
13.134
13.590
10.838
11.274
11.690
12.085
12.462
10.106
10.477
10.828
11.158
11.470
9.447
9.763
10.059
10.336
10.594
8.851
9.122
9.372
9.604
9.818
8.313
8.544
8.756
8.950
9.129
7.824
8.022
8.201
8.365
8.514
Periods
(n)
1
2
3
4
5
11%
0.901
1.713
2.444
3.102
3.696
12%
0.893
1.690
2.402
3.037
3.605
13%
0.885
1.668
2.361
2.974
3.517
14%
0.877
1.647
2.322
2.914
3.433
Interest rates (r)
15%
16%
0.870
0.862
1.626
1.605
2.283
2.246
2.855
2.798
3.352
3.274
17%
0.855
1.585
2.210
2.743
3.199
18%
0.847
1.566
2.174
2.690
3.127
19%
0.840
1.547
2.140
2.639
3.058
20%
0.833
1.528
2.106
2.589
2.991
6
7
8
9
10
4.231
4.712
5.146
5.537
5.889
4.111
4.564
4.968
5.328
5.650
3.998
4.423
4.799
5.132
5.426
3.889
4.288
4.639
4.946
5.216
3.784
4.160
4.487
4.772
5.019
3.685
4.039
4.344
4.607
4.833
3.589
3.922
4.207
4.451
4.659
3.498
3.812
4.078
4.303
4.494
3.410
3.706
3.954
4.163
4.339
3.326
3.605
3.837
4.031
4.192
11
12
13
14
15
6.207
6.492
6.750
6.982
7.191
5.938
6.194
6.424
6.628
6.811
5.687
5.918
6.122
6.302
6.462
5.453
5.660
5.842
6.002
6.142
5.234
5.421
5.583
5.724
5.847
5.029
5.197
5.342
5.468
5.575
4.836
4.988
5.118
5.229
5.324
4.656
7.793
4.910
5.008
5.092
4.486
4.611
4.715
4.802
4.876
4.327
4.439
4.533
4.611
4.675
16
17
18
19
20
7.379
7.549
7.702
7.839
7.963
6.974
7.120
7.250
7.366
7.469
6.604
6.729
6.840
6.938
7.025
6.265
6.373
6.467
6.550
6.623
5.954
6.047
6.128
6.198
6.259
5.668
5.749
5.818
5.877
5.929
5.405
5.475
5.534
5.584
5.628
5.162
5.222
5.273
5.316
5.353
4.938
4.990
5.033
5.070
5.101
4.730
4.775
4.812
4.843
4.870
November 2006
19
P1
Formulae
PROBABILITY
A ∪ B = A or B.
A ∩ B = A and B (overlap).
P(B A) = probability of B, given A.
Rules of Addition
If A and B are mutually exclusive:
P(A ∪ B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A ∪ B) = P(A) + P(B) – P(A ∩ B)
Rules of Multiplication
If A and B are independent: P(A ∩ B) = P(A) * P(B)
P(A ∩ B) = P(A) * P(B | A)
If A and B are not independent:
E(X) = ∑ (probability * payoff)
Quadratic Equations
If aX2 + bX + c = 0 is the general quadratic equation, the two solutions (roots) are given by:
X =
− b ± b 2 − 4ac
2a
DESCRIPTIVE STATISTICS
Arithmetic Mean
x =
∑x
n
x=
∑ fx
∑f
(frequency distribution)
Standard Deviation
SD =
∑( x − x ) 2
n
INDEX NUMBERS
Price relative = 100 * P1/P0
Price:
Quantity:
SD =
∑ fx 2
− x 2 (frequency distribution)
f
∑
Quantity relative = 100 * Q1/Q0
P
∑ w ∗  1
 Po
∑w




x 100
Q 
∑ w ∗  1 
 Qo  x 100
∑w
TIME SERIES
Additive Model
Series = Trend + Seasonal + Random
Multiplicative Model
Series = Trend * Seasonal * Random
P1
20
November 2006
LINEAR REGRESSION AND CORRELATION
The linear regression equation of Y on X is given by:
Y = a + bX or Y - Y = b(X – X)
where
b=
Covariance ( XY) n ∑ XY − ( ∑ X)( ∑ Y )
=
Variance ( X)
n ∑ X 2 − ( ∑ X) 2
and
a = Y – bX
or solve
∑ Y = na + b ∑ X
∑ XY = a ∑ X + b∑X2
Coefficient of correlation
r=
R(rank) = 1 -
Covariance ( XY)
Var ( X).Var ( Y )
n ∑ XY − ( ∑ X)( ∑ Y )
=
{n ∑ X 2 − ( ∑ X) 2 }{n ∑ Y 2 − ( ∑ Y ) 2 }
6∑d2
n(n 2 − 1)
FINANCIAL MATHEMATICS
Compound Interest (Values and Sums)
Future Value S, of a sum of X, invested for n periods, compounded at r% interest
S = X[1 + r]n
Annuity
Present value of an annuity of £1 per annum receivable or payable for n years, commencing in
one year, discounted at r% per annum:
PV =
1
1 
1 −

r  [1 + r ] n 
Perpetuity
Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r
November 2006
21
P1
The Examiner for Management Accounting – Performance Evaluation offers to
future candidates and to tutors using this booklet for study purposes, the
following background and guidance on the questions included in this
examination paper.
Section A – Question One – Compulsory
Question One consists of 18 objective test sub-questions. These are drawn from all sections of
the syllabus. They are designed to examine breadth across the syllabus and thus cover many
learning outcomes.
Section B – Question Two – Compulsory
Question Two has six sub-questions.
(a)
(b)
(c)
(d)
(e)
(f)
covers learning outcome C(iii) – Calculate projected revenues and costs based on
product/service volumes, pricing strategies and cost structures.
covers learning outcome C(iii) – Calculate projected revenues and costs based on
product/service volumes, pricing strategies and cost structures.
covers learning outcome C(xi) – Evaluate performance using fixed and flexible budget
reports.
covers learning outcome C(vi) – Evaluate and apply alternative approaches to budgeting.
covers learning outcome C(vi) – Evaluate and apply alternative approaches to budgeting.
covers learning outcome C(ii) – Calculate projected product/service volumes employing
appropriate forecasting techniques.
Section C – answer one of two questions
Question Three has two parts.
(a)
(b)
covers learning outcome B(iii) –Prepare and discuss a report which reconciles budget and
actual profit using absorption and/or marginal costing principles.
covers learning outcome B(ii) - Calculate and interpret material, labour, variable overhead,
fixed overhead and sales variances.
Question Four has three parts.
(a)
(b)
(c)
P1
covers learning outcome D(iv) – Calculate and apply measures of performance for
investment centres.
covers learning outcome D(vi) - Explain the typical consequences of a divisional structure
for performance measurement as divisions compete or trade with each other.
covers learning outcome D(vii) - Identify the likely consequences of different approaches
to transfer pricing for divisional decision making, divisional and group profitability, the
motivation of divisional management and the autonomy of individual divisions.
22
November 2006
Managerial Level Paper
P1 – Management Accounting - Performance
Evaluation
Examiner’s Answers
SECTION A
Answer to Question One
1.1
Standard selling price
Actual selling price
£26
£31
£ 5 x 8,200 = £41,000 Favourable
The correct answer is B.
1.2
Sales profit volume variance
Budgeted sales
Actual sales
Units
8,700
8,200
500
x (£26 - £10 - £4) = £6,000 Adverse
The correct answer is A.
1.3
Fixed overhead volume variance
Units
Budgeted output
8,700
Actual output
8,200
500
x £4 = £2,000 Adverse
The correct answer is A.
1.4
The correct answer is D.
1.5
ROI 300,000 / 6,750,000 x 100 = 4·44%
The correct answer is A.
November 2006
23
P1
1.6
RI £300K – 877·5K (13% x £6·75m) = -£577·5
The correct answer is D.
£m
89·20
1.7
Profit
Add
Current depreciation (120 x 20%)
Development costs (£9·60 x 2/3)
Less
Replacement depreciation (£168 x 20%)
Adjusted profit
Less cost of capital charge (Working 1)
EVA
24·00
6·40
33·60
86·00
21·84
64·16
Working 1
Cost of capital charge
Fixed assets (£168 – 33·6)
Working capital
Development costs
134·4
27·2
6·4
168.0
x 13% = 21·84
The correct answer is A.
1.8
The correct answer is B.
1.9
OAR 1,000/200 = £5 per unit
Total variance
Actual
Absorbed
£1,200,000/£5 =
£1,300,000
£1,200,000
£ 100,000 adverse
240,000
The correct answer is B.
1.10
Opening inventory
Closing inventory
Decrease
Units
800
500
300 x (£500,000/2,000) = £75,000 lower
The correct answer is B.
1.11
Selling price
Cost
Direct materials
Throughput contribution
TP/LF
Ranking
P1
W
£
200
X
£
150
Y
£
150
41
159
159/9
£17·66
1st
20
130
130/10
£13·00
3rd
30
120
120/7
£17·14
2nd
24
November 2006
1.12
Overheads
Reapportion
Maintenance
Stores
OAR
Assembly
(£)
100,000
Finishing
(£)
150,000
Stores
(£)
50,000
Maintenance
(£)
40,000
16,000
33,600
149,600
149,600/100,000
£1·496 per unit
18,000
22,400
190,400
6,000
-56,000
Nil
-40,000
Assembly
Absorbed 120,000 x £1·496
Incurred
Under absorbed
1.13
£179,520
£180,000
£480
$140,000 - $18,000(by product)
Sales revenue
X (2,500 x $50)
Y (3,500 x $60)
$122,000
$125,000
$210,000
$335,000
Split between products
X [($125,000/$335,000) x $122,000] + $24,000 =
Y [($210,000/$335,000) x $122,000] + $46,000 =
X
($)
1.14
Sales
10,000 x $800
12,000 x $612
12,000 x $1,200
Costs
22,000 x $360
12,000 x $1,012
Fixed costs
Production 22,000 x $240
Non production
Profit
Tax
Profit after tax
1.15
$69,522
$122,475
$191,997
rounding
Y
($)
8,000,000
7,344,000
14,400,000
-7,920,000
-12,144,000
-5,280,000
-1,500,000
-1,300,000
644,000
-161,000
483,000
956,000
-286,800
669,200
Planning variance
Ex-ante standard
Ex-post standard
£ per kg
4·10
4·50
0·40 x 11,200 = £4,480 Adverse
Usage variance
Standard 7 x 1,600
Actual
kg
11,200
12,000
800 x £4·50 = £3,600 Adverse
November 2006
Nil
25
P1
1.16
Selling price
Direct material
Direct labour
Overheads
Receiving/inspecting etc
Production scheduling
Profit per unit
W
£ per unit
200·00
50·00
30·00
X
£ per unit
183·00
40·00
35·00
Y
£ per unit
175·00
35·00
30·00
33·60
36·00
50·40
33·60
26·00
48·40
31·11
25·00
53·89
Cost driver rates
Receiving/inspecting quality assurance
Production scheduling/machine set up
1.17
Equivalent units table
Description
Units
Output
CWIP
1,920
500
Costs
OWIP
Process
Less normal loss – 180 x £10
EU cost
£1,400,000/5,000 = £280 per requisition
£1,200,000/800 = £1,500 per set up
Materials
%
EU
100
1,920
100
500
2,420
Labour
%
EU
100
1,920
90
450
2,370
Overheads
%
EU
100
1,920
40
200
2,120
£
98,000
387,800
485,800
1,800
484,000
£200
£
46,000
276,320
322,320
£
7,600
149,280
156,880
£136
£74
Value of Output – 1,920 units x (£200 + £136 + £74) = £787,200
1.18
Efficiency variance
Standard hours
Actual hours
Rate variance
Standard rate
Actual rate
P1
57,500
60,000
2,500
x £12 = £30,000 Adverse
£12·00
£12·75
£0·75
x 60,000 hours = £45,000 Adverse
26
November 2006
SECTION B
Answer to (a)
Production Budget in units
Quarter 1 Quarter 2 Quarter 3 Quarter 4
2,250
2,050
1,650
2,050
615
495
615
375
-615
-495
-615
-675
2,190
1,930
1,770
1,810
Required by sales
Plus required closing inventory
less opening inventory
Production Budget
Total
8,000
375
-675
7,700
Raw Materials purchases budget
Material B
Required by production
Plus required closing inventory
less opening inventory
Material Purchases Budget
Value
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Total
kg
kg
kg
kg
kg
6,570
5,790
5,310
5,430
23,100
2,605·50 2,389·50 2,443·50 2,011·50
2,011·50
-2,956·50
-2,956·50 -2,605·50 -2,389·50 -2,443·50
6,219
5,574
5,364
4,998
22,155
£43,533
£39,018
£37,548
£34,986
£155,085
Answer to (b)
If material A is in short supply during the coming year, X plc will need to source a different
supplier or find a substitute material. If they are unable to do this then they will have to make
best use of the materials in scarce supply and focus their efforts on producing the product which
maximises contribution per limiting factor. Rather than starting with the sales budget they will
now need to start with the production budget due to the scarcity of material A as there will be a
limit to how many units of output they can produce. The production budget therefore becomes
the key budget factor which will drive the preparation of all budgets.
X plc could also review any wastage that may be occurring and aim to reduce this.
Answer to (c)
Operating Statement
Activity
Overheads
Variable
Fixed
Labour
Skilled
Semi-skilled
November 2006
Fixed Budget Flexed Budget
7,700
7,250
£
£
168,000
158,182
112,000
112,000
462,000
415,800
1,157,800
27
435,000
391,500
1,096,682
Actual Flexible Budget Variance
7,250
£
£
185,000
26,818 adverse
105,000
7,000 favourable
568,750
332,400
1,191,150
133,750 adverse
59,100 favourable
94,468 adverse
P1
Answer to (d)
Incremental budgeting builds in any inefficiency contained in the previous year’s budget as it
simply takes the previous year’s budget or actual results and adjusts for anticipated changes.
Incremental budgeting does not encourage building the budget from zero and justifying each
item of cost. It also does not allow for the changing nature of the business environment as it is
inward looking.
ZBB does require each cost element to be specifically justified, as though the activities to which
the budget relates were being undertaken for the first time, thereby avoiding the problems
encountered with incremental budgeting.
Answer to (e)
A rolling budget system is particularly useful when future costs and/or activities cannot be
forecast accurately. A rolling budget is continuously updated by adding a further accounting
period (month or quarter) when the earliest accounting period has expired. This means that a
company will always be looking nine to twelve months ahead. Also, the first three quarters of the
new budget are reviewed and revised to take account of any changed circumstances.
As X plc is experiencing an increase in competition in the market it will need to be able to react
to this by adjusting selling price, sales volume and so on. Also, the changes in material and
labour availability mean that it will need to be able to adjust budgets if these resources become
limited and therefore expensive, or the opposite where it could possibly produce more and
therefore increase its sales effort.
Answer to (f)
The linear regression method determines mathematically the regression line of best fit. When
forecasting sales a series of historical values for sales volume that vary over time would be
plotted on a graph and a time series may then reveal a trend or relationship. This trend or
relationship can then be adjusted for variations, for example cyclical, seasonal, long term trend
and random variations. Once the trend line has been adjusted for such variations a forecast of
future sales can be made. However it should be noted that linear regression analysis assumes
that the past is an indication of what will happen in the future.
The linear regression method for sales forecasting may be useful to X plc in that it could provide
a base from which other adjustments can be made according to the state of the market,
availability and costs of material and labour.
P1
28
November 2006
SECTION C
Answer to Question Three
(a)
Operating Statement
£
586,000
84,240 Favourable
670,240
Budgeted profit
Sales volume contribution variance
Variance
Sales price
Material price
A
B
C
Material mix
A
B
C
Material yield
Fixed production overheads
expenditure
£
129,710
Favourable
43,000
18,500
5,875
Adverse
Favourable
Adverse
30,000
8,000
4,000
222,300
Favourable
Adverse
Adverse
Favourable
£35,000
Adverse
304,635 Favourable
974,875
Total variances
Actual profit
Workings
Mix variance
Actual materials in standard mix
Actual materials in actual mix
Difference
Standard price
Variance
A
kg
45,000
43,000
2,000
£15
£30,000
favourable
Yield variance
Standard output from material input (103,500/23)
Actual output
Yield
Material price variance
Standard price per kg
Actual price per kg
x no of kg
November 2006
B
kg
36,000
37,000
-1,000
£8
£8,000
adverse
Total
kg
103,500
103,500
£18,000 favourable
4,500 units
5,450 units
950 units
x £234
£222,300 favourable
A
B
£15·00
£8·00
£16·00
£7·50
-£1·00
£0·50
43,000
37,000
£43,000
£18,500
adverse favourable
29
C
kg
22,500
23,500
-1,000
£4
£4,000
adverse
C
£4·00
£4·25
-£0·25
23,500
£5,875
adverse
£30,375 adverse
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(b)
Report
To:
Production Manager
From: Management Accountant
Date: 21 November 2006
Title: Material Price, Mix and Yield Variances
This report interprets the material price, mix and yield variances and also discusses the
advantages and disadvantages of calculating the materials mix and yield variances.
(i)
The material price variance is adverse because materials A and C cost more than
standard and more than offsetting the favourable variance on B. Material, mix and yield
variances are inter-related and, as individual variances, they should not be interpreted in
isolation. By changing the mix this has led to a favourable mix and yield variance. This
indicates that the decision to use less of material A and more of B and C has worked in
the company’s favour. The mix was also more efficient than the standard mix because the
yield variance was also favourable. It should be remembered that substitution of one
material for another can only occur up to a point otherwise the identity of the product or
the quality of the product can be seriously impacted upon.
(ii)
The material mix and yield variances are sub-divisions of the material usage variance. X
Ltd produces an industrial component where a standard input mix is the norm, and
recognisable individual components of input are combined during the production process
to produce an output in which the individual items are no longer separately identifiable.
X Ltd may have decided to vary the input mix because of a shortage of material and/or in
order to take advantage of an attractive input price on material B. Whether X Ltd’s input
mix is a standard or non-standard one, there is a possibility that the outcome from the
process will differ from that which was expected, that is the yield, in this instance the yield
has been favourable. By calculating the mix and yield variances, X Ltd highlights the
different aspects of the production process and provides additional insights to help
managers to attain the optimum combination of materials input. You should note that mix
and yield variances are appropriate only to those production processes where managers
have the discretion to vary the mix of materials and deviate from engineered input-output
relationships.
If X Ltd had not calculated the mix and yield variances they would have just calculated
material usage variances which demonstrates how much of the direct material total
variance was caused by using a different quantity of a material, compared with the
standard allowance for the production achieved. The usage variance does not consider
how a mix of different materials would have impacted on the yield and would not provide
managers with an insight to attain the optimum combination.
Should you require any further information, please do not hesitate to contact me.
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November 2006
Answer to Question Four
(a)
Income Statements
Division X
£
100,000
50,000
50,000
15,000
35,000
Division Y
£
270,000
144,000
126,000
100,000
26,000
35,000
6,000
29,000
26,000
11,000
15,000
Return on capital employed
58·33%
23·64%
Operating Profit Margin
35·00%
9·63%
1·67
2·46
Sales
Variable Costs
Contribution
Fixed Costs
Profit
Profit
Less cost of capital charge
Residual Income
Asset Turnover
(b)
Residual Income
Return on capital employed
Operating Profit Margin
Asset Turnover
Division X
Division X
Division Y
Division Y
Current
Current
Transfer Price Transfer Price
Transfer Price Transfer Price
is Marginal Cost is Market Price is Marginal Cost is Market Price
-£1,000
£29,000
£45,000
£15,000
8·33%
58·33%
50·91%
23·64%
7·14%
35·00%
20·74%
9·63%
1·17
1·67
2·46
2·46
The residual income for Division X has increased by £30k and for Division Y it has decreased by
£30k. This is due to the transfer price being set at market price. Division X’s revenue has
increased by £10 per component transferred (3,000 transferred - £30,000) and Division Y’s
marginal cost has increased by £10 per component received (3,000 received - £30,000).
The ROCE for Division X has increased to 58·33%, that is, by seven times as the operating
profit has increased seven fold (£5k to £35k). Division Y’s ROCE has decreased from 50·91% to
23·64%, that is, by approximately 54% because profit has reduced by 54%, that is, from £56k to
£26k.
The operating profit margin for Division X has increased by approximately five times as profit
has increased by seven times and sales have increased by approximately 43%. For Division Y
the operating profit margin has decreased by approximately 54% due to profit decreasing by
approximately 54% and the sales remaining the same.
The asset turnover ratio for Division X has increased to 1·67 due to an extra £30k sales being
generated in relation to the same capital employed. Whereas for Division Y, the asset turnover
ratio has remained unchanged as there has been no change to the turnover generated in
relation to the capital employed.
Therefore in all of the above cases Division X’s performance has improved whereas Division Y’s
performance has deteriorated with the exception of the asset turnover ratio which remains
unchanged. The manager of Division X will be happy to set a transfer price equal to market price
November 2006
31
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and Division Y will not be willing to pay the market price due to the impact on performance.
Division Y will either wish to negotiate a lower transfer price or alternatively source the
component externally at perhaps a more competitive price.
(c)
(i)
If ZZ Group relaxes the imposed transfer pricing system and the divisional managers of X
and Y negotiate the transfer price instead, the manager of Division X will want to set a
transfer price equal to the market price and the manager of Division Y will wish to retain
the current transfer price equal to marginal cost, due to the impact on the performance
ratios. This will mean that Division Y will either need to negotiate a lower transfer price
with Division X or alternatively source the component externally at perhaps a more
competitive price.
If the managers of Division X and Division Y negotiate a transfer price it should be
acceptable to both divisions since both managers have been responsible for the
negotiations. However, there are disadvantages to the use of negotiated transfer prices:
• The negotiations may be protracted and time consuming;
• The managers may find it impossible to reach agreement and then central
management may need to intervene which would negate the objective of giving
autonomy to divisions;
• The managers may not be negotiating from an equal basis, that is, one may be
more experienced than another and achieve a better result. This could lead to poor
motivation and behavioural problems.
If negotiations fail and ZZ Group do not intervene then Division Y may source the
component externally. If the components are sourced externally this will result in spare
capacity of 2,000 components for Division X as there is only an external market for an
additional 1,000 components. Assuming Division X’s fixed costs remain constant and they
cannot use the spare capacity to generate further profits for the group then this will have a
negative impact on the overall profit for the ZZ Group.
(ii)
One of the main problems identified in C(i) is that Division X will want to set a transfer
price equal to the market place and that the manager of Division Y will wish to retain the
current transfer price equal to marginal cost, due to the impact on performance ratios. A
recommended resolution to the problem could be a two-part tariff or dual pricing transfer
pricing system. A two-part tariff works where the transfer is at marginal cost and a fixed
fee is credited to Division X to compensate them for the lost additional contribution and
the subsequent reduction in the performance ratios. Alternatively a dual pricing system
could be used where the transfer is recorded in Division Y at marginal cost and in Division
X at market price and the discrepancy between the two prices is recorded in an account
at head office. Either of these methods would allow the divisions to remain autonomous
and ZZ Group to protect group profits. The Group could continue to measure performance
based on the four key ratios and still motivate the divisional managers to improve their
performance.
The other issues identified when managers are negotiating a transfer price, that is,
negotiations becoming protracted and time consuming; difficulty in reaching an agreement
and the possibility that one manager may be more skilled than another in such
negotiations, could be overcome by head office appointing an arbitrator to assist the
managers in arriving at a fair transfer price.
If the divisional managers fail to negotiate a transfer price then central management will
have to intervene to avoid a reduction in group profit if Division Y sources the component
externally.
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November 2006