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ACCA MOCK
PERFORMANCE MANAGEMENT
Time allowed
3 hours and 15 minutes
This paper is divided into three sections:
Section A ‐ All 15 questions are compulsory and MUST be attempted
Section B ‐ All 15 questions are compulsory and MUST be attempted
Section C ‐ BOTH questions are compulsory and MUST be attempted
Formulae sheet, present value and annuity tables are on pages 3, 4
and 5
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1. D
Number of units to be sold = Contribution required / Contribution per unit
Contribution required = Total fixed cost + Total profit
Contribution required = ($20,000 x 12 + $10,000 x 4) + $400,000
Contribution required = $680,000
Contribution per unit = Unit selling price - Unit variable cost
Contribution per unit = $750 - ($220 + $105 + $29 + $76)
Contribution per unit = $320
Number of units to be sold = Contribution required / Contribution per unit
Number of units to be sold = $680,000 / $320
Number of units to be sold = 2,125 Units
2. A
The candidates need thorough knowledge of break-even formulas to solve this
question.
Break-even revenue = Fixed costs / Contribution to sales ratio
Re-arranging the formula;
Fixed costs = Break-even revenue x Contribution to sales ratio
Fixed costs = $600,000 x 40%
Fixed costs = $240,000
Contribution per unit = Selling price x Contribution to sales ratio
Contribution per unit = $90 x 40%
Contribution per unit = $36
Total contribution = Units sold x Contribution per unit
Total contribution = 30,000 x $36
Total contribution = $1,080,000
Total profit = Total contribution – Fixed costs
Total profit = $1,080,000 - $240,000
Total profit = $840,000
3. B
A risk-neutral decision-maker uses expected values to select the right option.
Given that the revenue from each job order is $325,000, the profits can be
maximised by selecting the project with lowest cost.
Costs of Job Orders:
Job Order ‘W’ = 220,000 x 0.6 + 300,000 x 0.3 + 360,000 x 0.1 = $258,000
Job Order ‘X’ = 105,000 x 0.6 + 135,000 x 0.3 + 400,000 x 0.1 = $143,500
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Job Order ‘Y’ = 285,000 x 0.6 + 290,000 x 0.3 + 295,000 x 0.1 = $287,500
Job Order ‘Z’ = 230,000 x 0.6 + 310,000 x 0.3 + 390,000 x 0.1 = $270,000
Based on expected values, Job order X incurs the lowest cost and, therefore,
results in maximum profits.
4. B
The first, second and fourth statements are incorrect. The characteristics of
standards include ownership, achievability and fairness. Rewards should be clear,
motivating and controllable. The model considers internal as well as external factors.
5. B
This question tests the ability of candidates to convert quantities from one unit to
another.
Cost of one bottle = $10
Cost of 8,000 bottles = $10 x 8,000 = $80,000
Liquid cost of one bottle = $1,500 / 1,000 x 300 = $450
Liquid cost of 8,000 bottles = $450 x 8,000 = $3,600,000
Labour cost of one bottle = $20 / 3,600 x 45 = $0.25
Labour cost of 8,000 bottles = $0.25 x 8,000 = $2,000
Courier charges of entire shipment = $0.008 x 1,000 x 3,200 = $25,600
Total cost of 8,000 bottles = $80,000 + $3,600,000 + $2,000 + $25,600 = $3,707,600
Price to quote = $3,707,600 x 125% = $4,634,500
6. A
The first two statements are incorrect. Penetration pricing is useful when the
demand for a product is highly elastic. Penetration pricing, and not price
skimming, is useful when a business wishes to achieve economies of scale.
7. D
Shadow price of a material is the value by which contribution increases for each
additional unit of material. It is the ‘extra’ price that a business can bear over and
above the current price.
Therefore, the maximum price a business can bear is $5 + $9 = $14 per kg.
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8. A
To be able to solve this question, candidates need to know the formula for calculating
return on capital employed, operating profit margin as well as asset turnover ratio.
ROCE = Operating profit / Total assets
Operating profit margin = Operating profit / Revenue
Asset turnover = Revenue / Total assets
If we multiply operating profit margin with asset turnover, the revenue in numerator
of the former and denominator of the latter are cancelled out. Therefore,
ROCE = Operating profit margin x Asset turnover
ROCE = 16% x 72%
ROCE = 11.52%
9. C
The first and third statements are incorrect. Life-cycle costing encourages long-term
focus. Moreover, it includes the costs incurred during the development phase.
10. B
MR = a - 2bQ
b = 50 / 2,500
b = 0.02
a = 600 + 0.02 x 90,000
a = 2,400
Substituting the values in first equation;
MR = 2,400 - 2 x 0.02Q
MR = 2,400 - 0.04Q
Since the profits are maximised when marginal revenue equals marginal cost;
MC = MR
Substituting the values of MC and MR;
420 = 2,400 – 0.04Q
0.04Q = 2,400 – 420
Q = 1980 / 0.04
Q = 49,500
All these values can now be entered in the demand equation to calculate profitmaximising selling price;
P = a – bQ
P = 2,400 – 0.02 x 49,500
P = $1,410
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11. C
The limiting factor analysis begins with the estimation of total demand and
identification of limit factor (if any). The contribution per unit and contribution per
unit of limiting factor are then calculated. The last step is to rank the products based
upon the highest contribution per unit of limiting factor. This enables the
organisation to maximise the benefits within the constraints of limiting factor.
12. D
The cost gap can be calculated as;
Cost gap = Estimated cost – Target cost
Estimated costs comprise of all types of costs, including production costs, nonproduction costs, variable costs and fixed costs.
Estimated cost = 90.10 + 75.30 + 60.80 + 18.90 + 25.20 + 11.20 = $281.50
Remember, margin is applied on sales, whereas mark-up is applied on cost.
Target cost = $300 / 100 x 75 = $225
Cost gap = $281.50 – $225 = $56.50
13. D
Standard proportion of Product A = 1,200 / 3,000 = 40%
Standard proportion of Product B = 1,800 / 3,000 = 60%
Actual quantity sold =1,500 + 1,000 = 2,500
Standard mix of actual quantity – Product A =2,500 x 40% = 1,000
Standard mix of actual quantity – Product B = 2,500 x 60% = 1,500
Product Standard mix
Actual mix
Variance Profit
A
1,000
1,500
500 (F)
$16.40
B
1,500
1,000
500 (A)
$30.20
Total
2,500
2,500
-
Variance
$8,200 (F)
$15,100 (A)
$6,900 (A)
14. C
Unexpected increase in product demand results in favourable sales volume
variance. Idle time variance is always adverse. Labour rate variance compares the
actual cost of labour with what it should have cost.
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15. D
In order to solve this question, the candidates need to have a complete
understanding of the elements involved in labour rate variance. Some additional
maths is required to solve.
Labour Rate Variance: (Actual rate – Standard rate) x Actual hours worked
The value is positive, if the variance is adverse. Putting values in the formula;
300,000 = (Actual rate – 15.00) x 35,000
300,000 = Actual rate x 35,000 – 15.00 x 35,000
300,000 = Actual rate x 35,000 – 525,000
300,000 + 525,000= Actual rate x 35,000
825,000 / 35,000 = Actual rate
Actual Rate = $23.57
Section B
16. C
The relevant cost of Paper A is its scrap value of $8,000 and any other information
is irrelevant as the material is no longer in use. The relevant cost of Paper B is
$250,000. The relevant cost of Paper C is $220,000 and the historical cost of
$200,000 is irrelevant.
Total relevant cost = $8,000 + $250,000 + $220,000
Total relevant cost = $478,000
17. C
Given that skilled workers will be compensated regardless of the job order, their
entire cost is irrelevant. Semi-skilled workers will be hired through local agency at
a cost of $600 x 21 = $12,600.
18. A
All information about the historical cost and book value of the printer is irrelevant.
Since the printer can no longer be sold, it has a relevant cost of zero. The
cartridges, however, will have to be procured for $15,000 and represent relevant
cost.
19. B
The fixed cost of electricity is not incremental and, therefore, irrelevant. Only the
variable charge of 1,200 units x $2.5 = $3,000 are relevant. Similarly, the interest
charge is notional and irrelevant cost.
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20. D
Overheads are excluded as they are not incremental. All sunk costs, i.e. costs
incurred in the past, are irrelevant. Notional costs are considered irrelevant.
21. D
Under maximax approach, Delicious Food will select the maximum of maximum
outcomes for each supply level.
300 meals = 1,200
400 meals = 1,450
500 meals = 1,700
600 meals = 1,950
Delicious Food will, therefore, prepare 600 meals.
22. A
Under maximin approach, Delicious Food will select the maximum of
minimum outcomes for each supply level.
300 meals = 1,200
400 meals = 1,050
500 meals = 900
600 meals = 750
Delicious Food will, therefore, prepare 300 meals.
23. C
Supply level
Demand level
300
400
500
600
$
$
$
$
300
0
150
300
450
400
250
0
100
200
500
500
250
0
100
600
750
500
250
0
Max regret
750
500
300
450
On the basis of minimax regret rule, Delicious Food will choose to prepare 500
meals as it minimises the maximum regret.
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24. A
The maximum price Delicious Food should pay would be the difference between
expected value with perfect information and expected value without perfect
information.
Expected value with perfect information = (0·20 x $1,200) + (0·30 x $1,450) + (0·40 x
$1,700) + (0·10 x $1,950)
Expected value with perfect information =$1,550
Expected value of producing 300 meals = (0·20 x $1,200) + (0·30 x $1,200) + (0·40 x
$1,200) + (0·10 x $1,200)
Expected value of producing 300 meals = $1,200
Expected value of producing 400 meals = (0·20 x $1,050) + (0·30 x $1,450) + (0·40 x
$1,450) + (0·10 x $1,450)
Expected value of producing 400 meals =$1,370
Expected value of producing 500 meals = (0·20 x $900) + (0·30 x $1,350) + (0·40 x
$1,700) + (0·10 x $1,700)
Expected value of producing 500 meals = $1,435
Expected value of producing 600 meals = (0·20 x $750) + (0·30 x $1,250) + (0·40 x
$1,600) + (0·10 x $1,950)
Expected value of producing 600 meals =$ 1,360
In the absence of perfect information, Delicious Food would choose to produce 500
meals with a total profit of $1,435.
Value of perfect information = $1,550 - $1,435
Value of perfect information = $115
25. A
The first and second statements are incorrect. A risk-neutral decision-maker uses
expected values to choose the right option. A risk taking decision-maker uses
maximax approach to choose the right option.
26. A
The first step is to calculate the revised standard rate of steel. Given that the price of
steel has increased by 30% in the international market, the standard should be
revised to: $5 x 130% = $6.5
Planning variance = (Revised standard Rate – Standard rate) x Actual quantity
Planning variance for Waterproof lockers = ($6.50 – $5.00) x 55,000
Planning variance for Waterproof lockers = $82,500 (A)
Planning variance for High-security lockers = ($6.50 – $5.00) x 260,000
Planning variance for High-security lockers = $390,000 (A)
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27. C
Operational
Operational
Operational
Operational
Operational
variance = (Actual rate – Revised standard rate) x Actual quantity
variance for Waterproof lockers = ($6.00 - $6.50) x 55,000
variance for Waterproof lockers = $27,500 (F)
variance for High-security lockers = ($6.00 - $6.50) x 260,000
variance for High-security lockers = $130,000 (F)
28. D
The first step is to calculate the revised standard usage of steel for Waterproof
lockers. Given that the usage of steel has increased by 10%, the standard should be
revised to: 2 kg x 110% = 2.20 kg per unit.
Material usage planning variance = (Standard quantity for actual production –
Revised quantity for actual production) x Standard price
Material usage planning variance for Waterproof lockers = (40,000 – 44,000) x $5
Material usage planning variance for Waterproof lockers = $20,000 (A)
Material usage planning variance for High-security lockers = (250,000 – 250,000) x $5
Material usage planning variance for High-security lockers = $0
29. D
Both statements are incorrect. Planning variances can be reduced by extensive
research and by incorporating external factors in the plan. Planning variances
compare original standard with revised standard.
30. C
The first two statements are incorrect. There is no, positive or negative, relationship
between planning and operational variance. Both the variances can be adverse as
well as favourable. Planning variances are not used to assess the performance of
junior managers. Instead, operational variances are used for this purpose.
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Section C
31. Silicon Co
Part (a)
Revenue from XX – 1,400 x 98% x $30.20
Revenue from YY – 1,700 x 98% x $46.50
Revenue from ZZ – 2,000 x 98% x $46.50
Total Revenue
Total variable cost of XX – 1,400 x ($15.20 + $14.50 - $2.50)
Total variable cost of YY – 1,700 x ($16.50 + $11.30 - $2.50)
Total variable cost of ZZ – 2,000 x ($17.10 + $10.80 - $2.50)
Fixed monthly cost of Division A - $120,000/12
Fixed monthly cost of Division B - $300,000/12
Total Costs
Total Profit
Part (b)
Processing Transistor X to Amplifier XX
Incremental revenue: (1,400 x 0.98 x $30.20) – (1,400 x $17.20)
Incremental cost: {1,400 x ($14.50 - $2.50)}
Net profit due to further processing:
$41,434
$77,469
$71,344
$190,247
($38,080)
($43,010)
($50,800)
($10,000)
($25,000)
($166,890)
$23,357
$17,354
($16,800)
$554
Processing Transistor Y to Amplifier YY
Incremental revenue: (1,700 x 0.98 x $46.50) – (1,700 x $19.60) $44,149
Incremental cost: {1,700 x ($11.30 - $2.50)} ($14,960)
Net profit due to further processing: $29,189
Processing Transistor Z to Amplifier ZZ
Incremental revenue: (2,000 x 0.98 x $36.40) – (2,000 x $22.50) $26,344
Incremental cost: {2,000 x ($10.80 - $2.50)} ($16,600)
Net profit due to further processing: $9,744
(Note: The calculations assume that fixed costs in Division B would be incurred
regardless of the decision to further process. In the longer run, fixed costs will also be
saved. Alternate calculations, with proper justification of fixed costs, will earn due
credit).
Conclusion
Given that further processing of each of the product results in net profit, all of them
should be processed further.
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Part (c)
The board has ordered Division A to transfer all products at marginal cost. Although
Division A would be able to recover its variable costs, it would not be able to
generate any profits. Transferring at marginal cost will also prevent Division A to
recover its fixed costs, thereby resulting in overall loss for the division.
Consequently, Division A will openly oppose such a decision. This decision will also
have a detrimental effect on the motivation of staff in Division A.
Both divisions currently operate as investment centres. This implies that their
performance is assessed on the basis of profitability, residual income and overall
return on capital employed. The decision made by the board will drastically affect
the profits of Division A. The usual criteria of assessing performance on the basis of
RI and ROI will become meaningless.
An alternate option for the board is to reclassify Division A as a cost centre instead
of investment centre. Since it will be transferring all of its products at marginal cost,
and without any profits, the suggested classification will limit the responsibility of
Division A to costs. However, the sales and marketing staff at Division A will have to
be transferred or made redundant. The additional costs associated with this process
must also be ascertained. Ideally, the board will have to merge the two divisions
into one as divisional structure will no longer be useful. Division A will simply
function as a production department.
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32. Clean Co
Part (a)
X
$4
$4
$1.5
$5
$14.5
Y
$6
$2
$3
$10
$21
Z
$2
$18
$7.5
$25
$52.5
Direct material cost (A)
Direct material cost (B)
Direct labour cost ($15 per hour)
Overhead cost per unit (W1)
Total cost per unit
W1 – Overhead cost per unit
Total overhead costs = $240,000 + $100,000 + $200,000 + $140,000
Total overhead costs = $680,000
Total labour hours = (1.5 / 15 x 14,000) + (3 / 15 x 16,000) + (7.5 / 15 x 18,000)
Total labour hours = 13,600
Overhead absorption rate (OAR) = $680,000 / 13,600
Overhead absorption rate (OAR) = $50 per labour hour
Detergent X = 1.5 / 15 x $50 = $5
Detergent Y = 3 / 15 x $50 = $10
Detergent Z = 7.5 / 15 x $50 = $25
Part (b)
Detergent X
Revenue – 14,000 x $36
Cost – 14,000 x $14.50
Profit
Detergent Y
Revenue – 16,000 x $28
Cost – 16,000 x $21
Profit
Detergent Z
Revenue – 18,000 x $53
Cost – 18,000 x $52.50
Profit
$504,000
($203,000)
$301,000
$448,000
($336,000)
$112,000
$954,000
($945,000)
$9,000
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Part (c)
Direct material cost (A)
Direct material cost (B)
Direct labour cost ($15 per hour)
Overhead cost per unit (W1, W2 and W3)
Total cost per unit $25.83 $33.75 $32.35
X
$4
$4
$1.5
$16.33
Y
$6
$2
$3
$22.75
W1 - Overhead cost of Detergent X
Procurement costs - $240,000 / 80 x 30
Machine set up costs - $100,000 / 20 x 6
Delivery costs - $200,000 / 60 x 20
Electricity costs - $140,000 / 10 x 3
Total cost
Units produced
Cost per unit
W2 - Overhead cost of Detergent Y
Procurement costs - $240,000 / 80 x 40
Machine set up costs - $100,000 / 20 x 12
Delivery costs - $200,000 / 60 x 30
Electricity costs - $140,000 / 10 x 6
Total cost
Units produced
Cost per unit
$120,000
$60,000
$100,000
$84,000
$364,000
16,000
$22.75
W3 - Overhead cost of Detergent Z
Procurement costs - $240,000 / 80 x 10
Machine set up costs - $100,000 / 20 x 2
Delivery costs - $200,000 / 60 x 10
Electricity costs - $140,000 / 10 x 1
Total cost
Units produced
Cost per unit
$30,000
$10,000
$33,000
$14,000
$87,333
18,000
$4.85
Z
$2
$18
$7.5
$4.85
$90,000
$30,000
$66,667
$42,000
$228,667
14,000
$16.33
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Part (d)
Detergent X
Revenue – 14,000 x $36
Cost – 14,000 x $25.83
Profit
Detergent Y
Revenue – 16,000 x $28
Cost – 16,000 x $33.75
Loss
Detergent Z
Revenue – 18,000 x $53
Cost – 18,000 x $32.35
Profit
$504,000
($361,620)
$142,380
$448,000
($540,000)
($92,000)
$954,000
($582,300)
$371,700
Part (e)
The overheads calculated on the basis of activity based costing (ABC) are
fundamentally different from the ones calculated through absorption costing. ABC
traces all the costs to their actual drivers and, therefore, provides a better
understanding of the costs. It also illustrates the true profitability of each product.
ABC reveals that Detergent Y is actually loss making. The production of detergent Y
includes considerably higher activities than the production of other two
detergents. Based on this information, it is beneficial for Clean Co to discontinue
the production of Detergent Y.
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