Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FOUR questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Pilot Paper – Skills module
Answer ALL FOUR questions
1
Triple Limited makes three types of gold watch – the Diva (D), the Classic (C) and the Poser (P). A traditional product
costing system is used at present; although an activity based costing (ABC) system is being considered. Details of the
three products for a typical period are:
Product D
Product C
Product P
Hours per unit Labour hours Machine hours ½
1½
1½
1
1
3
Materials Production
Cost per unit ($) Units
20
1,750
12
1,250
25
7,000
Required:
(a) Calculate the cost per unit for each product using traditional methods, absorbing overheads on the basis of
machine hours.
(3 marks)
Total production overheads are $654,500 and further analysis shows that the total production overheads can be
divided as follows:
Costs relating to set-ups
Costs relating to machinery
Costs relating to materials handling
Costs relating to inspection
Total production overhead
%
35
20
15
30
100
The following total activity volumes are associated with each product line for the period as a whole:
Product D
Product C
Product P
Number of
Set ups
175
115
480
Number of movements
of materials
112
121
187
Number of
inspections
1,150
1,180
1,670
670
120
1,000
Required:
(b) Calculate the cost per unit for each product using ABC principles (work to two decimal places).
(12 marks)
(c) Explain why costs per unit calculated under ABC are often very different to costs per unit calculated under
more traditional methods. Use the information from Triple Limited to illustrate.
(4 marks)
(d) Discuss the implications of a switch to ABC on pricing and profitability.
(6 marks)
(25 marks)
Taha Popatia - ARTT Business School - 02134523175
Direct labour costs $6 per hour and production overheads are absorbed on a machine hour basis. The overhead
absorption rate for the period is $28 per machine hour.
2
Simply Soup Limited manufactures and sells soups in a JIT environment. Soup is made in a manufacturing process
by mixing liquidised vegetables, melted butter and stock (stock in this context is a liquid used in making soups). They
operate a standard costing and variances system to control its manufacturing processes. At the beginning of the current
financial year they employed a new production manager to oversee the manufacturing process and to work alongside
the purchasing manager. The production manager will be rewarded by a salary and a bonus based on the directly
attributable variances involved in the manufacturing process
After three months of work there is doubt about the performance of the new production manager. On the one hand, the
cost variances look on the whole favourable, but the sales director has indicated that sales are significantly down and
the overall profitability is decreasing.
The table below shows the variance analysis results for the first three months of the manager’s work.
Table 1
Material Price Variance
Material Mix Variance
Material Yield Variance
Total Variance
Month 1 $300 (F)
$1,800 (F)
$2,126 (F)
$4,226 (F)
Month 2 $900 (A)
$2,253 (F)
$5,844 (F)
$7,197 (F)
Month 3
$2,200 (A)
$2,800 (F)
$9,752 (F)
$10,352 (F)
The actual level of activity was broadly the same in each month and the standard monthly material total cost was
approximately $145,000.
The standard cost card is as follows for the period under review
$
0.90 litres of liquidised vegetables @ $0.80/ltr =
0.72
0.05 litres of melted butter @$4/ltr
0.20
1.10 litres of stock @ $0.50/ltr
0.55
Total cost to produce 1 litre of soup
1.47
Required:
(a) Using the information in table 1:
(i)
Explain the meaning of each type of variances above (price, mix and yield but excluding the total variance)
and briefly discuss to what extent each type of variance is controllable by the production manager.
(6 marks)
(ii) Evaluate the performance of the production manager considering both the cost variance results above
and the sales director’s comments.
(6 marks)
(iii) Outline two suggestions how the performance management system might be changed to better reflect the
performance of the production manager.
(4 marks)
(b) The board has asked that the variances be calculated for Month 4. In Month 4 the production department data
is as follows:
Actual results for Month 4
Liquidised vegetables:
Melted butter:
Stock:
Actual production was 112,000 litres of soup
Required:
Bought
Bought
Bought
82,000 litres
4,900 litres
122,000 litres
costing $69,700
costing $21,070
costing $58,560
Calculate the material price, mix and yield variances for Month 4. You are not required to comment on the
performance that the calculations imply. Round variances to the nearest $.
(9 marks)
(25 marks)
Taha Popatia - ARTT Business School - 02134523175
F = Favourable. A = Adverse
BFG Limited is investigating the financial viability of a new product the S-pro. The S-pro is a short-life product for which
a market has been identified at an agreed design specification. The product will only have a life of 12 months.
The following estimated information is available in respect of S-pro:
1.
Sales should be 120,000 in the year in batches of 100 units. An average selling price of $1,050 per batch of 100
units is expected. All sales are for cash.
2.
An 80% learning curve will apply for the first 700 batches after which a steady state production time will apply,
with the labour time per batch after the first 700 batches being equal to the time for the 700th batch. The cost of
the first batch was measured at $2,500. This was for 500 hours at $5 per hour.
3.
Variable overhead is estimated at $2 per labour hour.
4.
Direct material will be $500 per batch of S-pro for the first 200 batches produced. The second 200 batches will
cost 90% of the cost per batch of the first 200 batches. All batches from then on will cost 90% of the batch cost
for each of the second 200 batches. All purchases are made for cash
5.
S-pro will require additional space to be rented. These directly attributable fixed costs will be $15,000 per
month.
A target net cash flow of $130,000 is required in order for this project to be acceptable.
Note: The learning curve formula is given on the formulae sheet. At the learning rate of 0.8 (80%), the learning
factor (b) is equal to -0.3219.
Required:
(a) Prepare detailed calculations to show whether product S-pro will provide the target net cash flow. (12 marks)
(b) Calculate what length of time then second batch will take if the actual rate of learning is:
(i) 80%;
(ii) 90%.
Explain which rate shows the faster learning.
(5 marks)
(c) Suggest specific actions that BFG could take to improve the net cash flow calculated above.
(8 marks)
(25 marks)
Taha Popatia - ARTT Business School - 02134523175
3
4
The following information relates to Preston Financial Services, an accounting practice. The business specialises in
providing accounting and taxation work for dentists and doctors. In the main the clients are wealthy, self-employed and
have an average age of 52.
The business was founded by and is wholly owned by Richard Preston, a dominant and aggressive sole practitioner.
He feels that promotion of new products to his clients would be likely to upset the conservative nature of his dentists
and doctors and, as a result, the business has been managed with similar products year on year.
You have been provided with financial information relating to the practice in appendix 1. In appendix 2, you have been
provided with non-financial information which is based on the balanced scorecard format.
Turnover ($’000)
Net profit ($’000)
Average cash balances ($’000)
Average debtor / trade receivables days (industry average 30 days)
Inflation rate (%)
Current year
945
187
21
18 days
3
Previous year
900
180
20
22 days
3
Current year
16%
7 weeks
Previous year
10%
10 weeks
Current year
1220
775
14%
Previous year
1500
600
20%
Current year
4%
Previous year
5%
30%
60%
25%
80%
Appendix 2: Balanced Scorecard (extract)
Internal Business Processes
Error rates in jobs done
Average job completion time
Customer Knowledge
Number of customers
Average fee levels ($)
Market Share
Learning and Growth
Percentage of revenue from non-core work
Industry average of the proportion of revenue from non-core work
in accounting practices
Employee retention rate.
Notes
1.
Error rates measure the number of jobs with mistakes made by staff as a proportion of the number of clients
serviced
2.
Core work is defined as being accountancy and taxation. Non-core work is defined primarily as pension advice and
business consultancy. Non core work is traditionally high margin work
Required:
(a) Using the information in appendix 1 only, comment on the financial performance of the business (briefly
consider growth, profitability, liquidity and credit management).
(8 marks)
(b) Explain why non financial information, such as the type shown in appendix 2, is likely to give a better
indication of the likely future success of the business than the financial information given in appendix 1.
(5 marks)
(c) Using the data given in appendix 2 comment on the performance of the business. Include comments on
internal business processes, customer knowledge and learning/growth, separately, and provide a concluding
comment on the overall performance of the business.
(12 marks)
(25 marks)
End of Question paper
Taha Popatia - ARTT Business School - 02134523175
Appendix 1: Financial information
Formulae Sheet
Learning curve
Y = axb
Where y =
a=
x=
b=
LR =
average cost per batch
cost of first batch
total number of batches produced
learning factor (log LR/log 2)
the learning rate as a decimal
y=a+bx
b=
n∑xy-∑x∑y
n∑x2 -(∑x)2
a=
∑y b∑x
n
n
r=
n∑xy-∑x∑y
n∑x2 -(∑x)2 )(n∑y 2 -(∑y)2 )
Demand curve
P = a – bQ
b = change in price
change in quantity
a = price when Q = 0
Taha Popatia - ARTT Business School - 02134523175
Regression analysis
Monday 10 December 2007
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FOUR questions are compulsory and MUST be attempted.
Formulae Sheet is on page 9
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
2
Taha Popatia - ARTT Business School - 02134523175
This is a blank page.
The question paper begins on page 3.
ALL FOUR questions are compulsory and MUST be attempted
Edward Co assembles and sells many types of radio. It is considering extending its product range to include digital
radios. These radios produce a better sound quality than traditional radios and have a large number of potential
additional features not possible with the previous technologies (station scanning, more choice, one touch tuning,
station identification text and song identification text etc).
A radio is produced by assembly workers assembling a variety of components. Production overheads are currently
absorbed into product costs on an assembly labour hour basis.
Edward Co is considering a target costing approach for its new digital radio product.
Required:
(a) Briefly describe the target costing process that Edward Co should undertake.
(3 marks)
(b) Explain the benefits to Edward Co of adopting a target costing approach at such an early stage in the product
development process.
(4 marks)
(c) Assuming a cost gap was identified in the process, outline possible steps Edward Co could take to reduce
this gap.
(5 marks)
A selling price of $44 has been set in order to compete with a similar radio on the market that has comparable features
to Edward Co’s intended product. The board have agreed that the acceptable margin (after allowing for all production
costs) should be 20%.
Cost information for the new radio is as follows:
Component 1 (Circuit board) – these are bought in and cost $4·10 each. They are bought in batches of 4,000 and
additional delivery costs are $2,400 per batch.
Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each completed radio. However, there is
some waste involved in the process as wire is occasionally cut to the wrong length or is damaged in the assembly
process. Edward Co estimates that 2% of the purchased wire is lost in the assembly process. Wire costs $0·50 per
metre to buy.
Other material – other materials cost $8·10 per radio.
Assembly labour – these are skilled people who are difficult to recruit and retain. Edward Co has more staff of this
type than needed but is prepared to carry this extra cost in return for the security it gives the business. It takes
30 minutes to assemble a radio and the assembly workers are paid $12·60 per hour. It is estimated that 10% of
hours paid to the assembly workers is for idle time.
Production Overheads – recent historic cost analysis has revealed the following production overhead data:
Month 1
Month 2
Total production overhead
$
620,000
700,000
Total assembly labour hours
19,000
23,000
Fixed production overheads are absorbed on an assembly hour basis based on normal annual activity levels. In a
typical year 240,000 assembly hours will be worked by Edward Co.
Required:
(d) Calculate the expected cost per unit for the radio and identify any cost gap that might exist.
(13 marks)
(25 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
1
Ties Only is a new business, selling high quality imported men’s ties via the internet. The managers, who also own
the company, are young and inexperienced but they are prepared to take risks. They are confident that importing
quality ties and selling via a website will be successful and that the business will grow quickly. This is despite the
well recognised fact that selling clothing is a very competitive business.
They were prepared for a loss-making start and decided to pay themselves modest salaries (included in administration
expenses in table 1 below) and pay no dividends for the foreseeable future.
The owners are so convinced that growth will quickly follow that they have invested enough money in website server
development to ensure that the server can handle the very high levels of predicted growth. All website development
costs were written off as incurred in the internal management accounts that are shown below in table 1.
Significant expenditure on marketing was incurred in the first two quarters to launch both the website and new
products. It is not expected that marketing expenditure will continue to be as high in the future.
Customers can buy a variety of styles, patterns and colours of ties at different prices.
The business’s trading results for the first two quarters of trade are shown below in table 1
Table 1
$
Sales
less Cost of Sales
Gross Profit
less expenses
Website development
Administration
Distribution
Launch marketing
Other variable expenses
Total expenses
Loss for quarter
Quarter 1
$
420,000
(201,600)
––––––––
218,400
120,000
100,500
20,763
60,000
50,000
––––––––
$
Quarter 2
$
680,000
(340,680)
––––––––
339,320
90,000
150,640
33,320
40,800
80,000
––––––––
(351,263)
––––––––
(132,863)
––––––––
(394,760)
––––––––
(55,440)
––––––––
Required:
(a) Assess the financial performance of the business during its first two quarters using only the data in table 1
above.
(12 marks)
(b) Briefly consider whether the losses made by the business in the first two quarters are a true reflection of the
current and likely future performance of the business.
(4 marks)
4
Taha Popatia - ARTT Business School - 02134523175
2
The owners are well aware of the importance of non-financial indicators of success and therefore have identified a
small number of measures to focus on. These are measured monthly and then combined to produce a quarterly
management report.
The data for the first two quarters management reports is shown below:
Table 2
The industry average conversion rate for website hits to number of ties sold is 3·2%. The industry average sales return
rate for internet-based clothing sales is 13%.
Required:
(c) Comment on each of the non-financial data in table 2 above taking into account, where appropriate, the
industry averages provided, providing your assessment of the performance of the business.
(9 marks)
(25 marks)
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
Quarter 1
Quarter 2
Website hits*
690,789
863,492
Number of ties sold
27,631
38,857
On time delivery
95%
89%
Sales returns
12%
18%
System downtime
2%
4%
* A website hit is automatically counted each time a visitor to the website opens the home page of Ties Only.
Spike Co manufactures and sells good quality leather bound diaries. Each year it budgets for its profits, including
detailed budgets for sales, materials and labour. If appropriate, the departmental managers are allowed to revise their
budgets for planning errors.
In recent months, the managing director has become concerned about the frequency of budget revisions. At a recent
board meeting he said ‘There seems little point budgeting any more. Every time we have a problem the budgets are
revised to leave me looking at a favourable operational variance report and at the same time a lot less profit than
promised.’
Required:
(a) Describe the circumstances when a budget revision should be allowed and when it should be refused.
(5 marks)
Two specific situations have recently arisen, for which budget revisions were sought:
Materials
A local material supplier was forced into liquidation. Spike Co’s buyer managed to find another supplier, 150 miles
away at short notice. This second supplier charged more for the material and a supplementary delivery charge on top.
The buyer agreed to both the price and the delivery charge without negotiation. ‘I had no choice’, the buyer said, ‘the
production manager was pushing me very hard to find any solution possible!’ Two months later, another, more
competitive, local supplier was found.
A budget revision is being sought for the two months where higher prices had to be paid.
Labour
During the early part of the year, problems had been experienced with the quality of work being produced by the
support staff in the labour force. The departmental manager had complained in his board report that his team were
‘unreliable, inflexible and just not up to the job’.
It was therefore decided, after discussion of the board report, that something had to be done. The company changed
its policy so as to recruit only top graduates from good quality universities. This has had the effect of pushing up the
costs involved but increasing productivity in relation to that element of the labour force.
The support staff departmental manager has requested a budget revision to cover the extra costs involved following
the change of policy.
Required:
(b) Discuss each request for a budget revision, putting what you see as both sides of the argument and reach a
conclusion as to whether a budget revision should be allowed.
(8 marks)
6
Taha Popatia - ARTT Business School - 02134523175
3
The market for leather bound diaries has been shrinking as the electronic versions become more widely available and
easier to use. Spike Co has produced the following data relating to leather bound diary sales for the year to date:
Budget
Sales volume
Sales price
Standard contribution
180,000 units
$17·00 per unit
$7·00 per unit
The total market for diaries in this period was estimated in the budget to be 1·8m units. In fact, the actual total market
shrank to 1·6m units for the period under review.
176,000 units
$16·40 per unit
Required:
(c) Calculate the total sales price and total sales volume variance.
(4 marks)
(d) Analyse the total sales volume variance into components for market size and market share.
(4 marks)
(e) Comment on the sales performance of the business.
(4 marks)
(25 marks)
7
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
Actual results for the same period
Sales volume
Sales price
Sniff Co manufactures and sells its standard perfume by blending a secret formula of aromatic oils with diluted
alcohol. The oils are produced by another company following a lengthy process and are very expensive. The standard
perfume is highly branded and successfully sold at a price of $39·98 per 100 millilitres (ml).
Sniff Co is considering processing some of the perfume further by adding a hormone to appeal to members of the
opposite sex. The hormone to be added will be different for the male and female perfumes. Adding hormones to
perfumes is not universally accepted as a good idea as some people have health concerns. On the other hand, market
research carried out suggests that a premium could be charged for perfume that can ‘promise’ the attraction of a suitor.
The market research has cost $3,000.
Data has been prepared for the costs and revenues expected for the following month (a test month) assuming that a
part of the company’s output will be further processed by adding the hormones.
The output selected for further processing is 1,000 litres, about a tenth of the company’s normal monthly output. Of
this, 99% is made up of diluted alcohol which costs $20 per litre. The rest is a blend of aromatic oils costing $18,000
per litre. The labour required to produce 1,000 litres of the basic perfume before any further processing is
2,000 hours at a cost of $15 per hour.
Of the output selected for further processing, 200 litres (20%) will be for male customers and 2 litres of hormone
costing $7,750 per litre will then be added. The remaining 800 litres (80%) will be for female customers and 8 litres
of hormone will be added, costing $12,000 per litre. In both cases the adding of the hormone adds to the overall
volume of the product as there is no resulting processing loss.
Sniff Co has sufficient existing machinery to carry out the test processing.
The new processes will be supervised by one of the more experienced supervisors currently employed by Sniff Co.
His current annual salary is $35,000 and it is expected that he will spend 10% of his time working on the hormone
adding process during the test month. This will be split evenly between the male and female versions of the product.
Extra labour will be required to further process the perfume, with an extra 500 hours for the male version and 700
extra hours for the female version of the hormone-added product. Labour is currently fully employed, making the
standard product. New labour with the required skills will not be available at short notice.
Sniff Co allocates fixed overhead at the rate of $25 per labour hour to all products for the purposes of reporting profits.
The sales prices that could be achieved as a one-off monthly promotion are:
– Male version: $75·00 per 100 ml
– Female version: $59·50 per 100 ml
Required:
(a) Outline the financial and other factors that Sniff Co should consider when making a further processing
decision.
Note: no calculations are required.
(4 marks)
(b) Evaluate whether Sniff Co should experiment with the hormone adding process using the data provided.
Provide a separate assessment and conclusion for the male and the female versions of the product.
(15 marks)
(c) Calculate the selling price per 100 ml for the female version of the product that would ensure further
processing would break even in the test month.
(2 marks)
(d) Sniff Co is considering outsourcing the production of the standard perfume. Outline the main factors it should
consider before making such a decision.
(4 marks)
(25 marks)
8
Taha Popatia - ARTT Business School - 02134523175
4
Formulae Sheet
Learning curve
Y = axb
average cost per batch
cost of first batch
total number of batches produced
learning factor (log LR/log 2)
the learning rate as a decimal
Regression analysis
y=a+bx
b=
Q™[\™[™y
Q™[2 ™x)2
a=
™\ E™x
n
n
r=
Q™[\-™[™y
2
Q™[ ™x)2 )(n™\ 2 ™y)2 )
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
End of Question Paper
9
Taha Popatia - ARTT Business School - 02134523175
Where y =
a=
x=
b=
LR =
Monday 9 June 2008
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FOUR questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FOUR questions are compulsory and MUST be attempted
Chaff Co processes and sells brown rice. It buys unprocessed rice seeds and then, using a relatively simple process,
removes the outer husk of the rice to produce the brown rice. This means that there is substantial loss of weight in
the process. The market for the purchase of seeds and the sales of brown rice has been, and is expected to be, stable.
Chaff Co uses a variance analysis system to monitor its performance.
There has been some concern about the interpretation of the variances that have been calculated in month 1.
1.
2.
3.
The purchasing manager is adamant, despite criticism from the production director, that he has purchased wisely
and saved the company thousands of dollars in purchase costs by buying the required quantity of cheaper seeds
from a new supplier.
The production director is upset at being criticised for increasing the wage rates for month 1; he feels the decision
was the right one, considering all the implications of the increase. Morale was poor and he felt he had to do
something about it.
The maintenance manager feels that saving $8,000 on fixed overhead has helped the profitability of the
business. He argues that the machines’ annual maintenance can wait for another month without a problem as
the machines have been running well.
The variances for month 1 are as follows:
$
48,000
52,000
15,000
18,000
12,000
18,000
30,000
8,000
85,000
21,000
Material price
Material usage
Labour rate
Labour efficiency
Labour idle time
Variable overhead expenditure
Variable overhead efficiency
Fixed overhead expenditure
Sales price
Sales volume
(Fav)
(Adv)
(Adv)
(Fav)
(Fav)
(Adv)
(Fav)
(Fav)
(Adv)
(Adv)
Fav = Favourable, Adv = Adverse
Chaff Co uses labour hours to absorb the variable overhead.
Required:
(a) Comment on the performance of the purchasing manager, the production director and the maintenance
manager using the variances and other information above and reach a conclusion as to whether or not they
have each performed well.
(9 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
In month 2 the following data applies:
Standard costs for 1 tonne of brown rice
–
–
–
–
–
1·4 tonnes of rice seeds are needed at a cost of $60 per tonne
It takes 2 labour hours of work to produce 1 tonne of brown rice and labour is normally paid $18 per hour. Idle
time is expected to be 10% of hours paid; this is not reflected in the rate of $18 above.
2 hours of variable overhead at a cost of $30 per hour
The standard selling price is $240 per tonne
The standard contribution per tonne is $56 per tonne
Budget information for month 2 is
Fixed costs were budgeted at $210,000 for the month
Budgeted production and sales were 8,400 tonnes
The actual results for month 2 were as follows:
Actual production and sales were 8,000 tonnes
–
–
–
–
–
–
12,000 tonnes of rice seeds were bought and used, costing $660,000
15,800 labour hours were paid for, costing $303,360
15,000 labour hours were worked
Variable production overhead cost $480,000
Fixed costs were $200,000
Sales revenue achieved was $1,800,000
Required:
(b) Calculate the variances for month 2 in as much detail as the information allows and reconcile the budget
profit to the actual profit using marginal costing principles. You are not required to comment on the
performance of the business or its managers for their performance in month 2.
(16 marks)
(25 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
–
–
Higgins Co (HC) manufactures and sells pool cues and snooker cues. The cues both use the same type of good quality
wood (ash) which can be difficult to source in sufficient quantity. The supply of ash is restricted to 5,400 kg per
period. Ash costs $40 per kg.
The cues are made by skilled craftsmen (highly skilled labour) who are well known for their workmanship. The skilled
craftsmen take years to train and are difficult to recruit. HC’s craftsmen are generally only able to work for 12,000
hours in a period. The craftsmen are paid $18 per hour.
HC sells the cues to a large market. Demand for the cues is strong, and in any period, up to 15,000 pool cues and
12,000 snooker cues could be sold. The selling price for pool cues is $41 and the selling price for snooker cues is
$69.
Manufacturing details for the two products are as follows:
Craftsmen time per cue
Ash per cue
Other variable costs per cue
Pool cues
0·5 hours
270 g
$1·20
Snooker cues
0·75 hours
270 g
$4·70
HC does not keep inventory.
Required:
(a) Calculate the contribution earned from each cue.
(2 marks)
(b) Determine the optimal production plan for a typical period assuming that HC is seeking to maximise the
contribution earned. You should use a linear programming graph (using the graph paper provided), identify
the feasible region and the optimal point and accurately calculate the maximum contribution that could be
earned using whichever equations you need.
(12 marks)
Some of the craftsmen have offered to work overtime, provided that they are paid double time for the extra hours over
the contracted 12,000 hours. HC has estimated that up to 1,200 hours per period could be gained in this way.
Required:
(c) Explain the meaning of a shadow price (dual price) and calculate the shadow price of both the labour
(craftsmen) and the materials (ash).
(5 marks)
(d) Advise HC whether to accept the craftsmens’ initial offer of working overtime, discussing the rate of pay
requested, the quantity of hours and one other factor that HC should consider.
(6 marks)
(25 marks)
4
Taha Popatia - ARTT Business School - 02134523175
2
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
This is a blank page.
Question 3 begins on page 6.
Bridgewater Co provides training courses for many of the mainstream software packages on the market.
The business has many divisions within Waterland, the one country in which it operates. The senior managers of
Bridgewater Co have very clear objectives for the divisions and these are communicated to divisional managers on
appointment and subsequently in quarterly and annual reviews. These are:
1.
2.
3.
4.
Each quarter, sales should grow and annual sales should exceed budget
Trainer (lecture staff) costs should not exceed $180 per teaching day
Room hire costs should not exceed $90 per teaching day
Each division should meet its budget for profit per quarter and annually
It is known that managers will be promoted based on their ability to meet these targets. A member of the senior
management is to retire after quarter 2 of the current financial year, which has just begun. The divisional managers
anticipate that one of them may be promoted at the beginning of quarter 3 if their performance is good enough.
The manager of the Northwest division is concerned that his chances of promotion could be damaged by the expected
performance of his division. He is a firm believer in quality and he thinks that if a business gets this right, growth and
success will eventually follow.
The current quarterly forecasts, along with the original budgeted profit for the Northwest division, are as follows:
Sales
less:
Trainers
Room hire
Staff training
Other costs
Forecast net profit
Original budgeted profit
Annual sales budget
Teaching days
Q1
$’000
40·0
Q2
$’000
36·0
Q3
$’000
50·0
Q4
$’000
60·0
Total
$’000
186·0
8·0
4·0
1·0
3·0
–––––
24·0
–––––
25·0
7·2
3·6
1·0
1·7
–––––
22·5
–––––
26·0
10·0
5·0
1·0
6·0
–––––
28·0
–––––
27·0
12·0
6·0
1·0
7·0
–––––
34·0
–––––
28·0
–––––
40
–––––
36
–––––
50
–––––
60
37·2
18·6
4·0
17·7
––––––
108·5
––––––
106·0
180·0
––––––
Required:
(a) Assess the financial performance of the Northwest division against its targets and reach a conclusion as to
the promotion prospects of the divisional manager
(8 marks)
6
Taha Popatia - ARTT Business School - 02134523175
3
The manager of the Northwest division has been considering a few steps to improve the performance of his division.
Voucher scheme
As a sales promotion, vouchers will be sold for $125 each, a substantial discount on normal prices. These vouchers
will entitle the holder to attend four training sessions on software of their choice. They can attend when they want to
but are advised that one training session per quarter is sensible. The manager is confident that if the promotion took
place immediately, he could sell 80 vouchers and that customers would follow the advice given to attend one session
per quarter. All voucher holders would attend planned existing courses and all will be new customers.
A new important software programme has recently been launched for which there could be a market for training
courses. Demonstration programs can be bought for $1,800 in quarter 1. Staff training would be needed, costing
$500 in each of quarters 1 and 2 but in quarters 3 and 4 extra courses could be offered selling this training. Assuming
similar class sizes and the usual sales prices, extra sales revenue amounting to 20% of normal sales are expected
(measured before the voucher promotion above). The manager is keen to run these courses at the same tutorial and
room standards as he normally provides. Software expenditure is written off in the income statement as incurred.
Delaying payments to trainers
The manager is considering delaying payment to the trainers. He thinks that, since his commitment to quality could
cause him to miss out on a well deserved promotion, the trainers owe him a favour. He intends to delay payment on
50% of all invoices received from the trainers in the first two quarters, paying them one month later than is usual.
Required:
(b) Revise the forecasts to take account of all three of the proposed changes.
(7 marks)
(c) Comment on each of the proposed steps and reach a conclusion as to whether, if all the proposals were taken
together, the manager will improve his chances of promotion.
(6 marks)
(d) Suggest two improvements to the performance measurement system used by Bridgewater Co that would
encourage a longer term view being taken by its managers.
(4 marks)
(25 marks)
7
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
Software upgrade
Jola Publishing Co publishes two forms of book.
The company publishes a children’s book (CB), which is sold in large quantities to government controlled schools.
The book is produced in only four large production runs but goes through frequent government inspections and quality
assurance checks.
The paper used is strong, designed to resist the damage that can be caused by the young children it is produced for.
The book has only a few words and relies on pictures to convey meaning.
The second book is a comprehensive technical journal (TJ). It is produced in monthly production runs, 12 times a
year. The paper used is of relatively poor quality and is not subject to any governmental controls and consequently
only a small number of inspections are carried out. The TJ uses far more machine hours than the CB in its production.
The directors are concerned about the performance of the two books and are wondering what the impact would be
of a switch to an activity based costing (ABC) approach to accounting for overheads. They currently use absorption
costing, based on machine hours for all overhead calculations. They have accurately produced an analysis for the
accounting year just completed as follows:
CB
$per unit
Direct production costs
Paper
Printing ink
Machine costs
TJ
$per unit
0·75
1·45
1·15
$per unit
0·08
4·47
1·95
3·35
2·30
5·65
9·05
3·40
Overheads
Total cost
Selling price
Margin
$per unit
6·50
3·95
10·45
13·85
3·40
The main overheads involved are:
Overhead
Property costs
Quality control
Production set up costs
% of total overhead
75·0%
23·0%
2·0%
Activity driver
Machine hours
Number of inspections
Number of set ups
If the overheads above were re-allocated under ABC principles then the results would be that the overhead allocation
to CB would be $0·05 higher and the overhead allocated to TJ would be $0·30 lower than previously.
Required:
(a) Explain why the overhead allocations have changed in the way indicated above.
(8 marks)
(b) Briefly explain the implementation problems often experienced when ABC is first introduced.
(4 marks)
8
Taha Popatia - ARTT Business School - 02134523175
4
The directors are keen to introduce ABC for the coming year and have provided the following cost and selling price
data:
1.
The paper used costs $2 per kg for a CB but the TJ paper costs only $1 per kg. The CB uses 400g of paper for
each book, four times as much as the TJ uses.
2.
Printing ink costs $30 per litre. The CB uses one third of the printing ink of the larger TJ. The TJ uses 150ml of
printing ink per book.
3.
The CB needs six minutes of machine time to produce each book, whereas the TJ needs 10 minutes per book.
The machines cost $12 per hour to run.
4.
The sales prices are to be $9·30 for the CB and $14·00 for the TJ
Overhead
Property costs
Quality control
Production set up costs
Total
Annual cost for the coming year
$
2,160,000
668,000
52,000
––––––––––
2,880,000
––––––––––
The CB will be inspected on 180 occasions next year, whereas the TJ will be inspected just 20 times.
Jola Publishing will produce its annual output of 1,000,000 CBs in four production runs and approximately 10,000
TJs per month in each of 12 production runs.
Required:
(c) Calculate the cost per unit and the margin for the CB and the TJ using machine hours to absorb the
overheads.
(5 marks)
(d) Calculate the cost per unit and the margin for the CB and the TJ using activity based costing principles to
absorb the overheads.
(8 marks)
(25 marks)
End of Question Paper
9
Taha Popatia - ARTT Business School - 02134523175
As mentioned above there are three main overheads, the data for these are:
Formulae Sheet
Learning curve
Y = axb
Where y =
a=
x=
b=
LR =
average cost per batch
cost of first batch
total number of batches produced
learning factor (log LR/log 2)
the learning rate as a decimal
y=a+bx
b=
n∑xy-∑x∑y
n∑x2 -(∑x)2
a=
∑y b∑x
n
n
r=
n∑xy-∑x∑y
n∑x2 -(∑x)2 )(n∑y 2 -(∑y)2 )
Demand curve
P = a – bQ
b = change in price
change in quantity
a = price when Q = 0
10
Taha Popatia - ARTT Business School - 02134523175
Regression analysis
Monday 8 December 2008
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FOUR questions are compulsory and MUST be attempted.
The formulae are on page 6.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FOUR questions are compulsory and MUST be attempted
Pace Company (PC) runs a large number of wholesale stores and is increasing the number of these stores all the time.
It measures the performance of each store on the basis of a target return on investment (ROI) of 15%. Store managers
get a bonus of 10% of their salary if their store’s annual ROI exceeds the target each year. Once a store is built there
is very little further capital expenditure until a full four years have passed.
PC has a store (store W) in the west of the country. Store W has historic financial data as follows over the past four
years:
Sales ($’000)
Gross profit ($’000)
Net profit ($’000)
Net assets at start of year ($’000)
2005
200
80
13
100
2006
200
70
14
80
2007
180
63
10
60
2008
170
51
8
40
The market in which PC operates has been growing steadily. Typically, PC’s stores generate a 40% gross profit margin.
Required:
(a) Discuss the past financial performance of store W using ROI and any other measure you feel appropriate
and, using your findings, discuss whether the ROI correctly reflects Store W’s actual performance.
(8 marks)
(b) Explain how a manager in store W might have been able to manipulate the results so as to gain bonuses
more frequently.
(4 marks)
PC has another store (store S) about to open in the south of the country. It has asked you for help in calculating the
gross profit, net profit and ROI it can expect over each of the next four years. The following information is provided:
Sales volume in the first year will be 18,000 units. Sales volume will grow at the rate of 10% for years two and three
but no further growth is expected in year 4. Sales price will start at $12 per unit for the first two years but then reduce
by 5% per annum for each of the next two years.
Gross profit will start at 40% but will reduce as the sales price reduces. All purchase prices on goods for resale will
remain constant for the four years.
Overheads, including depreciation, will be $70,000 for the first two years rising to $80,000 in years three and four.
Store S requires an investment of $100,000 at the start of its first year of trading.
PC depreciates non-current assets at the rate of 25% of cost. No residual value is expected on these assets.
Required:
(c) Calculate (in columnar form) the revenue, gross profit, net profit and ROI of store S over each of its first four
years.
(9 marks)
(d) Calculate the minimum sales volume required in year 4 (assuming all other variables remain unchanged) to
earn the manager of S a bonus in that year.
(4 marks)
(25 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
Shifters Haulage (SH) is considering changing some of the vans it uses to transport crates for customers. The new
vans come in three sizes; small, medium and large. SH is unsure about which type to buy. The capacity is 100 crates
for the small van, 150 for the medium van and 200 for the large van.
Demand for crates varies and can be either 120 or 190 crates per period, with the probability of the higher demand
figure being 0·6.
The sale price per crate is $10 and the variable cost $4 per crate for all van sizes subject to the fact that if the capacity
of the van is greater than the demand for crates in a period then the variable cost will be lower by 10% to allow for
the fact that the vans will be partly empty when transporting crates.
SH is concerned that if the demand for crates exceeds the capacity of the vans then customers will have to be turned
away. SH estimates that in this case goodwill of $100 would be charged against profits per period to allow for lost
future sales regardless of the number of customers that are turned away.
Depreciation charged would be $200 per period for the small, $300 for the medium and $400 for the large van.
SH has in the past been very aggressive in its decision-making, pressing ahead with rapid growth strategies. However,
its managers have recently grown more cautious as the business has become more competitive.
Required:
(a) Explain the principles behind the maximax, maximin and expected value criteria that are sometimes used to
make decisions in uncertain situations.
(4 marks)
(b) Prepare a profits table showing the SIX possible profit figures per period.
(9 marks)
(c) Using your profit table from (b) above discuss which type of van SH should buy taking into consideration the
possible risk attitudes of the managers.
(6 marks)
(d) Describe THREE methods other than those mentioned in (a) above, which businesses can use to analyse and
assess the risk that exists in its decision-making.
(6 marks)
(25 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
2
Henry Company (HC) provides skilled labour to the building trade. They have recently been asked by a builder to bid
for a kitchen fitting contract for a new development of 600 identical apartments. HC has not worked for this builder
before. Cost information for the new contract is as follows:
Labour for the contract is available. HC expects that the first kitchen will take 24 man-hours to fit but thereafter the
time taken will be subject to a 95% learning rate. After 200 kitchens are fitted the learning rate will stop and the time
taken for the 200th kitchen will be the time taken for all the remaining kitchens. Labour costs $15 per hour.
Overheads are absorbed on a labour hour basis. HC has collected overhead information for the last four months and
this is shown below:
Month
Month
Month
Month
1
2
3
4
Hours worked
9,300
9,200
9,400
9,600
Overhead cost $
115,000
113,600
116,000
116,800
HC normally works around 120,000 labour hours in a year.
HC uses the high low method to analyse overheads.
LogLR
The learning curve equation is y = axb, where b =
= –0.074
Log2
Required:
(a) Describe FIVE factors, other than the cost of labour and overheads mentioned above, that HC should take
into consideration in calculating its bid.
(10 marks)
(b) Calculate the total cost including all overheads for HC that it can use as a basis of the bid for the new
apartment contract.
(13 marks)
(c) If the second kitchen alone is expected to take 21·6 man-hours to fit demonstrate how the learning rate of
95% has been calculated.
(2 marks)
(25 marks)
4
Taha Popatia - ARTT Business School - 02134523175
3
Wargrin designs, develops and sells many PC games. Games have a short lifecycle lasting around three years only.
Performance of the games is measured by reference to the profits made in each of the expected three years of
popularity. Wargrin accepts a net profit of 35% of turnover as reasonable. A rate of contribution (sales price less
variable cost) of 75% is also considered acceptable.
Wargrin has a large centralised development department which carries out all the design work before it passes the
completed game to the sales and distribution department to market and distribute the product.
Wargrin has developed a brand new game called Stealth and this has the following budgeted performance figures.
The selling price of Stealth will be a constant $30 per game. Analysis of the costs show that at a volume of 10,000
units a total cost of $130,000 is expected. However at a volume of 14,000 units a total cost of $150,000 is
expected. If volumes exceed 15,000 units the fixed costs will increase by 50%.
Stealth’s budgeted volumes are as follows:
Sales volume
Year 1
8,000 units
Year 2
16,000 units
Year 3
4,000 units
In addition, marketing costs for Stealth will be $60,000 in year one and $40,000 in year two. Design and
development costs are all incurred before the game is launched and has cost $300,000 for Stealth. These costs are
written off to the income statement as incurred (i.e. before year 1 above).
Required:
(a) Explain the principles behind lifecycle costing and briefly state why Wargrin in particular should consider
these lifecycle principles.
(4 marks)
(b) Produce the budgeted results for the game ‘Stealth’ and briefly assess the game’s expected performance,
taking into account the whole lifecycle of the game.
(9 marks)
(c) Explain why incremental budgeting is a common method of budgeting and outline the main problems with
such an approach.
(6 marks)
(d) Discuss the extent to which a meaningful standard cost can be set for games produced by Wargrin. You
should consider each of the cost classifications mentioned above.
(6 marks)
(25 marks)
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
4
Formulae Sheet
Learning curve
Y = axb
average cost per batch
cost of first batch
total number of batches produced
learning factor (log LR/log 2)
the learning rate as a decimal
Regression analysis
y=a+bx
b=
Q™[\™[™y
Q™[2 ™x)2
a=
™\ E™x
n
n
r=
Q™[\-™[™y
2
Q™[ ™x)2 )(n™\ 2 ™y)2 )
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
End of Question Paper
6
Taha Popatia - ARTT Business School - 02134523175
Where y =
a=
x=
b=
LR =
Monday 8 June 2009
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 10
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
2
Taha Popatia - ARTT Business School - 02134523175
This is a blank page.
The question paper begins on page 3.
ALL FIVE questions are compulsory and MUST be attempted
Yam Co is involved in the processing of sheet metal into products A, B and C using three processes, pressing,
stretching and rolling. Like many businesses Yam faces tough price competition in what is a mature world market.
The factory has 50 production lines each of which contain the three processes: Raw material for the sheet metal is
first pressed then stretched and finally rolled. The processing capacity varies for each process and the factory manager
has provided the following data:
Pressing
Stretching
Rolling
Processing time per metre in hours
Product A
Product B
Product C
0·50
0·50
0·40
0·25
0·40
0·25
0·40
0·25
0·25
The factory operates for 18 hours each day for five days per week. It is closed for only two weeks of the year for
holidays when maintenance is carried out. On average one hour of labour is needed for each of the 225,000 hours
of factory time. Labour is paid $10 per hour.
The raw materials cost per metre is $3·00 for product A, $2·50 for product B and $1·80 for product C. Other factory
costs (excluding labour and raw materials) are $18,000,000 per year. Selling prices per metre are $70 for product
A, $60 for product B and $27 for product C.
Yam carries very little inventory.
Required:
(a) Identify the bottleneck process and briefly explain why this process is described as a ‘bottleneck’.
(3 marks)
(b) Calculate the throughput accounting ratio (TPAR) for each product assuming that the bottleneck process is
fully utilised.
(8 marks)
(c) Assuming that the TPAR of product C is less than 1:
(i) Explain how Yam could improve the TPAR of product C.
(4 marks)
(ii) Briefly discuss whether this supports the suggestion to cease the production of product C and briefly
outline three other factors that Yam should consider before a cessation decision is taken.
(5 marks)
(20 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
1
Oliver is the owner and manager of Oliver’s Salon which is a quality hairdresser that experiences high levels of
competition. The salon traditionally provided a range of hair services to female clients only, including cuts, colouring
and straightening
A year ago, at the start of his 2009 financial year, Oliver decided to expand his operations to include the hairdressing
needs of male clients. Male hairdressing prices are lower, the work simpler (mainly hair cuts only) and so the time
taken per male client is much less.
The prices for the female clients were not increased during the whole of 2008 and 2009 and the mix of services
provided for female clients in the two years was the same.
The latest financial results are as follows:
2008
$
Sales
Less cost of sales:
Hairdressing staff costs
Hair products – female
Hair products – male
Gross profit
Less expenses:
Rent
Administration salaries
Electricity
Advertising
2009
$
200,000
65,000
29,000
$
$
238,500
91,000
27,000
8,000
–––––––
–––––––
94,000
––––––––
106,000
10,000
9,000
7,000
2,000
–––––––
126,000
––––––––
112,500
10,000
9,500
8,000
5,000
–––––––
Total expenses
28,000
––––––––
78,000
––––––––
Profit
32,500
––––––––
80,000
––––––––
Oliver is disappointed with his financial results. He thinks the salon is much busier than a year ago and was expecting
more profit. He has noted the following extra information:
1.
Some female clients complained about the change in atmosphere following the introduction of male services,
which created tension in the salon.
2.
Two new staff were recruited at the start of 2009. The first was a junior hairdresser to support the specialist
hairdressers for the female clients. She was appointed on a salary of $9,000 per annum. The second new staff
member was a specialist hairdresser for the male clients. There were no increases in pay for existing staff at the
start of 2009 after a big rise at the start of 2008 which was designed to cover two years’ worth of increases.
Oliver introduced some non-financial measures of success two years ago.
Number
Number
Number
Number
Number
of
of
of
of
of
2008
12
0
8,000
4
0
complaints
male client visits
female client visits
specialist hairdressers for female clients
specialist hairdressers for male clients
4
2009
46
3,425
6,800
5
1
Taha Popatia - ARTT Business School - 02134523175
2
Required:
(a) Calculate the average price for hair services per male and female client for each of the years 2008 and 2009.
(3 marks)
(b) Assess the financial performance of the Salon using the data above.
(11 marks)
(c) Analyse and comment on the non-financial performance of Oliver’s business, under the headings of quality
and resource utilisation.
(6 marks)
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
(20 marks)
Crumbly Cakes make cakes, which are sold directly to the public. The new production manager (a celebrity chef) has
argued that the business should use only organic ingredients in its cake production. Organic ingredients are more
expensive but should produce a product with an improved flavour and give health benefits for the customers. It was
hoped that this would stimulate demand and enable an immediate price increase for the cakes.
Crumbly Cakes operates a responsibility based standard costing system which allocates variances to specific
individuals. The individual managers are paid a bonus only when net favourable variances are allocated to them.
The new organic cake production approach was adopted at the start of March 2009, following a decision by the new
production manager. No change was made at that time to the standard costs card. The variance reports for February
and March are shown below (Fav = Favourable and Adv = Adverse)
Manager responsible
Allocated variances
February
Variance $
March
Variance $
Material price (total for all ingredients)
Material mix
Material yield
25 Fav
0
20 Fav
2,100 Adv
600 Adv
400 Fav
Sales price
Sales contribution volume
40 Adv
35 Adv
7,000 Fav
3,000 Fav
Production manager
Sales manager
The production manager is upset that he seems to have lost all hope of a bonus under the new system. The sales
manager thinks the new organic cakes are excellent and is very pleased with the progress made.
Crumbly Cakes operate a JIT stock system and holds virtually no inventory.
Required:
(a) Assess the performance of the production manager and the sales manager and indicate whether the current
bonus scheme is fair to those concerned.
(7 marks)
In April 2009 the following data applied:
Standard cost card for one cake (not adjusted for the organic ingredient change)
Ingredients
Flour
Eggs
Butter
Sugar
Total input
Normal loss (10%)
Standard weight of a cake
Standard sales price of a cake
Standard contribution per cake after all variable costs
Kg
0·10
0·10
0·10
0·10
0·40
(0·04)
0·36
0·12
0·70
1·70
0·50
0·85
0·35
6
$
per
per
per
per
kg
kg
kg
kg
Taha Popatia - ARTT Business School - 02134523175
3
The budget for production and sales in April was 50,000 cakes. Actual production and sales was 60,000 cakes in
the month, during which the following occurred:
Ingredients used
Flour
Eggs
Butter
Sugar
Total input
Actual loss
Actual output of cake mixture
Actual sales price of a cake
Kg
5,700
6,600
6,600
4,578
23,478
(1,878)
21,600
$
$741
$5,610
$11,880
$2,747
$20,978
$0·99
Required:
(b) Calculate the material price, mix and yield variances and the sales price and sales contribution volume
variances for April. You are not required to make any comment on the performance of the managers.
(13 marks)
(20 marks)
7
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
All cakes produced must weigh 0·36 kg as this is what is advertised.
Bits and Pieces (B&P) operates a retail store selling spares and accessories for the car market. The store has previously
only opened for six days per week for the 50 working weeks in the year, but B&P is now considering also opening on
Sundays.
The sales of the business on Monday through to Saturday averages at $10,000 per day with average gross profit of
70% earned.
B&P expects that the gross profit % earned on a Sunday will be 20 percentage points lower than the average earned
on the other days in the week. This is because they plan to offer substantial discounts and promotions on a Sunday
to attract customers. Given the price reduction, Sunday sales revenues are expected to be 60% more than the average
daily sales revenues for the other days. These Sunday sales estimates are for new customers only, with no allowance
being made for those customers that may transfer from other days.
B&P buys all its goods from one supplier. This supplier gives a 5% discount on all purchases if annual spend exceeds
$1,000,000.
It has been agreed to pay time and a half to sales assistants that work on Sundays. The normal hourly rate is $20
per hour. In total five sales assistants will be needed for the six hours that the store will be open on a Sunday. They
will also be able to take a half-day off (four hours) during the week. Staffing levels will be allowed to reduce slightly
during the week to avoid extra costs being incurred.
The staff will have to be supervised by a manager, currently employed by the company and paid an annual salary of
$80,000. If he works on a Sunday he will take the equivalent time off during the week when the assistant manager
is available to cover for him at no extra cost to B&P. He will also be paid a bonus of 1% of the extra sales generated
on the Sunday project.
The store will have to be lit at a cost of $30 per hour and heated at a cost of $45 per hour. The heating will come
on two hours before the store opens in the 25 ‘winter’ weeks to make sure it is warm enough for customers to come
in at opening time. The store is not heated in the other weeks
The rent of the store amounts to $420,000 per annum.
Required:
(a) Calculate whether the Sunday opening incremental revenue exceeds the incremental costs over a year (ignore
inventory movements) and on this basis reach a conclusion as to whether Sunday opening is financially
justifiable.
(12 marks)
(b) Discuss whether the manager’s pay deal (time off and bonus) is likely to motivate him.
(4 marks)
(c) Briefly discuss whether offering substantial price discounts and promotions on Sunday is a good suggestion.
(4 marks)
(20 marks)
8
Taha Popatia - ARTT Business School - 02134523175
4
Northland’s major towns and cities are maintained by local government organisations (LGO), which are funded by
central government. The LGOs submit a budget each year which forms the basis of the funds received.
You are provided with the following information as part of the 2010 budget preparation.
Overheads
Overhead costs are budgeted on an incremental basis, taking the previous year’s actual expenditure and adding a set
% to allow for inflation. Adjustments are also made for known changes. The details for these are:
Overhead cost category
Property cost
Central wages
Stationery
2009 cost ($)
120,000
150,000
25,000
Known changes
None
Note 1 below
Note 2 below
Inflation adjustment
between 2009 and 2010
+5%
+3%
0%
Note 1: One new staff member will be added to the overhead team; this will cost $12,000 in 2010
Note 2: A move towards the paperless office is expected to reduce stationery costs by 40% on the 2009 spend
Road repairs
In 2010 it is expected that 2,000 metres of road will need repairing but a contingency of an extra 10% has been
agreed.
In 2009 the average cost of a road repair was $15,000 per metre repaired, but this excluded any cost effects of
extreme weather conditions. The following probability estimates have been made in respect of 2010:
Weather type predicted
Good
Poor
Bad
Probability
0·7
0·1
0·2
Increase in repair cost
0
+10%
+25%
Inflation on road repairing costs is expected to be 5% between 2009 and 2010.
New roads
New roads are budgeted on a zero base basis and will have to compete for funds along with other capital projects
such as hospitals and schools.
Required:
(a) Calculate the overheads budget for 2010.
(3 marks)
(b) Calculate the budgets for road repairs for 2010.
(6 marks)
(c) Explain the problems associated with using expected values in budgeting by an LGO and explain why a
contingency for road repairs might be needed.
(8 marks)
(d) Explain the process involved for zero based budgeting.
(3 marks)
(20 marks)
9
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
5
Formulae Sheet
Learning curve
Y = axb
average cost per batch
cost of first batch
total number of batches produced
learning factor (log LR/log 2)
the learning rate as a decimal
Regression analysis
y=a+bx
b=
Q™[\™[™y
Q™[2 ™x)2
a=
™\ E™x
n
n
r=
Q™[\-™[™y
2
Q™[ ™x)2 )(n™\ 2 ™y)2 )
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
End of Question Paper
10
Taha Popatia - ARTT Business School - 02134523175
Where y =
a=
x=
b=
LR =
Monday 14 December 2009
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 7
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FIVE questions are compulsory and MUST be attempted
Secure Net (SN) manufacture security cards that restrict access to government owned buildings around the world.
The standard cost for the plastic that goes into making a card is $4 per kg and each card uses 40g of plastic after an
allowance for waste. In November 100,000 cards were produced and sold by SN and this was well above the
budgeted sales of 60,000 cards.
The actual cost of the plastic was $5·25 per kg and the production manager (who is responsible for all buying and
production issues) was asked to explain the increase. He said ‘World oil price increases pushed up plastic prices by
20% compared to our budget and I also decided to use a different supplier who promised better quality and increased
reliability for a slightly higher price. I know we have overspent but not all the increase in plastic prices is my fault’
The actual usage of plastic per card was 35g per card and again the production manager had an explanation. He said
‘The world-wide standard size for security cards increased by 5% due to a change in the card reader technology,
however, our new supplier provided much better quality of plastic and this helped to cut down on the waste.’
SN operates a just in time (JIT) system and hence carries very little inventory.
Required:
(a) Calculate the total material price and total material usage variances ignoring any possible planning error in
the figures.
(4 marks)
(b) Analyse the above total variances into component parts for planning and operational variances in as much
detail as the information allows.
(8 marks)
(c) Assess the performance of the production manager.
(8 marks)
(20 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
Big Cheese Chairs (BCC) manufactures and sells executive leather chairs. They are considering a new design of
massaging chair to launch into the competitive market in which they operate.
They have carried out an investigation in the market and using a target costing system have targeted a competitive
selling price of $120 for the chair. BCC wants a margin on selling price of 20% (ignoring any overheads).
The frame and massage mechanism will be bought in for $51 per chair and BCC will upholster it in leather and
assemble it ready for despatch.
Leather costs $10 per metre and two metres are needed for a complete chair although 20% of all leather is wasted
in the upholstery process.
The upholstery and assembly process will be subject to a learning effect as the workers get used to the new design.
BCC estimates that the first chair will take two hours to prepare but this will be subject to a learning rate (LR) of 95%.
The learning improvement will stop once 128 chairs have been made and the time for the 128th chair will be the
time for all subsequent chairs. The cost of labour is $15 per hour.
The learning formula is shown on the formula sheet and at the 95% learning rate the value of b is –0·074000581.
Required:
(a) Calculate the average cost for the first 128 chairs made and identify any cost gap that may be present at
that stage.
(8 marks)
(b) Assuming that a cost gap for the chair exists suggest four ways in which it could be closed.
(6 marks)
The production manager denies any claims that a cost gap exists and has stated that the cost of the 128th chair will
be low enough to yield the required margin.
(c) Calculate the cost of the 128th chair made and state whether the target cost is being achieved on the 128th
chair.
(6 marks)
(20 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
2
The Western is a local government organisation responsible for waste collection from domestic households. The new
management accountant of The Western has decided to introduce some new forecasting techniques to improve the
accuracy of the budgeting. The next budget to be produced is for the year ended 31 December 2010.
Waste is collected by the tonne (T). The number of tonnes collected each year has been rising and by using time
series analysis the new management accountant has produced the following relationship between the tonnes collected
(T) and the time period in question Q (where Q is a quarter number. So Q = 1 represents quarter 1 in 2009 and
Q = 2 represents quarter 2 in 2009 and so on)
T = 2,000 + 25Q
Each quarter is subject to some seasonal variation with more waste being collected in the middle quarters of each
year. The adjustments required to the underlying trend prediction are:
Quarter
1
2
3
4
Tonnes
–200
+250
+150
–100
Once T is predicted the new management accountant hopes to use the values to predict the variable operating costs
and fixed operating costs that The Western will be subjected to in 2010. To this end he has provided the following
operating cost data for 2009.
Volume of waste
Tonnes
2,100
2,500
2,400
2,300
Total operating cost in 2009
(fixed + variable)
$’000s
950
1,010
1,010
990
Inflation on the operating cost is expected to be 5% between 2009 and 2010.
The regression formula is shown on the formula sheet.
Required:
(a) Calculate the tonnes of waste to be expected in the calendar year 2010.
(4 marks)
(b) Calculate the variable operating cost and fixed operating cost to be expected in 2010 using regression
analysis on the 2009 data and allowing for inflation as appropriate.
(10 marks)
Many local government organisations operate incremental budgeting as one of their main budgeting techniques. They
take a previous period’s actual spend, adjust for any known changes to operations and then add a % for expected
inflation in order to set the next period’s budget.
(c) Describe two advantages and two disadvantages of a local government organisation funded by taxpayer’s
money using incremental budgeting as its main budgeting technique.
(6 marks)
(20 marks)
4
Taha Popatia - ARTT Business School - 02134523175
3
Thatcher International Park (TIP) is a theme park and has for many years been a successful business, which has
traded profitably. About three years ago the directors decided to capitalise on their success and reduced the
expenditure made on new thrill rides, reduced routine maintenance where possible (deciding instead to repair
equipment when it broke down) and made a commitment to regularly increase admission prices. Once an admission
price is paid customers can use any of the facilities and rides for free.
These steps increased profits considerably, enabling good dividends to be paid to the owners and bonuses to the
directors. The last two years of financial results are shown below.
2008
$
5,250,000
2009
$
5,320,000
2,500,000
80,000
260,000
150,000
15,000
1,200,000
––––––––––
1,045,000
––––––––––
2,200,000
70,000
320,000
160,000
18,000
1,180,000
––––––––––
1,372,000
––––––––––
13,000,000
12,000,000
Dividend paid
500,000
650,000
Number of visitors
150,000
140,000
Sales
Less expenses:
Wages
Maintenance – routine
Repairs
Directors salaries
Directors bonuses
Other costs (including depreciation)
Net profit
Book value of assets at start of year
TIP operates in a country where the average rate of inflation is around 1% per annum.
Required:
(a) Assess the financial performance of TIP using the information given above.
(14 marks)
During the early part of 2008 TIP employed a newly qualified management accountant. He quickly became
concerned about the potential performance of TIP and to investigate his concerns he started to gather data to measure
some non-financial measures of success. The data he has gathered is shown below:
Table 1
2008
9,000 hours
20 minutes
Hours lost due to breakdown of rides (see note 1)
Average waiting time per ride
2009
32,000 hours
30 minutes
Note 1: TIP has 50 rides of different types. It is open 360 days of the year for 10 hours each day
Required:
(b) Assess the quality of the service that TIP provides to its customers using Table 1 and any other relevant data
and indicate the risks it is likely to face if it continues with its current policies.
(6 marks)
(20 marks)
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
4
Stay Clean manufactures and sells a small range of kitchen equipment. Specifically the product range contains a
dishwasher (DW), a washing machine (WM) and a tumble dryer (TD). The TD is of a rather old design and has for
some time generated negative contribution. It is widely expected that in one year’s time the market for this design of
TD will cease, as people switch to a washing machine that can also dry clothes after the washing cycle has completed.
Stay Clean is trying to decide whether or not to cease the production of TD now or in 12 months’ time when the new
combined washing machine/drier will be ready. To help with this decision the following information has been provided:
1.
The normal selling prices, annual sales volumes and total variable costs for the three products are as follows:
Selling price per unit
Material cost per unit
Labour cost per unit
Contribution per unit
Annual sales
DW
$200
$70
$50
$80
5,000 units
WM
$350
$100
$80
$170
6,000 units
TD
$80
$50
$40
–$10
1,200 units
2.
It is thought that some of the customers that buy a TD also buy a DW and a WM. It is estimated that 5% of the
sales of WM and DW will be lost if the TD ceases to be produced.
3.
All the direct labour force currently working on the TD will be made redundant immediately if TD is ceased now.
This would cost $6,000 in redundancy payments. If Stay Clean waited for 12 months the existing labour force
would be retained and retrained at a cost of $3,500 to enable them to produce the new washing/drying product.
Recruitment and training costs of labour in 12 months’ time would be $1,200 in the event that redundancy takes
place now.
4.
Stay Clean operates a just in time (JIT) policy and so all material cost would be saved on the TD for 12 months
if TD production ceased now. Equally, the material costs relating to the lost sales on the WM and the DW would
also be saved. However, the material supplier has a volume based discount scheme in place as follows:
Total annual expenditure ($)
0–600,000
600,001–800,000
800,001–900,000
900,001–960,000
960,001 and above
Discount
0%
1%
2%
3%
5%
Stay Clean uses this supplier for all its materials for all the products it manufactures. The figures given above in
the cost per unit table for material cost per unit are net of any discount Stay Clean already qualifies for.
5.
The space in the factory currently used for the TD will be sublet for 12 months on a short-term lease contract if
production of TD stops now. The income from that contract will be $12,000.
6.
The supervisor (currently classed as an overhead) supervises the production of all three products spending
approximately 20% of his time on the TD production. He would continue to be fully employed if the TD ceases
to be produced now.
Required:
(a) Calculate whether or not it is worthwhile ceasing to produce the TD now rather than waiting 12 months
(ignore any adjustment to allow for the time value of money).
(13 marks)
(b) Explain two pricing strategies that could be used to improve the financial position of the business in the next
12 months assuming that the TD continues to be made in that period.
(4 marks)
(c) Briefly describe three issues that Stay Clean should consider if it decides to outsource the manufacture of
one of its future products.
(3 marks)
(20 marks)
6
Taha Popatia - ARTT Business School - 02134523175
5
Formulae Sheet
Learning curve
Y = axb
average cost per batch
cost of first batch
total number of batches produced
learning factor (log LR/log 2)
the learning rate as a decimal
Regression analysis
y=a+bx
b=
Q™[\™[™y
Q™[2 ™x)2
a=
™\ E™x
n
n
r=
Q™[\-™[™y
2
Q™[ ™x)2 )(n™\ 2 ™y)2 )
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
End of Question Paper
7
Taha Popatia - ARTT Business School - 02134523175
Where y =
a=
x=
b=
LR =
Monday 14 June 2010
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 8.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FIVE questions are compulsory and MUST be attempted
Brick by Brick (BBB) is a building business that provides a range of building services to the public. Recently they
have been asked to quote for garage conversions (GC) and extensions to properties (EX) and have found that they are
winning fewer GC contracts than expected.
BBB has a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour
basis. BBB thinks that a switch to activity based costing (ABC) to absorb overheads would reduce the cost associated
to GC and hence make them more competitive.
You are provided with the following data:
Overhead
category
Supervisors
Planners
Property related
Total
Annual
overheads $
90,000
70,000
240,000
––––––––
400,000
––––––––
Activity driver
Site visits
Planning documents
Labour hours
Total number
of activities per
year
500
250
40,000
A typical GC costs $3,500 in materials and takes 300 labour hours to complete. A GC requires only one site visit by
a supervisor and needs only one planning document to be raised. The typical EX costs $8,000 in materials and takes
500 hours to complete. An EX requires six site visits and five planning documents. In all cases labour is paid $15 per
hour.
Required:
(a) Calculate the cost and quoted price of a GC and of an EX using labour hours to absorb the overheads.
(5 marks)
(b) Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb the overheads.
(5 marks)
(c) Assuming that the cost of a GC falls by nearly 7% and the price of an EX rises by about 2% as a result of
the change to ABC, suggest possible pricing strategies for the two products that BBB sells and suggest two
reasons other than high prices for the current poor sales of the GC.
(6 marks)
(d) One BBB manager has suggested that only marginal cost should be included in budget cost calculations as
this would avoid the need for arbitrary overhead allocations to products. Briefly discuss this point of view and
comment on the implication for the amount of mark-up that would be applied to budget costs when producing
quotes for jobs.
(4 marks)
(20 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
Sticky Wicket (SW) manufactures cricket bats using high quality wood and skilled labour using mainly traditional
manual techniques. The manufacturing department is a cost centre within the business and operates a standard
costing system based on marginal costs.
At the beginning of April 2010 the production director attempted to reduce the cost of the bats by sourcing wood from
a new supplier and de-skilling the process a little by using lower grade staff on parts of the production process. The
standards were not adjusted to reflect these changes.
The variance report for April 2010 is shown below (extract).
Variances
Material price
Material usage
Labour rate
Labour efficiency
Labour idle time
Adverse
$
Favourable
$
5,100
7,500
43,600
48,800
5,400
The production director pointed out in his April 2010 board report that the new grade of labour required significant
training in April and this meant that productive time was lower than usual. He accepted that the workers were a little
slow at the moment but expected that an improvement would be seen in May 2010. He also mentioned that the new
wood being used was proving difficult to cut cleanly resulting in increased waste levels.
Sales for April 2010 were down 10% on budget and returns of faulty bats were up 20% on the previous month. The
sales director resigned after the board meeting stating that SW had always produced quality products but the new
strategy was bound to upset customers and damage the brand of the business.
Required
(a) Assess the performance of the production director using all the information above taking into account both the
decision to use a new supplier and the decision to de-skill the process.
(7 marks)
In May 2010 the budgeted sales were 19,000 bats and the standard cost card is as follows:
Materials (2kg at $5/kg)
Labour (3hrs at $12/hr)
Marginal cost
Selling price
Contribution
Std cost
$
10
36
Std cost
$
46
68
22
In May 2010 the following results were achieved:
40,000kg of wood were bought at a cost of $196,000, this produced 19,200 cricket bats. No inventory of raw
materials is held. The labour was paid for 62,000 hours and the total cost was $694,000. Labour worked for
61,500 hours.
The sales price was reduced to protect the sales levels. However, only 18,000 cricket bats were sold at an average
price of $65.
Required:
(b) Calculate the materials, labour and sales variances for May 2010 in as much detail as the information allows.
You are not required to comment on the performance of the business.
(13 marks)
(20 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
2
Cut and Stitch (CS) make two types of suits using skilled tailors (labour) and a delicate and unique fabric (material).
Both the tailors and the fabric are in short supply and so the accountant at CS has correctly produced a linear
programming model to help decide the optimal production mix.
The model is as follows:
Variables:
Let W = the number of work suits produced
Let L = the number of lounge suits produced
Constraints
Tailors’ time: 7W + 5L ≤ 3,500 (hours) – this is line T on the diagram
Fabric: 2W + 2L ≤ 1,200 (metres) – this is line F on the diagram
Production of work suits: W ≤ 400 – this is line P on the diagram
Objective is to maximise contribution subject to:
C = 48W + 40L
On the diagram provided the accountant has correctly identified OABCD as the feasible region and point B as the
optimal point.
CS – Production Plan
L
Feasible region OABCD
Optimal point
B
800
P
600
A
400
B
240
200
E
C
T
Cont
0
200
D
400
F
600
800
W
Required:
(a) Find by appropriate calculation the optimal production mix and related maximum contribution that could be
earned by CS.
(4 marks)
(b) Calculate the shadow prices of the fabric per metre and the tailor time per hour.
4
(6 marks)
Taha Popatia - ARTT Business School - 02134523175
3
The tailors have offered to work an extra 500 hours provided that they are paid three times their normal rate of
$1·50 per hour at $4·50 per hour.
Required:
(c) Briefly discuss whether CS should accept the offer of overtime at three times the normal rate.
(6 marks)
(d) Calculate the new optimum production plan if maximum demand for W falls to 200 units.
(4 marks)
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
(20 marks)
Hammer is a large garden equipment supplier with retail stores throughout Toolland. Many of the products it sells
are bought in from outside suppliers but some are currently manufactured by Hammer’s own manufacturing division
‘Nail’.
The prices (a transfer price) that Nail charges to the retail stores are set by head office and have been the subject of
some discussion. The current policy is for Nail to calculate the total variable cost of production and delivery and add
30% for profit. Nail argues that all costs should be taken into consideration, offering to reduce the mark-up on costs to
10% in this case. The retail stores are unhappy with the current pricing policy arguing that it results in prices that are
often higher than comparable products available on the market.
Nail has provided the following information to enable a price comparison to be made of the two possible pricing policies
for one of its products.
Garden shears
Steel: the shears have 0·4kg of high quality steel in the final product. The manufacturing process loses 5% of all steel
put in. Steel costs $4,000 per tonne (1 tonne = 1,000kg)
Other materials: Other materials are bought in and have a list price of $3 per kg although Hammer secures a
10% volume discount on all purchases. The shears require 0·1kg of these materials.
The labour time to produce shears is 0·25 hours per unit and labour costs $10 per hour.
Variable overheads are absorbed at the rate of 150% of labour rates and fixed overheads are 80% of the variable
overheads.
Delivery is made by an outsourced distributor that charges Nail $0·50 per garden shear for delivery.
Required:
(a) Calculate the price that Nail would charge for the garden shears under the existing policy of variable cost plus
30%.
(6 marks)
(b) Calculate the increase or decrease in price if the pricing policy switched to total cost plus 10%.
(4 marks)
(c) Discuss whether or not including fixed costs in a transfer price is a sensible policy.
(4 marks)
(d) Discuss whether the retail stores should be allowed to buy in from outside suppliers if the prices are cheaper
than those charged by Nail.
(6 marks)
(20 marks)
6
Taha Popatia - ARTT Business School - 02134523175
4
Jump has a network of sports clubs which is managed by local managers reporting to the main board. The local managers
have a lot of autonomy and are able to vary employment contracts with staff and offer discounts for membership fees
and personal training sessions. They also control their own maintenance budget but do not have control over large
amounts of capital expenditure.
A local manager’s performance and bonus is assessed relative to three targets. For every one of these three targets
that is reached in an individual quarter, $400 is added to the manager’s bonus, which is paid at the end of the year.
The maximum bonus per year is therefore based on 12 targets (three targets in each of the four quarters of the year).
Accordingly the maximum bonus that could be earned is 12 x $400 = $4,800, which represents 40% of the basic
salary of a local manager. Jump has a 31 March year end.
The performance data for one of the sports clubs for the last four quarters is as follows
Qtr to
30 June 2009
Number of members
3,000
Member visits
20,000
Personal training sessions booked
310
Staff days
450
Staff lateness days
20
Days in quarter
90
Qtr to
30 September 2009
3,200
24,000
325
480
28
90
Qtr to
Qtr to
31 December 2009 31 March 2010
3,300
3,400
26,000
24,000
310
339
470
480
28
20
90
90
Agreed targets are:
1.
2.
3.
Staff must be on time over 95% of the time (no penalty is made when staff are absent from work)
On average 60% of members must use the clubs’ facilities regularly by visiting at least 12 times per quarter
On average 10% of members must book a personal training session each quarter
Required:
(a) Calculate the amount of bonus that the manager should expect to be paid for the latest financial year.
(6 marks)
(b) Discuss to what extent the targets set are controllable by the local manager (you are required to make a case
for both sides of the argument).
(9 marks)
(c) Describe two methods as to how a manager with access to the accounting and other records could unethically
manipulate the situation so as to gain a greater bonus.
(5 marks)
(20 marks)
7
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
5
Formulae Sheet
Learning curve
Y = axb
average cost per batch
cost of first batch
total number of batches produced
learning factor (log LR/log 2)
the learning rate as a decimal
Regression analysis
y=a+bx
b=
n∑xy-∑x∑y
n∑x2 -(∑x)2
a=
∑y b∑x
n
n
r=
n∑xy-∑x∑y
2
n∑x -(∑x)2 )(n∑y 2 -(∑y)2 )
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
End of Question Paper
8
Taha Popatia - ARTT Business School - 02134523175
Where y =
a=
x=
b=
LR =
Monday 13 December 2010
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 8.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
2
Taha Popatia - ARTT Business School - 02134523175
This is a blank page.
The question paper begins on page 3.
ALL FIVE questions are compulsory and MUST be attempted
Carad Co is an electronics company which makes two types of televisions – plasma screen TVs and LCD TVs. It
operates within a highly competitive market and is constantly under pressure to reduce prices. Carad Co operates a
standard costing system and performs a detailed variance analysis of both products on a monthly basis. Extracts from
the management information for the month of November are shown below:
Total number of units made and sold
Material price variance
Total labour variance
1,400
$28,000 A
$6,050 A
Note
1
2
3
Notes
(1) The budgeted total sales volume for TVs was 1,180 units, consisting of an equal mix of plasma screen TVs and
LCD screen TVs. Actual sales volume was 750 plasma TVs and 650 LCD TVs. Standard sales prices are $350
per unit for the plasma TVs and $300 per unit for the LCD TVs. The actual sales prices achieved during
November were $330 per unit for plasma TVs and $290 per unit for LCD TVs. The standard contributions for
plasma TVs and LCD TVs are $190 and $180 per unit respectively.
(2) The sole reason for this variance was an increase in the purchase price of one of its key components, X. Each
plasma TV made and each LCD TV made requires one unit of component X, for which Carad Co’s standard cost
is $60 per unit. Due to a shortage of components in the market place, the market price for November went up
to $85 per unit for X. Carad Co actually paid $80 per unit for it.
(3) Each plasma TV uses 2 standard hours of labour and each LCD TV uses 1·5 standard hours of labour. The
standard cost for labour is $14 per hour and this also reflects the actual cost per labour hour for the company’s
permanent staff in November. However, because of the increase in sales and production volumes in November,
the company also had to use additional temporary labour at the higher cost of $18 per hour. The total capacity
of Carad’s permanent workforce is 2,200 hours production per month, assuming full efficiency. In the month of
November, the permanent workforce were wholly efficient, taking exactly 2 hours to complete each plasma TV
and exactly 1·5 hours to produce each LCD TV. The total labour variance therefore relates solely to the temporary
workers, who took twice as long as the permanent workers to complete their production.
Required:
(a) Calculate the following for the month of November, showing all workings clearly:
(i)
The sales price variance and sales volume contribution variance;
(6 marks)
(ii) The material price planning variance and material price operational variance;
(2 marks)
(iii) The labour rate variance and the labour efficiency variance.
(7 marks)
(b) Explain the reasons why Carad Co would be interested in the material price planning variance and the
material price operational variance.
(5 marks)
(20 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
1
The Accountancy Teaching Co (AT Co) is a company specialising in the provision of accountancy tuition courses in
the private sector. It makes up its accounts to 30 November each year. In the year ending 30 November 2009, it
held 60% of market share. However, over the last twelve months, the accountancy tuition market in general has faced
a 20% decline in demand for accountancy training leading to smaller class sizes on courses. In 2009 and before, AT
Co suffered from an ongoing problem with staff retention, which had a knock-on effect on the quality of service
provided to students. Following the completion of developments that have been ongoing for some time, in 2010 the
company was able to offer a far-improved service to students. The developments included:
–
–
–
–
–
A new dedicated 24 hour student helpline
An interactive website providing instant support to students
A new training programme for staff
An electronic student enrolment system
An electronic marking system for the marking of students’ progress tests. The costs of marking electronically were
expected to be $4 million less in 2010 than marking on paper. Marking expenditure is always included in cost
of sales
Extracts from the management accounts for 2009 and 2010 are shown below:
2009
$’000
Turnover
Cost of sales
Gross profit
Indirect expenses:
Marketing
Property
Staff training
Interactive website running costs
Student helpline running costs
Enrolment costs
2010
$’000
72,025
(52,078)
––––––––
19,947
3,291
6,702
1,287
–
–
5,032
––––––
Total indirect expenses
Net operating profit
$’000
$’000
66,028
(42,056)
–––––––
23,972
4,678
6,690
3,396
3,270
2,872
960
––––––
(16,312)
––––––––
3,635
––––––––
(21,866)
–––––––
2,106
–––––––
On 1 December 2009, management asked all ‘freelance lecturers’ to reduce their fees by at least 10% with immediate
effect (‘freelance lecturers’ are not employees of the company but are used to teach students when there are not
enough of AT Co’s own lecturers to meet tuition needs). All employees were also told that they would not receive a
pay rise for at least one year. Total lecture staff costs (including freelance lecturers) were $41·663 million in 2009
and were included in cost of sales, as is always the case. Freelance lecturer costs represented 35% of these total
lecture staff costs. In 2010 freelance lecture costs were $12·394 million. No reduction was made to course prices in
the year and the mix of trainees studying for the different qualifications remained the same. The same type and
number of courses were run in both 2009 and 2010 and the percentage of these courses that was run by freelance
lecturers as opposed to employed staff also remained the same.
Due to the nature of the business, non-financial performance indicators are also used to assess performance, as
detailed below.
2009
Percentage of students transferring to AT Co from
another training provider
Number of late enrolments due to staff error
Percentage of students passing exams first time
Labour turnover
Number of student complaints
Average no. of employees
8%
297
48%
32%
315
1,080
4
2010
20%
106
66%
10%
84
1,081
Taha Popatia - ARTT Business School - 02134523175
2
Required:
Assess the performance of the business in 2010 using both financial performance indicators calculated from the
above information AND the non-financial performance indicators provided.
NOTE: Clearly state any assumptions and show all workings clearly. Your answer should be structured around the
following main headings: turnover; cost of sales; gross profit; indirect expenses; net operating profit. However, in
discussing each of these areas you should also refer to the non-financial performance indicators, where relevant.
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
(20 marks)
The Cosmetic Co is a company producing a variety of cosmetic creams and lotions. The creams and lotions are sold
to a variety of retailers at a price of $23·20 for each jar of face cream and $16·80 for each bottle of body lotion. Each
of the products has a variety of ingredients, with the key ones being silk powder, silk amino acids and aloe vera. Six
months ago, silk worms were attacked by disease causing a huge reduction in the availability of silk powder and silk
amino acids. The Cosmetic Co had to dramatically reduce production and make part of its workforce, which it had
trained over a number of years, redundant.
The company now wants to increase production again by ensuring that it uses the limited ingredients available to
maximise profits by selling the optimum mix of creams and lotions. Due to the redundancies made earlier in the year,
supply of skilled labour is now limited in the short-term to 160 hours (9,600 minutes) per week, although unskilled
labour is unlimited. The purchasing manager is confident that they can obtain 5,000 grams of silk powder and
1,600 grams of silk amino acids per week. All other ingredients are unlimited. The following information is available
for the two products:
Cream
3 grams
1 gram
4 grams
4 minutes
3 minutes
Materials required: silk powder (at $2·20 per gram)
– silk amino acids (at $0·80 per gram)
– aloe vera (at $1·40 per gram)
Labour required: skilled ($12 per hour)
– unskilled (at $8 per hour)
Lotion
2 grams
0·5 grams
2 grams
5 minutes
1·5 minutes
Each jar of cream sold generates a contribution of $9 per unit, whilst each bottle of lotion generates a contribution of
$8 per unit. The maximum demand for lotions is 2,000 bottles per week, although demand for creams is unlimited.
Fixed costs total $1,800 per week. The company does not keep inventory although if a product is partially complete
at the end of one week, its production will be completed in the following week.
Required:
(a) On the graph paper provided, use linear programming to calculate the optimum number of each product that
the Cosmetic Co should make per week, assuming that it wishes to maximise contribution. Calculate the total
contribution per week for the new production plan. All workings MUST be rounded to 2 decimal places.
(14 marks)
(b) Calculate the shadow price for silk powder and the slack for silk amino acids. All workings MUST be rounded
to 2 decimal places.
(6 marks)
(20 marks)
6
Taha Popatia - ARTT Business School - 02134523175
3
The Gadget Co produces three products, A, B and C, all made from the same material. Until now, it has used
traditional absorption costing to allocate overheads to its products. The company is now considering an activity based
costing system in the hope that it will improve profitability. Information for the three products for the last year is as
follows:
Production and sales volumes (units)
Selling price per unit
Raw material usage (kg) per unit
Direct labour hours per unit
Machine hours per unit
Number of production runs per annum
Number of purchase orders per annum
Number of deliveries to retailers per annum
A
15,000
$7.50
2
0·1
0·5
16
24
48
B
12,000
$12
3
0·15
0·7
12
28
30
C
18,000
$13
4
0·2
0·9
8
42
62
The price for raw materials remained constant throughout the year at $1·20 per kg. Similarly, the direct labour cost
for the whole workforce was $14·80 per hour. The annual overhead costs were as follows:
Machine set up costs
Machine running costs
Procurement costs
Delivery costs
$
26,550
66,400
48,000
54,320
Required:
(a) Calculate the full cost per unit for products A, B and C under traditional absorption costing, using direct
labour hours as the basis for apportionment.
(5 marks)
(b) Calculate the full cost per unit of each product using activity based costing.
(9 marks)
(c) Using your calculation from (a) and (b) above, explain how activity based costing may help The Gadget Co
improve the profitability of each product.
(6 marks)
(20 marks)
5
Some commentators argue that: ‘With continuing pressure to control costs and maintain efficiency, the time has come
for all public sector organisations to embrace zero-based budgeting. There is no longer a place for incremental
budgeting in any organisation, particularly public sector ones, where zero-based budgeting is far more suitable
anyway.’
Required:
(a) Discuss the particular difficulties encountered when budgeting in public sector organisations compared with
budgeting in private sector organisations, drawing comparisons between the two types of organisations.
(5 marks)
(b) Explain the terms ‘incremental budgeting’ and ‘zero-based budgeting’.
(4 marks)
(c) State the main stages involved in preparing zero-based budgets.
(3 marks)
(d) Discuss the view that ‘there is no longer a place for incremental budgeting in any organisation, particularly
public sector ones,’ highlighting any drawbacks of zero-based budgeting that need to be considered.
(8 marks)
(20 marks)
7
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
4
Formulae Sheet
Learning curve
Y = axb
cumulative average time per unit to produce x units
the time taken for the first unit of output
the cumulative number of units produced
the index of learning (log LR/log2)
the learning rate as a decimal
Regression analysis
y=a+bx
b=
Q™[\™[™y
Q™[2 ™x)2
a=
™\ E™x
n
n
r=
Q™[\-™[™y
(Q™[ ™x)2 )(n™\ 2 ™y)2 )
2
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
End of Question Paper
8
Taha Popatia - ARTT Business School - 02134523175
Where y =
a=
x=
b=
LR =
Monday 13 June 2011
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 8.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FIVE questions are compulsory and MUST be attempted
Cement Co is a company specialising in the manufacture of cement, a product used in the building industry. The
company has found that when weather conditions are good, the demand for cement increases since more building
work is able to take place. Last year, the weather was so good, and the demand for cement was so great, that Cement
Co was unable to meet demand. Cement Co is now trying to work out the level of cement production for the coming
year in order to maximise profits. The company doesn’t want to miss out on the opportunity to earn large profits by
running out of cement again. However, it doesn’t want to be left with large quantities of the product unsold at the end
of the year, since it deteriorates quickly and then has to be disposed of. The company has received the following
estimates about the probable weather conditions and corresponding demand levels for the coming year:
Weather
Good
Average
Poor
Probability
25%
45%
30%
Demand
350,000 bags
280,000 bags
200,000 bags
Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has to be disposed
of at a cost of $0·50 per bag.
Cement Co has decided to produce at one of the three levels of production to match forecast demand. It now has to
decide which level of cement production to select.
Required:
(a) Construct a pay off table to show all the possible profit outcomes.
(8 marks)
(b) Decide the level of cement production the company should choose, based on the following decision rules:
(i)
Maximin
(1 mark)
(ii) Maximax
(1 mark)
(iii) Expected value
(4 marks)
You must justify your decision under each rule, showing all necessary calculations.
(c) Describe the ‘maximin’ and ‘expected value’ decision rules, explaining when they might be used and the
attitudes of the decision makers who might use them.
(6 marks)
(20 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
Heat Co specialises in the production of a range of air conditioning appliances for industrial premises. It is about to
launch a new product, the ‘Energy Buster’, a unique air conditioning unit which is capable of providing unprecedented
levels of air conditioning using a minimal amount of electricity. The technology used in the Energy Buster is unique
so Heat Co has patented it so that no competitors can enter the market for two years. The company’s development
costs have been high and it is expected that the product will only have a five-year life cycle.
Heat Co is now trying to ascertain the best pricing policy that they should adopt for the Energy Buster’s launch onto
the market. Demand is very responsive to price changes and research has established that, for every $15 increase in
price, demand would be expected to fall by 1,000 units. If the company set the price at $735, only 1,000 units
would be demanded.
The costs of producing each air conditioning unit are as follows:
Direct materials
Labour
Fixed overheads
Total cost
$
42
12 (1·5 hours at $8 per hour. See note below)
6 (based on producing 50,000 units per annum)
–––
60
–––
Note
The first air conditioning unit took 1·5 hours to make and labour cost $8 per hour. A 95% learning curve exists, in
relation to production of the unit, although the learning curve is expected to finish after making 100 units. Heat Co’s
management have said that any pricing decisions about the Energy Buster should be based on the time it takes to
make the 100th unit of the product. You have been told that the learning co-efficient, b = –0·0740005.
All other costs are expected to remain the same up to the maximum demand levels.
Required:
(a) (i)
Establish the demand function (equation) for air conditioning units;
(3 marks)
(ii) Calculate the marginal cost for each air conditioning unit after adjusting the labour cost as required by
the note above;
(6 marks)
(iii) Equate marginal cost and marginal revenue in order to calculate the optimum price and quantity.
(3 marks)
(b) Explain what is meant by a ‘penetration pricing’ strategy and a ‘market skimming’ strategy and discuss
whether either strategy might be suitable for Heat Co when launching the Energy Buster.
(8 marks)
(20 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
2
Noble is a restaurant that is only open in the evenings, on SIX days of the week. It has eight restaurant and kitchen
staff, each paid a wage of $8 per hour on the basis of hours actually worked. It also has a restaurant manager and a
head chef, each of whom is paid a monthly salary of $4,300. Noble’s budget and actual figures for the month of May
was as follows:
Number of meals
Revenue: Food
Drinks
Budget
1,200
$
48,000
12,000
–––––––
$
Actual
1,560
$
60,840
11,700
––––––––
60,000
Variable costs:
Staff wages
Food costs
Drink costs
Energy costs
Contribution
Fixed costs:
Manager’s and chef’s pay
Rent, rates and depreciation
Operating profit
(9,216)
(6,000)
(2,400)
(3,387)
72,540
(13,248)
(7,180)
(5,280)
(3,500)
(21,003)
–––––––
38,997
(8,600)
(4,500)
–––––––
$
(13,100)
––––––––
25,897
–––––––
(29,208)
––––––––
43,332
(8,600)
(4,500)
–––––––
(13,100)
––––––––
30,232
––––––––
The budget above is based on the following assumptions:
1
The restaurant is only open six days a week and there are four weeks in a month. The average number of orders
each day is 50 and demand is evenly spread across all the days in the month.
2
The restaurant offers two meals: Meal A, which costs $35 per meal and Meal B, which costs $45 per meal. In
addition to this, irrespective of which meal the customer orders, the average customer consumes four drinks each
at $2·50 per drink. Therefore, the average spend per customer is either $45 or $55 including drinks, depending
on the type of meal selected. The May budget is based on 50% of customers ordering Meal A and 50% of
customers ordering Meal B.
3
Food costs represent 12·5% of revenue from food sales.
4
Drink costs represent 20% of revenue from drinks sales.
5
When the number of orders per day does not exceed 50, each member of hourly paid staff is required to work
exactly six hours per day. For every incremental increase of five in the average number of orders per day, each
member of staff has to work 0·5 hours of overtime for which they are paid at the increased rate of $12 per hour.
You should assume that all costs for hourly paid staff are treated wholly as variable costs.
6
Energy costs are deemed to be related to the total number of hours worked by each of the hourly paid staff, and
are absorbed at the rate of $2·94 per hour worked by each of the eight staff.
Required:
(a) Prepare a flexed budget for the month of May, assuming that the standard mix of customers remains the
same as budgeted.
(12 marks)
4
Taha Popatia - ARTT Business School - 02134523175
3
(b) After preparation of the flexed budget, you are informed that the following variances have arisen in relation to
total food and drink sales:
Sales mix contribution variance
Sales quantity contribution variance
$1,014 Adverse
$11,700 Favourable
Required:
(c) Noble’s owner told the restaurant manager to run a half-price drinks promotion at Noble for the month of May
on all drinks. Actual results showed that customers ordered an average of six drinks each instead of the usual
four but, because of the promotion, they only paid half of the usual cost for each drink. You have calculated the
sales margin price variance for drink sales alone and found it to be a worrying $11,700 adverse. The restaurant
manager is worried and concerned that this makes his performance for drink sales look very bad.
Required:
Briefly discuss TWO other variances that could be calculated for drinks sales or food sales in order to ensure
that the assessment of the restaurant manager’s performance is fair. These should be variances that COULD
be calculated from the information provided above although no further calculations are required here.
(4 marks)
(20 marks)
4
(a) Brace Co is an electronics company specialising in the manufacture of home audio equipment. Historically, the
company has used solely financial performance measures to assess the performance of the company as a whole.
The company’s Managing Director has recently heard of the ‘balanced scorecard approach’ and is keen to learn
more.
Required:
Describe the balanced scorecard approach to performance measurement.
(10 marks)
(b) Brace Co is split into two divisions, A and B, each with their own cost and revenue streams. Each of the divisions
is managed by a divisional manager who has the power to make all investment decisions within the division.
The cost of capital for both divisions is 12%. Historically, investment decisions have been made by calculating
the return on investment (ROI) of any opportunities and at present, the return on investment of each division is
16%.
A new manager who has recently been appointed in division A has argued that using residual income (RI) to
make investment decisions would result in ‘better goal congruence’ throughout the company.
Each division is currently considering the following separate investments:
Capital required for investment
Sales generated by investment
Net profit margin
Project for Division A
$82·8 million
$44·6 million
28%
Project for Division B
$40·6 million
$21·8 million
33%
The company is seeking to maximise shareholder wealth.
Required:
Calculate both the return on investment and residual income of the new investment for each of the two
divisions. Comment on these results, taking into consideration the manager’s views about residual income.
(10 marks)
(20 marks)
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
BRIEFLY describe the sales mix contribution variance and the sales quantity contribution variance. Identify
why each of them has arisen in Noble’s case.
(4 marks)
Thin Co is a private hospital offering three types of surgical procedures known as A, B and C. Each of them uses a
pre-operative injection given by a nurse before the surgery. Thin Co currently rent an operating theatre from a
neighbouring government hospital. Thin Co does have an operating theatre on its premises, but it has never been put
into use since it would cost $750,000 to equip. The Managing Director of Thin Co is keen to maximise profits and
has heard of something called ‘throughput accounting’, which may help him to do this. The following information is
available:
1
All patients go through a five step process, irrespective of which procedure they are having:
–
–
–
–
–
step
step
step
step
step
1:
2:
3:
4:
5:
consultation with the advisor;
pre-operative injection given by the nurse;
anaesthetic given by anaesthetist;
procedure performed in theatre by the surgeon;
recovery with the recovery specialist.
2
The price of each of procedures A, B and C is $2,700, $3,500 and $4,250 respectively.
3
The only materials’ costs relating to the procedures are for the pre-operative injections given by the nurse, the
anaesthetic and the dressings. These are as follows:
Procedure A
$ per procedure
Pre-operative nurse’s injections
700
Anaesthetic
35
Dressings
5·60
4
Procedure B
$ per procedure
800
40
5·60
Procedure C
$ per procedure
1,000
45
5·60
There are five members of staff employed by Thin Co. Each works a standard 40-hour week for 47 weeks of the
year, a total of 1,880 hours each per annum. Their salaries are as follows:
–
–
–
–
–
Advisor: $45,000 per annum;
Nurse: $38,000 per annum;
Anaesthetist: $75,000 per annum;
Surgeon: $90,000 per annum;
Recovery specialist: $50,000 per annum.
The only other hospital costs (comparable to ‘factory costs’ in a traditional manufacturing environment) are
general overheads, which include the theatre rental costs, and amount to $250,000 per annum.
5
Maximum annual demand for A, B and C is 600, 800 and 1,200 procedures respectively. Time spent by each
of the five different staff members on each procedure is as follows:
Advisor
Nurse
Anaesthetist
Surgeon
Recovery specialist
Procedure A
Hours
per procedure
0·24
0·27
0·25
0·75
0·60
Procedure B
Hours
per procedure
0·24
0·28
0·28
1
0·70
Procedure C
Hours
per procedure
0·24
0·30
0·33
1·25
0·74
Part hours are shown as decimals e.g. 0·24 hours = 14·4 minutes (0·24 x 60).
Surgeon’s hours have been correctly identified as the bottleneck resource.
6
Taha Popatia - ARTT Business School - 02134523175
5
Required:
(a) Calculate the throughput accounting ratio for procedure C.
Note: It is recommended that you work in hours as provided in the table rather than minutes.
(6 marks)
(b) The return per factory hour for products A and B has been calculated and is $2,612·53 and $2,654·40
respectively. The throughput accounting ratio for A and B has also been calculated and is 8·96 and 9·11
respectively.
(7 marks)
(c) Assume that your calculations in part (b) showed that, if the optimum product mix is adhered to, there will be
excess demand for procedure C of 696 procedures per annum. In order to satisfy this excess demand, the
company is considering equipping and using its own theatre, as well as continuing to rent the existing theatre.
The company cannot rent any more theatre time at either the existing theatre or any other theatres in the area,
so equipping its own theatre is the only option. An additional surgeon would be employed to work in the newly
equipped theatre.
Required:
Discuss whether the overall profit of the company could be improved by equipping and using the extra
theatre.
Note: Some basic calculations may help your discussion.
(7 marks)
(20 marks)
7
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
Calculate the optimum product mix and the maximum profit per annum.
Formulae Sheet
Learning curve
Y = axb
cumulative average time per unit to produce x units
the time taken for the first unit of output
the cumulative number of units produced
the index of learning (log LR/log2)
the learning rate as a decimal
Regression analysis
y=a+bx
b=
Q™[\™[™y
Q™[2 ™x)2
a=
™\ E™x
n
n
r=
Q™[\-™[™y
2
(Q™[ ™x)2 )(n™\ 2 ™y)2 )
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
8
Taha Popatia - ARTT Business School - 02134523175
Where Y =
a=
x=
b=
LR =
Monday 5 December 2011
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 6.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FIVE questions are compulsory and MUST be attempted
The Telephone Co (T Co) is a company specialising in the provision of telephone systems for commercial clients. There
are two parts to the business:
–
–
installing telephone systems in businesses, either first time installations or replacement installations;
supporting the telephone systems with annually renewable maintenance contracts.
T Co has been approached by a potential customer, Push Co, who wants to install a telephone system in new offices
it is opening. Whilst the job is not a particularly large one, T Co is hopeful of future business in the form of replacement
systems and support contracts for Push Co. T Co is therefore keen to quote a competitive price for the job. The
following information should be considered:
1.
One of the company’s salesmen has already been to visit Push Co, to give them a demonstration of the new
system, together with a complimentary lunch, the costs of which totalled $400.
2.
The installation is expected to take one week to complete and would require three engineers, each of whom is
paid a monthly salary of $4,000. The engineers have just had their annually renewable contract renewed with
T Co. One of the three engineers has spare capacity to complete the work, but the other two would have to be
moved from contract X in order to complete this one. Contract X generates a contribution of $5 per engineer hour.
There are no other engineers available to continue with Contract X if these two engineers are taken off the job.
It would mean that T Co would miss its contractual completion deadline on Contract X by one week. As a result,
T Co would have to pay a one-off penalty of $500. Since there is no other work scheduled for their engineers in
one week’s time, it will not be a problem for them to complete Contract X at this point.
3.
T Co’s technical advisor would also need to dedicate eight hours of his time to the job. He is working at full
capacity, so he would have to work overtime in order to do this. He is paid an hourly rate of $40 and is paid for
all overtime at a premium of 50% above his usual hourly rate.
4.
Two visits would need to be made by the site inspector to approve the completed work. He is an independent
contractor who is not employed by T Co, and charges Push Co directly for the work. His cost is $200 for each
visit made.
5.
T Co’s system trainer would need to spend one day at Push Co delivering training. He is paid a monthly salary
of $1,500 but also receives commission of $125 for each day spent delivering training at a client’s site.
6.
120 telephone handsets would need to be supplied to Push Co. The current cost of these is $18·20 each,
although T Co already has 80 handsets in inventory. These were bought at a price of $16·80 each. The handsets
are the most popular model on the market and frequently requested by T Co’s customers.
7.
Push Co would also need a computerised control system called ‘Swipe 2’. The current market price of Swipe 2
is $10,800, although T Co has an older version of the system, ‘Swipe 1’, in inventory, which could be modified
at a cost of $4,600. T Co paid $5,400 for Swipe 1 when it ordered it in error two months ago and has no other
use for it. The current market price of Swipe 1 is $5,450, although if T Co tried to sell the one they have, it would
be deemed to be ‘used’ and therefore only worth $3,000.
8.
1,000 metres of cable would be required to wire up the system. The cable is used frequently by T Co and it has
200 metres in inventory, which cost $1·20 per metre. The current market price for the cable is $1·30 per metre.
9.
You should assume that there are four weeks in each month and that the standard working week is 40 hours
long.
Required:
(a) Prepare a cost statement, using relevant costing principles, showing the minimum cost that T Co should
charge for the contract. Make DETAILED notes showing how each cost has been arrived at and EXPLAINING
why each of the costs above has been included or excluded from your cost statement.
(14 marks)
(b) Explain the relevant costing principles used in part (a) and explain the implications of the minimum price
that has been calculated in relation to the final price agreed with Push Co.
(6 marks)
(20 marks)
2
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1
Bath Co is a company specialising in the manufacture and sale of baths. Each bath consists of a main unit plus a set
of bath fittings. The company is split into two divisions, A and B. Division A manufactures the bath and Division B
manufactures sets of bath fittings. Currently, all of Division A’s sales are made externally. Division B, however, sells to
Division A as well as to external customers. Both of the divisions are profit centres.
The following data is available for both divisions:
Division A
Current selling price for each bath
Costs per bath:
Fittings from Division B
Other materials from external suppliers
Labour costs
Annual fixed overheads
Annual production and sales of baths (units)
Maximum annual market demand for baths (units)
$450
$75
$200
$45
$7,440,000
80,000
80,000
Division B
Current external selling price per set of fittings
Current price for sales to Division A
Costs per set of fittings:
Materials
Labour costs
Annual fixed overheads
Maximum annual production and sales of sets of fittings (units)
(including internal and external sales)
Maximum annual external demand for sets of fittings (units)
Maximum annual internal demand for sets of fittings (units)
$80
$75
$5
$15
$4,400,000
200,000
180,000
80,000
The transfer price charged by Division B to Division A was negotiated some years ago between the previous divisional
managers, who have now both been replaced by new managers. Head Office only allows Division A to purchase its
fittings from Division B, although the new manager of Division A believes that he could obtain fittings of the same
quality and appearance for $65 per set, if he was given the autonomy to purchase from outside the company. Division
B makes no cost savings from supplying internally to Division A rather than selling externally.
Required:
(a) Under the current transfer pricing system, prepare a profit statement showing the profit for each of the
divisions and for Bath Co as a whole. Your sales and costs figures should be split into external sales and
inter-divisional transfers, where appropriate.
(6 marks)
(b) Head Office is considering changing the transfer pricing policy to ensure maximisation of company profits without
demotivating either of the divisional managers. Division A will be given autonomy to buy from external suppliers
and Division B to supply external customers in priority to supplying to Division A.
Calculate the maximum profit that could be earned by Bath Co if transfer pricing is optimised.
(8 marks)
(c) Discuss the issues of encouraging divisional managers to take decisions in the interests of the company as a
whole, where transfer pricing is used. Provide a reasoned recommendation of a policy Bath Co should adopt.
(6 marks)
(20 marks)
3
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Taha Popatia - ARTT Business School - 02134523175
2
3
You have recently been appointed as an assistant management accountant in a large company, PC Co. When you
meet the production manager, you overhear him speaking to one of his staff, saying:
‘Budgeting is a waste of time. I don’t see the point of it. It tells us what we can’t afford but it doesn’t keep us from
buying it. It simply makes us invent new ways of manipulating figures. If all levels of management aren’t involved in
the setting of the budget, they might as well not bother preparing one.’
Required:
(a) Identify and explain SIX objectives of a budgetary control system.
(9 marks)
(20 marks)
4
Fit Co specialises in the manufacture of a small range of hi-tech products for the fitness market. They are currently
considering the development of a new type of fitness monitor, which would be the first of its kind in the market. It
would take one year to develop, with sales then commencing at the beginning of the second year. The product is
expected to have a life cycle of two years, before it is replaced with a technologically superior product. The following
cost estimates have been made.
Year 1
Units manufactured and sold
Research and development costs
Product design costs
Marketing costs
Manufacturing costs:
Variable cost per unit
Fixed production costs
Distribution costs:
Variable cost per unit
Fixed distribution costs
Selling costs:
Variable cost per unit
Fixed selling costs
Administration costs
$160,000
$800,000
$1,200,000
$200,000
Year 2
100,000
Year 3
200,000
$1,000,000
$1,750,000
$40
$650,000
$42
$1,290,000
$4
$120,000
$4·50
$120,000
$3
$180,000
$900,000
$3·20
$180,000
$1,500,000
Note: You should ignore the time value of money.
Required:
(a) Calculate the life cycle cost per unit.
(6 marks)
(b) After preparing the cost estimates above, the company realises that it has not taken into account the effect of the
learning curve on the production process. The variable manufacturing cost per unit above, of $40 in year 2 and
$42 in year 3, includes a cost for 0·5 hours of labour. The remainder of the variable manufacturing cost is not
driven by labour hours. The year 2 cost per hour for labour is $24 and the year 3 cost is $26 per hour.
Subsequently, it has now been estimated that, although the first unit is expected to take 0·5 hours, a learning
curve of 95% is expected to occur until the 100th unit has been completed.
Calculate the revised life cycle cost per unit, taking into account the effect of the learning curve.
Note: the value of the learning co-efficient, b, is –0·0740005.
(c) Discuss the benefits of life cycle costing.
(10 marks)
(4 marks)
(20 marks)
4
Taha Popatia - ARTT Business School - 02134523175
(b) Discuss the concept of a participative style of budgeting in terms of the six objectives identified in part (a).
(11 marks)
Choc Co is a company which manufactures and sells three types of biscuits in packets. One of them is called ‘Ooze’
and contains three types of sweeteners: honey, sugar and syrup. The standard materials usage and cost for one unit
of ‘Ooze’ (one packet) is as follows:
Honey
Sugar
Syrup
$
0·40
0·45
0·25
–––––
1·10
–––––
20 grams at $0·02 per gram
15 grams at $0·03 per gram
10 grams at $0·025 per gram
In the three months ended 30 November 2011, Choc Co produced 101,000 units of ‘Ooze’ using 2,200 kg of honey,
1,400 kg of sugar and 1,050 kg of syrup. Note: there are 1,000 grams in a kilogram (kg).
Choc Co has used activity-based costing to allocate its overheads for a number of years. One of its main overheads is
machine set-up costs. In the three months ended 30 November 2011, the following information was available in
relation to set-up costs:
Budget
Total number of units produced
Total number of set ups
Total set-up costs
264,000
330
$52,800
Actual
Total number of units produced
Total number of set ups
Total set-up costs
320,000
360
$60,000
Required:
(a) Calculate the following variances for materials in Ooze:
(i)
Total materials usage variance;
(4 marks)
(ii) Total materials mix variance;
(4 marks)
(iii) Total materials quantity (yield) variance.
(4 marks)
(b) Calculate the following activity-based variances in relation to the set-up cost of the machines:
(i)
The expenditure variance;
(3 marks)
(ii) The efficiency variance.
(3 marks)
(c) Briefly outline the steps involved in allocating overheads using activity based costing.
(2 marks)
(20 marks)
5
[P.T.O.
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5
Formulae Sheet
Learning curve
Y = axb
cumulative average time per unit to produce x units
the time taken for the first unit of output
the cumulative number of units produced
the index of learning (log LR/log2)
the learning rate as a decimal
Regression analysis
y=a+bx
b=
Q™[\™[™y
Q™[2 ™x)2
a=
™\ E™x
n
n
r=
Q™[\-™[™y
2
(Q™[ ™x)2 )(n™\ 2 ™y)2 )
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
6
Taha Popatia - ARTT Business School - 02134523175
Where Y =
a=
x=
b=
LR =
Monday 11 June 2012
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 7.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FIVE questions are compulsory and MUST be attempted
Robber Co manufactures control panels for burglar alarms, a very profitable product. Every product comes with a one
year warranty offering free repairs if any faults arise in this period.
It currently produces and sells 80,000 units per annum, with production of them being restricted by the short supply
of labour. Each control panel includes two main components – one key pad and one display screen. At present,
Robber Co manufactures both of these components in-house. However, the company is currently considering
outsourcing the production of keypads and/or display screens. A newly established company based in Burgistan is
keen to secure a place in the market, and has offered to supply the keypads for the equivalent of $4·10 per unit and
the display screens for the equivalent of $4·30 per unit. This price has been guaranteed for two years.
The current total annual costs of producing the keypads and the display screens are:
Production
Direct materials
Direct labour
Heat and power costs
Machine costs
Depreciation and insurance costs
Total annual production costs
Keypads
80,000 units
$’000
160
40
64
26
84
374
Display screens
80,000 units
$’000
116
60
88
30
96
390
Notes:
1. Materials costs for keypads are expected to increase by 5% in six months’ time; materials costs for display screens
are only expected to increase by 2%, but with immediate effect.
2. Direct labour costs are purely variable and not expected to change over the next year.
3. Heat and power costs include an apportionment of the general factory overhead for heat and power as well as
the costs of heat and power directly used for the production of keypads and display screens. The general
apportionment included is calculated using 50% of the direct labour cost for each component and would be
incurred irrespective of whether the components are manufactured in-house or not.
4. Machine costs are semi-variable; the variable element relates to set up costs, which are based upon the number
of batches made. The keypads’ machine has fixed costs of $4,000 per annum and the display screens’ machine
has fixed costs of $6,000 per annum. Whilst both components are currently made in batches of 500, this would
need to change, with immediate effect, to batches of 400.
5. 60% of depreciation and insurance costs relate to an apportionment of the general factory depreciation and
insurance costs; the remaining 40% is specific to the manufacture of keypads and display screens.
Required:
(a) Advise Robber Co whether it should continue to manufacture the keypads and display screens in-house or
whether it should outsource their manufacture to the supplier in Burgistan, assuming it continues to adopt
a policy to limit manufacture and sales to 80,000 control panels in the coming year.
(8 marks)
(b) Robber Co takes 0·5 labour hours to produce a keypad and 0·75 labour hours to produce a display screen.
Labour hours are restricted to 100,000 hours and labour is paid at $1 per hour. Robber Co wishes to increase
its supply to 100,000 control panels (i.e. 100,000 each of keypads and display screens).
Advise Robber Co as to how many units of keypads and display panels they should either manufacture and/or
outsource in order to minimise their costs.
(7 marks)
(c) Discuss the non-financial factors that Robber Co should consider when making a decision about outsourcing
the manufacture of keypads and display screens.
(5 marks)
(20 marks)
2
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1
The Universal Health System (UHS) provides the entire healthcare service to residents in Illopia. The UHS is funded
centrally through revenues from taxpayers. However, the government is not involved in the day-to-day running of the
UHS, which is largely managed regionally by a number of self-governing trusts, such as the Sickham UHS Trust.
The Sickham UHS Trust runs one hospital in Sickham and, like other trusts in Illopia, receives 70% of its income
largely from the UHS’ ‘payments by results’ scheme, which was established two years ago. Under this scheme, the
trust receives a pre-set tariff (fee income) for each service it provides. If the Trust manages to provide any of its services
at a lower cost than the pre-set tariff, it is allowed to use the surplus as it wishes. Similarly, it has to bear the cost of
any deficits itself. Currently, the Trust knows that a number of its services simply cannot be provided at the tariff paid
and accepts that these always lead to a deficit. Similarly, other services always seem to create a surplus. This is partly
because different trusts define their services and account for overheads differently. Also, it is partly due to regional
differences in costs, which are not taken into account by the scheme, which operates on the basis that ‘one tariff fits
all’.
The remaining 30% of the Trust’s income comes from transplant and heart operations. Since these are not covered
by the scheme, the payment the Trust receives is based on the actual costs it incurs in providing the operations.
However, the Trust is not allowed to exceed the total budget provided for these operations in any one year.
Over recent years, the Trust’s board of directors has become increasingly dissatisfied with the financial performance
of the Trust and has blamed it on poor costing systems, leading to an inability to control costs. As a result, the finance
director and his second in command – the financial controller – have now been replaced. The board of directors has
taken this decision after complaining that ‘the Trust simply cannot sustain the big deficit between income and
spending’. The new financial controller comes from a manufacturing background and is a great advocate of target
costing, believing that the introduction of a target costing system at the Sickham UHS Trust is the answer to all of its
problems. The new financial director is unconvinced, believing target costing to be only really suitable in
manufacturing companies.
Required:
(a) Explain the main steps involved in developing a target price and target cost for a product in a typical
manufacturing company.
(6 marks)
(b) Explain four key characteristics that distinguish services from manufacturing.
(4 marks)
(c) Describe how the Sickham UHS Trust is likely, in the current circumstances, to try to derive:
(i)
a target cost for the services that it provides under the ‘payment by results’ scheme; and
(ii) a target cost for transplants and heart operations.
(2 marks)
(2 marks)
(d) Discuss THREE of the particular difficulties that the Sickham UHS Trust may find in using target costing in
its service provision.
(6 marks)
(20 marks)
3
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2
Sauce Co manufactures and sells cartons of cooking sauces, which deteriorate over time and must be used within
three months. Over the last two years, Sauce Co has experienced all kinds of problems. The financial and sales
directors believe these to be a result of persistently unrealistic sales targets imposed by the managing director, who
makes forecasts based on his own subjective and overly optimistic views about future sales. Whilst an incentive
scheme is in place for employees, the company has not hit its targets for the last three years, so no bonuses have
been paid out. The financial director has asked you to forecast the sales for the last two quarters of 2012, hoping to
present these figures to the managing director in an attempt to persuade him that the basis of forecasting needs to be
changed. Production volumes are also currently based on anticipated sales rather than actual orders.
The following sales figures are available for the last two years. All of the figures represent actual sales except for
quarter 2 of 2012, which is an estimate. The financial director is satisfied that this estimate can be relied upon.
Year
2010
2011
2012
Quarter One
’000 units
Quarter Two
’000 units
1,200
1,400
1,000
1,150
Quarter Three
’000 units
900
1,050
Quarter Four
’000 units
1,100
1,300
The following centred moving averages have been calculated, using a base period of four quarters:
Year
2011
2012
Quarter One
’000 units
1,068·75
1,243·75
Quarter Two
’000 units
1,112·5
1,287·5
Quarter Three
’000 units
1,162·5
Quarter Four
’000 units
1,206·25
The average seasonal variations for 2010 have already been made available to you and are 0·908 for quarter 3 and
1·082 for quarter 4. The random component is negligible and can therefore be ignored.
Required:
(a) Using the information provided above, and assuming a proportional (multiplicative) model, forecast the sales
of Sauce Co for the last two quarters of 2012. Calculate your seasonal adjustments to four decimal places.
(10 marks)
(b) Discuss the likely impact that the budgeting style and inaccurate sales forecasts have had on the staff and
business of Sauce Co.
(10 marks)
(20 marks)
4
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3
Lock Co makes a single product – a lock – and uses marginal costing. The standard cost card for one unit is as follows:
Standard cost card
Selling price
$
80
–––
12
20
4
–––
36
–––
Direct materials (4 kg at $3 per kg)
Direct labour (2 hours at $10 per hour)
Variable overhead (2 hours at $2 per hour)
Marginal cost
A junior member of the accounts team produced the following variance statement for the month of May.
Sales
Less: Marginal cost
Direct materials
Direct labour
Variable overheads
Contribution
Budget
(1,000 units)
$
80,000
Actual
(960 units)
$
76,800
(12,000)
(20,000)
(4,000)
–––––––
44,000
–––––––
(11,126)
(18,240)
(3,283)
–––––––
44,151
–––––––
Variances
$
3,200 Adv
874 Fav
1,760 Fav
717 Fav
––––
151 Fav
––––
Lock Co used 3,648 kg of materials in the period and the labour force worked – and was paid for – 1,824 hours.
Until now, Lock Co has had a market share of 25%. In the month of May, however, the market faced an unexpected
10% decline in the demand for locks.
Required:
(a) Prepare a statement which reconciles budgeted contribution to actual contribution in as much detail as
possible. Do not calculate the sales price and the labour rate variances, since both of these have a value of
nil. Clearly show all other workings.
(12 marks)
(b) The production director at Lock Co believes that the way to persistently increase market share in the long term
is to focus on quality, and is hoping to introduce a ‘Total Quality Management’ (TQM) approach. The finance
director also shares this view and has said that ‘standard costing will no longer have a place within the
organisation if TQM is introduced.’
Discuss the view that there is no longer a place for standard costing if TQM is introduced at Lock Co.
(8 marks)
(20 marks)
5
[P.T.O.
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4
The Biscuits division (Division B) and the Cakes division (Division C) are two divisions of a large, manufacturing
company. Whilst both divisions operate in almost identical markets, each division operates separately as an
investment centre. Each month, operating statements must be prepared by each division and these are used as a
basis for performance measurement for the divisions.
Last month, senior management decided to recharge head office costs to the divisions. Consequently, each division
is now going to be required to deduct a share of head office costs in its operating statement before arriving at ‘net
profit’, which is then used to calculate return on investment (ROI). Prior to this, ROI has been calculated using
controllable profit only. The company’s target ROI, however, remains unchanged at 20% per annum. For each of the
last three months, Divisions B and C have maintained ROIs of 22% per annum and 23% per annum respectively,
resulting in healthy bonuses being awarded to staff. The company has a cost of capital of 10%.
The budgeted operating statement for the month of July is shown below:
Sales revenue
Less variable costs
Contribution
Less controllable fixed costs
Controllable profit
Less apportionment of head office costs
Net profit
Divisional net assets
B
$’000
1,300
(700)
––––––
600
(134)
––––––
466
(155)
––––––
311
––––––
$23·2m
C
$’000
1,500
(800)
––––––
700
(228)
––––––
472
(180)
––––––
292
––––––
$22·6m
Required
(a) Calculate the expected annualised Return on Investment (ROI) using the new method as preferred by senior
management, based on the above budgeted operating statements, for each of the divisions.
(2 marks)
(b) The divisional managing directors are unhappy about the results produced by your calculations in (a) and have
heard that a performance measure called ‘residual income’ may provide more information.
Calculate the annualised residual income (RI) for each of the divisions, based on the net profit figures for the
month of July.
(3 marks)
(c) Discuss the expected performance of each of the two divisions, using both ROI and RI, and making any
additional calculations deemed necessary. Conclude as to whether, in your opinion, the two divisions have
performed well.
(6 marks)
(d) Division B has now been offered an immediate opportunity to invest in new machinery at a cost of $2·12 million.
The machinery is expected to have a useful economic life of four years, after which it could be sold for $200,000.
Division B’s policy is to depreciate all of its machinery on a straight-line basis over the life of the asset. The
machinery would be expected to expand Division B’s production capacity, resulting in an 8·5% increase in
contribution per month.
Recalculate Division B’s expected annualised ROI and annualised RI, based on July’s budgeted operating
statement after adjusting for the investment. State whether the managing director will be making a decision
that is in the best interests of the company as a whole if ROI is used as the basis of the decision.
(5 marks)
(e) Explain any behavioural problems that will result if the company’s senior management insist on using solely
ROI, based on net profit rather than controllable profit, to assess divisional performance and reward staff.
(4 marks)
(20 marks)
6
Taha Popatia - ARTT Business School - 02134523175
5
Formulae Sheet
Learning curve
Y = axb
cumulative average time per unit to produce x units
the time taken for the first unit of output
the cumulative number of units produced
the index of learning (log LR/log2)
the learning rate as a decimal
Regression analysis
y=a+bx
b=
Q™[\™[™y
Q™[2 ™x)2
a=
™\ E™x
n
n
r=
Q™[\-™[™y
2
(Q™[ ™x)2 )(n™\ 2 ™y)2 )
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
7
Taha Popatia - ARTT Business School - 02134523175
Where Y =
a=
x=
b=
LR =
Monday 3 December 2012
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 8.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FIVE questions are compulsory and MUST be attempted
Hair Co manufactures three types of electrical goods for hair: curlers (C), straightening irons (S) and dryers (D.) The
budgeted sales prices and volumes for the next year are as follows:
Selling price
Units
C
$110
20,000
S
$160
22,000
D
$120
26,000
Each product is made using a different mix of the same materials and labour. Product S also uses new revolutionary
technology for which the company obtained a ten-year patent two years ago. The budgeted sales volumes for all the
products have been calculated by adding 10% to last year’s sales.
The standard cost card for each product is shown below.
Material 1
Material 2
Skilled labour
Unskilled labour
C
$
12
8
16
14
S
$
28
22
34
20
D
$
16
26
22
28
Both skilled and unskilled labour costs are variable.
The general fixed overheads are expected to be $640,000 for the next year.
Required:
(a) Calculate the weighted average contribution to sales ratio for Hair Co.
Note: round all workings to 2 decimal places.
(6 marks)
(b) Calculate the total break-even sales revenue for the next year for Hair Co.
Note: round all workings to 2 decimal places.
(2 marks)
(c) Using the graph paper provided, draw a multi-product profit-volume (PV) chart showing clearly the profit/loss
lines assuming:
(i)
you are able to sell the products in order of the ones with the highest ranking contribution to sales ratios
first; and
(ii) you sell the products in a constant mix.
Note: only one graph is required.
(9 marks)
(d) Briefly comment on your findings in (c).
(3 marks)
(20 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
Truffle Co makes high quality, hand-made chocolate truffles which it sells to a local retailer. All chocolates are made
in batches of 16, to fit the standard boxes supplied by the retailer. The standard cost of labour for each batch is $6·00
and the standard labour time for each batch is half an hour. In November, Truffle Co had budgeted production of
24,000 batches; actual production was only 20,500 batches. 12,000 labour hours were used to complete the work
and there was no idle time. All workers were paid for their actual hours worked. The actual total labour cost for
November was $136,800. The production manager at Truffle Co has no input into the budgeting process.
At the end of October, the managing director decided to hold a meeting and offer staff the choice of either accepting
a 5% pay cut or facing a certain number of redundancies. All staff subsequently agreed to accept the 5% pay cut
with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change was implemented
immediately and made the chocolates more difficult to shape. When recipe changes such as these are made, it takes
time before the workers become used to working with the new ingredient mix, making the process 20% slower for at
least the first month of the new operation.
The standard costing system is only updated once a year in June and no changes are ever made to the system outside
of this.
Required:
(a) Calculate the total labour rate and total labour efficiency variances for November, based on the standard cost
provided above.
(4 marks)
(b) Analyse the total labour rate and total labour efficiency variances into component parts for planning and
operational variances in as much detail as the information allows.
(8 marks)
(c) Assess the performance of the production manager for the month of November.
(8 marks)
(20 marks)
3
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2
Web Co is an online retailer of fashion goods and uses a range of performance indicators to measure the performance
of the business. The company’s management have been increasingly concerned about the lack of sales growth over
the last year and, in an attempt to resolve this, made the following changes right at the start of quarter 2:
Advertising: Web Co placed an advert on the webpage of a well-known online fashion magazine at a cost of
$200,000. This had a direct link from the magazine’s website to Web Co’s online store.
Search engine: Web Co also engaged the services of a website consultant to ensure that, when certain key words are
input by potential customers onto key search engines, such as Google and Yahoo, Web Co’s website is listed on the
first page of results. This makes it more likely that a customer will visit a company’s website. The consultant’s fee was
$20,000.
Website availability: During quarter 1, there were a few problems with Web Co’s website, meaning that it was not
available to customers some of the time. Web Co was concerned that this was losing them sales and the IT
department therefore made some changes to the website in an attempt to correct the problem.
The following incentives were also offered to customers:
Incentive 1: A free ‘Fast Track’ delivery service, guaranteeing delivery within two working days, for all continuing
customers who subscribe to Web Co’s online subscription newsletter. Subscribers are thought by Web Co to become
customers who place further orders.
Incentive 2: A $10 discount to all customers spending $100 or more at any one time.
The results for the last two quarters are shown below, quarter 2 being the most recent one. The results for quarter 1
reflect the period before the changes and incentives detailed above took place and are similar to the results of other
quarters in the preceding year.
Quarter 1
Total sales revenue
$2,200,000
Net profit margin
25%
Total number of orders from customers
40,636
Total number of visits to website
101,589
Conversion rate – visitor to purchaser
40%
The percentage of total visitors accessing website through magazine link
0
Website availability
95%
Number of customers spending more than $100 per visit
4,650
Number of subscribers to online newsletter
4,600
Quarter 2
$2,750,000
16·7%
49,600
141,714
35%
19·9%
95%
6,390
11,900
Required:
Assess the performance of the business in Quarter 2 in relation to the changes and incentives that the company
introduced at the beginning of this quarter. State clearly where any further information might be necessary,
concluding as to whether the changes and incentives have been effective.
(20 marks)
4
Taha Popatia - ARTT Business School - 02134523175
3
Designit is a small company providing design consultancy to a limited number of large clients. The business is mature
and fairly stable year on year. It has 30 employees and is privately owned by its founder. Designit prepares an annual
fixed budget. The company’s accounts department consists of one part-qualified accountant who has a heavy
workload. He prepares the budget using spreadsheets. The company has a November year end.
Designit pays each of its three sales managers an annual salary of $150,000, plus an individual bonus based on
sales targets set at the beginning of the year. There are always two levels of bonus that can be earned, based on a
lower and an upper level of fee income. For the year ended 30 November 2012, for example, each of the sales
managers was given a lower target of securing $1·5m of fee income each, to be rewarded by an individual bonus
equating to 20% of salary. If any of the managers secured a further $1·5m of fee income, their bonus would increase
by 5% to the upper target of 25%. None of the managers achieved the upper target but all of them achieved the lower
one.
This is the same every year and Designit finds that often the managers secure work from several major clients early
in the year and reach the $1·5m target well before the year has ended. They then make little effort to secure extra
fees for the company, knowing that it would be almost impossible to hit the second target. This, together with a few
other problems that have arisen, has made the company consider whether its current budgeting process could be
improved and whether the bonus scheme should also be changed.
Designit is now considering replacing the fixed budget with a monthly rolling budget, which Designit believes will
make the budgeting process more relevant and timely and encourage managers to focus on the future rather than the
past. It would also prevent the problem of targets being met too early on in the year by the sales managers because
the targets would be set for monthly performance rather than annual performance. For example, a manager could be
given a target of securing $200,000 fee income in the first month for a reward of 2% of salary. Then, depending on
what is happening both within the business and in the economy as a whole, at the end of the first month, a different
target fee income could be set for the second month.
Required:
(a) Explain what a monthly rolling budget is and how it would operate at Designit.
(4 marks)
(b) Discuss the problems that may be encountered if Designit decides to introduce monthly rolling budgets
together with a new bonus scheme, such as the one outlined above.
(6 marks)
(c) Discuss the problems with the current bonus scheme and, assuming that the company decides against
introducing rolling budgets, describe and justify an alternative, more effective bonus scheme that could be
introduced.
(6 marks)
(d) Discuss the risk of using the company accountant’s own spreadsheets for budgeting.
(4 marks)
(20 marks)
5
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4
Wash Co assembles and sells two types of washing machines – the Spin (S) and the Rinse (R). The company has
two divisions: the assembly division, and the retail division.
The company’s policy is to transfer the machines from the assembly division to the retail division at full cost plus
10%. This has resulted in internal transfer prices, when S and R are being transferred to the retail division, of
$220·17 and $241·69 respectively. The retail division currently sells S to the general public for $320 per machine
and R for $260 per machine. Assume it incurs no other costs except for the transfer price.
The retail division’s manager is convinced that, if he could obtain R at a lower cost and therefore reduce the external
selling price from $260 to $230 per unit, he could significantly increase sales of R, which would be beneficial to both
divisions. He has questioned the fact that the overhead costs are allocated to the products on the basis of labour
hours; he thinks it should be done using machine hours or even activity based costing.
You have obtained the following information for the last month from the assembly division:
Production and sales (units)
Materials cost
Labour cost (at $12 per hour)
Machine hours (per unit)
Total no. of production runs
Total no. of purchase orders
Total no. of deliveries to retail division
Product S
3,200
$117
$6
2
30
82
64
Product R
5,450
$95
$9
1
12
64
80
$
306,435
415,105
11,680
144,400
––––––––
877,620
––––––––
Overhead costs:
Machine set-up costs
Machine maintenance costs
Ordering costs
Delivery costs
Total
Required:
(a) Using traditional absorption costing, calculate new transfer prices for S and R if machine hours are used as
a basis for absorption rather than labour hours.
Note: round all workings to 2 decimal places.
(3 marks)
(b) Using activity based costing to allocate the overheads, recalculate the transfer prices for S and R.
Note: round all workings to 2 decimal places.
(c) (i)
(8 marks)
Calculate last month’s profit for each division, showing it both for each product and in total, if activity
based costing is used.
(3 marks)
6
Taha Popatia - ARTT Business School - 02134523175
5
Using labour hours to allocate overhead
Assembly’s division profit
Retail division’s profit
Product S
$
64,064
319,456
Product R
$
119,737
99,790
Total *
$
183,801
419,246
––––––––
603,047*
––––––––
86,720
69,760
97,065
349,563
183,785
419,323
––––––––
603,108*
––––––––
Using machine hours to allocate overheads
Assembly division’s profit
Retail division’s profit
* Note: small differences arise in figures because of rounding.
Required:
Given these two sets of figures and your calculations in (c) (i), discuss whether activity based costing
should be implemented. Consider the decision from the view of each of the divisional managers.
(6 marks)
(20 marks)
7
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(ii) You have calculated the profits that both divisions made last month using traditional absorption costing and
found them to be as follows:
Formulae Sheet
Learning curve
Y = axb
cumulative average time per unit to produce x units
the time taken for the first unit of output
the cumulative number of units produced
the index of learning (log LR/log2)
the learning rate as a decimal
Regression analysis
y=a+bx
b=
Q™[\™[™y
Q™[2 ™x)2
a=
™\ E™x
n
n
r=
Q™[\-™[™y
2
(Q™[ ™x)2 )(n™\ 2 ™y)2 )
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
8
Taha Popatia - ARTT Business School - 02134523175
Where Y =
a=
x=
b=
LR =
Monday 3 June 2013
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 8.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FIVE questions are compulsory and MUST be attempted
Gym Bunnies (GB) is a health club. It currently has 6,000 members, with each member paying a subscription fee of
$720 per annum. The club is comprised of a gym, a swimming pool and a small exercise studio.
A competitor company is opening a new gym in GB’s local area, and this is expected to cause a fall in GB’s
membership numbers, unless GB can improve its own facilities. Consequently, GB is considering whether or not to
expand its exercise studio in a hope to improve its membership numbers. Any improvements are expected to last for
three years.
Option 1
No expansion. In this case, membership numbers would be expected to fall to 5,250 per annum for the next three
years. Operational costs would stay at their current level of $80 per member per annum.
Option 2
Expand the exercise studio. The capital cost of this would be $360,000.The expected effect on membership numbers
for the next three years is as follows:
Probability
0·4
0·6
Effect on membership numbers
Remain at their current level of 6,000 members per annum
Increase to 6,500 members per annum
The effect on operational costs for the next three years is expected to be:
Probability
0·5
0·5
Effect on operational costs
Increase to $120 per member per annum
Increase to $180 per member per annum
Required:
(a) Using the criterion of expected value, prepare and fully label a decision tree that shows the two options
available to GB. Recommend the decision that GB should make.
Note: Ignore time value of money.
(12 marks)
(b) Calculate the maximum price that GB should pay for perfect information about the expansion’s exact effect
on MEMBERSHIP NUMBERS.
(6 marks)
(c) Briefly discuss the problems of using expected values for decisions of this nature.
(2 marks)
(20 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
Squarize is a large company which, for many years, operated solely as a pay-tv broadcaster. However, five years ago,
it started product bundling, offering broadband and telephone services to its pay-tv customers. Customers taking up
the offer were then known in the business as ‘bundle customers’ and they had to take up both the broadband and
telephone services together with the pay-tv service. Other customers were still able to subscribe to pay-tv alone but
not to broadband and telephone services without the pay-tv service.
All contracts to customers of Squarize are for a minimum three-month period. The pay-tv box is sold to the customer
at the beginning of the contract; however, the broadband and telephone equipment is only rented to them.
In the first few years after product bundling was introduced, the company saw a steady increase in profits. Then,
Squarize saw its revenues and operating profits fall. Consequently, staff bonuses were not paid, and staff became
dissatisfied. Several reasons were identified for the deterioration of results:
1.
2.
3.
In the economy as a whole, discretionary spending had been severely hit by rising unemployment and inflation.
In a bid to save cash, many pay-tv customers were cancelling their contracts after the minimum three-month
period as they were then able to still keep the pay-tv box. The box comes with a number of free channels, which
the customer can still continue to receive free of charge, even after the cancellation of their contract.
The company’s customer service call centre, which is situated in another country, had been the cause of lots of
complaints from customers about poor service, and, in particular, the number of calls it sometimes took to resolve
an issue.
Some bundle customers found that the broadband service that they had subscribed to did not work. As a result,
they were immediately cancelling their contracts for all services within the 14 day cancellation period permitted
under the contracts.
In a response to the above problems and in an attempt to increase revenues and profits, Squarize made the following
changes to the business:
1.
2.
3.
4.
It made a strategic decision to withdraw the pay-tv–broadband–telephone package from the market and, instead,
offer each service as a standalone product.
It guaranteed not to increase prices for a 12-month period for each of its three services.
It transferred its call centre back to its home country and increased the level of staff training given for call centre
workers.
It investigated and resolved the problem with customers’ broadband service.
It is now one year since the changes were made and the finance director wants to use a balanced scorecard to assess
the extent to which the changes have been successful in improving the performance of the business.
Required:
(a) For each perspective of the balanced scorecard, identify two goals (objectives) together with a corresponding
performance measure for each goal which could be used by the company to assess whether the changes
have been successful. Justify the use of each of the performance measures that you choose.
(16 marks)
(b) Discuss how the company could reduce the problem of customers terminating their pay-tv service after only
three months.
(4 marks)
(20 marks)
3
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2
Cam Co manufactures webcams, devices which can provide live video and audio streams via personal computers. It
has recently been suffering from liquidity problems and hopes that these will be eased by the launch of its new
webcam, which has revolutionary audio sound and visual quality. The webcam is expected to have a product life cycle
of two years. Market research has already been carried out to establish a target selling price and projected lifetime
sales volumes for the product. Cost estimates have also been prepared, based on the current proposed product
specification. Cam Co uses life cycle costing to work out the target costs for its products, believing it to be more
accurate to use an average cost across the whole lifetime of a product, rather than potentially different costs for
different years. You are provided with the following relevant information for the webcam:
Projected lifetime sales volume
Target selling price per unit
Target profit margin (35% selling price)
Target cost per unit
Estimated lifetime cost per unit (see note below for detailed breakdown)
50,000 units
$200
$70
$130
$160
Note: Estimated lifetime cost per unit:
$
Manufacturing costs
Direct material (bought in parts)
Direct labour
Machine costs
Quality control costs
Rework costs
$
40
26
21
10
3
–––
100
Non-manufacturing costs
Product development costs
Marketing costs
25
35
–––
60
––––
160
––––
Estimated lifetime cost per unit
The average market price for a webcam is currently $150.
The company needs to close the cost gap of $30 between the target cost and the estimated lifetime cost. The following
information has been identified as relevant:
1.
2.
3.
Direct material cost: all of the parts currently proposed for the webcam are bespoke parts. However, most of these
can actually be replaced with standard parts costing 55% less. However, three of the bespoke parts, which
currently account for 20% of the estimated direct material cost, cannot be replaced, although an alternative
supplier charging 10% less has been sourced for these parts.
Direct labour cost: the webcam uses 45 minutes of direct labour, which costs $34·67 per hour. The use of more
standard parts, however, will mean that whilst the first unit would still be expected to take 45 minutes, there will
now be an expected rate of learning of 90% (where ‘b’ = –0·152). This will end after the first 100 units have
been completed.
Rework cost: this is the average rework cost per webcam and is based on an estimate of 15% of webcams
requiring rework at a cost of $20 per rework. With the use of more standard parts, the rate of reworks will fall to
10% and the cost of each rework will fall to $18.
Required:
(a) Recalculate the estimated lifetime cost per unit for the webcam after taking into account points 1 to 3 above.
(12 marks)
(b) Explain the ‘market skimming’ (also known as ‘price skimming’) pricing strategy and discuss, as far as the
information allows, whether this strategy may be more appropriate for Cam Co than charging one price
throughout the webcam’s entire life.
(8 marks)
(20 marks)
4
Taha Popatia - ARTT Business School - 02134523175
3
Block Co operates an absorption costing system and sells three types of product – Commodity 1, Commodity 2 and
Commodity 3. Like other competitors operating in the same market, Block Co is struggling to maintain revenues and
profits in face of the economic recession which has engulfed the country over the last two years. Sales prices fluctuate
in the market in which Block Co operates. Consequently, at the beginning of each quarter, a market specialist, who
works on a consultancy basis for Block Co, sets a budgeted sales price for each product for the quarter, based on his
expectations of the market. This then becomes the ‘standard selling price’ for the quarter. The sales department itself
is run by the company’s sales manager, who negotiates the actual sales prices with customers. The following budgeted
figures are available for the quarter ended 31 May 2013.
Product
Commodity 1
Commodity 2
Commodity 3
Budgeted production
and sales units
30,000
28,000
26,000
Standard selling price
per unit
$30
$35
$41·60
Standard variable
production costs per unit
$18
$28·40
$26·40
Block Co uses absorption costing. Fixed production overheads are absorbed on the basis of direct machine hours and
the budgeted cost of these for the quarter ended 31 May 2013 was $174,400. Commodity 1, 2 and 3 use
0·2 hours, 0·6 hours and 0·8 hours of machine time respectively.
The following data shows the actual sales prices and volumes achieved for each product by Block Co for the quarter
ended 31 May 2013 and the average market prices per unit.
Product
Commodity 1
Commodity 2
Commodity 3
Actual production and
sales units
29,800
30,400
25,600
Actual selling price
per unit
$31
$34
$40·40
Average market price
per unit
$32·20
$33·15
$39·10
The following variances have already been correctly calculated for Commodities 1 and 2:
Sales price operational variances
Commodity 1: $35,760 Adverse
Commodity 2: $25,840 Favourable
Sales price planning variances
Commodity 1: $65,560 Favourable
Commodity 2: $56,240 Adverse
Required:
(a) Calculate, for Commodity 3 only, the sales price operational variance and the sales price planning variance.
(4 marks)
(b) Using the data provided for Commodities 1, 2 and 3, calculate the total sales mix variance and the total sales
quantity variance.
(11 marks)
(c) Briefly discuss the performance of the business and, in particular, that of the sales manager for the quarter
ended 31 May 2013.
(5 marks)
(20 marks)
5
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4
Newtown School’s head teacher has prepared the budget for the year ending 31 May 2014. The government pays
the school $1,050 for each child registered at the beginning of the school year, which is June 1, and $900 for any
child joining the school part-way through the year. The school does not have to refund the money to the government
if a child leaves the school part-way through the year. The number of pupils registered at the school on 1 June 2013
is 690, which is 10% lower than the previous year. Based on past experience, the probabilities for the number of
pupils starting the school part-way through the year are as follows:
Probability
0·2
0·3
0·5
No. of pupils joining late
50
20
26
The head teacher admits to being ‘poor with numbers’ and does not understand probabilities so, when calculating
budgeted revenue, he just calculates a simple average for the number of pupils expected to join late. His budgeted
revenue for the year ending 31 May 2014 is therefore as follows:
Pupils
690
32
Pupils registered at beginning of school year
Average expected number of new joiners
Rate per pupil
$1,050
$900
Total income
$724,500
$28,800
–––––––––
$753,300
–––––––––
The head teacher uses incremental budgeting to budget for his expenditure, taking actual expenditure for the previous
year as a starting point and simply adjusting it for inflation, as shown below.
Note
Repairs and maintenance
Salaries
Capital expenditure
1
2
3
Actual cost
for y/e 31 May 2013
$
44,000
620,000
65,000
Total budgeted expenditure
Budget surplus
Inflationary
adjustment
+3%
+2%
+6%
Budgeted cost for
y/e 31 May 2014
$
45,320
632,400
68,900
––––––––
746,620
––––––––
6,680
––––––––
Notes
1. $30,000 of the costs for the year ended 31 May 2013 related to standard maintenance checks and repairs that
have to be carried out by the school every year in order to comply with government health and safety standards.
These are expected to increase by 3% in the coming year. In the year ended 31 May 2013, $14,000 was also
spent on redecorating some of the classrooms. No redecorating is planned for the coming year.
2. One teacher earning a salary of $26,000 left the school on 31 May 2013 and there are no plans to replace her.
However, a 2% pay rise will be given to all staff with effect from 1 December 2013.
3. The full $65,000 actual costs for the year ended 31 May 2013 related to improvements made to the school
gym. This year, the canteen is going to be substantially improved, although the extent of the improvements and
level of service to be offered to pupils is still under discussion. There is a 0·7 probability that the cost will be
$145,000 and a 0·3 probability that it will be $80,000. These costs must be paid in full before the end of the
year ending 31 May 2014.
The school’s board of governors, who review the budget, are concerned that the budget surplus has been calculated
incorrectly. They believe that it should have been calculated using expected income, based on the probabilities
provided, and using expected expenditure, based on the information provided in notes 1 to 3. They believe that
incremental budgeting is not proving a reliable tool for budget setting in the school since, for the last three years, there
have been shortfalls of cash despite a budget surplus being predicted. Since the school has no other source of funding
available to it, these shortfalls have had serious consequences, such as the closure of the school kitchen for a
considerable period in the last school year, meaning that no hot meals were available to pupils. This is thought to
have been the cause of the 10% fall in the number of pupils registered at the school on 1 June 2013.
6
Taha Popatia - ARTT Business School - 02134523175
5
Required:
(a) Considering the views of the board of governors, recalculate the budget surplus/deficit for the year ending
31 May 2014.
(6 marks)
(b) Discuss the advantages and disadvantages of using incremental budgeting.
(4 marks)
(c) Briefly outline the three main steps involved in preparing a zero-based budget.
(6 marks)
(d) Discuss the extent to which zero-based budgeting could be used by Newtown School to improve the
budgeting process.
(4 marks)
7
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Taha Popatia - ARTT Business School - 02134523175
(20 marks)
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
8
Taha Popatia - ARTT Business School - 02134523175
LR = the learning rate as a decimal
Monday 2 December 2013
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 7.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FIVE questions are compulsory and MUST be attempted
Process Co has two divisions, A and B. Division A produces three types of chemicals: products L, M and S, using a
common process. Each of the products can either be sold by Division A to the external market at split-off point (after
the common process is complete) or can be transferred to Division B for individual further processing into products
LX, MX and SX.
In November 2013, which is a typical month, Division A’s output was as follows:
Product
L
M
S
Kg
1,200
1,400
1,800
The market selling prices per kg for the products, both at split-off point and after further processing, are as follows:
$
5·60
6·50
6·10
L
M
S
LX
MX
SX
$
6·70
7·90
6·80
The specific costs for each of the individual further processes are:
$
Variable cost of $0·50 per kg of LX
Variable cost of $0·70 per kg of MX
Variable cost of $0·80 per kg of SX
Further processing leads to a normal loss of 5% at the beginning of the process for each of the products being
processed.
Required:
(a) Calculate and conclude whether any of the products should be further processed in Division B in order to
optimise the profit for the company as a whole.
(10 marks)
(b) It has been suggested that Division A should transfer products L and M to Division B for further processing, in
order to optimise the profit of the company as a whole. Divisions A and B are both investment centres and all
transfers from Division A to Division B would be made using the actual marginal cost. As a result, if
Division A were to make the transfers as suggested, their divisional profits would be much lower than if it were
to sell both products externally at split-off point. Division B’s profits, however, would be much higher.
Required:
Discuss the issues arising from this suggested approach to transfer pricing.
(5 marks)
(c) Process Co is becoming increasingly concerned that environmental costs may be increasing within the company.
However, the company has not yet developed a structured way for accounting for these costs. It has heard of a
number of different management accounting techniques which can be used to account for environmental costs,
including ‘input/output analysis’, ‘flow cost accounting’, ‘environmental activity-based costing’ and ‘life cycle
costing’.
Required:
Briefly describe TWO of these techniques in the context of environmental management accounting.
(5 marks)
(20 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
Solar Systems Co (S Co) makes two types of solar panels at its manufacturing plant: large panels for commercial
customers and small panels for domestic customers. All panels are produced using the same materials, machinery
and a skilled labour force. Production takes place for five days per week, from 7 am until 8 pm (13 hours), 50 weeks
of the year. Each panel has to be cut, moulded and then assembled using a cutting machine (Machine C), a moulding
machine (Machine M) and an assembly machine (Machine A).
As part of a government scheme to increase renewable energy sources, S Co has guaranteed not to increase the price
of small or large panels for the next three years. It has also agreed to supply a minimum of 1,000 small panels each
year to domestic customers for this three-year period.
Due to poor productivity levels, late orders and declining profits over recent years, the finance director has suggested
the introduction of throughput accounting within the organisation, together with a ‘Just in Time’ system of production.
Material costs and selling prices for each type of panel are shown below.
Selling price per unit
Material costs per unit
Large panels
$
12,600
4,300
Small panels
$
3,800
1,160
Total factory costs, which include the cost of labour and all factory overheads, are $12 million each year at the plant.
Out of the 13 hours available for production each day, workers take a one hour lunch break. For the remaining
12 hours, Machine C is utilised 85% of the time and Machines M and A are utilised 90% of the time. The
unproductive time arises either as a result of routine maintenance or because of staff absenteeism, as each machine
needs to be manned by skilled workers in order for the machine to run. The skilled workers are currently only trained
to work on one type of machine each. Maintenance work is carried out by external contractors who provide a round
the clock service (that is, they are available 24 hours a day, seven days a week), should it be required.
The following information is available for Machine M, which has been identified as the bottleneck resource:
Machine M
Large panels
Hours per unit
1·4
Small panels
Hours per unit
0·6
There is currently plenty of spare capacity on Machines C and A. Maximum annual demand for large panels and small
panels is 1,800 units and 1,700 units respectively.
Required:
(a) Calculate the throughput accounting ratio for large panels and for small panels and explain what they
indicate to S Co about production of large and small panels.
(9 marks)
(b) Assume that your calculations in part (a) have shown that large panels have a higher throughput accounting ratio
than small panels.
Required:
Using throughput accounting, prepare calculations to determine the optimum production mix and maximum
profit of S Co for the next year.
(5 marks)
(c) Suggest and discuss THREE ways in which S Co could try to increase its production capacity and hence
increase throughput in the next year without making any additional investment in machinery.
(6 marks)
(20 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
2
Mic Co produces microphones for mobile phones and operates a standard costing system. Before production
commenced, the standard labour time per batch for its latest microphone was estimated to be 200 hours. The
standard labour cost per hour is $12 and resource allocation and cost data were therefore initially prepared on this
basis.
Production of the microphone started in July and the number of batches assembled and sold each month was as
follows:
Month
July
August
September
October
November
No of batches assembled and sold
1
1
2
4
8
The first batch took 200 hours to make, as anticipated, but, during the first four months of production, a learning
effect of 88% was observed, although this finished at the end of October. The learning formula is shown on the
formula sheet and at the 88% learning rate the value of b is –0·1844245.
Mic Co uses ‘cost plus’ pricing to establish selling prices for all its products. Sales of its new microphone in the first
five months have been disappointing. The sales manager has blamed the production department for getting the labour
cost so wrong, as this, in turn, caused the price to be too high. The production manager has disclaimed all
responsibility, saying that, ‘as usual, the managing director prepared the budgets alone and didn’t consult me and,
had he bothered to do so, I would have told him that a learning curve was expected.’
Required:
(a) Calculate the actual total monthly labour costs for producing the microphones for each of the five months
from July to November.
(9 marks)
(b) Discuss the implications of the learning effect coming to an end for Mic Co, with regard to costing, budgeting
and production.
(4 marks)
(c) Discuss the potential advantages and disadvantages of involving senior staff at Mic Co in the budget setting
process, rather than the managing director simply imposing the budgets on them.
(7 marks)
(20 marks)
4
Taha Popatia - ARTT Business School - 02134523175
3
Protect Against Fire Co (PAF Co) manufactures and sells fire safety equipment and also provides fire risk assessments
and fire safety courses to businesses. It has been trading for many years in the country of Calana, where it is the
market leader.
Five years ago, the directors of PAF Co established a similar operation in its neighbouring country, Sista, renting
business premises at various locations across the country. The fire safety market in Sista has always been dominated
by two other companies, and when PAF Co opened the Sista division, its plan was to become market leader there
within five years. Both the Calana division (Division C) and the Sista division (Division S) usually restrict themselves
to a marketing budget of $0·5 million per annum but in 2013, Division S launched a $2m advertising campaign in
a final push to increase market share. It also left its prices for products and services unchanged in 2013 rather than
increasing them in line with its competitors.
Although the populations of both countries are similar, geographically, the country of Sista is twice as large as Calana
and its customers are equally spread across the country. The products and services offered by the two divisions to
their customers require skilled staff, demand for which is particularly high in Sista. Following the appointment of a
new government in Sista at the end of 2012, stricter fire safety regulations were immediately introduced for all
companies. At the same time, the government introduced a substantial tax on business property rents which landlords
passed on to their tenants.
International shortages of fuel have led to a 20% increase in fuel prices in both countries in the last year.
Summary statements of profit or loss for the two divisions for the two years ended 30 November 2012 and
30 November 2013 are shown below.
Revenue
Material costs
Payroll costs
Property costs
Gross profit
Distribution and marketing costs
Administrative overheads
Operating profit
Employee numbers
Market share
Division S
2013
$’000
38,845
(3,509)
(10,260)
(3,200)
–––––––
21,876
(10,522)
(7,024)
–––––––
4,330
–––––––
380
30%
Division S
2012
$’000
26,937
(2,580)
(6,030)
(1,800)
–––––––
16,527
(7,602)
(6,598)
–––––––
2,327
–––––––
241
25%
Division C
2013
$’000
44,065
(4,221)
(8,820)
(2,450)
–––––––
28,574
(7,098)
(12,012)
–––––––
9,464
–––––––
420
55%
Division C
2012
$’000
40,359
(3,385)
(7,700)
(2,320)
–––––––
26,954
(5,998)
(11,974)
–––––––
8,982
–––––––
385
52%
Required:
Using all the information above, assess the financial performance of Division S in the year ended 30 November
2013. State clearly where further information might be required in order to make more reasoned conclusions
about the division’s performance.
Note: Up to 7 marks are available for calculations.
(20 marks)
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
4
Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain. It uses a just-in-time system
and holds no inventories.
The standard cost for the cotton which is used to make the bed sheets and pillowcases is $5 per m2. Each bed sheet
uses 2 m2 of cotton and each pillowcase uses 0·5 m2. Production levels for bed sheets and pillowcases for November
were as follows:
Bed sheets
Pillowcases
Budgeted production
levels (units)
120,000
190,000
Actual production
levels (units)
120,000
180,000
The actual cost of the cotton in November was $5·80 per m2. 248,000 m2 of cotton was used to make the bed
sheets and 95,000 m2 was used to make the pillowcases.
The world commodity prices for cotton increased by 20% in the month of November. At the beginning of the month,
the hotel chain made an unexpected request for an immediate design change to the pillowcases. The new design
required 10% more cotton than previously. It also resulted in production delays and therefore a shortfall in production
of 10,000 pillowcases in total that month.
The production manager at Bedco is responsible for all buying and any production issues which occur, although he
is not responsible for the setting of standard costs.
Required:
(a) Calculate the following variances for the month of November, for both bed sheets and pillow cases, and in
total:
(i)
Material price planning variance;
(3 marks)
(ii) Material price operational variance;
(3 marks)
(iii) Material usage planning variance;
(3 marks)
(iv) Material usage operational variance.
(3 marks)
(b) Assess the performance of the production manager for the month of November.
(8 marks)
(20 marks)
6
Taha Popatia - ARTT Business School - 02134523175
5
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
7
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
LR = the learning rate as a decimal
Monday 2 June 2014
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 7.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
ALL FIVE questions are compulsory and MUST be attempted
Duff Co manufactures three products, X, Y and Z. Demand for products X and Y is relatively elastic whilst demand for
product Z is relatively inelastic. Each product uses the same materials and the same type of direct labour but in
different quantities. For many years, the company has been using full absorption costing and absorbing overheads on
the basis of direct labour hours. Selling prices are then determined using cost plus pricing. This is common within
this industry, with most competitors applying a standard mark-up.
Budgeted production and sales volumes for X, Y and Z for the next year are 20,000 units, 16,000 units and
22,000 units respectively.
The budgeted direct costs of the three products are shown below:
Product
Direct materials
Direct labour ($12 per hour)
X
$ per unit
25
30
Y
$ per unit
28
36
Z
$ per unit
22
24
In the next year, Duff Co also expects to incur indirect production costs of $1,377,400, which are analysed as follows:
Cost pools
Machine set up costs
Material ordering costs
Machine running costs
General facility costs
$
280,000
316,000
420,000
361,400
––––––––––
1,377,400
––––––––––
Cost drivers
Number of batches
Number of purchase orders
Number of machine hours
Number of machine hours
The following additional data relate to each product:
Product
Batch size (units)
No of purchase orders per batch
Machine hours per unit
X
500
4
1·5
Y
800
5
1·25
Z
400
4
1·4
Duff Co wants to boost sales revenue in order to increase profits but its capacity to do this is limited because of its
use of cost plus pricing and the application of the standard mark-up. The finance director has suggested using activity
based costing (ABC) instead of full absorption costing, since this will alter the cost of the products and may therefore
enable a different price to be charged.
Required:
(a) Calculate the budgeted full production cost per unit of each product using Duff Co’s current method of
absorption costing. All workings should be to two decimal places.
(3 marks)
(b) Calculate the budgeted full production cost per unit of each product using activity based costing. All workings
should be to two decimal places.
(11 marks)
(c) Discuss the impact on the selling prices and the sales volumes OF EACH PRODUCT which a change to
activity based costing would be expected to bring about.
(6 marks)
(20 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
Tablet Co makes two types of tablet computer, the Xeno (X) and the Yong (Y). X currently generates a contribution of
$30 per unit and Y generates a contribution of $40 per unit. There are three main stages of production: the build
stage, the program stage and the test stage. Each of these stages requires the use of skilled labour which, due to a
huge increase in demand for tablet computers over recent months, is now in short supply. The following information
is available for the two products:
Stage
Build ($10 per hour)
Program ($16 per hour)
Test ($12 per hour)
Xeno (X)
Minutes per unit
24
16
10
Yong (Y)
Minutes per unit
20
14
4
Tablet Co is now preparing its detailed production plans for the next quarter. During this period it expects that the
skilled labour available will be 30,000 hours (1,800,000 minutes) for the build stage, 28,000 hours
(1,680,000 minutes) for the program stage and 12,000 hours (720,000 minutes) for the test stage. The maximum
demand for X and Y over the three-month period is expected to be 85,000 units and 66,000 units respectively. Fixed
costs are $650,000 per month.
Due to rapid technological change, the company holds no inventory of finished goods.
Required:
(a) On the graph paper provided, use linear programming to calculate the optimum number of each product
which Tablet Co should make in the next quarter assuming it wishes to maximise contribution. Calculate the
total profit for the quarter.
(14 marks)
(b) Calculate the amount of any slack resources arising as a result of the optimum production plan and explain
the implications of these amounts for decision-making within Tablet Co.
(6 marks)
(20 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
2
The Rotech group comprises two companies, W Co and C Co.
W Co is a trading company with two divisions: The Design division, which designs wind turbines and supplies the
designs to customers under licences and the Gearbox division, which manufactures gearboxes for the car industry.
C Co manufactures components for gearboxes. It sells the components globally and also supplies W Co with
components for its Gearbox manufacturing division.
The financial results for the two companies for the year ended 31 May 2014 are as follows:
External sales
Sales to Gearbox division
Cost of sales
Administration costs
Distribution costs
Operating profit
Capital employed
W Co
Design division
Gearbox division
$’000
$’000
14,300
25,535
(4,900)
(3,400)
–
–––––––
6,000
–––––––
–––––––
23,540
(16,200)*
(4,200)
(1,260)
–––––––
3,875
–––––––
–––––––
32,320
C Co
$’000
8,010
7,550
–––––––
15,560
–––––––
(5,280)
(2,600)
(670)
–––––––
7,010
–––––––
–––––––
82,975
* Includes cost of components purchased from C Co.
Required:
(a) Discuss the performance of C Co and each division of W Co, calculating and using the following three
performance measures:
(i) Return on capital employed (ROCE)
(ii) Asset turnover
(iii) Operating profit margin
Note: There are 4·5 marks available for calculations and 5·5 marks available for discussion.
(10 marks)
(b) C Co is currently working to full capacity. The Rotech group’s policy is that group companies and divisions must
always make internal sales first before selling outside the group. Similarly, purchases must be made from within
the group wherever possible. However, the group divisions and companies are allowed to negotiate their own
transfer prices without interference from Head Office.
C Co has always charged the same price to the Gearbox division as it does to its external customers. However,
after being offered a 5% lower price for similar components from an external supplier, the manager of the Gearbox
division feels strongly that the transfer price is too high and should be reduced. C Co currently satisfies 60% of
the external demand for its components. Its variable costs represent 40% of revenue.
Required:
Advise, using suitable calculations, the total transfer price or prices at which the components should be
supplied to the Gearbox division from C Co.
(10 marks)
(20 marks)
4
Taha Popatia - ARTT Business School - 02134523175
3
Gam Co sells electronic equipment and is about to launch a new product onto the market. It needs to prepare its
budget for the coming year and is trying to decide whether to launch the product at a price of $30 or $35 per unit.
The following information has been obtained from market research:
Price per unit $30
Probability
Sales volume
0·4
120,000
0·5
110,000
140,000
0·1
Price per unit $35
Probability
0·3
0·3
0·4
Sales volume
108,000
100,000
94,000
Notes
1 Variable production costs would be $12 per unit for production volumes up to and including 100,000 units each
year. However, if production exceeds 100,000 units each year, the variable production cost per unit would fall
to $11 for all units produced.
2 Advertising costs would be $900,000 per annum at a selling price of $30 and $970,000 per annum at a price
of $35.
3 Fixed production costs would be $450,000 per annum.
Required:
(a) Calculate each of the six possible profit outcomes which could arise for Gam Co in the coming year.
(8 marks)
(b) Calculate the expected value of profit for each of the two price options and recommend, on this basis, which
option Gam Co would choose.
(3 marks)
(c) Briefly explain the maximin decision rule and identify which price should be chosen by management if they
use this rule to decide which price should be charged.
(3 marks)
(d) Discuss the factors which may give rise to uncertainty when setting budgets.
(6 marks)
(20 marks)
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
4
Valet Co is a car valeting (cleaning) company. It operates in the country of Strappia, which has been badly affected
by the global financial crisis. Petrol and food prices have increased substantially in the last year and the average
disposable household income has decreased by 30%. Recent studies have shown that the average car owner keeps
their car for five years before replacing it, rather than three years as was previously the case. Figures over recent years
also show that car sales in Strappia are declining whilst business for car repairs is on the increase.
Valet Co offers two types of valet – a full valet and a mini valet. A full valet is an extensive clean of the vehicle, inside
and out; a mini valet is a more basic clean of the vehicle. Until recently, four similar businesses operated in Valet Co’s
local area, but one of these closed down three months ago after a serious fire on its premises. Valet Co charges
customers $50 for each full valet and $30 for each mini valet and this price never changes. Their budget and actual
figures for the last year were as follows:
Budget
Number of valets:
Full valets
Mini valets
Revenue
Variable costs:
Staff wages
Cleaning materials
Energy costs
Contribution
Fixed costs:
Rent, rates and depreciation
Operating profit
3,600
2,000
$
Actual
$
240,000
(114,000)
(6,200)
(6,520)
––––––––
4,000
3,980
$
$
319,400
(122,000)
(12,400)
(9,200)
––––––––
(126,720)
––––––––
113,280
(143,600)
––––––––
175,800
(36,800)
––––––––
76,480
––––––––
––––––––
(36,800)
––––––––
139,000
––––––––
––––––––
The budgeted contribution to sales ratios for the two types of valet are 44·6% for full valets and 55% for mini valets.
Required:
(a) Using the data provided for full valets and mini valets, calculate:
(i)
The total sales mix contribution variance;
(4 marks)
(ii) The total sales quantity contribution variance.
(4 marks)
(b) Briefly describe the sales mix contribution variance and the sales quantity contribution variance. (2 marks)
(c) Discuss the SALES performance of the business for the period, taking into account your calculations from
part (a) AND the information provided in the scenario.
(10 marks)
(20 marks)
6
Taha Popatia - ARTT Business School - 02134523175
5
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
7
Taha Popatia - ARTT Business School - 02134523175
LR = the learning rate as a decimal
Monday 1 December 2014
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
This paper is divided into two sections:
Section A – ALL 20 questions are compulsory and MUST be
attempted
Section B – ALL FIVE questions are compulsory and MUST be
attempted
Formulae Sheet is on page 14.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
Section A – ALL 20 questions are compulsory and MUST be attempted
Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen answer to
each multiple choice question.
Each question is worth 2 marks.
Dust Co has two divisions, A and B. Each division is currently considering the following separate projects:
Division A
Capital required for the project
$32·6 million
Sales generated by project
$14·4 million
Operating profit margin
30%
Cost of capital
10%
Current return on investment of division
15%
Division B
$22·2 million
$8·8 million
24%
10%
9%
If residual income is used as the basis for the investment decision, which Division(s) would choose to invest in
the project?
A
B
C
D
2
Division A only
Division B only
Both Division A and Division B
Neither Division A nor Division B
The following costs have arisen in relation to the production of a product:
(i)
(ii)
(iii)
(iv)
Planning and concept design costs
Testing costs
Production costs
Distribution and customer service costs
In calculating the life cycle costs of a product, which of the above items would be included?
A
B
C
D
3
Which of the following describes a ‘basic standard’ within the context of budgeting?
A
B
C
D
4
(iii) only
(i), (ii) and (iii) only
(i), (ii) and (iv) only
All of the above
A standard which is kept unchanged over a period of time
A standard which is based on current price levels
A standard set at an ideal level, which makes no allowance for normal losses, waste and machine downtime
A standard which assumes an efficient level of operation, but which includes allowances for factors such as
normal loss, waste and machine downtime
The following statements have been made about planning and control as described in the three tiers of Robert
Anthony’s decision-making hierarchy:
(1) Strategic planning is concerned with making decisions about the efficient and effective use of existing resources
(2) Operational control is about ensuring that specific tasks are carried out efficiently and effectively
Which of the above statements is/are true?
A
B
C
D
1 only
2 only
Neither 1 nor 2
Both 1 and 2
2
Taha Popatia - ARTT Business School - 02134523175
1
5
P Co makes two products – P1 and P2 – budgeted details of which are as follows:
Selling price
Cost per unit:
Direct materials
Direct labour
Variable overhead
Fixed overhead
Profit per unit
P1
$
10·00
P2
$
8·00
3·50
1·50
0·60
1·20
–––––
3·20
–––––
4·00
1·00
0·40
1·00
–––––
1·60
–––––
Product P1
Product P2
10,000 units
12,500 units
The fixed overhead costs included in P1 relate to apportionment of general overhead costs only. However, P2 also
includes specific fixed overheads totalling $2,500.
If only product P1 were to be made, how many units (to the nearest unit) would need to be sold in order to
achieve a profit of $60,000 each year?
A
B
C
D
6
25,625
19,205
18,636
26,406
units
units
units
units
A company has the following production planned for the next four weeks. The figures reflect the full capacity level of
operations. Planned output is equal to the maximum demand per product.
Product
Selling price
Raw material cost
Direct labour cost
Variable overhead cost
Fixed overhead cost
Profit
Planned output
Direct labour hours per unit
A
$ per unit
160
24
66
24
16
––––
30
––––
B
$ per unit
214
56
88
18
10
––––
42
––––
C
$ per unit
100
22
33
24
8
––––
13
––––
D
$ per unit
140
40
22
18
12
––––
48
––––
300
6
125
8
240
3
400
2
The direct labour force is threatening to go on strike for two weeks out of the coming four. This means that only
2,160 hours will be available for production rather than the usual 4,320 hours.
If the strike goes ahead, which product or products should be produced if profits are to be maximised?
A
B
C
D
D and A
B and D
D only
B and C
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
Budgeted production and sales for the year ended 30 November 2015 are:
7
The following table shows the number of clients who attended a particular accountancy practice over the last four
weeks and the total costs incurred during each of the weeks:
Week
Number of clients
1
2
3
4
400
440
420
460
Total cost
$
36,880
39,840
36,800
40,000
A
B
C
D
8
7,280 + 74x
16,080 + 52x
3,200 + 80x
40,000/x
Oxco has two divisions, A and B. Division A makes a component for air conditioning units which it can only sell to
Division B. It has no other outlet for sales.
Current information relating to Division A is as follows:
Marginal cost per unit
Transfer price of the component
Total production and sales of the component each year
Specific fixed costs of Division A per year
$100
$165
2,200 units
$10,000
Cold Co has offered to sell the component to Division B for $140 per unit. If Division B accepts this offer, Division A
will be shut.
If Division B accepts Cold Co’s offer, what will be the impact on profits per year for the group as a whole?
A
B
C
D
9
Increase of $65,000
Decrease of $78,000
Decrease of $88,000
Increase of $55,000
The following statements have been made in relation to activity-based costing:
(1) A cost driver is a factor which causes a change in the cost of an activity
(2) Traditional absorption costing tends to under-estimate overhead costs for high volume products
Which of the above statements is/are true?
A
B
C
D
1 only
2 only
Neither 1 nor 2
Both 1 and 2
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Applying the high low method to the above information, which of the following could be used to forecast total
cost ($) from the number of clients expected to attend (where x = the expected number of clients)?
10 A linear programming model has been formulated for two products, X and Y. The objective function is depicted by the
formula C = 5X + 6Y, where C = contribution, X = the number of product X to be produced and Y = the number
of product Y to be produced.
Each unit of X uses 2 kg of material Z and each unit of Y uses 3 kg of material Z. The standard cost of material Z is
$2 per kg.
The shadow price for material Z has been worked out and found to be $2·80 per kg.
A
B
C
D
Increase of $96
Increase of $56
Increase of $16
No change
11 The following statements have been made about both standard costing and total quality management (TQM):
(1) They focus on assigning responsibility solely to senior managers
(2) They work well in rapidly changing environments
Which of the above statements is/are true?
A
B
C
D
1 only
2 only
Neither 1 nor 2
Both 1 and 2
12 The following statements have been made about environmental cost accounting:
(1) The majority of environmental costs are already captured within a typical organisation’s accounting system. The
difficulty lies in identifying them
(2) Input/output analysis divides material flows within an organisation into three categories: material flows; system
flows; and delivery and disposal flows
Which of the above statements is/are true?
A
B
C
D
1 only
2 only
Neither 1 nor 2
Both 1 and 2
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If an extra 20 kg of material Z becomes available at $2 per kg, what will the maximum increase in contribution
be?
13 Def Co provides accounting services to government departments. On average, each staff member works six chargeable
hours per day, with the rest of their working day being spent on non-chargeable administrative work. One of the
company’s main objectives is to produce a high level of quality and customer satisfaction.
Def Co has set its targets for the next year as follows:
(1) Cutting departmental expenditure by 5%
(2) Increasing the number of chargeable hours handled by advisers to 6·2 per day
(3) Obtaining a score of 4·7 or above on customer satisfaction surveys
A
B
C
D
Economy
1
2
3
1
Efficiency
3
1
2
2
Effectiveness
2
3
1
3
14 Which of the following is an advantage of non-participative budgeting as compared to participative budgeting?
A
B
C
D
It increases motivation
It is less time consuming
It increases acceptance
The budgets produced are more attainable
15 The following are all steps in the implementation of the target costing process for a product:
(1)
(2)
(3)
(4)
(5)
Calculate the target cost
Calculate the estimated current cost based on the existing product specification
Set the required profit
Set the selling price
Calculate the target cost gap
Which of the following represents the correct sequence if target costing were to be used?
A
B
C
D
(1),
(2),
(4),
(4),
(2),
(3),
(3),
(5),
(3),
(4),
(1),
(3),
(4),
(1),
(2),
(1),
(5)
(5)
(5)
(2)
16 What is the name given to a budget which has been prepared by building on a previous period’s budgeted or
actual figures?
A
B
C
D
Incremental budget
Flexible budget
Zero based budget
Functional budget
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Which of the above targets assesses economy, efficiency and effectiveness at Def Co?
17 Tree Co is considering employing a sales manager. Market research has shown that a good sales manager can increase
profit by 30%, an average one by 20% and a poor one by 10%. Experience has shown that the company has
attracted a good sales manager 35% of the time, an average one 45% of the time and a poor one 20% of the time.
The company’s normal profits are $180,000 per annum and the sales manager’s salary would be $40,000 per
annum.
Based on the expected value criterion, which of the following represents the correct advice which Tree Co should
be given?
Do not employ a sales manager as profits would be expected to fall by $1,300
Employ a sales manager as profits will increase by $38,700
Employ a sales manager as profits are expected to increase by $100
Do not employ a sales manager as profits are expected to fall by $39,900
18 A company manufactures two products, C and D, for which the following information is available:
Product C
Budgeted production (units)
1,000
Labour hours per unit/in total
8
Number of production runs required
13
Number of inspections during production
5
Total production set up costs
Total inspection costs
Other overhead costs
Product D
4,000
10
15
3
Total
5,000
48,000
28
8
$140,000
$80,000
$96,000
Other overhead costs are absorbed on the basis of labour hours per unit.
Using activity-based costing, what is the budgeted overhead cost per unit of product D?
A
B
C
D
$43·84
$46·25
$131·00
$140·64
19 X Co uses rolling budgeting, updating its budgets on a quarterly basis. After carrying out the last quarter’s update to
the cash budget, it projected a forecast cash deficit of $400,000 at the end of the year. Consequently, the planned
purchase of new capital equipment has been postponed.
Which of the following types of control is the sales manager’s actions an example of?
A
B
C
D
Feedforward control
Negative feedback control
Positive feedback control
Double loop feedback control
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A
B
C
D
20 The following circumstances may arise in relation to the launch of a new product:
(i)
(ii)
(iii)
(iv)
Demand is relatively inelastic
There are significant economies of scale
The firm wishes to discourage new entrants to the market
The product life cycle is particularly short
Which of the above circumstances favour a penetration pricing policy?
(ii) and (iii) only
(ii) and (iv)
(i), (ii) and (iii)
(ii), (iii) and (iv) only
(40 marks)
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A
B
C
D
Section B – ALL FIVE questions are compulsory and MUST be attempted
Chair Co has developed a new type of luxury car seat. The estimated labour time for the first unit is 12 hours but a
learning curve of 75% is expected to apply for the first eight units produced. The cost of labour is $15 per hour. The
cost of materials and other variable overheads is expected to total $230 per unit.
Chair Co plans on pricing the seat by adding a 50% mark-up to the total variable cost per seat, with the labour cost
being based on the incremental time taken to produce the 8th unit.
Required:
(a) Calculate the price which Chair Co expects to charge for the new seat.
Note: The learning index for a 75% learning curve is –0·415.
(5 marks)
(b) The first phase of production has now been completed for the new car seat. The first unit actually took
12·5 hours to make and the total time for the first eight units was 34·3 hours, at which point the learning effect
came to an end. Chair Co are planning on adjusting the price to reflect the actual time it took to complete the
8th unit.
Required:
(i)
Calculate the actual rate of learning and state whether this means that the labour force actually learnt
more quickly or less quickly than expected.
(3 marks)
(ii) Briefly explain whether the adjusted price charged by Chair Co will be higher or lower than the price you
calculated in part (a) above. You are NOT required to calculate the adjusted price.
(2 marks)
(10 marks)
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1
Glam Co is a hairdressing salon which provides both ‘cuts’ and ‘treatments’ to clients. All cuts and treatments at the
salon are carried out by one of the salon’s three senior stylists. The salon also has two salon assistants and two junior
stylists.
Every customer attending the salon is first seen by a salon assistant, who washes their hair; next, by a senior stylist,
who cuts or treats the hair depending on which service the customer wants; then finally, a junior stylist who dries
their hair. The average length of time spent with each member of staff is as follows:
Assistant
Senior stylist
Junior stylist
Cut
Hours
0·1
1
0·5
Treatment
Hours
0·3
1·5
0·5
The salon is open for eight hours each day for six days per week. It is only closed for two weeks each year. Staff
salaries are $40,000 each year for senior stylists, $28,000 each year for junior stylists and $12,000 each year for
the assistants. The cost of cleaning products applied when washing the hair is $0·60 per client. The cost of all
additional products applied during a ‘treatment’ is $7·40 per client. Other salon costs (excluding labour and raw
materials) amount to $106,400 each year.
Glam Co charges $60 for each cut and $110 for each treatment.
The senior stylists’ time has been correctly identified as the bottleneck activity.
Required:
(a) Briefly explain why the senior stylists’ time has been described as the ‘bottleneck activity’, supporting your
answer with calculations.
(4 marks)
(b) Calculate the throughput accounting ratio (TPAR) for ‘cuts’ and the TPAR for ‘treatments’ assuming the
bottleneck activity is fully utilised.
(6 marks)
(10 marks)
10
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2
The Hi Life Co (HL Co) makes sofas. It has recently received a request from a customer to provide a one-off order of
sofas, in excess of normal budgeted production. The order would need to be completed within two weeks. The
following cost estimate has already been prepared:
Direct materials:
Fabric
Wood
Direct labour:
Skilled
Semi-skilled
Factory overheads
Note
1
2
200 m2 at $17 per m2
50 m at $8·20 per m2
200 hours at $16 per hour
300 hours at $12 per hour
500 hours at $3 per hour
Total production cost
Administration overheads at 10% of total production cost
Total cost
3
4
5
6
$
3,400
410
3,200
3,600
1,500
–––––––
12,110
1,211
–––––––
13,321
–––––––
Notes
1
The fabric is regularly used by HL Co. There are currently 300 m2 in inventory, which cost $17 per m2. The
current purchase price of the fabric is $17·50 per m2.
2
This type of wood is regularly used by HL Co and usually costs $8·20 per m2. However, the company’s current
supplier’s earliest delivery time for the wood is in three weeks’ time. An alternative supplier could deliver
immediately but they would charge $8·50 per m2. HL Co already has 500 m2 in inventory but 480 m2 of this
is needed to complete other existing orders in the next two weeks. The remaining 20 m2 is not going to be needed
until four weeks’ time.
3
The skilled labour force is employed under permanent contracts of employment under which they must be paid
for 40 hours’ per week’s labour, even if their time is idle due to absence of orders. Their rate of pay is $16 per
hour, although any overtime is paid at time and a half. In the next two weeks, there is spare capacity of
150 labour hours.
4
There is no spare capacity for semi-skilled workers. They are currently paid $12 per hour or time and a half for
overtime. However, a local agency can provide additional semi-skilled workers for $14 per hour.
5
The $3 absorption rate is HL Co’s standard factory overhead absorption rate; $1·50 per hour reflects the cost of
the factory supervisor’s salary and the other $1·50 per hour reflects general factory costs. The supervisor is paid
an annual salary and is also paid $15 per hour for any overtime he works. He will need to work 20 hours’
overtime if this order is accepted.
6
This is an apportionment of the general administration overheads incurred by HL Co.
Required:
Prepare, on a relevant cost basis, the lowest cost estimate which could be used as the basis for the quotation.
Explain briefly your reasons for including or excluding each of the costs in your estimate.
(10 marks)
11
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3
Jamair was founded in September 2007 and is one of a growing number of low-cost airlines in the country of Shania.
Jamair’s strategy is to operate as a low-cost, high efficiency airline, and it does this by:
–
–
–
–
–
Operating mostly in secondary cities to reduce landing costs.
Using only one type of aircraft in order to reduce maintenance and operational costs. These planes are leased
rather than bought outright.
Having only one category of seat class.
Having no pre-allocated seats or in-flight entertainment.
Focusing on e-commerce with customers both booking tickets and checking in for flights online.
The airline was given an ‘on time arrival’ ranking of seventh best by the country’s aviation authority, who rank all 50
of the country’s airlines based on the number of flights which arrive on time at their destinations. 48 Jamair flights
were cancelled in 2013 compared to 35 in 2012. This increase was due to an increase in the staff absentee rate at
Jamair from 3 days per staff member per year to 4·5 days.
The average ‘ground turnaround time’ for airlines in Shania is 50 minutes, meaning that, on average, planes are on
the ground for cleaning, refuelling, etc for 50 minutes before departing again. Customer satisfaction surveys have
shown that 85% of customers are happy with the standard of cleanliness on Jamair’s planes.
The number of passengers carried by the airline has grown from 300,000 passengers on a total of 3,428 flights in
2007 to 920,000 passengers on 7,650 flights in 2013. The overall growth of the airline has been helped by the
limited route licensing policy of the Shanian government, which has given Jamair almost monopoly status on some
of its routes. However, the government is now set to change this policy with almost immediate effect, and it has
become more important than ever to monitor performance effectively.
Required:
(a) Describe each of the four perspectives of the balanced scorecard.
(6 marks)
(b) For each perspective of the balanced scorecard, identify one goal together with a corresponding performance
measure which could be used by Jamair to measure the company’s performance. The goals and measures
should be specifically relevant to Jamair. For each pair of goals and measures, explain why you have chosen
them.
(9 marks)
(15 marks)
12
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4
The Safe Soap Co makes environmentally-friendly soap using three basic ingredients. The standard cost card for one
batch of soap for the month of September was as follows:
Material
Lye
Coconut oil
Shea butter
Kilograms
0·25
0·6
0·5
Price per kilogram ($)
10
4
3
The budget for production and sales in September was 120,000 batches. Actual production and sales were 136,000
batches. The actual ingredients used were as follows:
Material
Lye
Coconut oil
Shea butter
Kilograms
34,080
83,232
64,200
Required:
(a) Calculate the total material mix variance and the total material yield variance for September.
(8 marks)
(b) In October the materials mix and yield variances were as follows:
Mix: $6,000 adverse
Yield: $10,000 favourable
The production manager is pleased with the results overall, stating:
‘At the beginning of September I made some changes to the mix of ingredients used for the soaps. As I expected,
the mix variance is adverse in both months because we haven’t yet updated our standard cost card but, in both
months, the favourable yield variance more than makes up for this. Overall, I think we can be satisfied that the
changes made to the product mix are producing good results and now we are able to produce more batches and
meet the growing demand for our product.’
The sales manager, however, holds a different view and says:
‘I’m not happy with this change in the ingredients mix. I’ve had to explain to the board why the sales volume
variance for October was $22,000 adverse. I’ve tried to explain that the quality of the soap has declined slightly
and some of my customers have realised this and simply aren’t happy but no-one seems to be listening. Some
customers are even demanding that the price of the soap be reduced and threatening to go elsewhere if the
problem isn’t sorted out.’
Required:
(i)
Briefly explain what the adverse materials mix and favourable materials yield variances indicate about
production at Safe Soap Co in October.
Note: You are NOT required to discuss revision of standards or operational and planning variances.
(4 marks)
(ii) Discuss whether the sales manager could be justified in claiming that the change in the materials mix
has caused an adverse sales volume variance in October.
(3 marks)
(15 marks)
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5
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
14
Taha Popatia - ARTT Business School - 02134523175
LR = the learning rate as a decimal
Monday 1 June 2015
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
This paper is divided into two sections:
Section A – ALL 20 questions are compulsory and MUST be attempted
Section B – ALL FIVE questions are compulsory and MUST be attempted
Formulae Sheet is on page 13.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
Do NOT record any of your answers on the exam paper.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
Section A – ALL 20 questions are compulsory and MUST be attempted
Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple
choice question. Do not write out the answers to the MCQs on the lined pages of the answer booklet.
Each question is worth 2 marks.
1
A division is considering investing in capital equipment costing $2·7m. The useful economic life of the equipment is
expected to be 50 years, with no resale value at the end of the period. The forecast return on the initial investment
is 15% per annum before depreciation. The division’s cost of capital is 7%.
A
B
C
D
2
$0
($270,000)
$162,000
$216,000
The Fruit Company (F Co) currently grows fruit which customers pick themselves from the fields before paying. F Co
is concerned that a large number of customers are eating some of the fruit whilst picking it and are therefore not
paying for all of it. As a result, it has to decide whether to hire staff to pick and package the fruit instead. The following
values and costs have been identified:
(i)
(ii)
(iii)
(iv)
The
The
The
The
total sales value of the fruit currently picked and paid for by customers
cost of growing the fruit
cost of hiring staff to pick and package the fruit
total sales value of the fruit if it is picked and packaged by staff instead
Which of the above are relevant to the decision?
A
B
C
D
3
All of the above
(ii), (iii) and (iv) only
(i), (ii) and (iv) only
(i), (iii) and (iv) only
Which of the following statements describes target costing?
A
B
C
D
It calculates the expected cost of a product and then adds a margin to it to arrive at the target selling price
It allocates overhead costs to products by collecting the costs into pools and sharing them out according to each
product’s usage of the cost driving activity
It identifies the market price of a product and then subtracts a desired profit margin to arrive at the target cost
It identifies different markets for a product and then sells that same product at different prices in each market
2
Taha Popatia - ARTT Business School - 02134523175
What is the expected annual residual income of the initial investment?
4
The Mobile Sandwich Co prepares sandwiches which it delivers and sells to employees at local businesses each day.
Demand varies between 325 and 400 sandwiches each day. As the day progresses, the price of the sandwiches is
reduced and, at the end of the day, any sandwiches not sold are thrown away. The company has prepared a regret
table to show the amount of profit which would be foregone each day at each supply level, given the varying daily
levels of demand.
Regret table
325
350
375
400
Daily supply of sandwiches (units)
350
375
400
$21
$82
$120
$0
$44
$78
$40
$0
$34
$90
$52
$0
Applying the decision criterion of minimax regret, how many sandwiches should the company decide to supply
each day?
A
B
C
D
5
325
350
375
400
The following statements have been made about transaction processing systems and executive information systems:
(i) A transaction processing system collects and records the transactions of an organisation
(ii) An executive information system is a way of integrating the data from all operations within the organisation into
a single system
Which of the above statements is/are true?
A
B
C
D
6
(i) only
(ii) only
Both (i) and (ii)
Neither (i) nor (ii)
The following information is available for a manufacturing company which produces multiple products:
(i)
(ii)
(iii)
(iv)
The product mix ratio
Contribution to sales ratio for each product
General fixed costs
Method of apportioning general fixed costs
Which of the above are required in order to calculate the break-even sales revenue for the company?
A
B
C
D
7
All of the above
(i), (ii) and (iii) only
(i), (iii) and (iv) only
(ii) and (iii) only
Which of the following is an external source of information?
A
B
C
D
Value of sales, analysed for each customer
Value of purchases, analysed for each supplier
Prices of similar products, analysed for each competitor company
Hours worked, analysed for each employee
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Daily demand
for sandwiches (units)
325
$0
$36
$82
$142
8
C Co uses material B, which has a current market price of $0·80 per kg. In a linear program, where the objective is
to maximise profit, the shadow price of material B is $2 per kg. The following statements have been made:
(i) Contribution will be increased by $2 for each additional kg of material B purchased at the current market price
(ii) The maximum price which should be paid for an additional kg of material B is $2
(iii) Contribution will be increased by $1·20 for each additional kg of material B purchased at the current market
price
(iv) The maximum price which should be paid for an additional kg of material B is $2·80
A
B
C
D
9
(ii) only
(ii) and (iii)
(i) only
(i) and (iv)
X Co uses a throughput accounting system. Details of product A, per unit, are as follows:
Selling price
Material costs
Conversion costs
Time on bottleneck resource
$320
$80
$60
6 minutes
What is the return per hour for product A?
A
B
C
D
$40
$2,400
$30
$1,800
10 The following ratios have been calculated for a company:
Gross profit margin
Operating profit margin
Gearing (debt/equity)
Asset turnover
42%
28%
40%
65%
What is the return on capital employed for the company?
A
B
C
D
27·3%
18·2%
11·2%
16·8%
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Taha Popatia - ARTT Business School - 02134523175
Which of the above statements is/are correct?
11 A company manufactures three products using different amounts of the same grade of labour, which is in short supply.
The following budgeted data relates to the products:
Selling price
Materials ($2 per kg)
Labour ($10 per hour)
Variable overheads
Fixed overheads
Profit per unit
P1
$
120
(40)
(10)
(20)
(6)
––––
44
––––
P2
$
140
(32)
(20)
(28)
(9)
––––
51
––––
P3
$
95
(22)
(11)
(24)
(12)
––––
26
––––
What order should the products be manufactured in to ensure that profit is maximised?
A
B
C
D
P1
2nd
2nd
1st
1st
P2
1st
3rd
3rd
2nd
P3
3rd
1st
2nd
3rd
12 The following statements have been made about life cycle costing:
(i) It focuses on the short-term by identifying costs at the beginning of a product’s life cycle
(ii) It identifies all costs which arise in relation to the product each year and then calculates the product’s profitability
on an annual basis
(iii) It accumulates a product’s costs over its whole life time and works out the overall profitability of a product
(iv) It allocates costs to each stage of a product’s life cycle and writes them off at the end of each stage
Which of the above statements is/are correct?
A
B
C
D
(i) and (iii)
(iii) only
(i) and (iv)
(ii) only
13 A company’s sales and cost of sales figures have remained unchanged for the last two years. The following information
has been noted:
Year ended
Inventory turnover period
Payables payment period
Receivables payment period
Current ratio
Quick ratio
31 May 2015
45 days
40 days
60 days
1·3
1·1
31 May 2014
38 days
35 days
68 days
1·4
1·3
The following statements have been made about the company’s performance for the most recent year:
(i) Customers are taking longer to pay and this may have contributed to the decline in the company’s current ratio
(ii) Inventory levels have decreased and this may have contributed to the decline in the company’s quick ratio
Which of the above statements is/are true?
A
B
C
D
(i) only
(ii) only
Both (i) and (ii)
Neither (i) nor (ii)
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Per unit:
14 Caf Co budgeted to sell 10,000 units of a new product in the period at a budgeted selling price of $5 per unit. Actual
sales volumes in the period were as budgeted but the actual sales price achieved was only $4 per unit. This was
because a competitor launched a similar product at the same time. Caf Co had been unaware that this was going to
happen when it prepared its budget and, had it known this, it would have revised its expected selling price to $3·80
per unit, which was the price of the competitor’s product.
What is the sales price planning variance?
$12,000 A
$12,000 F
$2,000 F
$2,000 A
15 The following budgeted data for a particular period was available for a company selling two products:
Product A
Product B
Sales price
per unit
$20
$24
Variable cost
per unit
$8
$11
Sales volume
in units
15,840
10,560
The actual results for the period were as follows:
Product A
Product B
Sales price
per unit
$22
$26
Variable cost
per unit
$8
$11
Sales volume
in units
14,200
12,500
What is the total sales quantity contribution variance for the period?
A
B
C
D
$3,720
$3,720
$4,320
$4,320
F
A
F
A
16 A company predicted that the learning rate for production of a new product would be 80%. The actual learning rate
was 75%. The following possible reasons were stated for this:
(i) The number of new employees recruited was lower than expected
(ii) Unexpected problems were encountered with production
(iii) Unexpected changes to Health and Safety laws meant that the company had to increase the number of breaks
during production for employees
Which of the above reasons could have caused the difference between the expected rate of learning and the
actual rate of learning?
A
B
C
D
All of the above
(ii) and (iii) only
(i) only
None of the above
6
Taha Popatia - ARTT Business School - 02134523175
A
B
C
D
17 When activity-based costing is used for environmental accounting, which statement is correct for
environment-related costs and environment-driven costs?
A
B
C
D
Environment-related costs can be attributed to joint cost centres and environment-driven costs cannot be
Environment-driven costs can be attributed to joint cost centres and environment-related costs cannot be
Both environment-related costs and environment-driven costs can be attributed to joint cost centres
Neither environment-related costs nor environment-driven costs can be attributed to joint cost centres
18 The following statements have been made about the materials mix variance for a company manufacturing different
products using the same type of material (measured in kgs):
The mix variance can be calculated by taking the difference between the actual quantity in the standard mix and
the actual quantity in the actual mix, then multiplying it by the actual cost per kg
(ii) The mix variance arises because there is a difference between what the input should have been for the output
achieved and the actual output
Which of the above statements is/are correct?
A
B
C
D
Neither (i) nor (ii)
Both (i) and (ii)
(i) only
(ii) only
19 At the start of the year, a division has non-current assets of $4 million and makes no additions or disposals during
the year. Depreciation is charged at a rate of 10% per annum on all non-current assets held at the end of the year.
Working capital is $0·5 million at the start of the year although this is expected to increase by 20% by the end of the
year. The budgeted profit of the division after depreciation is $1·2m.
What is the expected ROI of the division for the year, based on average capital employed?
A
B
C
D
27·59%
26·37%
18·39%
31·58%
20 The following statements have been made in relation to the concepts outlined in throughput accounting:
(i) Inventory levels should be kept to a minimum
(ii) All machines within a factory should be 100% efficient, with no idle time
Which of the above statements is/are correct?
A
B
C
D
(i) only
(ii) only
Both (i) and (ii)
Neither (i) nor (ii)
(40 marks)
7
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Taha Popatia - ARTT Business School - 02134523175
(i)
Section B – ALL FIVE questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
Beckley Hill (BH) is a private hospital carrying out two types of procedures on patients. Each type of procedure incurs
the following direct costs:
Procedure
Surgical time and materials
Anaesthesia time and materials
A
$
1,200
800
B
$
2,640
1,620
BH currently calculates the overhead cost per procedure by taking the total overhead cost and simply dividing it by
the number of procedures, then rounding the cost to the nearest 2 decimal places. Using this method, the total cost
is $2,475·85 for Procedure A and $4,735·85 for Procedure B.
Recently, another local hospital has implemented activity-based costing (ABC). This has led the finance director at BH
to consider whether this alternative costing technique would bring any benefits to BH. He has obtained an analysis
of BH’s total overheads for the last year and some additional data, all of which is shown below:
Cost
Administrative costs
Nursing costs
Catering costs
General facility costs
Cost driver
Administrative time per procedure
Length of patient stay
Number of meals
Length of patient stay
Total overhead costs
Procedure
No. of procedures
Administrative time per procedure (hours)
Length of patient stay per procedure (hours)
Average no. of meals required per patient
$
1,870,160
6,215,616
966,976
8,553,600
–––––––––––
17,606,352
–––––––––––
A
14,600
1
24
1
B
22,400
1·5
48
4
Required:
(a) Calculate the full cost per procedure using activity-based costing.
(6 marks)
(b) Making reference to your findings in part (a), advise the finance director as to whether activity-based costing
should be implemented at BH.
(4 marks)
(10 marks)
8
Taha Popatia - ARTT Business School - 02134523175
1
Mobe Co manufactures electronic mobility scooters. The company is split into two divisions: the scooter division
(Division S) and the motor division (Division M). Division M supplies electronic motors to both Division S and to
external customers. The two divisions run as autonomously as possible, subject to the group’s current policy that
Division M must make internal sales first before selling outside the group; and that Division S must always buy its
motors from Division M. However, this company policy, together with the transfer price which Division M charges
Division S, is currently under review.
Details of the two divisions are given below.
Division S
Division S’s budget for the coming year shows that 35,000 electronic motors will be needed. An external supplier
could supply these to Division S for $800 each.
Division M
Division M has the capacity to produce a total of 60,000 electronic motors per year. Details of Division M’s budget,
which has just been prepared for the forthcoming year, are as follows:
Budgeted sales volume (units)
Selling price per unit for external sales of motors
Variable costs per unit for external sales of motors
60,000
$850
$770
The variable cost per unit for motors sold to Division S is $30 per unit lower due to cost savings on distribution and
packaging.
Maximum external demand for the motors is 30,000 units per year.
Required:
Assuming that the group’s current policy could be changed, advise, using suitable calculations, the number of
motors which Division M should supply to Division S in order to maximise group profits. Recommend the transfer
price or prices at which these internal sales should take place.
Note: All relevant workings must be shown.
(10 marks)
9
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
2
Bokco is a manufacturing company. It has a small permanent workforce but it is also reliant on temporary workers,
whom it hires on three-month contracts whenever production requirements increase. All buying of materials is the
responsibility of the company’s purchasing department and the company’s policy is to hold low levels of raw materials
in order to minimise inventory holding costs. Bokco uses cost plus pricing to set the selling prices for its products once
an initial cost card has been drawn up. Prices are then reviewed on a quarterly basis. Detailed variance reports are
produced each month for sales, material costs and labour costs. Departmental managers are then paid a monthly
bonus depending on the performance of their department.
One month ago, Bokco began production of a new product. The standard cost card for one unit was drawn up to
include a cost of $84 for labour, based on seven hours of labour at $12 per hour. Actual output of the product during
the first month of production was 460 units and the actual time taken to manufacture the product totalled 1,860
hours at a total cost of $26,040.
After being presented with some initial variance calculations, the production manager has realised that the standard
time per unit of seven hours was the time taken to produce the first unit and that a learning rate of 90% should have
been anticipated for the first 1,000 units of production. He has consequently been criticised by other departmental
managers who have said that, ‘He has no idea of all the problems this has caused.’
Required:
(a) Calculate the labour efficiency planning variance and the labour efficiency operational variance AFTER taking
account of the learning effect.
Note: The learning index for a 90% learning curve is –0·1520
(5 marks)
(b) Discuss the likely consequences arising from the production manager’s failure to take into account the
learning effect before production commenced.
(5 marks)
(10 marks)
10
Taha Popatia - ARTT Business School - 02134523175
3
ALG Co is launching a new, innovative product onto the market and is trying to decide on the right launch price for
the product. The product’s expected life is three years. Given the high level of costs which have been incurred in
developing the product, ALG Co wants to ensure that it sets its price at the right level and has therefore consulted a
market research company to help it do this. The research, which relates to similar but not identical products launched
by other companies, has revealed that at a price of $60, annual demand would be expected to be 250,000 units.
However, for every $2 increase in selling price, demand would be expected to fall by 2,000 units and for every $2
decrease in selling price, demand would be expected to increase by 2,000 units.
A forecast of the annual production costs which would be incurred by ALG Co in relation to the new product are as
follows:
Annual production (units)
Direct material
Direct labour
Overheads
200,000
$
2,400,000
1,200,000
1,400,000
250,000
$
3,000,000
1,500,000
1,550,000
300,000
$
3,600,000
1,800,000
1,700,000
350,000
$
4,200,000
2,100,000
1,850,000
Required:
(a) Calculate the total variable cost per unit and total fixed overheads.
(3 marks)
(b) Calculate the optimum (profit maximising) selling price for the new product AND calculate the resulting profit
for the period.
Note: If P = a – bx then MR = a – 2bx.
(7 marks)
(c) The sales director is unconvinced that the sales price calculated in (b) above is the right one to charge on the
initial launch of the product. He believes that a high price should be charged at launch so that those customers
prepared to pay a higher price for the product can be ‘skimmed off’ first.
Required:
Discuss the conditions which would make market skimming a more suitable pricing strategy for ALG, and
recommend whether ALG should adopt this approach instead.
(5 marks)
(15 marks)
11
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4
Lesting Regional Authority (LRA) is responsible for the provision of a wide range of services in the Lesting region,
which is based in the south of the country ‘Alaia’. These services include, amongst other things, responsibility for
residents’ welfare, schools, housing, hospitals, roads and waste management.
Over recent months the Lesting region experienced the hottest temperatures on record, resulting in several forest fires,
which caused damage to several schools and some local roads. Unfortunately, these hot temperatures were then
followed by flooding, which left a number of residents without homes and saw higher than usual numbers of
admissions to hospitals due to the outbreak of disease. These hospitals were full and some patients were treated in
tents. Residents have been complaining for some years that a new hospital is needed in the area.
Prior to these events, the LRA was proudly leading the way in a new approach to waste management, with the
introduction of its new ‘Waste Recycling Scheme.’ Two years ago, it began phase 1 of the scheme and half of its
residents were issued with different coloured waste bins for different types of waste. The final phase was due to begin
in one month’s time. The cost of providing the new waste bins is significant but LRA’s focus has always been on the
long-term savings both to the environment and in terms of reduced waste disposal costs.
The LRA is about to begin preparing its budget for the coming financial year, which starts in one month’s time. Over
recent years, zero-based budgeting (ZBB) has been introduced at a number of regional authorities in Alaia and, given
the demand on resources which LRA faces this year, it is considering whether now would be a good time to introduce
it.
Required:
(a) Describe the main steps involved in preparing a zero-based budget.
(3 marks)
(b) Discuss the problems which the Lesting Regional Authority (LRA) may encounter if it decides to introduce
and use ZBB to prepare its budget for the coming financial year.
(9 marks)
(c) Outline THREE potential benefits of introducing zero-based budgeting at the LRA.
(3 marks)
(15 marks)
12
Taha Popatia - ARTT Business School - 02134523175
5
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
13
Taha Popatia - ARTT Business School - 02134523175
LR = the learning rate as a decimal
September/December 2015
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
This question paper is divided into two sections:
Section A – ALL 20 questions are compulsory and MUST be attempted
Section B – ALL FIVE questions are compulsory and MUST be attempted
Formulae Sheet is on page 7.
Do NOT open this question paper until instructed by the supervisor.
During reading and planning time only the question paper may be
annotated. You must NOT write in your answer booklet until instructed
by the supervisor.
Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
Section B – ALL FIVE questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
The Chemical Free Clean Co (C Co) provides a range of environmentally-friendly cleaning services to business
customers, often providing a specific service to meet a client’s needs. Its customers range from large offices and
factories to specialist care wards at hospitals, where specialist cleaning equipment must be used and regulations
adhered to. C Co offers both regular cleaning contracts and contracts for one-off jobs. For example, its latest client
was a chain of restaurants which employed them to provide an extensive clean of all their business premises after an
outbreak of food poisoning.
The cleaning market is very competitive, although there are only a small number of companies providing a chemical
free service. C Co has always used cost-plus pricing to determine the prices which it charges to its customers but
recently, the cost of the cleaning products C Co uses has increased. This has meant that C Co has had to increase its
prices, resulting in the loss of several regular customers to competing service providers.
The finance director at C Co has heard about target costing and is considering whether it could be useful at C Co.
Required:
(a) Briefly describe the main steps involved in deriving a target cost.
(3 marks)
(b) Explain any difficulties which may be encountered and any benefits which may arise when implementing
target costing at C Co.
(7 marks)
(10 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
Bus Co is a large bus operator, operating long-distance bus services across the country. There are two other national
operators in the country. Bus Co’s mission is to ‘be the market leader in long-distance transport providing a greener,
cleaner service for passengers nationwide’. Last month, an independent survey of 40,000 passengers was carried
out, the results of which are shown in the table below:
Table: Bus passenger satisfaction % by national operator
Operator
Bus
Prime
Express
Overall satisfaction Value for money
*
67
*
58
*
67
Punctuality
80
76
76
Journey time
82
83
89
* denotes that the percentage has not yet been calculated.
The ‘overall satisfaction’ percentages, which have not yet been inserted into the table, are calculated using a weighted
average which reflects the importance customers place on each of the other three criteria above. The weightings used
are as follows:
Value for money
Punctuality
Journey time
40%
32%
28%
The managing director (MD) of Bus Co has said: ‘Independent research has shown that our customers are the most
satisfied of any national bus operator. We are now leading the way on what matters most to customers – value for
money and punctuality.’
Required:
(a) Calculate the ‘overall satisfaction’ percentage for each operator.
(2 marks)
(b) Taking into account all the data in the table and your calculations from part (a), discuss whether the
managing director’s statement is true.
(4 marks)
(c) When measuring performance using a ‘value for money’ approach, the criteria of economy, efficiency and
effectiveness can be used.
Required:
Briefly define ‘efficiency’ and ‘effectiveness’ and suggest one performance measure for EACH, which would
help Bus Co assess the efficiency and effectiveness of the service it provides.
(4 marks)
(10 marks)
3
[P.T.O.
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2
The Organic Bread Company (OBC) makes a range of breads for sale direct to the public. The production process
begins with workers weighing out ingredients on electronic scales and then placing them in a machine for mixing. A
worker then manually removes the mix from the machine and shapes it into loaves by hand, after which the bread is
then placed into the oven for baking.
All baked loaves are then inspected by OBC’s quality inspector before they are packaged up and made ready for sale.
Any loaves which fail the inspection are donated to a local food bank.
The standard cost card for OBC’s ‘Mixed Bloomer’, one of its most popular loaves, is as follows:
White flour
Wholegrain flour
Yeast
Total
450 grams at $1·80 per kg
150 grams at $2·20 per kg
10 grams at $20 per kg
––––
610 grams
––––
$
0·81
0·33
0·20
––––
1·34
––––
Budgeted production of Mixed Bloomers was 1,000 units for the quarter, although actual production was only
950 units. The total actual quantities used and their actual costs were:
White flour
Wholegrain flour
Yeast
Total
Kg
408·5
152·0
10·0
––––––
570·5
––––––
$ per kg
1·90
2·10
20·00
Required:
(a) Calculate the total material mix variance and the total material yield variance for OBC for the last quarter.
(7 marks)
(b) Using the information in the question, suggest THREE possible reasons why an ADVERSE MATERIAL YIELD
variance could arise at OBC.
(3 marks)
(10 marks)
4
Taha Popatia - ARTT Business School - 02134523175
3
Cardio Co manufactures three types of fitness equipment: treadmills (T), cross trainers (C) and rowing machines (R).
The budgeted sales prices and volumes for the next year are as follows:
Selling price
Units
T
$1,600
420
C
$1,800
400
R
$1,400
380
The standard cost card for each product is shown below.
Material
Labour
Variable overheads
T
$
430
220
110
C
$
500
240
120
R
$
360
190
95
Labour costs are 60% fixed and 40% variable. General fixed overheads excluding any fixed labour costs are expected
to be $55,000 for the next year.
Required:
(a) Calculate the weighted average contribution to sales ratio for Cardio Co.
(4 marks)
(b) Calculate the margin of safety in $ revenue for Cardio Co.
(3 marks)
(c) Using the graph paper provided and assuming that the products are sold in a CONSTANT MIX, draw a
multi-product breakeven chart for Cardio Co. Label fully both axes, any lines drawn on the graph and the
breakeven point.
(6 marks)
(d) Explain what would happen to the breakeven point if the products were sold in order of the most profitable
products first.
Note: You are NOT required to demonstrate this on the graph drawn in part (c).
(2 marks)
(15 marks)
5
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
4
Cardale Industrial Metal Co (CIM Co) is a large supplier of industrial metals. The company is split into two divisions:
Division F and Division N. Each division operates separately as an investment centre, with each one having full control
over its non-current assets. In addition, both divisions are responsible for their own current assets, controlling their
own levels of inventory and cash and having full responsibility for the credit terms granted to customers and the
collection of receivables balances. Similarly, each division has full responsibility for its current liabilities and deals
directly with its own suppliers.
Each divisional manager is paid a salary of $120,000 per annum plus an annual performance-related bonus, based
on the return on investment (ROI) achieved by their division for the year. Each divisional manager is expected to
achieve a minimum ROI for their division of 10% per annum. If a manager only meets the 10% target, they are not
awarded a bonus. However, for each whole percentage point above 10% which the division achieves for the year, a
bonus equivalent to 2% of annual salary is paid, subject to a maximum bonus equivalent to 30% of annual salary.
The following figures relate to the year ended 31 August 2015:
Sales
Controllable profit
Less apportionment of Head Office costs
Net profit
Non-current assets
Inventory, cash and trade receivables
Trade payables
Division F
$’000
14,500
2,645
(1,265)
–––––––
1,380
–––––––
9,760
2,480
2,960
Division N
$’000
8,700
1,970
(684)
––––––
1,286
––––––
14,980
3,260
1,400
During the year ending 31 August 2015, Division N invested $6·8m in new equipment including a technologically
advanced cutting machine, which is expected to increase productivity by 8% per annum. Division F has made no
investment during the year, although its computer system is badly in need of updating. Division F’s manager has said
that he has already had to delay payments to suppliers (i.e. accounts payables) because of limited cash and the
computer system ‘will just have to wait’, although the cash balance at Division F is still better than that of Division N.
Required:
(a) For each division, for the year ended 31 August 2015, calculate the appropriate closing return on investment
(ROI) on which the payment of management bonuses will be based. Briefly justify the figures used in your
calculations.
Note: There are 3 marks available for calculations and 2 marks available for discussion.
(5 marks)
(b) Based on your calculations in part (a), calculate each manager’s bonus for the year ended 31 August 2015.
(3 marks)
(c) Discuss whether ROI is providing a fair basis for calculating the managers’ bonuses and the problems arising
from its use at CIM Co for the year ended 31 August 2015.
(7 marks)
(15 marks)
6
Taha Popatia - ARTT Business School - 02134523175
5
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
7
Taha Popatia - ARTT Business School - 02134523175
LR = the learning rate as a decimal
March/June 2016 – Sample Questions
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
This question paper is divided into two sections:
Section A – ALL 20 questions are compulsory and MUST be attempted
Section B – ALL FIVE questions are compulsory and MUST be attempted
Formulae Sheet is on page 7.
Do NOT open this question paper until instructed by the supervisor.
During reading and planning time only the question paper may be
annotated. You must NOT write in your answer booklet until instructed
by the supervisor.
Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
The Association of
Chartered Certified
Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
Section B – ALL FIVE questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
Jewel Co is setting up an online business importing and selling jewellery headphones. The cost of each set of
headphones varies depending on the number purchased, although they can only be purchased in batches of 1,000
units. It also has to pay import taxes which vary according to the quantity purchased.
Jewel Co has already carried out some market research and identified that sales quantities are expected to vary
depending on the price charged. Consequently, the following data has been established for the first month:
Number of batches
imported and sold
1
2
3
4
5
Average cost per unit
including import taxes
$
10·00
8·80
7·80
6·40
6·40
Total fixed costs
per month
$
10,000
10,000
12,000
12,000
14,000
Expected selling price
per unit
$
20
18
16
13
12
Required:
(a) Calculate how many batches Jewel Co should import and sell.
(6 marks)
(b) Explain why Jewel Co could not use the algebraic method to establish the optimum price for its product.
(4 marks)
(10 marks)
2
Taha Popatia - ARTT Business School - 02134523175
1
Swim Co offers training courses to athletes and has prepared the following breakeven chart:
$ 150,000
140,000
Line A
130,000
120,000
Line B
110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000
Line C
30,000
20,000
10,000
0
0
100
200
300
400
500
600
Number of athletes
Required:
(a) State the breakeven sales revenue for Swim Co and estimate, to the nearest $10,000, the company’s profit
if 500 athletes attend a training course.
(2 marks)
(b) Using the chart above, explain the cost and revenue structure of the company.
(8 marks)
(10 marks)
3
[P.T.O.
Taha Popatia - ARTT Business School - 02134523175
2
Shoe Co, a shoe manufacturer, has developed a new product called the ‘Smart Shoe’ for children, which has a
built-in tracking device. The shoes are expected to have a life cycle of two years, at which point Shoe Co hopes to
introduce a new type of Smart Shoe with even more advanced technology. Shoe Co plans to use life cycle costing to
work out the total production cost of the Smart Shoe and the total estimated profit for the two-year period.
Shoe Co has spent $5·6m developing the Smart Shoe. The time spent on this development meant that the company
missed out on the opportunity of earning an estimated $800,000 contribution from the sale of another product.
The company has applied for and been granted a ten-year patent for the technology, although it must be renewed
each year at a cost of $200,000. The costs of the patent application were $500,000, which included $20,000 for
the salary costs of Shoe Co’s lawyer, who is a permanent employee of the company and was responsible for preparing
the application.
The following information is also available for the next two years:
Year 1
280,000
$
55
16
8
Sales volumes (units)
Selling price per unit
Material cost per unit
Labour cost per unit
Year 2
420,000
$
45
14
7
Note: A unit is a pair of shoes
Other costs are expected to be as follows:
Fixed production overheads
Selling and distribution costs
Environmental costs
Year 1
$m
1·6
0·6
0·1
Year 2
$m
2·2
0·9
0·15
Shoe Co is still negotiating with marketing companies with regard to its advertising campaign, so is uncertain as to
what the total marketing costs will be each year. However, the following information is available as regards the
probabilities of the range of costs which are likely to be incurred:
Year 1
Expected cost
($m)
2·2
2·6
2·9
Probability
0·2
0·5
0·3
Year 2
Expected cost
($m)
1·8
2·1
2·3
Probability
0·3
0·4
0·3
Required:
Applying the principles of life cycle costing, calculate the total expected profit for Shoe Co for the two-year period.
(10 marks)
4
Taha Popatia - ARTT Business School - 02134523175
3
A manufacturing company, Man Co, has two divisions: Division L and Division M. Both divisions make a single
standardised product. Division L makes component L, which is supplied to both Division M and external customers.
Division M makes product M using one unit of component L and other materials. It then sells the completed
product M to external customers. To date, Division M has always bought component L from Division L.
The following information is available:
Selling price
Direct materials:
Component L
Other
Direct labour
Variable overheads
Selling and distribution costs
Contribution per unit before fixed costs
Annual fixed costs
Annual external demand (units)
Capacity of plant
Component L
$
40
(12)
(6)
(2)
(4)
–––
16
–––
$500,000
160,000
300,000
Product M
$
96
(40)
(17)
(9)
(3)
(1)
–––
26
–––
$200,000
120,000
130,000
Division L charges the same price for component L to both Division M and external customers. However, it does not
incur the selling and distribution costs when transferring internally.
Division M has just been approached by a new supplier who has offered to supply it with component L for $37 per
unit. Prior to this offer, the cheapest price which Division M could have bought component L for from outside the
group was $42 per unit.
It is head office policy to let the divisions operate autonomously without interference at all.
Required:
(a) Calculate the incremental profit/(loss) per component for the group if Division M accepts the new supplier’s
offer and recommend how many components Division L should sell to Division M if group profits are to be
maximised.
(3 marks)
(b) Using the quantities calculated in (a) and the current transfer price, calculate the total annual profits of each
division and the group as a whole.
(6 marks)
(c) Discuss the problems which will arise if the transfer price remains unchanged and advise the divisions on a
suitable alternative transfer price for component L.
(6 marks)
(15 marks)
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4
Glove Co makes high quality, hand-made gloves which it sells for an average of $180 per pair. The standard cost of
labour for each pair is $42 and the standard labour time for each pair is three hours. In the last quarter, Glove Co
had budgeted production of 12,000 pairs, although actual production was 12,600 pairs in order to meet demand.
37,000 hours were used to complete the work and there was no idle time. The total labour cost for the quarter was
$531,930.
At the beginning of the last quarter, the design of the gloves was changed slightly. The new design required workers
to sew the company’s logo on to the back of every glove made and the estimated time to do this was 15 minutes for
each pair. However, no-one told the accountant responsible for updating standard costs that the standard time per
pair of gloves needed to be changed. Similarly, although all workers were given a 2% pay rise at the beginning of the
last quarter, the accountant was not told about this either. Consequently, the standard was not updated to reflect these
changes.
When overtime is required, workers are paid 25% more than their usual hourly rate.
Required:
(a) Calculate the total labour rate and total labour efficiency variances for the last quarter.
(2 marks)
(b) Analyse the above total variances into component parts for planning and operational variances in as much
detail as the information allows.
(6 marks)
(c) Assess the performance of the production manager for the last quarter.
(7 marks)
(15 marks)
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5
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
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LR = the learning rate as a decimal
Wednesday 7 September 2016
Time allowed: 3 hours 15 minutes
This question 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 is on page 18.
Do NOT open this question paper until instructed by the supervisor.
Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
The Association of
Chartered Certified
Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
Section A – ALL 15 questions are compulsory and MUST be attempted
Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple
choice question. Do not write out the answers to the MCQs on the lined pages of the answer booklet.
Each question is worth 2 marks.
A manufacturing company which produces a range of products has developed a budget for the life-cycle of a new
product, P. The information in the following table relates exclusively to product P:
Design costs
Direct manufacturing costs
Depreciation costs
Decommissioning costs
Machine hours
Production and sales units
Lifetime total
$800,000
Per unit
$20
$500,000
$20,000
4
300,000
The company’s total fixed production overheads are budgeted to be $72 million each year and total machine hours
are budgeted to be 96 million hours. The company absorbs overheads on a machine hour basis.
What is the budgeted life-cycle cost per unit for product P?
A
B
C
D
2
$24·40
$25·73
$27·40
$22·73
A company makes and sells product X and product Y. Twice as many units of product Y are made and sold as that of
product X. Each unit of product X makes a contribution of $10 and each unit of product Y makes a contribution of
$4. Fixed costs are $90,000.
What is the total number of units which must be made and sold to make a profit of $45,000?
A
B
C
D
3
7,500
22,500
15,000
16,875
Product GX consists of a mix of three materials, J, K and L. The standard material cost of a unit of GX is as follows:
Material J
Material K
Material L
5 kg at $4 per kg
2 kg at $12 per kg
3 kg at $8 per kg
$
20
24
24
During March, 3,000 units of GX were produced, and actual usage was:
Material J
Material K
Material L
13,200 kg
6,500 kg
9,300 kg
What was the materials yield variance for March?
A
B
C
D
$6,800
$6,800
$1,000
$1,000
favourable
adverse
favourable
adverse
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1
4
A manufacturer and retailer of kitchens introduces an enterprise resource planning system.
Which of the following is NOT likely to be a potential benefit of introducing this system?
A
B
C
D
5
Schedules of labour are prepared for manufacturing
Inventory records are updated automatically
Sales are recorded into the financial ledgers
Critical strategic information can be summarised
Different management accounting techniques can be used to account for environmental costs.
What is this technique known as?
A
B
C
D
6
Activity-based costing
Life-cycle costing
Input-output analysis
Flow cost accounting
A government is trying to assess schools by using a range of financial and non-financial factors. One of the chosen
methods is the percentage of students passing five exams or more.
Which of the three Es in the value for money framework is being measured here?
A
B
C
D
7
Which of the following techniques is NOT relevant to target costing?
A
B
C
D
8
Economy
Efficiency
Effectiveness
Expertise
Value analysis
Variance analysis
Functional analysis
Activity analysis
A government department generates information which should not be disclosed to anyone who works outside of the
department. There are many other government departments working within the same building.
Which of the following would NOT be an effective control procedure for the generation and distribution of the
information within the government department?
A
B
C
D
If working from home, departmental employees must use a memory stick to transfer data, as laptop computers
are not allowed to leave the department
All departmental employees must enter non-disclosed and regularly updated passwords to access their computers
All authorised employees must swipe an officially issued, personal identity card at the entrance to the department
before they can gain access
All hard copies of confidential information must be shredded at the end of each day or locked overnight in a safe
if needed again
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One of these techniques involves analysing costs under three distinct categories: material, system, and delivery and
disposal.
9
A jewellery company makes rings (R) and necklaces (N).
The resources available to the company have been analysed and two constraints have been identified:
Labour time
Machine time
3R + 2N ≤ 2,400 hours
0·5R + 0·4N ≤ 410 hours
The management accountant has used linear programming to determine that R = 500 and N = 400.
Which of the following is/are slack resources?
A
B
C
D
1 only
2 only
Both 1 and 2
Neither 1 nor 2
10 At the end of 20X1, an investment centre has net assets of $1m and annual operating profits of $190,000. However,
the bookkeeper forgot to account for the following:
A machine with a net book value of $40,000 was sold at the start of the year for $50,000 and replaced with a
machine costing $250,000. Both the purchase and sale are cash transactions. No depreciation is charged in the year
of purchase or disposal. The investment centre calculates return on investment (ROI) based on closing net assets.
Assuming no other changes to profit or net assets, what is the return on investment (ROI) for the year?
A
B
C
D
18·8%
19·8%
15·1%
15·9%
11 A manufacturing company uses three processes to make its two products, X and Y. The time available on the three
processes is reduced because of the need for preventative maintenance and rest breaks.
The table below details the process times per product and daily time available:
Process
1
2
3
Hours available
per day
22
22
18
Hours required
to make one unit
of product X
1·00
0·75
1·00
Hours required
to make one unit
of product Y
0·75
1·00
0·50
Daily demand for product X and product Y is 10 units and 16 units respectively.
Which of the following will improve throughput?
A
B
C
D
Increasing the efficiency of the maintenance routine for Process 2
Increasing the demand for both products
Reducing the time taken for rest breaks on Process 3
Reducing the time product X requires for Process 1
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(1) Labour time available
(2) Machine time available
12 PlasBas Co uses recycled plastic to manufacture shopping baskets for local retailers. The standard price of the recycled
plastic is $0·50 per kg and standard usage of recycled plastic is 0·2 kg for each basket. The budgeted production
was 80,000 baskets.
Due to recent government incentives to encourage recycling, the standard price of recycled plastic was expected to
reduce to $0·40 per kg. The actual price paid by the company was $0·42 per kg and 100,000 baskets were
manufactured using 20,000 kg of recycled plastic.
What is the materials operational price variance?
$2,000 favourable
$1,600 favourable
$400 adverse
$320 adverse
13 A profit centre manager claims that the poor performance of her division is entirely due to factors outside her control.
She has submitted the following table along with notes from a market expert, which she believes explains the cause
of the poor performance:
Category
Sales volume (units)
Budget
this year
500
Actual
this year
300
Actual
last year
400
Sales revenue
$50,000
$28,500
$40,000
Total material cost
$10,000
$6,500
$8,000
Market expert notes
The entire market has decreased by 25%
compared to last year. The product will be
obsolete in four years
Rivalry in the market saw selling prices fall by
10%
As demand for the raw materials is
decreasing, suppliers lowered their prices by
5%
After adjusting for the external factors outside the manager’s control, in which category/categories is there
evidence of poor performance?
A
B
C
D
Material cost only
Sales volume and sales price
Sales price and material cost
Sales price only
14 Which of the following statements regarding market penetration as a pricing strategy is/are correct?
(1) It is useful if significant economies of scale can be achieved
(2) It is useful if demand for a product is highly elastic
A
B
C
D
1 only
2 only
Neither 1 nor 2
Both 1 and 2
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A
B
C
D
15 A company makes two products using the same type of materials and skilled workers. The following information is
available:
Budgeted volume (units)
Material per unit ($)
Labour per unit ($)
Product A
1,000
10
5
Product B
2,000
20
20
Fixed costs relating to material handling amount to $100,000. The cost driver for these costs is the volume of material
purchased.
General fixed costs, absorbed on the basis of labour hours, amount to $180,000.
A
B
C
D
$113
$120
$40
$105
(30 marks)
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Using activity-based costing, what is the total fixed overhead amount to be absorbed into each unit of product B
(to the nearest whole $)?
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This is a blank page.
Section B begins on page 8.
Section B – ALL 15 questions are compulsory and MUST be attempted
Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple
choice question. Do not write out the answers to the MCQs on the lined pages of the answer booklet.
Each question is worth 2 marks.
The following scenario relates to questions 16–20.
Mylo runs a cafeteria situated on the ground floor of a large corporate office block. Each of the five floors of the building
are occupied and there are in total 1,240 employees.
Mylo has analysed daily sales over the previous six months and established four possible demand levels and their
associated probabilities. He has produced the following payoff table to show the daily profits which could be earned from
the lunch sales in the cafeteria:
Demand level
450
620
775
960
Probability
0·15
0·30
0·40
0·15
450
$
1,170
1,170
1,170
1,170
Supply level
620
775
$
$
980
810
1,612
1,395
1,612
2,015
1,612
2,015
960
$
740
1,290
1,785
2,496
16 If Mylo adopts a maximin approach to decision-making, which daily supply level will he choose?
A
B
C
D
450
620
775
960
lunches
lunches
lunches
lunches
17 If Mylo adopts a minimax regret approach to decision-making, which daily supply level will he choose?
A
B
C
D
450
620
775
960
lunches
lunches
lunches
lunches
18 Which of the following statements is/are true if Mylo chooses to use expected values to assist in his
decision-making regarding the number of lunches to be provided?
(1)
(2)
(3)
(4)
Mylo would be considered to be taking a defensive and conservative approach to his decision
Expected values will ignore any variability which could occur across the range of possible outcomes
Expected values will not take into account the likelihood of the different outcomes occurring
Expected values can be applied by Mylo as he is evaluating a decision which occurs many times over
A
B
C
D
1, 2 and 3
2 and 4
1 and 3 only
4 only
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Mylo sells lunches and snacks in the cafeteria. The lunch menu is freshly prepared each morning and Mylo has to decide
how many meals to make each day. As the office block is located in the city centre, there are several other places situated
around the building where staff can buy their lunch, so the level of demand for lunches in the cafeteria is uncertain.
19 The human resources department has offered to undertake some research to help Mylo to predict the number of
employees who will require lunch in the cafeteria each day. This information will allow Mylo to prepare an accurate
number of lunches each day.
What is the maximum amount which Mylo would be willing to pay for this information (to the nearest whole $)?
$191
$359
$478
$175
20 Mylo is now considering investing in a speciality coffee machine. He has estimated the following daily results for the
new machine:
Sales (650 units)
Variable costs
Contribution
Incremental fixed costs
Profit
$
1,300
(845)
––––––
455
(70)
––––––
385
––––––
Which of the following statements are true regarding the sensitivity of this investment?
(1)
(2)
(3)
(4)
The investment is more sensitive to a change in sales volume than sales price
If variable costs increase by 44% the investment will make a loss
The investment’s sensitivity to incremental fixed costs is 550%
The margin of safety is 84·6%
A
B
C
D
1, 2 and 3
2 and 4
1, 3 and 4
3 and 4 only
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A
B
C
D
The following scenario relates to questions 21–25.
Corfe Co is a business which manufactures computer laptop batteries and it has developed a new battery which has a
longer usage time than batteries currently available in laptops. The selling price of the battery is forecast to be $45.
The maximum production capacity of Corfe Co is 262,500 units. The company’s management accountant is currently
preparing an annual flexible budget and has collected the following information so far:
185,000
$
740,000
1,017,500
750,000
Material costs
Labour costs
Fixed costs
200,000
$
800,000
1,100,000
750,000
225,000
$
900,000
1,237,500
750,000
In addition to the above costs, the management accountant estimates that for each increment of 50,000 units produced,
one supervisor will need to be employed. A supervisor’s annual salary is $35,000.
The production manager does not understand why the flexible budgets have been produced as he has always used a fixed
budget previously.
21 Assuming the budgeted figures are correct, what would the flexed total production cost be if production is 80%
of maximum capacity?
A
B
C
D
$2,735,000
$2,770,000
$2,885,000
$2,920,000
22 The management accountant has said that a machine maintenance cost was not included in the flexible budget but
needs to be taken into account.
The new battery will be manufactured on a machine currently owned by Corfe Co which was previously used for a
product which has now been discontinued. The management accountant estimates that every 1,000 units will take
14 hours to produce. The annual machine hours and maintenance costs for the machine for the last four years have
been as follows:
Year
Year
Year
Year
1
2
3
4
Machine time
(hours)
5,000
4,400
4,850
1,800
Maintenance costs
($’000)
850
735
815
450
What is the estimated maintenance cost if production of the battery is 80% of maximum capacity (to the nearest
$’000)?
A
B
C
D
$575,000
$593,000
$500,000
$735,000
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Production (units)
23 In the first month of production of the new battery, actual sales were 18,000 units and the sales revenue achieved
was $702,000. The budgeted sales units were 17,300.
Based on this information, which of the following statements is true?
A
B
C
D
When the budget is flexed, the sales variance will include both the sales volume and sales price variances
When the budget is flexed, the sales variance will only include the sales volume variance
When the budget is flexed, the sales variance will only include the sales price variance
When the budget is flexed, the sales variance will include the sales mix and quantity variances and the sales
price variance
(1)
(2)
(3)
(4)
The
The
The
The
budget could be time-consuming to produce as splitting out semi-variable costs may not be straightforward
range of output over which assumptions about how costs will behave could be difficult to determine
flexible budget will give managers more opportunity to include budgetary slack than a fixed budget
budget will encourage all activities and their value to the organisation to be reviewed and assessed
A
B
C
D
1 and 2 only
1, 2 and 3
1 and 4
2, 3 and 4
25 The management accountant intends to use a spreadsheet for the flexible budget in order to analyse performance of
the new battery.
Which of the following statements are benefits regarding the use of spreadsheets for budgeting?
(1)
(2)
(3)
(4)
The user can change input variables and a new version of the budget can be quickly produced
Errors in a formula can be easily traced and data can be difficult to corrupt in a spreadsheet
A spreadsheet can take account of qualitative factors to allow decisions to be fully evaluated
Managers can carry out sensitivity analysis more easily on a budget model which is held in a spreadsheet
A
B
C
D
1, 3 and 4
1, 2 and 4
1 and 4 only
2 and 3
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24 Which of the following statements relating to the preparation of a flexible budget for the new battery are true?
The following scenario relates to questions 26–30.
Helot Co develops and sells computer games. It is well known for launching innovative and interactive role-playing games
and its new releases are always eagerly anticipated by the gaming community. Customers value the technical excellence
of the games and the durability of the product and packaging.
Helot Co has previously used a traditional absorption costing system and full cost plus pricing to cost and price its products.
It has recently recruited a new finance director who believes the company would benefit from using target costing. He is
keen to try this method on a new game concept called Spartan, which has been recently approved.
The finance director has also begun collecting cost data for the new game and has projected the following:
Production costs per unit
Direct material
Direct labour
Direct machining
Set-up
Inspection and testing
Total non-production costs
Design (salaries and technology)
Marketing consultants
Distribution
$
3·00
2·50
5·05
0·45
4·30
$’000
2,500
1,700
1,400
26 Which of the following statements would the finance director have used to explain to Helot Co’s board what the
benefits were of adopting a target costing approach so early in the game’s life-cycle?
(1) Costs will be split into material, system, and delivery and disposal categories for improved cost reduction analysis
(2) Customer requirements for quality, cost and timescales are more likely to be included in decisions on product
development
(3) Its key concept is based on how to turn material into sales as quickly as possible in order to maximise net cash
(4) The company will focus on designing out costs prior to production, rather than cost control during live production
A
B
C
D
1, 2 and 4
2, 3 and 4
1 and 3
2 and 4 only
27 What is the forecast cost gap for the new game?
A
B
C
D
$2·05
$0·00
$13·70
$29·25
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After discussion with the board, the finance director undertook some market research to find out customers’ opinions on
the new game concept and to assess potential new games offered by competitors. The results were used to establish a
target selling price of $45 for Spartan and an estimated total sales volume of 350,000 units. Helot Co wants to achieve
a target profit margin of 35%.
28 The board of Helot Co has asked the finance director to explain what activities can be undertaken to close a cost gap
on its computer games.
(1)
(2)
(3)
(4)
Buy cheaper, lower grade plastic for the game discs and cases
Using standard components wherever possible in production
Employ more trainee game designers on lower salaries
Use the company’s own online gaming websites for marketing
A
B
C
D
1, 2 and 3
1, 3 and 4
2 and 4
2 and 3 only
29 The direct labour cost per unit has been based on an expected learning rate of 90% but now the finance director has
realised that a 95% learning rate should be applied.
Which of the following statements is true?
A
B
C
D
The
The
The
The
target
target
target
target
cost
cost
cost
cost
will
will
will
will
decrease and the cost gap will increase
increase and the cost gap will decrease
remain the same and the cost gap will increase
remain the same and the cost gap will decrease
30 Helot Co is thinking about expanding its business and introducing a new computer repair service for customers. The
board has asked if target costing could be applied to this service.
Which of the following statements regarding services and the use of target costing within the service sector is
true?
A
B
C
D
The purchase of a service transfers ownership to the customer
Labour resource usage is high in services relative to material requirements
A standard service cannot be produced and so target costing cannot be used
Service characteristics include uniformity, perishability and intangibility
(30 marks)
13
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Which of the following would be appropriate ways for Helot Co to close a cost gap?
Section C – Both questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
All Jungle Co customers have the option to sign up for the company’s ‘Gold’ membership service, which provides next
day delivery on all orders, in return for an annual service fee of $40. In September 20X5, Jungle Co formed its own
logistics company and took over the delivery of all of its parcels, instead of using the services of international delivery
companies.
Over the last year, there has been worldwide growth in the electronic goods market of 20%. Average growth rates and
gross profit margins for cloud computing service providers have been 50% and 80% respectively in the last year.
Jungle Co’s prices have remained stable year on year for all sectors of its business, with price competitiveness being
crucial to its continuing success as the leading global electronic retailer.
The following information is available for Jungle Co for the last two financial years:
Notes
Revenue
Cost of sales
Gross profit
Administration expenses
Distribution expenses
Other operating expenses
1
2
3
Net profit
31 August 20X6
$’000
94,660
(54,531)
–––––––
40,129
(2,760)
(13,420)
(140)
–––––––
23,809
–––––––
–––––––
31 August 20X5
$’000
82,320
(51,708)
–––––––
30,612
(1,720)
(13,180)
(110)
–––––––
15,602
–––––––
–––––––
31 August 20X6
$’000
38,990
41,870
12,400
1,400
–––––––
94,660
–––––––
–––––––
31 August 20X5
$’000
41,160
32,640
6,520
2,000
–––––––
82,320
–––––––
–––––––
31 August 20X6
$’000
23,394
26,797
4,240
100
–––––––
54,531
–––––––
–––––––
31 August 20X5
$’000
28,812
21,216
1,580
100
–––––––
51,708
–––––––
–––––––
Notes
1.
Breakdown of revenue
Household goods
Electronic goods
Cloud computing services
Gold membership fees
2.
Breakdown of cost of sales
Household goods
Electronic goods
Cloud computing services
Gold membership fees
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31 Jungle Co is a very successful multinational retail company. It has been selling a large range of household and
electronic goods for some years. One year ago, it began using new suppliers from the country of Slabak, where labour
is very cheap, for many of its household goods. In 20X4, Jungle Co also became a major provider of ‘cloud computing’
services, investing heavily in cloud technology. These services provide customers with a way of storing and accessing
data and programs over the internet rather than on their computers’ hard drives.
3.
Administration expenses
Included in these costs are the costs of running the customer service department ($860,000 in 20X5;
$1,900,000 in 20X6.) This department deals with customer complaints.
4.
Non-financial data
31 August 20X6
74%
1,400,000
7,100,000
14·00%
Percentage of orders delivered on time
No. of customer complaints
No. of customers
Percentage of late ‘Gold’ member deliveries
31 August 20X5
92%
320,000
6,500,000
2·00%
Discuss the financial and non-financial performance of Jungle Co for the year ending 31 August 20X6.
Note: There are 7 marks available for calculations and 13 marks available for discussion.
(20 marks)
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Required:
32 CSC Co is a health food company producing and selling three types of high-energy products: cakes, shakes and
cookies, to gyms and health food shops. Shakes are the newest of the three products and were first launched three
months ago. Each of the three products has two special ingredients, sourced from a remote part the world. The first
of these, Singa, is a super-energising rare type of caffeine. The second, Betta, is derived from an unusual plant
believed to have miraculous health benefits.
Per unit
Selling price
Costs:
Ingredients: Singa ($1·20 per gram)
Ingredients: Betta ($1·50 per gram)
Other ingredients
Labour ($10 per hour)
Variable overheads
Contribution
Cakes
$
5·40
Cookies
$
4·90
Shakes
$
6·00
0·30
0·75
0·25
1·00
0·50
–––––
2·60
–––––
0·60
0·30
0·45
1·20
0·60
–––––
1·75
–––––
1·20
1·50
0·90
0·80
0·40
–––––
1·20
–––––
For each of the three products, the expected demand for the next month is 11,200 cakes, 9,800 cookies and
2,500 shakes.
The total fixed costs for the next month are $3,000.
CSC Co has just found out that the supply of Betta is going to be limited to 12,000 grams next month. Prior to this,
CSC Co had signed a contract with a leading chain of gyms, Encompass Health, to supply it with 5,000 shakes each
month, at a discounted price of $5·80 per shake, starting immediately. The order for the 5,000 shakes is not included
in the expected demand levels above.
Required:
(a) Assuming that CSC Co keeps to its agreement with Encompass Health, calculate the shortage of Betta, the
resulting optimum production plan and the total profit for next month.
(6 marks)
One month later, the supply of Betta is still limited and CSC Co is considering whether it should breach its contract
with Encompass Health so that it can optimise its profits.
Required:
(b) Discuss whether CSC Co should breach the agreement with Encompass Health.
Note: No further calculations are required.
(4 marks)
Several months later, the demand for both cakes and cookies has increased significantly to 20,000 and 15,000 units
per month respectively. However, CSC Co has lost the contract with Encompass Health and, after suffering from further
shortages of supply of Betta, Singa and of its labour force, CSC Co has decided to stop making shakes at all. CSC Co
now needs to use linear programming to work out the optimum production plan for cakes and cookies for the coming
month. The variable ‘x’ is being used to represent cakes and the variable ‘y’ to represent cookies.
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CSC Co’s projected manufacture costs and selling prices for the three products are as follows:
The following constraints have been formulated and a graph representing the new production problem has been
drawn:
Singa: 0·25x + 0·5y ≤ 12,000
Betta: 0·5x + 0·2y ≤ 12,500
Labour: 0·1x + 0·12y ≤ 3,000
x ≤ 20,000
y ≤ 15,000
x, y ≥ 0
Demand for cakes
70,000
tta
Be
Cookies
60,000
50,000
40,000
30,000
20,000
10,000
A
Demand for cookies
C=
B
2·6
x+
0
1·7
5y
0
10,000
C
D
20,000
Lab
o
Singa
ur
30,000
40,000
50,000
60,000
70,000
Cakes
Required:
(c) (i)
Explain what the line labelled ‘C = 2·6x + 1·75y’ on the graph is and what the area represented by the
points 0ABCD means.
(4 marks)
(ii) Explain how the optimum production plan will be found using the line labelled ‘C = 2·6x + 1·75y’ and
identify the optimum point from the graph.
(2 marks)
(iii) Explain what a slack value is and identify, from the graph, where slack will occur as a result of the
optimum production plan.
(4 marks)
Note: No calculations are needed for part (c).
(20 marks)
17
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80,000
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
18
Taha Popatia - ARTT Business School - 02134523175
LR = the learning rate as a decimal
March/June 2017 – Sample Questions
Time allowed: 3 hours 15 minutes
This question 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 is on page 6.
Do NOT open this question paper until instructed by the supervisor.
Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
The Association of
Chartered Certified
Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
2
Taha Popatia - ARTT Business School - 02134523175
This is a blank page.
Section C begins on page 3.
Section C – Both questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
31 The School Uniform Company (SU Co) manufactures school uniforms. One of its largest contracts is with the Girls’
Private School Trust (GPST), which has 35 schools across the country, all with the same school uniform.
The design of the new dresses has meant that a complicated new sewing technique needed to be used. Consequently,
all staff required training before they could begin production. The manager of the sewing department expected each
of the new dresses to take 10 minutes to make as compared to 8 minutes per dress for the old style. SU Co has 24
staff, each of whom works 160 hours per month and is paid a wage of $12 per hour. All staff worked all of their
contracted hours in February on production of the GPST dresses and there was no idle time. No labour rate variance
arose in February.
Activity levels for February were as follows:
Budgeted production and sales (units)
Actual production and sales (units)
30,000
24,000
The production manager at SU Co is responsible for all purchasing and production issues which occur. SU Co uses
standard costing and usually, every time a design change takes place, the standard cost card is updated prior to
production commencing. However, the company accountant responsible for updating the standards has been off sick
for the last two months. Consequently, the standard cost card for the new dress has not yet been updated.
Required:
(a) Calculate the material variances in as much detail as the information allows for the month of February.
(7 marks)
(b) Calculate the labour efficiency variances in as much detail as the information allows for the month of
February.
(5 marks)
(c) Assess the performance of the production manager for the month of February.
(8 marks)
(20 marks)
3
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After a recent review of the uniform at the GPST schools, the school’s spring/summer dress has been re-designed to
incorporate a dropped waistband. Each new dress now requires 2·2 metres of material, which is 10% more material
than the previous style of dress required. However, a new material has also been chosen by the GPST which costs
only $2·85 per metre which is 5% cheaper than the material used on the previous dresses. In February, the total
amount of material used and purchased at this price was 54,560 metres.
32 The People’s Bank is a bank based in the country of Nawkrei. It has a total of 65 branches across the country and
also offers online banking (access to services via computer) and telephone banking (access to customer service agents
over the telephone) to its customers. Recently, The People’s Bank also began offering its customers a range of mobile
banking services, which can be accessed from customers’ smartphones and tablet computers. Its customer-base is
made up of both private individuals and business customers. The range of services it offers includes:
The People’s Bank’s vision is to be ‘the bank that gives back to its customers’ and their purpose is ‘to help the people
and businesses of Nawkrei to live better lives and achieve their ambitions’. In order to achieve this, the bank’s values
are stated as:
(1) Putting customers’ needs first, which involves anticipating and understanding customers’ needs and making
products and services accessible to as many customers as possible. The People’ Bank has recently invested
heavily in IT security to prevent fraud and also invested to make more services accessible to disabled and visually
impaired customers
(2) Making business simple, which involves identifying opportunities to simplify activities and communicating clearly
and openly
(3) Making a difference to the communities they serve, which involves primarily helping the disadvantaged and new
homeowners but also supporting small and medium-sized businesses (SMEs) and acting fairly and responsibly
at all times
Extracts from The People’s Bank’s balanced scorecard are shown below:
Performance measure
20X6
Actual
20X6
Target
Financial perspective
Return on capital employed (ROCE)
Interest income
Net interest margin (margin achieved on interest income)
Amount of new lending to SMEs
11%
$7·5m
2·4%
$135m
12%
$7m
2·5%
$150m
Customer perspective
Number of first-time homebuyers given a mortgage by The People’s Bank
Number of complaints (per 1,000 customers)
Number of talking cashpoints installed for the visually impaired
Number of wheelchair ramps installed in branches
86,000
1·5
120
55
80,000
2
100
50
110
2
100
5
3
430,000
10
400,000
1,300
1,500
1,020,000
1,000,000
1,990
2,000
7,250
7,000
Internal processes
Number of business processes within The People’s Bank re-engineered
and simplified
Number of new services made available through ‘mobile banking’
Incidences of fraud on customers’ accounts or credit cards
(per 1,000 customers)
Total carbon dioxide emissions (tonnes)
Learning and growth
Number of colleagues trained to provide advice to SMEs
Number of hours (paid for by The People’s Bank) used to support
community projects
Number of trainee positions taken up by candidates from Nawkrei’s
most disadvantaged areas
Number of community organisations supported (either through funding
or by volunteers from The People’s Bank)
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Taha Popatia - ARTT Business School - 02134523175
Current accounts
Savings accounts
Credit cards
Business and personal loans
Mortgages (loans for property purchases)
Required:
(a) Explain why the balanced scorecard approach to performance measurement is more useful to measure
performance for The People’s Bank than a traditional approach using solely financial performance measures.
(4 marks)
(b) Using all of the information provided, including The People’s Bank’s vision and values, discuss the
performance of The People’s Bank in 20X6.
Note: Use each of the four headings of the balanced scorecard to structure your discussion.
(16 marks)
5
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(20 marks)
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
6
Taha Popatia - ARTT Business School - 02134523175
LR = the learning rate as a decimal
September/December 2017 – Sample Questions
Time allowed: 3 hours 15 minutes
This question paper is divided into three sections:
Section A – A
LL 15 questions are compulsory and MUST be attempted
Section B – A
LL 15 questions are compulsory and MUST be attempted
Section C – B
OTH questions are compulsory and MUST be attempted
Formulae Sheet is on page 4.
Do NOT open this question paper until instructed by the supervisor.
Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
The Association of
Chartered Certified
Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
Section C – Both questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
31 TR Co is a pharmaceutical company which researches, develops and manufactures a wide range of drugs. One of these
drugs, ‘Parapain’, is a pain relief drug used for the treatment of headaches and until last month TR Co had a patent on
Parapain which prevented other companies from manufacturing it. The patent has now expired and several competitors
have already entered the market with similar versions of Parapain, which are made using the same active ingredients.
Each batch of Parapain is currently made using the following materials:
Material Z:
Material Y:
500 grams at $0·10 per gram
300 grams at $0·50 per gram
Each batch of Parapain requires 20 minutes of machine time to make and the variable running costs for machine time
are $6 per hour. The fixed production overhead cost is expected to be $2 per batch for the period, based on a budgeted
production level of 250,000 batches.
The skilled workers who have been working on Parapain until now are being moved onto the production of TR Co’s
new and unique anti-malaria drug which cost millions of dollars to develop. TR Co has obtained a patent for this
revolutionary drug and it is expected to save millions of lives. No other similar drug exists and, whilst demand levels
are unknown, the launch of the drug is eagerly anticipated all over the world.
Agency staff, who are completely new to the production of Parapain and cost $18 per hour, will be brought in to
produce Parapain for the foreseeable future. Experience has shown there will be a significant learning curve involved
in making Parapain as it is extremely difficult to handle. The first batch of Parapain made using one of the agency
workers took 5 hours to make. However, it is believed that an 80% learning curve exists, in relation to production of
the drug, and this will continue until the first 1,000 batches have been completed. TR Co’s management has said that
any pricing decisions about Parapain should be based on the time it takes to make the 1,000th batch of the drug.
Note: The learning co-efficient, b = –0·321928
Required:
(a) Calculate the optimum (profit-maximising) selling price for Parapain and the resulting annual profit which TR
Co will make from charging this price.
Note: If P = a – bQ, then MR = a – 2bQ
(12 marks)
(b) Discuss and recommend whether market penetration or market skimming would be the most suitable pricing
strategy for TR Co when launching the new anti-malaria drug.
(8 marks)
(20 marks)
2
Taha Popatia - ARTT Business School - 02134523175
TR Co is reviewing its pricing policy in light of the changing market. It has carried out some market research in an
attempt to establish an optimum price for Parapain. The research has established that for every $2 decrease in price,
demand would be expected to increase by 5,000 batches, with maximum demand for Parapain being one million
batches.
32 Sports Co is a large manufacturing company specialising in the manufacture of a wide range of sports clothing and
equipment. The company has two divisions: Clothing (Division C) and Equipment (Division E). Each division operates
with little intervention from Head Office and divisional managers have autonomy to make decisions about long-term
investments.
Sports Co measures the performance of its divisions using return on investment (ROI), calculated using controllable
profit and average divisional net assets. The target ROI for each of the divisions is 18%. If the divisions meet or exceed
this target the divisional managers receive a bonus.
Last year, an investment which was expected to meet the target ROI was rejected by one of the divisional managers
because it would have reduced the division’s overall ROI. Consequently, Sports Co is considering the introduction of a
new performance measure, residual income (RI), in order to discourage this dysfunctional behaviour in the future. Like
ROI, this would be calculated using controllable profit and average divisional net assets.
Sales revenue
Less variable costs
Contribution
Less fixed costs
Net profit
Opening divisional controllable net assets
Closing divisional controllable net assets
Division C
$’000
3,800
(1,400)
––––––
2,400
(945)
––––––
1,455
––––––
Division E
$’000
8,400
(3,030)
––––––
5,370
(1,420)
––––––
3,950
––––––
13,000
9,000
24,000
30,000
Notes:
(1) Included in the fixed costs are depreciation costs of $165,000 and $460,000 for Divisions C and E respectively.
30% of the depreciation costs in each division relates to assets controlled but not owned by Head Office.
Division E invested $2m in plant and machinery at the beginning of the year, which is included in the net assets
figures above, and uses the reducing balance method to depreciate assets. Division C, which uses the straight-line
method, made no significant additions to non-current assets. It is the policy of both divisions to charge a full year’s
depreciation in the year of acquisition.
(2) Head Office recharges all of its costs to the two divisions. These have been included in the fixed costs and amount
to $620,000 for Division C and $700,000 for Division E.
(3) Sports Co has a cost of capital of 12%.
Required:
(a) (i)
(6 marks)
(ii) Discuss the performance of the two divisions for the year, including the main reasons why their ROI
results differ from each other. Explain the impact the difference in ROI could have on the behaviour of the
manager of the worst performing division.
(6 marks)
(b) (i)
Calculate the return on investment (ROI) for each of the two divisions of Sports Co.
Calculate the residual income (RI) for each of the two divisions of Sports Co and briefly comment on the
results of this performance measure.
(4 marks)
(ii) Explain the advantages and disadvantages of using residual income (RI) to measure divisional
performance.
(4 marks)
(20 marks)
3
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The draft operating statement for the year, prepared by the company’s trainee accountant, is shown below:
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
End of Question Paper
4
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Taha Popatia - ARTT Business School - 02134523175
LR = the learning rate as a decimal
March/June 2018 – Sample Questions
F5 ACCA
Time allowed: 3 hours 15 minutes
This question paper is divided into three sections:
Section A – A
LL 15 questions are compulsory and MUST be attempted
Section B – A
LL 15 questions are compulsory and MUST be attempted
Section C – B
OTH questions are compulsory and MUST be attempted
Formulae Sheet is on page 6.
Do NOT open this question paper until instructed by the supervisor.
Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
The Association of
Chartered Certified
Accountants
Taha Popatia - ARTT Business School - 02134523175
Performance
Management
Paper F5
Fundamentals Level – Skills Module
Section C – Both questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
Recently, Division B has upgraded its portable battery so it can also be used to rapidly charge mobile devices and
laptops. The mobile device or laptop must be attached to the battery using a special adaptor which is supplied to the
customer with the battery. Division B currently buys the adaptors from Division A, which also sells them externally to
other companies.
The following data is available for both divisions:
Division B
Selling price for each portable battery, including adaptor
Costs per battery:
Adaptor from Division A
Other materials from external suppliers
Labour costs
Annual fixed overheads
Annual production and sales of portable batteries (units)
Maximum annual market demand for portable batteries (units)
Division A
Selling price per adaptor to Division B
Selling price per adaptor to external customers
Costs per adaptor:
Materials
Labour costs
Annual fixed overheads
Current annual production capacity and sales of adaptors – both internal and
external sales (units)
Maximum annual external demand for adaptors (units)
$180
$13
$45
$35
$5,460,000
150,000
180,000
$13
$15
$3
$4
$2,200,000
350,000
200,000
In addition to the materials and labour costs above, Division A incurs a variable cost of $1 per adaptor for all adaptors
it sells externally.
Currently, Head Office’s purchasing policy only allows Division B to purchase the adaptors from Division A but Division A
has refused to sell Division B any more than the current level of adaptors it supplies to it.
The manager of Division B is unhappy. He has a special industry contact who he could buy the adaptors from at exactly
the same price charged by Division A if he were given the autonomy to purchase from outside the group.
After discussions with both of the divisional managers and to ensure that the managers are not demotivated, Head
Office has now agreed to change the purchasing policy to allow Division B to buy externally, provided that it optimises
the profits of the group as a whole.
Required:
(a) Under the current transfer pricing system, prepare a profit statement showing the profit for each of the
divisions and for The Portable Garage Co (PGC) as a whole. Your sales and costs figures should be split into
external sales and inter-divisional transfers, where appropriate.
(9 marks)
(b) Assuming that the new group purchasing policy will ensure the optimisation of group profits, calculate and
discuss the number of adaptors which Division B should buy from Division A and the number of adaptors
which Division A should sell to external customers.
Note: There are 3 marks available for calculations and 3 marks for discussion.
2
(6 marks)
Taha Popatia - ARTT Business School - 02134523175
31 The Portable Garage Co (PGC) is a company specialising in the manufacture and sale of a range of products for
motorists. It is split into two divisions: the battery division (Division B) and the adaptor division (Division A). Division
B sells one product – portable battery chargers for motorists which can be attached to a car’s own battery and used to
start up the engine when the car’s own battery fails. Division A sells adaptors which are used by customers to charge
mobile devices and laptops by attaching them to the car’s internal power source.
Assume now that no external supplier exists for the adaptors which Division B uses.
(c) Calculate and discuss what the minimum transfer price per unit would be for any additional adaptors supplied
above the current level by Division A to Division B so that Division B can meet its maximum annual demand
for the new portable batteries.
Note: There are 2 marks available for calculations and 3 marks available for discussion.
(20 marks)
3
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(5 marks)
32 The Alka Hotel is situated in a major city close to many theatres and restaurants.
The Alka Hotel has 25 double bedrooms and it charges guests $180 per room per night, regardless of single or double
occupancy. The hotel’s variable cost is $60 per occupied room per night.
The Alka Hotel is open for 365 days a year and has a 70% budgeted occupancy rate. Fixed costs are budgeted at
$600,000 a year and accrue evenly throughout the year.
During the first quarter (Q1) of the year the room occupancy rates are significantly below the levels expected at other
times of the year with the Alka Hotel expecting to sell 900 occupied room nights during Q1. Options to improve
profitability are being considered, including closing the hotel for the duration of Q1 or adopting one of two possible
projects as follows:
For Q1 only the Alka Hotel management would offer guests a ‘theatre package’. Couples who pay for two consecutive
nights at a special rate of $67·50 per room night will also receive a pair of theatre tickets for a payment of $100. The
theatre tickets are very good value and are the result of long negotiation between the Alka Hotel management and the
local theatre. The theatre tickets cost the Alka Hotel $95 a pair. The Alka Hotel’s fixed costs specific to this project
(marketing and administration) are budgeted at $20,000.
The hotel’s management believes that the ‘theatre package’ will have no effect on their usual Q1 customers, who are
all business travellers and who have no interest in theatre tickets, but will still require their usual rooms.
Project 2 – Restaurant
There is scope to extend the Alka Hotel and create enough space to operate a restaurant for the benefit of its guests.
The annual costs, revenues and volumes for the combined restaurant and hotel are illustrated in the following graph:
$’000
2,000
Breakeven chart for combined restaurant and hotel operations
Sales
1,560
1,500
Total cost
1,000
Fixed cost
800
500
Margin of safety
2,000
4,000
5,161
6,000
Number of occupied rooms
Note: The graph does not include the effect of the ‘theatre package’ offer.
4
7,300 8,000
Taha Popatia - ARTT Business School - 02134523175
Project 1 – Theatre package
Required:
(a) Using the current annual budgeted figures, and ignoring the two proposed projects, calculate the breakeven
number of occupied room nights and the margin of safety as a percentage.
(4 marks)
(b) Ignoring the two proposed projects, calculate the budgeted profit or loss for Q1 and explain whether the hotel
should close for the duration of Q1.
(4 marks)
(c) Calculate the breakeven point in sales value of Project 1 and explain whether the hotel should adopt the
project.
(4 marks)
(d) Using the graph, quantify and comment upon the financial effect of Project 2 on the Alka Hotel.
(8 marks)
(20 marks)
5
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Note: There are up to four marks available for calculations.
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
b=
change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
End of Question Paper
6
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LR = the learning rate as a decimal