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ACCA LSBF F5 Revision Kit
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F5 Performance Management
PERFORMANCE MANAGEMENT British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by InterActive World Wide Limited Westgate House, 8-9 Holborn London EC1N 2LL
ISBN 978-1-907217-20-3 First Edition 2009 Printed in Romania © 2009 InterActive World Wide Limited.
London School of Business & Finance and the LSBF logo are trademarks or registered trademarks of London School of Business & Finance (UK) Limited in the UK and in other countries and are used under license. All used brand names or typeface names are trademarks or registered trademarks of their respective holders. We are grateful to the Association of Chartered Certified Accountants (ACCA), the Chartered Institute of Management Accountants (CIMA) and the Institute of Chartered Accountants of England and Wales (ICAEW) for their permission to reproduce past examination questions. All the solutions to these questions have been prepared by InterActive World Wide Limited. All our rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of InterActive World Wide.
Foreword Thank you for choosing to study with the London School of Business and Finance (LSBF).
A dynamic, quality-oriented and innovative educational institution, the London School of Business and Finance offers specialised programmes, designed with students and employers in mind. We are always at the frontline driving the latest professional developments and trends. LSBF attracts the highest quality candidates from over 140 countries worldwide. We work in partnership with leading accountancy firms, banks and best-practice organisations – enabling thousands of students to realise their full potential in accountancy, finance and the business world. With an international perspective, LSBF has developed a rich portfolio of professional qualifications and executive education programmes. To complement our face-to-face and cutting-edge online learning products, LSBF is now pleased to offer tailored study materials to support students in their preparation for exams. The exam focused content in this manual will provide you with a comprehensive and up-to-date understanding of the ACCA syllabus. We have an award-winning team of tutors, who are highly experienced in helping students through their professional exams and have received consistently excellent feedback. I hope that you will find this manual helpful and wish you the best of luck in your studies.
ACCA, BA, Founder and CEO PERFORMANCE MANAGEMENT
5 How to use this LSBF Revision Kit
9 About ACCA Paper F5 - Performance Management
55 Feedback and Review Form 131 PERFORMANCE MANAGEMENT
CONTENTS Number Name of Question
29 SLP Limited
22 Bobs Biscuits
23 Veloracer (PM 6/03)
24 BFG (pilot paper, amended)
25 Mermus (FMC 12/04, amended)
26 Ash (FMC 6/06, amended)
27 Woodeezer (FMC 12/02, amended)
28 Linsil (FMC 6/04, amended)
30 Carat (FMC 12/03, amended)
20 CBP Limited
31 Simply Soup (Pilot paper)
32 Bath Toys Limited
33 Stags R Us
34 Y and Z
35 Pasta Pronto
36 Preston Financial Services (Pilot paper, amended)
37 Building Blocks
21 Great Vines of Fire
19 SRP Limited
8 CS Group
1 Linacre Co December 2005
2 Triple Pilot Paper
3 F plc
4 ZZ Ltd
5 SY Ltd
6 Chloe’s Cakes
7 Bababing Ltd
9 Walters Water
18 J Limited
10 Simon Ltd
11 BMBD Company
12 Benson Company
13 Tims Rackets
14 AVX plc
15 Envico (PM 12/05, amended)
16 Beatrice Buggy
17 Berties Burger Company
38 FP Photocopiers PERFORMANCE MANAGEMENT
F5 How to use this LSBF
Revision Kit PERFORMANCE MANAGEMENT
HOW TO USE THIS LSBF REVISION KIT
How to use this LSBF Revision Kit
So, you have a nice big revision kit packed with questions, but do not know where to start? And when to start? And how to start?!
Where and When to Start
This rather depends on where you have reached in your studies: If you have not yet started your class, online program, or self-study plan, then it is a bit early to be attempting • exam-standard questions! However, it would be useful to pick out some questions at random and read them through. Get a feel for the requirements, as these tend to be examined over and over again – and this will help you when you start your studying. Your brain will link what you read and hear with the exam question requirements you have already seen, and this should help to strengthen your overall understanding of how the knowledge gets tested.
If you have started your class, online program, or self-study plan, you will probably have a tutor, or study planner, which directs you to practise specific questions, based on what you have covered so far. Try to keep up with the suggested questions – as the real exam approaches there are likely to be plenty • more exam questions that you are told to attempt, so do not fall behind! The more questions you have practised, the more likely you are to be successful. As the real exam approaches, do not be afraid to repeat questions you have practised before. Any good • question is worth doing at least twice! Don’t fall into the trap of starting with Q1, then Q2, Q3 etc. as this tends to result in lots of practice of the • first syllabus area and virtually no practice of anything else! Pick questions at random from throughout the book, and keep a record of what you have attempted so far, by ticking the Question List after every attempt.
How to Start – Attempting Questions
There are in fact several ways to attempt a question. Some are better methods than others, but it all rather depends on how close you are to the exams and how your brain works. THE FULL QUESTION ATTEMPT
To start, read ONLY the requirements: • o Break each requirement down as much as you can – for example, the following requirement has three separate things to do to earn marks: “Discuss the ethical issues in the scenario and how the directors and auditors should manage them.” Your answer would need to discuss issues, explain what the directors should do, and then explain what the auditors should do – three separate tasks, each of them carrying part of the total mark. o Note how many marks are available. It varies by exam, but the most common allocation is one mark for each point you adequately make in your answer. So, if you are not sure, a 9-mark requirement probably wants you to cover 9 separate points. o Re-read the requirements to make sure you fully understand them – it is these that drive the format of the answer. Before you read the story/scenario (if there is one), PLAN what might go into your answer. It might be the • case that once you read the story and have a better idea of what is happening, some of your early thoughts can be discarded. However, if you were asked to produce a tax computation, or an audit plan, or a set of financial statements, you should have a good idea of the structure and content of your answer without reading the detailed story. PERFORMANCE MANAGEMENT If there is a story/scenario supporting the requirements, then clearly you should read it. But: • o Simply copying parts of the story into your answer is unlikely to earn marks – unless you ADD something yourself. Typically this means using the story to illustrate the technical point that the requirement has forced you to discuss. o Try to put any relevant information straight into your answer plan – it is easy to highlight dozens of interesting things, then have to read the whole story again to remember why you highlighted them!
When writing your full answer, use the requirement to structure your answer and provide any headings you • may need. Keep your presentation neat. Most exam questions requiring written answers do NOT want a long • discursive essay. Most answers need a series of relatively short paragraphs explaining a series of points briefly, but with enough detail to make it obvious what you are trying to explain. For more guidance on this, look at the Answers in the back of this book. When you have finished your attempt, take a couple of minutes to rest – then review the suggested solution • in the Revision Kit. Make a note of those elements of the answer that you got wrong or missed out. The brain tends to be a logical thing – if you miss a point or make a mistake this time, there is every chance you will make the same mistake again!
THE QUICK QUESTION ATTEMPT Of course, in the real exam you have to provide full answers – so you MUST make plenty of full attempts, as described above.
However, especially with written questions, it is often possible to spend only 10-15 minutes on a question and still get some real benefit. o Simply read the requirements, and plan an answer as described above in “The Full Question Attempt”.
Now go and look at the answer, especially the headings and layout. If your plan is similarly structured, then you were clearly on the right path and understood the tasks set by the examiner. o Now go back and read the scenario. You know your plan is ok, so try to put things from the scenario into your planned structure, wherever they seem to be most relevant. Just expand your plan – but do not write out a full answer. This is a useful exercise as you get closer to the real exam, as it allows you to gain confidence in the examiner’s requirements and also see a large number of different questions relatively quickly.
However, for questions with numbers and calculations, only a full attempt is likely to work.
The Last 4 Exam Papers
The most recent exam papers, together with the examiner’s own suggested solutions, can be found, for free, on the ACCA’s website at www.accaglobal.com/students/acca/exams In our Revision Kits, additional questions have been included to ensure that you can practise things similar to recent exam questions. Examiners tend to be very repetitive in style, but clearly they are not going to set exactly the same story and numbers again!
F5 About ACCA Paper F5 –
Performance Management PERFORMANCE MANAGEMENT
ABOUT ACCA PAPER F5 - PERFORMANCE MANAGEMENT
Aim of the paper
To develop knowledge and skills in the application of management accounting techniques to quantitative and qualitative information for planning, decision-making, performance evaluation and control.
Outline of the syllabus 1. Cost accounting techniques.
2. Decision-making techniques including risk and uncertainty.
3. Budgeting techniques and methods.
4. Standard costing systems.
5. Performance appraisal including financial and non-financial measures.
Format of the exam paper
The syllabus is assessed by a three hour paper-based examination. The examination consists of five questions of 20 marks each. All questions are compulsory.
FAQs - How does the new syllabus relate to the papers in the previous syllabus?
The paper is materially based on part of the previous paper 2.4 FMC but with additional material from papers 1.2 and 3.3. It covers the management accounting topics from the first paper but drops financial management topics. To balance against that it now incorporates new topics on performance appraisal and more business maths. PERFORMANCE MANAGEMENT
F5 QuestionsPERFORMANCE MANAGEMENT
1. Linacre Co Linacre Co operates an activity-based costing system and has forecast the following information for next year.
Cost Pool Cost Cost Driver Number of Drivers Production set-ups $105,000 Set-ups 300 Product testing $300,000 Tests 1,500 Component supply and storage $25,000 Component orders 500 Customer orders and delivery $112,500 Customer orders 1,000
General fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are expected to be $900,000 and these overheads are absorbed on a direct labour hour basis. Total direct labour hours for next year are expected to be 300,000 hours.
Linacre Co expects orders for Product ZT3 next year to be 100 orders of 60 units per order and 60 orders of 50 units per order. The company holds no inventories of Product ZT3 and will need to produce the order requirement in production runs of 900 units. One order for components is placed prior to each production run. Four tests are made during each production run to ensure that quality standards are maintained. The following additional cost and profit information relates to product ZT3: Component cost: $1.00 per unit
Direct labour: 10 minutes per unit at $7.80 per hour Profit mark up: 40% of total unit cost Required (a) Calculate the activity-based recovery rates for each cost pool. (4 marks) (b) Calculate the total unit cost and selling price of Product ZT3. (9 marks) (c) Discuss the reasons why activity-based costing may be preferred to traditional absorption costing in the modern manufacturing environment. (12 marks)
(Total = 25 marks)
2. Triple 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: Hours per unit Materials Production
Labour hours Machine hours Cost per unit units $ Product D
1.5 20 750 Product C
1 12 1,250 Product P
3 25 7,000 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.
Required (a) Calculate the cost per unit for each product using traditional methods, absorbing overheads on the basis of machine hours. (3 marks) PERFORMANCE MANAGEMENT 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
35 Costs relating to machinery
20 Costs relating to materials handling
15 Costs relating to inspection
30 Total production overhead 100 The following total activity volumes are associated with each product line for the period as a whole: Number of Number of movements Number of Set ups of materials inspections
75 12 150 Product C 115 21 180 Product P 480 87 670 670 120 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)
(Total = 25 marks)3. F plc
F plc supplies pharmaceutical drugs to drug stores. Although the company makes a satisfactory return, the directors are concerned that some orders are profitable and others are not. The management has decided to are making a profit. Each customer order is charged as follows. Customers are charged the list price of the drugs ordered plus a charge for selling and distribution costs (overheads). A profit margin is also added, but that does not form part of this analysis. Currently F plc uses a simple absorption rate to absorb these overheads. The rate is calculated based on the budgeted annual selling and distribution costs and the budgeted annual total list price of the drugs ordered. An analysis of customers has revealed that many customers place frequent small orders with each order requesting a variety of drugs. The management of F plc has examined more carefully the nature of its selling
and distribution costs, and the following data have been prepared for the budget for next year: Total list price of drugs supplied £8m
Number of customer orders 8,000 Selling and Distribution Costs £000 Cost driver Invoice processing 280 See Note 2 Packing
220 Size of package – see Note 3 Delivery 180 Number of deliveries – see Note 4
Other overheads 200 Number of orders
Total overheads 880
1. Each order will be shipped in one package and will result in one delivery to the customer and one invoice (an order never results in more than one delivery).
2. Each invoice has a different line for each drug ordered. There are 28,000 invoice lines each year. It is estimated that 25% of invoice processing costs are related to the number of invoices, and 75% are related to the number of invoice lines.
3. Packing costs are £32 for a large package, and £25 for a small package.
4. The delivery vehicles are always filled to capacity for each journey. The delivery vehicles can carry either six large packages or 12 small packages (or appropriate combinations of large and small packages). It is estimated that there will be 1,000 delivery journeys each year, and the total delivery mileage that is specific to particular customers is estimated at 350,000 miles each year. £40,000 of delivery costs are related to loading the delivery vehicles, and the remainder of these costs are related to specific delivery distance to customers.
The management has asked for two typical orders to be costed using next year’s budget data, using the current method, and the proposed activity-based costing approach. Details of two typical orders are shown below: Order A Order B
Lines on invoice
8 Package size small large Specific delivery distance 8 miles 40 miles List price of drugs supplied £1,200 £900
Required: (a) Calculate the charge for selling and distribution overheads for Order A and Order B using: (i) the current system; and
(ii) the activity-based costing approach. (10 marks) (b) Write a report to the management of F plc in which you (i) assess the strengths and weaknesses of the proposed activity-based costing approach for F plc; and
(5 marks) the activity-based-costing approach. (5 marks)
(Total = 20 marks)4. ZZ Ltd
ZZ Ltd make and sell cameras. They wish to extend their product range to include digital camcorders. These
camcorders will be easier to use, have a better picture resolution and lots of features not available with previous technologies. The camcorders are produced by assembly workers assembling a variety of components. All production overheads are currently absorbed on an assembly labour hour basis based on normal annual activity levels.
ZZ Ltd are considering a switch to target costing for its new digital camcorder.
Required (a) Explain the difference between standard costs and target costs (3 marks) (b) Explain why a move to target costing will be beneficial to ZZ Ltd (4 marks) PERFORMANCE MANAGEMENT A selling price of £240 has been set by ZZ Ltd to compete with other similar products. The company would like a 40% profit margin. Cost information for the new camcorder is as follows: Component 1 (Circuit board) – cost £50 each and are bought in batches of 5,000. Delivery costs for each batch are £7,500. Component 2 (Wiring) – each camcorder needs 50cm of wiring. ZZ Ltd estimates that of the wire purchased, 10% is lost in the production process. Wire costs £3.00 per metre to buy. Other materials – cost £12.50 per camcorder Assembly labour – it takes 2 hour to assemble each camcorder and it pays £10 per hour to its workers.
The factory operates on a 16 hour day, six days a week, 50 weeks of the year. ZZ Ltd have 100 skilled assembly workers available for this task.
Production overheads – historical data shows the following:
Total Production Overhead Total Assembly Hours
Month 1 £880,000 25,000 Month 2 £790,000 22,000 Month 3 £850,000 24,000
Required (c) Calculate any cost gap that might exist between target cost and expected cost. (13 marks)
(Total = 20 marks)5. SY Ltd
SY Ltd, a manufacturer of computer games, has developed a new game called the MANPAC. This is an interactive 3D game and is the first of its kind to be introduced to the market. SY Ltd is due to launch the MANPAC in time for the peak selling season. Traditionally SY Ltd has priced its games based on standard manufacturing cost plus selling and administration cost plus a profit margin. However, the management team of SY Ltd has recently attended a computer games approaches. The team has returned from the conference and would like more details on the topics they heard about and how they could have been applied to the MANPAC.
Required: As management accountant of SY Ltd, (a) discuss how the following techniques could have been applied to the MANPAC:
life cycle costing, target costing; (9 marks) (b) explain each stage in the life cycle of the MANPAC and the issues that the management team will need to consider at each stage. (11 marks)
(Total = 20 marks)
QUESTIONS6. Chloe’s Cakes
Chloe’s Cakes make three different types of cake, Birthday, Christmas and Wedding. Each cake goes through three processes, mixing, baking and icing. Like many businesses Chloe’s faces tough competition from a mature market place. The cake factory has 20 production lines which cover the three process. The processing capacity varies for each process and the manager has provided the following details:
Processing time per cake in hours Birthday Christmas Wedding Mixing
1.5 The cake factory is open for 12 hours a day for six days per week. The factory closes down for one week in the summer and one week at Christmas. Labour is paid at £7.50 per hour.
Raw materials cost £5.00 for the birthday cake, £10.00 for the Christmas cake and £20.00 for the wedding cake. Other factory costs (excluding labour and raw materials) are £200,000 per year. Selling prices are £20 for the birthday cake, £25.00 for the Christmas cake and £80.00 for the wedding cake. Due to the perishable nature, Chloe’s carries very little inventory.
Required (a) Identify the bottleneck process and explain why this process is described as a bottleneck. (3 marks)
(b) Calculate the throughput accounting ratio (TPAR) for each product (assuming the bottleneck is fully utilised). (8 marks) (c) Explain how Chloe’s could improve their TPAR (4 marks)
(d) Should Chloe’s discontinue to make Christmas cakes? (5 marks) (20 marks)
Bababing Ltd make two products the Baba and the Bing. The factory is open five days a week for 50 weeks of the year. The current selling prices and costs for the two products are: Baba Bing £ per unit £ per unit
50.00 Direct materials
17.50 Direct labour
6.60 Variable overheads
7.50 Fixed overheads
10.42 Profit per unit
7.98 Bababings machines can only work on one product at a time. The two products pass through two departments,
using some skilled and some semi skilled workers. The labour time needed in both departments are: Minutes per unit of product Baba Bing
15 Department 2
12 It is difficult to recruit staff to Bababing and so they can only utilise current staff, who are available for a maximum 1440 minutes in department 1 and 972 minutes in department 2 per day. PERFORMANCE MANAGEMENT Fixed overheads for the year are £250,000 and are absorbed based on labour time available in department 1.
Required: (a) Identify the bottleneck and support your answer with figures. (3 marks) (b) Compare and contrast marginal costing and throughput accounting (3 marks) (c) Calculate the optimal production plan and contribution earned each day using traditional contribution analysis (3 marks) (d) Calculate the optimal production plan and throughput each day using throughput analysis (3 marks) (e) Calculate the throughput accounting ratio for each product (4 marks) (f) Explain backflush accounting and when it is appropriate to use (4 marks)
QUESTIONS8. CS Group (36 mins)
a) Explain what a relevant cost is, using examples (7 marks) The CS group is planning its annual marketing conference for its sales executives and has approached the VBJ Holiday company (VBJ) to obtain a quotation.
VBJ has been trying to win the business of the CS group for some time and is keen to provide a quotation which the CS group will find acceptable in the hope that this will lead to future contracts. The manager of VBJ has produced the following cost estimate for the conference:
Coach running costs 2,000 Driver costs 3,000 Hotel costs 5,000 General overheads 2,000
–––––– Sub total 12,000 Profit (30%) 3,600–––––– Total 15,600
You have considered this cost estimate but you believe that it would be more appropriate to base the quotation on relevant costs. You have therefore obtained the following further information: Coach running costs represent the fuel costs of $1,500 plus an apportionment of the annual fixed costs of operating the coach. No specific fixed costs would be incurred if the coach is used on this contract. If the contract did not go ahead, the coach would not be in use for eight out of the ten days of the conference. For the other two days a contract has already been accepted which contains a significant financial penalty clause. This contract earns a contribution of $250 per day. A replacement coach could be hired for $180 per day. Driver costs represent the salary and related employment costs of one driver for 10 days. If the driver is used on this contract the company will need to replace the driver so that VBJ can complete its existing work. The replacement driver would be hired from a recruitment agency that charges $400 per day for a suitably qualified driver. Hotel costs are the expected costs of hiring the hotel for the conference. General overheads are based upon the overhead absorption rate of VBJ and are set annually when the company prepares its budgets. The only general overhead cost that can be specifically identified with the conference is the time that has been spent in considering the costs of the conference and preparing the quotation. This amounted to $250.
b) Prepare a statement showing the total relevant cost of the contract. Explain clearly the reasons for each of the values in your quotation and for excluding any of the costs (if appropriate). (10 marks) c) Explain how the use of relevant costs as the basis of setting a selling price may be appropriate for short term decisions, but may be inappropriate for long term pricing decisions. (3 marks) PERFORMANCE MANAGEMENT (UK)
9. Walters Water
Walters Water produces, amongst other products, 1 litre bottles of water. The company is considering adding extra ingredients to the bottled water to make two more limited edition products aimed at the youth market. Walters plans to add flavourings and guarana to the bottled water for the first new product “GG” and then multivitamins to the bottled water to make “water plus”, the company’s second new product.
These two added ingredients have been chosen due to market research completed by Walters Water at a cost of £1,000. The budgeted costs and revenues for the next month for the new products are detailed below. The output selected for further processing is 10,000 litres. This represents 20% of the usual production at Walters. This water costs £0.10 per litre to produce. As the company is dealing with water, it must cope with evaporation. The water evaporates 10% during the process prior to further processing. It takes 100 hours of skilled labour to make the GG per month and 220 hours of semi skilled labour to make the water plus per month. The skilled labour is currently employed by the company and paid £12 per hour. If GG is made, it will be necessary for the skilled workers to work 100 hours overtime which would be paid at time and a half or reduce production on another product that earns contribution at £8 per hour. The semi skilled labour is paid at £6.50 per hour. They currently have 300 hours idle time per month. Two supervisors will be required to work on the two new products. The supervisors will spend 25% of their time on the new products and are each currently paid £25,000 pa. Of the water selected for further processing, 60 % will be for the GG. 50ml of guarana will be added per litre of water. Guarana costs £2 per litre to purchase. 10g of vitamins will be dissolved per litre of water to produce the water plus. Vitamins cost £40 per kilo. These items are added once the evaporation has taken place. The overhead absorption rate is absorbed using a litres produced basis of £0.25 per litre produced. The company will also have to increase the factory floor space by 10% increasing the rent from £1,500 per month to £2,055.55 per month. The company policy is to have a 20% profit margin.
a) Prepare on a relevant cost basis, the lowest selling price for each product. Explain the reasons for each of the values in your quotation and for excluding any of the costs (if appropriate). (14 marks) b) Briefly explain 3 other appropriate methods Walters Water could have used to set his selling price
10. Simon Ltd (36 mins)
Simon Ltd is run by Simon Leather who makes leather belts for designers. He uses the finest Argentinean leather and needs highly trained machinists to make the belts up to the quality designers expect. 2 His belts usually sell for £50 per item and use 0.2m of leather and 30 minutes of labour.
Simon Ltd has 5 staff. They work a standard 8 hour day, 5 days a week, 48 weeks of the year. They earn £15 per hour. Leather costs £20 per metre. Simon also has some variable overheads of £6 per unit. Fixed overheads are £28,800.
a) Calculate the number of belts Simon will have to sell to break even. (3 marks) Simon decides to branch out and start to also sell handbags to the same market. The handbags sell for £250 2 each and use 1.5m of leather with 1 hour of labour being required. Variable overheads are £20 per handbag.
There has been a bad case of foot and mouth in Argentina. Simon can only use the leather he has currently 2 being shipped to him for the next month. The leather which is due to arrive imminently measures 100m .
Simon has an order for 50 handbags for London fashion week that he must supply or face a large fine.
b) Calculate the optimal production plan for Simon. (8 marks)
c) What is the maximum Simon would be willing to pay as a fine for not delivering the 50 ordered handbags?
d) Simon Ltd is considering outsourcing the machining to a 3rd party. Outline issues Simon should consider before going ahead. (5 marks)
(20 marks)11. BMBD Company (36 mins)
BMBD are preparing their production plan for the next three months and from historical information have estimated the maximum demand for their products
BD 400 BMBD has just had a customer delay their order and so has some spare capacity for the next three months.
The figures above also include a special contract of 50 batches of the BM and the MB which must be fulfilled. Two of the parts used in the production process, the C and the R are in short supply over the next 3 months. BMBD do not carry stocks of these items. Part C will be limited to 7,000 units and part R to 3,500 units. There are 100 units in each batch. The costs and selling prices per batch as as follows:
BM MB BD £/batch £/batch £/batch
Selling price 400 650 250 Part C (£20 per part)
20 Part R (£10 per part)
20 Part P (£30 per part)
30 Labour (£8 per hour)
8 Factory costs absorbed
50 Required a) Determine the optimal production plan to maximize profit at BMBD company over the next 3 months.
(12 marks) PERFORMANCE MANAGEMENT (UK) BMBD is trying to decide whether to manufacture part P rather than buy it in for the next 3 months. In order to manufacture P the company will need to buy a machine which costs £35,000. It will then cost £15 per unit to manufacture.
b) Advise whether BMBD should manufacture part P in house (your advise should include calculations).
(8 marks) (Total = 20 marks)
12. Benson Company (36 mins)
Benson Company is a dog grooming service. They provide two services, the Scottie and the Labrador. The Scottie is a short service which just involves a wash and comb and the all over Labrador includes a wash, condition, comb, nail clip and blow dry. Both services involve the same resources, just in different quantities.
The cost cards for both services are listed below:
Scottie Labrador £ per service £ per service
24.00 Specialised cleaning materials (£5 per litre)
0.75 Direct labour (£7.50 per hour)
7.50 Variable machine time (£3.00 per hour)
0.75 Fixed overheads (£3.00 per labour hour)
–––––– –––––– Profit
12.00 Benson Company budgets to sell 240 Scotties and 226 Labradors per month. However, Benson Company is facing a shortage of resources over the next month. The maximum amount of specialized cleaning material available is 60 litres, the total amount of labour available is 300 hours and the total machine time available is 150 hours. Crufts will be on in the next month and Benson company has a contract to provide 25 Scotties and 50 Labradors in 2nd week of the month. If Benson Company does not honour this contract it will be fined a hefty amount and be left shame faced in the dog world.
Required: a) Using linear programming, advise Benson of the best mix of services to provide to maximize contribution. (14 marks)
b) Find the shadow price for machine hours (6 marks)
(Total = 20 marks)
13. Tims Raquets (36 mins)
Tims Rackets (TR) manufacture and sell both tennis rackets and badminton rackets. The rackets are both made from the same high performance lightweight alloy which can be difficult to source in sufficient quantity. The alloy is currently restricted to 3,000kgs per quarter and costs £25 per kg. The rackets are made and strung by machines and highly trained employees who are difficult to recruit. These highly skilled workers are available to work 4,000 hours per period and are paid £20 per hour.
TR sells to a large market and has a high demand for their products. During a quarter up to 5,000 tennis rackets and 3,000 badminton rackets can be sold at £75.50 and £70.50 respectively.
QUESTIONS Manufacturing details are as follows
Tennis rackets Badminton rackets
Labour time per racket 0.8hrs 0.5hrs Alloy per racket 500g 600g Machine costs per racket £2.00 £1.50
a) Calculate the contribution earned from each racket. (2 marks)
b) Using linear programming, determine the optimal production plan for a quarter. (12 marks) The staff have offered to work some overtime.
c) Explain the meaning of a shadow price (dual price) and calculate the maximum amount TR should pay the workers for the overtime. (5 marks)14. AVX Plc (36 mins)
AVX plc assembles boards for use by high technology audio video companies. Due to the rapidly advancing technology in this field,AVX plc is constantly being challenged to learn new techniques. AVX plc uses standard costing to control its costs against targets set by senior managers. The standard labour cost per batch of one particular type of circuit board (CB45) is set out below: Direct labour – 50 hours @ £10/hour £500 The following labour efficiency variances arose during the first six months of the assembly of CB45:
Month Number of batches Labour efficiency Assembled and sold variance
1 Nil December 1 170.00 Favourable January 2 452.20 Favourable February 4 1,089.30 Favourable March 8 1,711.50 Favourable April 16 3,423.00 Favourable
An investigation has confirmed that all of the costs were as expected except that there was a learning effect in respect of the direct labour that had not been anticipated when the standard cost was set.
a) i) Calculate the monthly rates of learning that applied during the six months; ii) Identify when the learning period ended and briefly discuss the implications of your findings for AVX plc.
AVX plc initially priced each batch of CB45 circuit boards on the basis of its standard cost of £960 plus a mark up of 25%. Recently the company has noticed that, due to increasing competition, it is having difficulty maintaining its sales volume at this price. PERFORMANCE MANAGEMENT (UK) The finance director has agreed that the long run unit variable cost of the CB45 circuit board is £672.72 per batch. She has suggested that the price charged should be based on an analysis of market demand. She has discovered that at a price of £1,200 the demand is 16 batches per month, for every £20 reduction in selling price there is an increase in demand of 1 batch of CB45 circuit boards, and for every £20 increase in selling price there is a reduction in demand of 1 batch.
Required: b) Calculate the profit maximizing selling price per batch using the date supplied by the Finance Director.
Note: If Price (P) = a-bx then marginal revenue (MR) = a-2bx (8 marks)
(Total = 20 marks)15. Envico (PM 12/05, amended) (36 mins)
Envico Ltd is well established and provides seminars on various aspects of current and recently announced changes in employment legislation. Envico Ltd has decided to enter into a one-year renewable contract with Mieras Business Associates, which owns large premises that are suitable for holding educational seminars in each of eight cities. Envico Ltd has had similar dealings with Mieras Business Associates during recent years.
Mieras Business Associates has offered a choice of four different contracts, each of which relates to seminar rooms of differing sizes. These are known as room types A, B, C and D, which are capable of accommodating 100, 200, 300 and 400 delegates respectively. Envico Ltd will charge an all-inclusive fee of £80 per delegate at every seminar throughout the year. The cost incurred by Envico Ltd varies according to room type, as shown in the following table:
Room type No of attendees Cost per seminar (£)
A 100 6,000
B 200 10,800
C 300 14,400
D 400 16,000
Envico must decide in advance of the forthcoming year which size of conference room to contract for. It is not possible to contract for a different size conference room in different cities, i.e. only one size of room can be the subject of the contract with Mieras Business Associates. Due to the rapid growth in interest regarding environmental issues and corporate social responsibility, and the large amount of forthcoming legislative changes, Envico Ltd has decided to hold one seminar in every week of the year in each city. Sometimes a regional government representative will attend and speak at such seminars. On other occasions a national government representative will attend and speak at such seminars. The rest of the time the speakers at seminars are representatives from within Envico Ltd.
Envico has estimated the following frequency regarding seminars to be held during the forthcoming year:
Category of speaker: %
20 Regional government representative
50 National government representative
30 Market research has indicated that where a national government representative is in attendance, Envico Ltd can be reasonably assured of selling 400 seminar places and where a regional government representative is in attendance 200 seminar places can be sold. Envico Ltd expects to sell only 100 seminar places when there is no attendance by a government representative.
a) Explain the difference between risk and uncertainty and illustrate with brief examples. (4 marks)
b) Advise Envico Ltd on the size of seminar room that should be contracted from Mieras Business Associates, using the criterion of expected value. Your answer should show the expected annual contribution from each decision option. (10 marks)
c) Determine whether your decision in (a) would change if you were to use the Maximin and Minimax regret decision criteria. Your answer should be supported by relevant workings. (6 marks)
(Total = 20 marks)
16. Beatrice Buggy
Beatrice Buggy is a revolutionary new car seat for babies. Not only does the buggy clip onto conventional push chair frames and clip into most types of cars, but it also turns into a mini pull along chair. The pull along chair is designed to help mum when the car seat gets that little bit too heavy and she gets caught short. It uses revolutionary technology and has been patented.
The proprietor of Beatrice Buggy is inexperienced in the business world and has come to you for advise.
a) Advise Beatrice Buggy on the choice of 3 appropriate pricing strategies for their new product. (9 marks) b) Explain the difference between elastic and inelastic demand giving examples to illustrate your answer.
Advise on whether the new car seat is elastic or inelastic. (7 marks)
c) Briefly explain the factors which affect the elasticity of demand. (4 marks)
(Total = 20 marks)
17. Berties Burger Company
Berties Burger (BB) is considering changing some of their mobile burger vans for new models. The new burger van can come in 3 sizes which different burger cooking capacities. The burger capacity for the small is 150, 250 for the medium and 500 for the large. Daily demand for the burgers can be either 220 or 420 burgers. The probability of 220 burgers being demand is 0.6.
Each burger can be sold for £1.50 and the variable cost of production are £0.50. BB is concerned about which size van to order. If demand exceeds the number of burgers the van can cook, customers would have to be turned away. It’s unlikely these customers will return to eat Burgers from BB so it has been decided £15 per day will be charged against the profits, of that day, to allow for lost future sales, regardless of the number of customers denied their burger.
Depreciation charged per day will be £10 for the small van, £20 for the medium and £30 for the large. The business operates in a very competitive market and the managers of BB who were once risk takers have become more cautious with their business decisions. PERFORMANCE MANAGEMENT (UK)
a) Prepare a profits table showing the six possible profit figures per day. (9 marks)
b) Using your profit table from (b) above, discuss which type of burger van SH should buy taking into consideration the possible risk attitude of the managers. (5 marks) c) Describe THREE methods which businesses can use to analyse and assess the risk that exists in its decision making (excluding maximax, maximin and expected values). (6 marks)
18. J Limited (36 mins)
J Limited has recently been taken over by a much larger company. For many years the budgets have been set by adding an inflation adjustment to the previous year’s budget. The new owners of J are insisting on a “zero- base” approach when the next budget is set, as they believe many of the indirect costs in J are much higher than in other companies under their control.
a) Explain the main features of incremental budgeting and outline the problems that can occur when using it.
(5 marks) b) Explain the main features of zero-based budgeting and outline the problems that can occur when using it. (5 marks)
c) Explain how the use of zero-based budgeting can motivate employees. (4 marks)
d) Explain THREE behavioural consequences that may result after the introduction of participative budgeting
(6 marks) (Total = 20 marks)
19. SRP Limited (36 mins)
SRP Limited is a highly successful manufacturing company. However, SRP Limited have been adversely affected by the recession and needs to keep a tight control on costs. They are reviewing the way they prepare their accounts. They currently prepare accounts for a fixed period and are considering a switch to rolling budgets.
a) Discuss the advantages and disadvantages of rolling budgets (6 marks)
b) Explain, giving examples, how budgets can be used for feedback and feed-forward control. (6 marks) c) Discuss how a limitation of materials available will affect the way SRP Limited compile the budgets.
SRP Ltd can only purchase 200kg of material A. They use 2kgs of this material to produce each unit of product Z. The company currently carries stock of 100kg of material A and needs to carry a closing stock of 80% of the opening stock. SRP Ltd also already has an opening stock of 50 units of product Z which will increase 20% for closing stock.
d) Find the sales level of product Z for the next period. (4 marks)
(Total = 20 marks)
20. CBP Limited (36 mins)
4 800 1,750
3 920 1,830
2 650 1,425
1 780 1,520
Month Production Total Cost Units £
Grape Vines of Fire make wine. The company needs to understand their costs better and so have taken data to analyse from the last few months.
21. Grape Vines of Fire Company
(Total = 20 marks)
c) Briefly explain THREE reasons why budgetary planning and control may be inappropriate in a rapidly changing business environment. (6 marks)
a) Prepare a materials purchase budget for quarter 1. (9 marks)
4 12,000 The company also has £200,000 pa of fixed admin costs.
CBP produces one type of product. The budgeted sales price and production costs are given below:
15 The fixed production overhead of £750,000 is absorbed based on annual output. It has been decided that inventory is too high and must be decreased. Finished goods: 6,000 units are held and the closing inventories for quarters 1, 2 and 3 will be 50%, 30% and 25% of the following quarters sales Raw materials: 4,000kg are currently held and it has been decided that the closing inventories for quarters 1 and 2 will be 30 % and 25% of the following quarters production requirements. The budgeted sales are:
8 Fixed production overheads
10 Variable production costs
50 Material C (2kg @£5 per kg)
PERFORMANCE MANAGEMENT (UK)
a) Derive a formula for the total cost model for 1 month using the high low method (5 marks)
b) Identify why the high low method is not always appropriate for finding the total costs. (3 marks)
c) Using regression analysis find the regression equation for the above data. (9 marks)
d) Using the regression equation, calculate cost if production is 850,000 bottles. (3 marks)
(Total = 20 marks)22. Bobs Biscuits
The management accountant of Bobs Biscuits has found the trend for digestive biscuit sales against time to be: Y = 200,000 + 160,000X
Where X is the quarter (X increases by 1 for each new quarter) and Y is sales of digestives The seasonal variations are:Q1 Q2 Q3 Q4
Average seasonal variation -10% +15% +10% -15%
a) Forecast sales for quarters 15 to 18, assuming these seasonal variations continue. (5 marks) The management accountant has been trying to establish the seasonal variation for cookies. He has collated the following data:
Spring Summer Autumn Winter
12 +20 Year 2 -12 -15 +14 +22 Year 3 -20 -21 +13
b) Calculate the average seasonal variation for each season and explain what is meant by seasonal variation
c) Explain the term cyclical variations and illustrate with an example. (3 marks)
d) Time series analysis extrapolates past performance into the future. Discuss the drawbacks of extrapolation for Bobs Biscuits. (8 marks)
(Total = 20 marks) PERFORMANCE MANAGEMENT (UK)
23. Veloracer (PM 6/03)
Velo Racers has designed a radically new concept in racing bikes with the intention of selling them to professional racing teams. The estimated cost and selling price of the first bike to be manufactured and assembled is as follows:
Materials 1,000 Assembly Labour (50 hours at £10 per hour) 1 500 Fixed Overheads (200% of Assembly labour) 1,000 Profit (20% of total cost) 1, 500 Selling Price 3,000
Velo Racers plans to sell all bikes at total cost plus 20% and the material cost per bike will remain constant irrespective of the number sold. Velo Racers’ management expects the assembly time to gradually improve with experience and has estimated an 80% learning curve. A racing team has approached the company and asked for the following quotations:
1. If we were to purchase the first bike assembled, and immediately put in an order for the second, what would be the price of the second bike?
2. If we waited until you had sold two bikes to another team, and then ordered the third and fourth bikes to be assembled, what would be the average price of the third and fourth bikes?
3. If we decided to immediately equip our entire team with the new bike, what would be the price per bike if we placed an order for the first eight to be assembled?
a) Explain Learning Curve Theory and in particular the concept of cumulative average time. (4 marks)
b) Provide detailed price quotations for each of the three enquiries outlined above. (6 marks)
c) Identify the major areas within management accounting where learning curve theory is likely to have consequences and suggest potential limitations of this theory. (10 marks)
(Total = 20 marks)
24. BFG (Pilot paper, amended) (36 mins)
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.
QUESTIONS 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. (9 marks)
b) Calculate what length of time the 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. (6 marks)
(Total = 20 marks) PERFORMANCE MANAGEMENT (UK)
25. Mermus (FMC 12/04, amended) (36 mins) Mermus is comparing budget and actual data for the last three months.
Budget Actual $ $ $ $
Sales 950,000 922,500
Cost of sales Raw materials 133,000 130,500 Direct labour 152,000 153,000 Variable production overheads 100,700 96,300 Fixed production overheads 125,400 115,300
438,900 427,400 The budget was prepared on the basis of 95,000 units produced and sold, but actual production and sales for the three-month period were 90,000 units.
Mermus uses standard costing and absorbs fixed production overheads on a machine hour basis. A total of 28,500 standard machine hours were budgeted. A total of 27,200 machine hours were actually used in the three-month period.
a) Prepare a revised budget at the new level of activity using a flexible budgeting approach. (4 marks)
b) Calculate the following: i) Raw material total cost variance; ii) Direct labour total cost variance; iii) Fixed overhead efficiency variance; iv) Fixed overhead capacity variance; v) Fixed overhead expenditure variance. (10 marks) c) Suggest possible explanations for the following variances. i) Raw materials total cost variance; ii) Fixed overhead efficiency variance; iii) Fixed overhead expenditure variance. (6 marks)
(Total = 20 marks)
26. Ash (FMC 6/06, amended) (36 mins)
Ash recorded the following actual results for Product RS8 for the last month: Product RS8 2,100 units produced and sold for $14.50 per unit Direct material M3 1,050 kg costing $1,680 Direct material M7 1,470 kg costing $2,793 Direct labour 525 hours costing $3,675 Variable production overhead $1,260 Fixed production overhead $4,725
QUESTIONS PERFORMANCE MANAGEMENT (UK) Standard selling price and cost data for one unit of Product RS8 is as follows.
Selling price $15.00 Direct material M3 0.6 kg at $1.55 per kg Direct material M7 0.68 kg at $1.75 per kg Direct labour 14 minutes at $7.20 per direct labour hour Variable production overhead $2.10 per direct labour hour Fixed production overhead $9.00 per direct labour hour At the start of the last month, 497 standard labour hours were budgeted for production of Product RS8. No inventories of raw materials are held. All production of Product RS8 is sold immediately to a single customer under a just-in-time agreement.
a) Prepare an operating statement that reconciles budgeted profit with actual profit for Product RS8 for the last month. You should calculate variances in as much detail as allowed by the information provided.
b) Discuss how the operating statement you have produced can assist managers in: i) Controlling variable costs ii) Controlling fixed production overhead costs. (4 marks)
(Total = 20 marks)27. Woodeezer (FMC 12/02, amended) (36 mins)
Woodeezer makes quality wooden benches for both indoor and outdoor use. Results have been disappointing in recent years and a new managing director, Peter Beech, was appointed to raise production volumes. After an initial assessment Peter Beech considered that budgets had been set at levels which made it easy for employees to achieve. He argued that employees would be better motivated by setting budgets which challenged them more in terms of higher expected output. Other than changing the overall budgeted output, Mr Beech has not yet altered any part of the standard cost card. Thus, the budgeted output and sales for November 20X2 was 4,000 benches and the standard cost card below was calculated on this basis:
Wood 25 kg at $3.20 per kg
80.00 Labour 4 hours at $8 per hour
32.00 Variable overheads 4 hours at $4 per hour
16.00 Fixed overhead 4 hours at $16 per hour
Selling price 220.00
–––––– Standard profit
–––––– Overheads are absorbed on the basis of labour hours and the company uses an absorption costing system. There were no inventories at the beginning of November 20X2. Inventories are valued at standard cost.
QUESTIONS Actual results for November 20X2 were as follows:
Wood 80,000 kg at $3.50 280,000 Labour 16,000 hours at $7 112,000 Variable overhead
60,000 Fixed overhead
–––––– Total production cost (3,600 benches) 648,000 Closing inventory (400 benches at $192) 76,800–––––– Cost of sales
571,200 Sales (3,200 benches)
–––––– Actual profit
–––––– The average monthly production and sales for some years prior to November 20X2 had been 3,400 units and budgets had previously been set at this level. Very few operating variances had historically been generated by the standard costs used. Mr Beech has made some significant changes to the operations of the company. However, the other directors are now concerned that Mr Beech has been too ambitious in raising production targets. Mr Beech had also changed suppliers of raw materials to improve quality, increased selling prices, begun to introduce less skilled labour, and significantly reduced fixed overheads. The finance director suggested that an absorption costing system is misleading and that a marginal costing system should be considered at some stage in the future to guide decision-making.
a) Prepare an operating statement for November 20X2. This should show all operating variances and should reconcile budgeted and actual profit for the month for Woodeezer Co. (14 marks) b) In so far as the information permits, examine the impact of the operational changes made by Mr Beech on the profitability of the company. In your answer, consider each of the following. i) Motivation and budget setting; and ii) Possible causes of variances. (6 marks)
(Total = 20 marks)28. Linsil (FMC 6/04, amended) (36 mins)
Linsil has produced the following operating statement reconciling budgeted and actual gross profit for the last three months, based on actual sales of 122,000 units of its single product:
Operating statement $ $ $
Budgeted gross profit 800,000
Budgeted fixed production overhead 352,000
–––––––– Budgeted contribution
1,152,000 Sales volume contribution variance 19,200 Sales price variance
–––––––– (41,800)–––––––– Actual sales less standard variable cost of sales 1,110,200 PERFORMANCE MANAGEMENT (UK)
Planning variances Favourable Adverse
Material 18,099 Labour
Operational variances Material
16,635 Labour 117,998
–––––––– Actual contribution
943,304 Budgeted fixed production overhead (352,000) Fixed production overhead expenditure variance 27,000
–––––––– Actual fixed production overhead
–––––––– Actual gross profit
–––––––– The standard direct costs and selling price applied during the three-month period and the actual direct costs and selling price for the period were as follows:
Selling price ($/unit)
31.00 Direct material usage (kg/unit)
2.80 Direct material price ($/kg)
2.46 Direct labour efficiency (hrs/unit)
1.30 Direct labour rate ($/hr)
12.60 After the end of the three-month period and prior to the preparation of the above operating statement, it was decided to revise the standard costs retrospectively to take account of the following.
1. A 3% increase in the direct material price per kilogram;
2. A labour rate increase of 4%;
3. The standard for labour efficiency had anticipated buying a new machine leading to a 10% decrease in labour hours; instead of buying a new machine, existing machines had been improved, giving an expected 5% saving in material usage.
a) Calculate the revised standard costs. (4 marks)
b) Using the information provided demonstrate how the planning and operational variances in the operating statement have been calculated. (8 marks) c) Explain the significance of separating variances into planning and operational elements and the problems which could arise. (8 marks)
(Total = 20 marks)
QUESTIONS29. SLP Limited (36 mins)
SLP Limited has recently appointed a new managing director. She has received the variance report for September 20X0, which is shown below.
Month 9 variance report Output and sales for month 9 Budget 1,500 units.
Actual 1,800 units.
£ £ £
Budgeted contribution 289,500
Budgeted fixed costs 50,000
–––––––– Budgeted profit
239,500 Volume variance
–––––––– Expected profit on actual sales
297,400 Sales price variance
Production variances Favourable Adverse
Materials price 5,792 Materials usage
320 Labour rate
7,250 Labour efficiency 17,500 Variable overhead expenditure 3,625 Variable overhead efficiency 8,750 Fixed overhead
–––––––– –––––––– 32,042 15,195 16,847–––––––– Actual profit
–––––––– Background information (not seen by the managing director)
SLP makes one type of product. The standard unit cost and price is as follows:
Selling price 300
Direct materials (4kg @ £8)
32 Direct labour (5hrs @ £10)
50 Variable overheads (5hrs @ £5) 25 (107)
–––– –––– Contribution
193 The company has budgeted fixed overheads of £50,000pm and a budgeted sales and production level of 1,500 units per month.
SLP has just completed month 9. They produced and sold 1,800 units. The direct materials purchased and used were 7,240kgs for £52,128. The actual direct labour hours worked were 7,250. PERFORMANCE MANAGEMENT (UK)
a) Prepare a report for the managing director of SLP Limited that explains and interprets the month 9 variance report. The managing director has recently joined the company and has very little financial experience. (11 marks)
The managing director is concerned about the labour rate variance and its cause. She ahs discovered a shortage of the required skilled labourers has caused the market rate to rise to £12 per hour.
b) In view of this additional information, calculate for direct labour i) The total variance ii) The planning variance iii) The two operational variances and show how they reconcile. (9 marks)
(Total = 20 marks)30. Carat (FMC 12/03, amended) (36 mins)
Carat, a premium food manufacturer, is reviewing operations for a three-month period of 2003. The company operates a standard marginal costing system and manufactures one product, ZP, for which the following standard revenue and cost data per unit of product is available: Selling price $12.00 Direct material A 2.5 kg at $1.70 per kg Direct material B 1.5 kg at $1.20 per kg Direct labou 0.45 hrs at $6.00 per hour Fixed production overheads for the three-month period were expected to be $62,500.
Actual data for the three-month period was as follows: Sales and production 48,000 units of ZP were produced and sold for $580,800 Direct material A 121,951 kg were used at a cost of $200,000 Direct material B 67,200 kg were used at a cost of $84,000 Direct labour Employees worked for 18,900 hours, but 19,200 hours were paid at a cost of $117,12 Fixed production overheads $64,000 Budgeted sales for the three-month period were 50,000 units of Product ZP.
Required: a) Calculate the following variances.
i) Sales volume contribution and sales price variances; ii) Price, mix and yield variances; iii) Labour rate, labour efficiency and idle time variances. (8 marks)
b) Prepare an operating statement that reconciles budgeted gross profit to actual gross profit with each variance clearly shown. (5 marks)
QUESTIONS c) Critically discuss the types of standard used in standard costing and their effect on employee motivation.
(7 marks) (Total = 20 marks)31. Simply Soup (Pilot paper) (36 mins)
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 F = Favourable A = Adverse
Month 1 Month 2 Month 3
Material Price Variance $300 (F) $900 (A) $2,200 (A) Material Mix Variance $1,800 (F) $2,253 (F) $2,800 (F) Material Yield Variance $2,126 (F) $5,844 (F) $9,752 (F) Total Variance $4,226 (F) $7,197 (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
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. (5 marks) b) The board has asked that the variances be calculated for Month 4. In Month 4 the production department data is as follows: PERFORMANCE MANAGEMENT (UK)
Actual results for Month 4
Liquidised vegetables: Bought 82,000 litres costing $69,700 Melted butter: Bought 4,900 litres costing $21,070 Stock: Bought 122,000 litres costing $58,560 Actual production was 112,000 litres of soup
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)
(Total = 20 marks)32. Bath Toys Limited (36 mins)
Bath Toys Limited manufacture and sell good quality bath toys. 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. The managing director has become concerned about the number of budget reviews over the last few months. He commented at a recent board meeting that “it seems pointless having a budget anymore as every time there is a problem the budgets are revised, leaving me looking at favourable operational variances. Profit levels have also fallen, even with all these favourable operational variances”. The managing director is on the war path as two more budget revisions have been requested. They are as follows:
The labour force in use earlier this year were producing poor quality work. The departmental manager complained that his staff were below par and not up to the job. The board therefore changed the recruitment policy for this department. They are now only allowed to recruit graduates with at least a 2:1 from good universities. So far, this has pushed up costs but has also increased productivity substantially. The department manager has requested a budget revision to cover the extra costs involved following the change of policy.
The usual local material supplier went into liquidation two months ago. Bath Toys’ buyer managed to source an emergency supply from another supplier who are not local. The buyer accepted the increased price per unit and extra delivery charges without negotiation. The buyer feels she had choice but to accept the expense as the production manager was pushing her to find any solution possible. A new local supplier has been found who is cheaper and will be used from now onwards. The purchasing manager is now seeking a budget revision for the two months where the higher prices had to be paid.
a) Discuss both sides of the argument for whether each budget revision should be made. Make a recommendationas to whether it should be allowed. (8 marks)
QUESTIONS The market for Bath Toys has been shrinking as showering children, rather than bathing them, becomes more popular. Bath Toys has produced the following information relating to bath toy sales for the year to date:
Sales volume 200,000 units Sales price $17.00 per unit Standard contribution $7.00 per unit The market for bath toys was estimated in the budget to be 2m units. The actual market shrank to 1.7m units for the period under review.
Actual results for the same period Sales volume 176,000 units Sales price $16.40 per unit
b) Calculate the total sales price and total sales volume variance. (4 marks)
c) Analyse the total sales volume variance into components for market size and market share. (4 marks)
d) Comment on the sales performance of the business. (4 marks)
(Total = 20 marks)33. Stags R Us (36 mins)
Stags R Us are a company that specialize in organising stag parties for grooms to be. The stag parties are either a set package or are highly tailored to the groups needs. The company operates in three divisions, UK destinations, European destinations and central services. The UK destinations and European destination departments are run as profit centres whereas the central services department is a cost centre. The costs of the central services department, which are pre-dominantly fixed, include those incurred by the design, administration and finance departments. The central service costs are apportioned to the other departments based on the number of excursions undertaken by the other two departments. The basic budgeting and reporting system of Stags R Us provides the following information:
The budgeted details for last year were:
European UK Destinations Destinations
Number of excursions 4,000 2,000
Average price per excursion 10,000 7,000 Average direct costs per excursion 5,500 3,000 Central services recharge per excursion 2,500 2,500 Average profit per excursion 2,000 1,500
Number of excursions 2,600 2,500
Average price per excursion 13,000 6,100 Average direct costs per excursion 8,000 2,700 Central services recharge per excursion 2,500 2,500 Average profit per excursion 2,500 900 The actual costs for the central services department were £17.5 million.
a) Calculate the budgeted and actual profits for each of the profit centres and for the whole company for the year. (4 marks) b) Calculate the sales price variances and the sales mix profit and sales quantity profit variances. (8 marks)
c) Discuss the performance of the company for the year and suggest any potential changes to the budgeting and reporting system that would improve performance evaluation within the company. (8 marks)
(Total = 20 marks)
PERFORMANCE MANAGEMENT (UK)
34. Y and Z (36 mins)
Y and Z are two divisions of a large company that operate in similar markets. The divisions are treated as investment centres and every month they each prepare an operating statement to be submitted to the parent company. Operating statements for these two divisions for October are shown below:
Operating Statements for October Y Z £000 £000
Sales revenue 900 555
Less variable costs 345 312
–––– –––– Contribution
555 243 Less controllable fixed costs (includes deprn on divisional assets)
–––– –––– Controllable income
460 201 Less apportioned central costs 338 180
–––– –––– Net income before tax
–––– –––– Total divisional net assets £9.76m £1.26m
The company currently has a target return on capital of 12% per annum. However, the company believes its cost of capital is likely to rise and is considering increasing the target return on capital. At present the performance of each division and the divisional management are assessed primarily on the basis of Return on Investment (ROI).
a) Calculate the annualised Return on Investment (ROI) for divisions Y and Z, and discuss the relative performance of the two divisions using the ROI data and other information given above. (9 marks) b) Calculate the annualised Residual Income (RI) for divisions Y and Z, and explain the implications of this information for the evaluation of the divisions’ performance. (7 marks) c) Briefly discuss the strengths and weaknesses of ROI and RI as methods of assessing the performance of divisions. (4 marks)
(Total = 20 marks)
35. Pasta Pronto (36 mins)
Pasta Pronto (PP) is a pasta manufacturere with a number of different divisions. Two of PP’s divisions are Ravioli and Tortellini. Some of their details are listed below:
Ravioli Tortellini £ £
Net profit for the year ended 30 September 20X9 500,000 120,000
–––––––– –––––––– NBV of non current assets at 1 October 20X8 520,000 460,000 Additions to non current assets on 2 October 20X8 180,000 Depreciation for year ended 30 September 20X9 (75,000) (80,000) –––––––– –––––––– NBV of non current assets at 30 September 20X9 625,000 380,000 Net current assets
1,375,000 620,000 Total net assets at 30 September 2009 2,000,000 1,000,000
–––––––– –––––––– PERFORMANCE MANAGEMENT (UK) The required rate of return of shareholders is 18%.
A new investment of new piping equipment is available to both divisions at the start of year X9/10.The cost of the new equipment will be £100,000 and produce annual net profits of £20,000 for the foreseeable future. All other income and expenditures are expected to continue at the X8/X9 level. The depreciation policy is to charge no depreciation in year of acquisition.
a) Describe how the balanced scorecard is used as a performance measure and explain if it is relevant to assess the performance of Ravioli and Tortellini. (6 marks) b) For both Ravioli and Tortellini, calculate the return on investment and residual income for the year ended
30 September 20X9 and comment briefly on their performance. (6 marks)
c) Advise whether Ravioli or Tortellini should take the investment opportunity, supporting your advise with calculations. (8 marks)36. Preston Financial Services (Pilot paper, amended) (36 mins)
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.
Appendix 1: Financial information Current year Previous year
Turnover ($’000) 945 900
Net profit ($’000) 187 180
Average cash balances ($’000)
20 Average debtor/trade receivables days (industry average 30 days) 18 days 22 days Inflation rate (%)
Appendix 2: Balanced Scorecard (extract) Internal Business Processes Current year Previous year
Error rates in jobs done 16% 10%
Average job completion time 7 weeks 10 weeks
Customer Knowledge Current year Previous year
Number of customers 1220 1500
Average fee levels ($) 775 600
Market Share 14% 20%
Learning and Growth Current year Previous year
Percentage of revenue from non-core work 4% 5% Industry average of the proportion of revenue from non-core work in accounting practices
30% 25% Employee retention rate. 60% 80%
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
a) Using the information in appendix 1 only, comment on the financial performance of the business (briefly consider growth, profitability, liquidity and credit management). (5 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.
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. (10 marks)
(Total = 20 marks) PERFORMANCE MANAGEMENT (UK)
37. Building Blocks (36 mins)
Building blocks are a charity that provide a service to young unemployed individuals, helping them back to work. The charity helps them to identify their educational/work experience needs and to help with emotional issues. It also helps young people who wish to change career. Building Blocks is run with a mixture of employees and volunteers. As there are a number of charities in this section, there is competition for any funding available and so it is important that Building Blocks runs to a professional standard.
a) Using Fitzgerald and Moon’s dimensions of performance, suggest how Building Blocks can assess their performance, using examples. (12 marks) b) Explain how charities and not for profit organizations usually assess how well they are performing and illustrate with examples for Building Blocks. (6 marks) c) Give two reasons why it is harder to complete a standard cost for services, rather than for a tangible product. (2 marks)
(Total = 20 marks)
38. FP Photocopiers (36 mins)
FP sells and repairs photocopiers. The company has operated for many years with two departments, the sales department and the service department, but the departments had no autonomy. The company is now thinking of restructuring so that the two departments will become profit centres. The sales department This department sells new photocopiers. The department sells 2,000 copiers per year. Included in the selling price is £60 for a one year guarantee. All customers pay this fee. This means that during the first year of ownership If the photocopier needs to be repaired then the repair costs are not charged to the customer. On average 500 photocopiers per year need to be repaired under the guarantee. The repair work is carried out by the service department who, under the proposed changes, would charge the sales department for doing the repairs. It is estimated that on average the repairs will take 3 hours each and that the charge by the service department will be £136,500 for the 500 repairs. The service department This department has two sources of work: the work needed to satisfy the guarantees for the sales department and repair work for external customers. Customers are charged at full cost plus 40%. The details of the budget for the next year for the service department revealed standard costs of: Parts at cost Labour £15 per hour Variable overheads £10 per labour house Fixed overheads £22 pre labour hour The calculation of these standards is based on the estimated maximum market demand and includes the expected 500 repairs for the sales department. The average cost of the parts needed for a repair is £54. This means that the charge to the sales department for the repair work, including the 40% mark up, will be £136,500. Proposed change It has now been suggested that FP should be structured so that the two departments become profit centres and that the managers of the departments are given autonomy. The individual salaries of the managers would be linked to the profits of their respective departments.
QUESTIONS Budgets have been produced for each department on the assumption that the service department will repair 500 photocopiers for the sales department and that the transfer price for this work will be calculated in the same way as the price charged to external customers. However the manager of the sales department has now stated that he intends to have the repairs done by another company, RS, because they have offered to carry out the work for a fixed fee of £180 per repair and this is less than the price that the sales department would charge.
a) Calculate the individual profits of the sales department and the service department, and of FP as a whole from the guarantee scheme if: i) The repairs are carried out by the service department and are charged at full cost plus 40% ii) The repairs are carried out by the service department and are charged at marginal cost iii) The repairs are carried out by RS
(8 marks) b) i) Explain, with reasons, why a “full cost plus” transfer pricing model may not be appropriate for FP. (3 marks)
ii) Comment on other issues that the managers of FP should consider if they decide to allow RS to carry out the repairs. (4 marks) c) Briefly explain the advantages and disadvantages of structuring the departments as profit centres.
(5 marks) (Total = 20 marks) PERFORMANCE MANAGEMENT (UK)
F5 Answers PERFORMANCE MANAGEMENT
ANSWERS1. Linacre Co (a)
Cost Pool Cost Cost Driver Number of Drivers Recovery Rate
Production set-ups $105,000 Set-ups 300 350 per set up Product testing $300,000 Tests 1,500 200 per test Component supply and storage $25,000 Component orders 500 50 per order Customer orders and delivery $112,500 Customer orders 1,000 112.50 per order
(b) Total Unit Cost and Selling Price of Product ZT3 Cost Working $/unit
1.00 Direct Labour
1.30 General overheads
3.33 Total Unit Cost
6.13 Mark up 2.45 (40%) Selling Price
(1) 10 minutes per unit at $7.80 per hour = 7.80/60mins x 10 mins = $1.30 per unit (2) $900,000/300,000 = $3 per direct labour hour
As each unit takes 10 minutes, $3 x 10/60 = $0.50 (3) Overheads
Number of units being produced 100 orders x 60 units = 6,000 units 60 orders x 50 units = 3,000 units Total = 9,000 units
Number of set ups for ZT3 9,000 units/900 units per prod. run = 10 prod. Runs (so 10 set ups) Cost 10 x $350 = $3,500
= $0.388 per unit ($3,500/9,000 units) Product test.
Number of tests 4 tests per run × 10 runs = 40 tests.
At $200/test = $8,000 annual cost.
= $0.888/unit ($8,000/9,000units) Component supply.
Number of component supplies 1 order per run × 10 runs = 10 orders.
At $50/order = $500 annual cost.
= $0.056/unit ($500/9,000units) Customer supply.
160 orders × $112.50/order = $18,000 annual cost.
($18,000/9,000units) Total overhead costs from cost pools.
This is $(0.388 + 0.888 + 0.056 + 2) = $3.33/unit. (to 2 d.p) PERFORMANCE MANAGEMENT
(C) Absorption Costing
Absorption Costing is a traditional method which calculates the full cost of an item. This includes a charge for fixed overheads. This overhead is absorbed using an overhead absorption rate which is calculated using just one driver such as number of units, number of labour hours used or number of machine hours used.
This was suitable in the past as companies made just one or few products and overheads were modest.
The modern business environment
The modern business environment tends to be rather more complex. Overheads usually account for a higher proportion of costs. This is due to various reasons including: 1) shorter production runs which are therefore more frequent; 2) automation and computerisation meaning the direct labour costs are lower but there are more salaried staff controlling the automation and computers; 3) just in time management has been introduced which has increased quality control and improved production planning and therefore reduced material and production costs.
ABC In ABC the overheads are not judged to be driven by just one activity as in absorption costing.
Overheads are grouped into cost pools and then the driver of each cost pool found. This means that the overheads are broken down and absorbed on the most appropriate basis.
Absorption Costing Versus ABC
There are a number of reasons why ABC may be preferred in the modern business environment to absorption costing. 1) As ABC identifies many cost drivers rather than absorption costing’s one, there will be a fairer allocation of overheads. 2) In a modern business environment most businesses have a greater number of products in the marketplace. ABC will allow the business to more reliably identify the profitable products which it can concentrate on. 3) ABC identifies each cost pools cost driver.This means the business can therefore control these costs more closely and hence stay more competitive in the highly competitive modern environment. the required number of cost driver transactions (i.e.number of product tests) which is then used to find the level of support activity which must be provided for (i.e. the number of testers required). Using ABB (rather than an incremental approach) can help remove any inefficiencies that may have otherwise have been built into the budget.2. Triple (a)Traditional cost per unit
Product D Product C Product P
$ $ $ Material
25 Labour @$6 per hour
6 Direct costs
31 Production overhead @ $28 per machine hour
84 Total production cost per unit
65 49 115
(b)Cost per unit using ABC
Total overhead analysis
Type of overhead Driver % Total overhead Level of Cost/driver $ driver activity
Set-ups Number of set-ups 35 229,075 670 341.90 Machining Machine hours 20 130,900 23,375 (W1)
5.60 Materials handling Material movements 15 98,175 120 818.13 Inspection Number of inspections 30 196,350 1,000 196.35 100 654,000 Total overheads by product
Product D Product C Product P Total Activity Cost Activity Cost Activity Cost Activity Cost
Overhead $ $ $ $ Set-ups 75 25,643 115 39,319 480 164,113 670 229,075 Machining (W1) 1,125 6,300 1,250 7,000 21,000 117,600 23,375 130,900 Material handling 12 9,817 21 17,181 87 71,177 120 98,175 Inspection 150 29,453 180 35,343 670 131,554 1,000 196,350 Total overhead cost 77,213 98,843 484,444 654,500 Units produced 750 1,250 7,000 Costs per unit
69.21 Cost per unit D C P
$ $ $ Direct costs (from (a))
69.21 117.95 100.07 100.21
(1) Total number of machine hours
Product Hours/unit Production units Total hours
D 1½ 750 1,125 C 1 1,250 1,250 P 3 7,000 21,000 Total machine hours 23,375
(c) ABC compared to traditional methods summary Product D Product C Product P
Production units 750 1,250 7,000 Conventional overhead cost $42 $28 $84 ABC overhead cost $95 $79 $69
ABC and traditional methods give a different result for the cost of one unit of D, C and P. As the table above shows, the cost per unit is higher using ABC for products D and C but lower for product P. The main reason this happens is because the overheads have been absorbed on a different basis. With traditional methods all overheads are absorbed on the same basis which is usually a volume driven basis. Triple has used machine hours. It therefore allocates a large proportion of overheads to products which use lots of machine hours and a lower proportion to products which use less machine hours. PERFORMANCE MANAGEMENT This is illustrated in Triple as Product P uses 21,000 hours of machine hours and therefore has a high overhead cost compared Products D and C who uses 1,125 and 1,250 machine hours respectively and therefore have a lower overhead cost. Using ABC however, allows costs to be absorbed on a fairer basis as each cost pool is examined and a driver for that cost (which is not necessarily volume driven) is found. In the case of Triple it is discovered that only $130,900 of overheads are driven by machine hours and so the other $523,100 of overheads are due to other factors which are then absorbed based on activity. This results in a fairer cost per unit of each product.
(d)Effect on Pricing
Using ABC changes the cost of each product. Products D and C appear much more expensive, whereas P appears cheaper to produce. If Triple use a cost plus approach to pricing then the selling prices of each product must be adjusted accordingly.
Following this process will ignore market forces which should be considered at all times. If products D and C increase in price there may not be any demand for the product. The elasticity of the product should be considered. As they are gold watches, considered to be luxury goods, they are likely to have an elastic level of demand and therefore it is likely sales will fall if prices increase. Product P, again a gold watch, will fall in price following a cost plus approach. This should lead to an increase in sales.
The total revenue and total costs should be considered before making a decision on this matter. This is to see whether a drop in price will increase or decease total revenue due to the extra sales. Another consideration is that of the brand. Increasing/decreasing the price of these items may have an effect on the it. It may make the brand more or less desirable and again effect sales.
Effect on profit
If it is the market that sets the price of the watches, and not the company, it is not the selling price that will be affected but the level of profitability for each product.
Products D and C will appear less profitable under ABC and product P more profitable. This may have an effect on anyone (ie salesman) who are appraised on levels of profit. They wi