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ACCA
Paper F5 Performance Management
Revision Mock Examination June 2013 Answer Guide
Health Warning! How to pass Attempt the examination under exam conditions BEFORE looking at these suggested answers. Then constructively compare your answer, identifying the points you made well and identifying those not so well made. If you got basic definitions and rules wrong: rerevise by re-writing them out until you get them correct. Simply read or audit the answers congratulating yourself that you would have answered the questions as per the suggested answers.

How to fail

 Interactive World Wide Ltd, March 2013 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Interactive World Wide Ltd.

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Answer 1 Brunel Ltd

Tutorial help and key points

Throughput accounting and traditional contribution analysis comparison is a very important exam area, examined a few times in the past. In part (a) you should show calculations to get ranking order first, then the number of units to be made on the basis of this ranking, and then a profit calculation from these units. In part (b) you have to do exactly the same as in part (a) but with a throughput model. Ie just replace throughput (sales less variable cost) with throughput (sales less material cost only) and keep other steps the same. In parts (c) and (d) you must calculate TPAR using simple formula. Make sure you calculate separately throughput the return per hour for each product first. Then calculate factory cost (labour + overheads) per hour: remember to use same factory cost for each product. Then briefly explain how TPAR can be improved: this you can answer by carefully looking into TPAR formula.

Marking scheme
(a) Calculation of contribution per unit Calculation of contribution per limiting factor Ranking Production plan 1 mark for each product/ max 2 marks 0.5 mark each/max 1 0.5 mark each/max 1 1 mark each/max 2 (Total max 6 marks) (b) (i) Calculation of throughput per unit Calculation of throughput per limiting factor Ranking Production plan 1 mark for each product/ max 2 marks 0.5 mark each/max 1 0.5 mark each/max 1 1 mark each/max 2 (Total max 6 marks) (ii) (c) Three ways to relieve bottleneck process 2 marks for each valid suggestion/ max 6 (Total 8 marks) TOTAL = 20 marks Throughput Accounting Ratio 2 marks/max 2

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(a) Using the figures from (a) the contribution per product unit (selling price - variable cost) may be calculated as: A = $60 (2 + 28) = $30 B = $70 (40 + 4) = $26 We have: Contribution per unit Bottleneck hours per unit Contribution per bottleneck hour A $30 0.02 $1,500 B $26 0.015 $1,733

Ranking the products on the basis of contribution per bottleneck hour we should produce and sell product B up to its maximum demand and then product A with the remaining capacity. Maximum demand of product B Bottleneck hours required for B Bottleneck hours available for A Output of product A which is possible = = = = 45,000 120% 54,000 0.015 3,075 810 2,265/0.02 = = = = 54,000 units 810 hours 2,265 hours 113,250 units

The maximum net profit may be calculated as: $ Contribution product A Contribution product B Total contribution Less: Fixed overhead cost Net profit (b) (i) Return per bottleneck hour = (selling price - material cost)/bottleneck hours per unit Product A Product B = (60- 2)/0.02 = $2,900 = (70- 40)/0.0l5 = $2,000 113,250 $30 54,000 $26 3,397,500 1,404,000 _________ 4,801,500 1,470,000 _________ 3,331,500 _________

Flopro should sell product A up to its maximum demand and then product B using the remaining capacity. Maximum demand of product A = 120,000 120% = 144,000 units Bottleneck hours required for A = 144,000 0.02 = 2,880 hours Bottleneck hours available for B = 3,075 2,880 = 195 hours Output of product B which is possible = 195/0.015 = 13,000 units

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The maximum net profit may be calculated as: $ Throughput return product A 144,000 ($60 2) Throughput return product B 13,000 ($70 40) Total throughput return Less: Overhead cost Shown as variable in (a) (120,000 $28 + 45,000 $4) Fixed Net profit (ii) 8,352,000 390,000 _________ 8,742,000

(3,540,000) (1,470,000) _________ 3,732,000 _________

Throughput return per bottleneck hour for product B (as calculated above) = (70 40)/0.015 = $2,000 Cost per bottleneck hour = ($3,540,000 + $1,470,000)/3,075 = $1,629.27

Throughput accounting ratio for product B = $2,000/$1,629.27 = 1.2275 (c) The company can try to overcome the problem of scarcity by applying short/long term strategies, as follows; Outsourcing some of its products/operations Train staff to be more efficient Increase the length of the time the machine runs for Divert labour from another area of production Invest in new more efficient machinery.

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Answer 2 Soft Touch

Tutorial help and key points

A very likely exam question on Variance analysis examined almost in every single F5 examination. (a) First of all you have to layout an operating statement, starting from budgeted profit to reconcile that with actual. Then you need to work out all the variances as per details. Make sure you present workings for mix and yield variances as well. Using formulae learnt, calculation of planning and yield variances is very straightforward. In a brief discussion, explain advantages of analysing variances into their planning and operational components with a view to controllability.

(b) (c)

Marking scheme
(a) Operating statement with calculation of budgeted profit Calculation of variances (b) 2 marks for each planning and operational variances Two advantages for each planning and operational 4 marks 4 marks (TOTAL = 20 marks) 2 marks 10 marks

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(a) Operating statement $ Budgeted profit Budgeted fixed overhead cost Budgeted contribution 10,000 litres x $31.10 Sales volume contribution variance Standard contribution on actual sales Sales price variance Cost variances Liquid A price Liquid B price Liquid mix Liquid yield Variable overhead expenditure Variable overhead efficiency Fav Adv 8,062.50 212.50 10,350 22,050 3,100 700.00 ______ 912.50 ________ 43,562.5 42,650.00A __________ 214,800.00 (220,000) __________ (5,200.00) __________ W3 W3 W4 W5 W6 W6 111,000.00 200,000.00 __________ 311,000.00 15,550.00A __________ 295,450.00 38,000.00A __________ 257,450.00

W2 W2

Actual contribution Actual fixed overheads Actual profit/(loss) Workings: W1 Budgeted contribution per litre Selling price Liquid A Liquid B Variable overheads $50.00 ($12.00) ($2.70) ($4.20) ______ ($18.90) _______ $31.10 _______

W7

Contribution

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W2 Sales variances Actual sales litres 9,500 x x Actual selling price $46 PRICE VARIANCE Actual sales litres 9,500 Actual sales litres 9,500 x x x x Standard selling price $50 Standard contribution $31.10 VOLUME VARIANCE Budgeted sales litres x 10,000 x Standard contribution $31.10 $437,000 38,000A

$475,000

$295,450 $15,550A

$311,000

W3 Material price variances Liquid A AQ 10,750 PRICE VARIANCE AQ 10,750 Liquid B AQ 4,250 PRICE VARIANCE AQ 4,250 W4 Mix variance Liquid A AQAM AQSM Difference x Std cost per litre Mix ($) W5 Yield Variance Actual output 10,500 litres Expected output (given actual inputs) 12,000 litres (15,000 litres less 20% loss) ___________ Difference 1,500A litres X Standard cost per output litre x $14.70 ($12.00 + $2.70) Yield ($) $22,050A ___________ Liquid B Total x x x AP $15.75 SP $15.00

$169,312.50 $8,062.50A $161,250

x x x x

AP $5.95 SP $6.00

$25,287.50 $212.50F $25,500

10,750 4,250 15,000 9,600 5,400 15,000 (0.8/1.25 x 15,000) (0.45/1.25 x 15,000) 1,150A 1,150F Nil __________________________________________ $15.00 $6.00 $17,250A $6,900F $10,350A ________________________________________

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W6 Variable overhead variances AH 31,000 AH 31,000 x x x x AR EXPENDITURE SR $1.4 EFFICIENCY SR $1.4 $46,500 $3,100A $43,400 $700F $44,100

SH x 3hrs x 10,500 litres x W7 Actual contribution Revenue Liquid A Liquid B Variable overhead Stock adjustment Contribution (b)

$437,000.00 ($169,312.50) ($25,287.50) ($46,500.00) $18,900.00 (10,500 9,500 litres) x $18.90 $214,800.00 ____________

OPERATIONAL VARIANCES Liquid A AQ x AP 10,750 x $15.75 OPERATIONAL PRICE VARIANCE AQ x RSP 10,750 x $15.50 Liquid B AQ x AP 4,250 x $5.95 OPERATIONAL PRICE VARIANCE AQ x RSP 4,250 x $6.50 PLANNING VARIANCES Liquid A OSQ x 0.8 litres x 10,500 litres x PLANNING PRICE VARIANCE OSQ x 0.8 litres x 10,500 litres x Liquid B OSQ x 0.45 litres x 10,500 litres PLANNING PRICE VARIANCE OSQ x 0.45 litres x 10,500 litres x OSP $15.00 RSP $15.50

$169,312.50 $26,875A $166,625.00

$25,287.50 $2,337.50F $27,625.00

$126,000 $4,200A $130,200

OSP $6.00 RSP $6.50

$28,350 $2,362.50A $30,712.50

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(c) Planning and operating variances help management to evaluate performance in greater detail. Planning variances quantify and focus attention on the accuracy of the original standards. Large planning variances suggest that the planning team are not taking account of potential movements in the business environment, and should therefore undertake more detailed analysis in the future. In calculating a planning variance, a clear indication is obtained of how much of the total variance can be attributed to the original standard being inappropriate. Operational variances will then provide an accurate assessment of how a business is performing, by comparing actual outputs against an up-to-date and appropriate standard. In this way management will see a clear indication of how much of the total variance can be attributed to the day-to-day performance of the workforce, without any distortions creeping in due to out of date original standards. By clearly focussing management attention on the root causes of overall variances, the appropriate control action can be implemented.

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Answer 3 Igloo Ice Lolly

Tutorial help and key points

Decision making under uncertainty comes in exams on a variable basis and is mostly a straightforward question considering the applications of risk criteria. (a) (b) Brief definitions of each criterion along with the attitudes of the decision makers using such criteria. Start you pay off table with decisions on the right hand side and outcomes on the left, now see how many possible decisions followed by the possible outcomes, multiply both into each other, you will get an idea of how many profit calculations are required by the examiner. Copy the payoff table from (b) above and reach to decisions under each criterion mentioned in (a) above. For minimax regret you have to create a table of regrets.

(c)

Marking scheme
(a) 1 mark for Maximax and minimax regret and 2 marks for expected values (b) mark for each correctly calculated profit figure (c) For each risk attitude 2 marks for the calculation and 1 mark for stating which amount the company should choose to produce (with the exception of maximax where only 1 mark for calculation.) (TOTAL = 20 marks)

(a) Maximax stands for maximising the maximum return an investor might expect. An investor that subscribes to the maximax philosophy would generally select the strategy that could give him the best possible return. He will ignore all other possible returns and only focus on the biggest, hence this type of investor is often accused of being an optimist or a risk-taker. Minimax regret focuses on the opportunity risk approach attitude to risk. This approach seeks to compare the return achieved against the best possible outcome. For each outcome the regret of not choosing the best possible action is calculated. The aim of the approach is to minimise the maximum opportunity cost. People who are towards a risk averse attitude use the minimax regret approach. Expected value averages all possible returns in a weighted average calculation. It involves multiplying the possible outcomes by their associated probabilities. Expected values do not reflect the degree of risk but show the average outcome if

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the event were repeated many times. The accuracy of the expected value result will depend on the accuracy of probabilities and therefore accurate market research is very important for expected values. The user of expected values would have a risk neutral attitude. [1 mark for Maximax and minimax regret and 2 marks for expected values] (b) Action Outcome 8,000 3,000 1,000 P 0.2 0.5 0.2 8,000 10,550 1,550 (2,050) 3,000 3,800 3,800 200 1,000 1,100 1,100 1,100 250 87.5 87.5 87.5

250

0.1

(3,400)

(1,150)

(250)

87.5

[ mark for each correctly calculated profit figure] Example workings: Produce 8,000 and Demand 8,000 Sales (8,000 x $2.10) Cost (8,000 x $0.75) Creation Cost (250) Profit/Loss Produce 3,000 and Demand 8,000 Sales (3,000 x $2.10) Cost (3,000 x $0.75) Creation Cost (250) Profit/Loss Produce 8,000 and Demand 3,000 Sales (3,000 x $2.10) Cost (8,000 x $0.75) Creation Cost Unsold Lollies (5,000 x 0.30) Profit/Loss $

16,800 (6,000) 10,550

6,300 (2,250) 3,800

6,300 (6,000) (250) 1,500 1,550

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(c) For each risk attitude 2 marks for the calculation and 1 mark for stating which amount the company should choose to produce (with the exception of maximax where only 1 mark for calculation.) Risk Seeker Attitude A risk seeker attitude would use a maximax approach to determine how many ice lollies to produce and this involves should choosing the highest of all the best possible outcomes. Best Outcome Produce Produce Produce Produce 8,000 3,000 1,000 250 10,550 3,800 1,100 87.50

If the managers of Igloo Ice Lolly had a risk seeker attitude they would choose to produce 8,000 ice lollies as this gives the best possible outcome of $10,550. Risk Neutral Attitude A risk neutral attitude would use the expected values (EV) approach to determine how many ice lollies to produce. EV of produce 8,000 = (10,550 x 0.2) + (3,800 x 0.5) + (-2,050 x 0.2) + (-3,400 x 0.1) = $2,135 EV of produce 3,000 = (3,800 x 0.2) + (3,800 x 0.5) + (200 x 0.2) + (-150 x 0.1) = $2,585 EV of produce 1,000 = (1,100 x 0.2) + (1,100 x 0.5) + (1,100 x 0.2) + (-250 x 0.1) = $940 EV of produce 250 = (87.50 x 0.2) + (87.50 x 0.5) + (87.50 x 0.2) + (87.50 x 0.1) = $87.50 If the managers of Igloo ice lolly had a risk neutral attitude they would choose to produce 3,000 ice lollies as this gives them the highest expected value of $2,585.

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Risk Averse Attitude A risk averse attitude would use a minimax regret approach to determine how many ice lollies to produce. This involves creating an opportunity cost (regret) table. Action Outcome 8,000 3,000 1,000 250 Best outcome 10,550 3,800 1,100 87.5 8,000 0 2,250 3,150 3,488 Maximum Regret Produce Produce Produce Produce 8,000 3,000 1,000 250 3,488 6,750 9,450 10,463 3,000 6,750 0 900 1,238 1,000 9,450 2,700 0 338 250 10,463 3,713 1,013 0

If the managers of Igloo ice lolly have a risk averse attitude then they would choose to produce 8,000 ice lollies as this minimises the maximum regret as the opportunity cost is $3,488.

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Answer 4 Exelcier Co

Tutorial help and key points

A very likely exam question in decision making under uncertainty as it has not been examined yet under revised syllabus. (a) (b) First of all you have to draw up a decision tree, clearly showing up decision point, and all possible courses of actions and outcomes. Then you have to calculate the expected values of each outcome under all courses of actions, using joint probabilities.

Then you will select the highest expected value to go with as recommendation to the management.

Marking scheme
(a) Drawing of decision tree with complete possibilities and proper labelling (b) Calculation of expected values of all possible outcomes 10 marks (TOTAL = 20 marks) 10 marks

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(a)

A
Further Demand 60%

Poor 70%

No More Demand 40%

C
Further Demand 25% Advertise Good 30%

No More Demand 75%

D E

Dont Advertise

Poor 70%

Good 30%

(b) Point Tickets Profit (x) $000 20 (35) 135 75 p px $000 8.4 (9.8) 10.125 16.875 25.6 (14) 27

A B C D

7,000 5,000 13,000 10,000

0.42 0.28 0.075 0.225

EV of Advertise px = E F 5,000 10,000 (20) 90 0.7 0.3

EV of Dont Advertise px = 13 Therefore the company should advertise as it generates the highest expected value.

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Answer 5 Seagull

Tutorial help and key points

The title of the ACCA F5 paper is 'Performance Management', and you can expect to get at least one question explicitly set around performance management on every F5 paper that is set. The key to understanding performance management systems is to understand behavioural aspects of those systems, in other words, how performance management influences the actions of managers and other people within organisations. Parts (a) and (b) of this question are textbook-knowledge testers, and you should have no problem explaining the importance of controllability and authorising budget changes for the F5 exam. Part (c) of the question involves calculation and comment regarding planning and operational variances, and this is also a topic that is likely to come up on a frequent basis in the F5 exam. Make sure you are able to confidently answer questions like this one.

Marking scheme
(a) 2 marks per well-explained point, 4 marks maximum (b) 2 marks per well-explained point, 4 marks maximum (c) (i) (ii) (iii) 2 marks for each, 4 marks maximum 2 marks for each 4 marks maximum 4 marks maximum for (c) (iii) overall (TOTAL = 20 marks)

(a) The controllability principle: This is the performance management principle that individual managers should only be held accountable for events causing costs and revenues over which they have some degree of influence. It is demoralising for a person to be held accountable for events that they cannot control, since it is unfair and pointless to reward or criticise managers for events outside of their control. An important element of performance measurement systems is that they can motivate managers to act in ways that are in alignment with the objectives of the organisation, if rewards are linked to achievement of those objectives.

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An additional point is that the information generated by the organisation in regard to performance measurement should be given to managers that are able to act upon this information, in other words, managers that can take control over performance.

[2 marks per well-explained point, 4 marks maximum] (b) The purpose of a budget in the context of performance management: Budgets are set in advance of a period in order to allow control performance this means to compare actual operational performance against budgeted performance, and calculate variances to budget. It is possible to allow retrospective changes to an original budget, but such changes must be carefully controlled and authorised by senior managers if abuse is to be prevented. It is clear from the CEO's comments that the number and scale of budget revisions in Seagull is preventing Seagull from effectively controlling performance within her organisation.

Budget revisions: The key question to address in allowing or rejecting budget revisions is the controllability of the events that lead to the request for a budget revision by management. Budget revisions should only be allowed in light of events that are fully outside of the control of managers within the organisation, if such events make the original budget unusable for performance management and effective control. If a revision is to be made, care should be taken to ensure that it is fully authorised by senior managers. Budget revisions should be rejected where the cause of the event leading to the request for a budget revision is operational ie partly or fully within the control of managers within the organisation. Although it can sometimes be easier said than done to properly identify the controllability of an event, the onus should be on the manager in question to prove that they could not control the event.

[2 marks per well-explained point, 4 marks maximum]

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(c) (i) Sales variances books 14,000 15,000 _______ 1,000 $5 _______ $5,000 _______ $ 12 13 _______ $1 14,000 _______ $14,000 _______

Sales volume contribution variance: Actual books sold Budgeted books sold Standard contribution per book

A A

[1] [1]

Sales price variance: Actual selling price per book Standard selling price per book Actual books sold

A A

[1] [1]

(ii)

Market size and market share variances books

Market size variance Revised budgeted sales volume ((2.4/3) 15,000 books) Original budgeted books sold Standard contribution per book

12,000 15,000 _______ 3,000 $5 _______ $15,000 _______ books

[1]

A A

[] []

Market share variance: Revised budgeted sales volume ((2.4/3) 15,000 books) Actual books sold Standard contribution per book

12,000 14,000 _______ 2,000 $5 _______ $10,000 _______

F F

[1] [1]

(iii) The sales performance of Seagull during June 2010 Sales price variance: The sales price variance for the month was $14,000A is controllable by Seagull. It was probably caused as a result of an attempt made by Seagull to try to preserve sales volumes in a declining market through cutting the price charged for a book down from $13 to $12 per unit.

[1 mark per point, 2 marks maximum]

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Sales volume variance: Initially it would appear that the attempt to shore up sales volumes by cutting selling prices by one dollar did not work, since the overall sales volume contribution variance for Seagull is $5000A. However, this only tells part of the story. The fall in market size from 3m to 2.4m books is uncontrollable by Seagull, and it is not fair to blame Seagull's managers for this fall. Taking this drop into account would give a revised budgeted sales volume of 12,000 books, down from 15,000 books. The $10,000F market share variance is controllable by Seagull, and shows that they did very well to sell as many books as they did in a quickly declining market.

[1 mark per point, 3 marks maximum] [4 marks maximum for (c) (iii) overall]

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