2011 SUMMER EXAMINATION PERIOD

Module Code: PMC Module Name: Performance Measurement & Control Programme: MSc Finance
Exam Date: Summer 2011

Exam Duration: 3 hours writing time

No. of Pages (including cover sheet): 6

ALLOWABLE MATERIALS
Open Book Examination Non-programmable calculator permitted Statistical Tables are provided with this examination

INSTRUCTIONS TO CANDIDATES
1. SECTION A: Compulsory question. SECTION B: Answer TWO out of THREE questions. 2. Marks for each question are given in brackets. 3. This exam is worth 50% of the final marks for this module. You are required to achieve a minimum of 40% in this examination to pass the module. 4. All answers must be written in the answer booklet provided.

This paper MUST NOT BE REMOVED from the examination venue. Your mobile telephone must be switched off and in your bag throughout the exam.

SECTION A: Compulsory Question QUESTION ONE (a) Allwinner Plc is a company which manufactures a range of childrens sports
products, including footballs. These football products require bladders, leather, packaging materials, and labour as direct inputs to the production of the product. Allwinner Plc budget for the month of March 2011 was as follows: Budget for March, 2011
Sales: (6,000 units @ 48 each) Variable costs: Bladders (6,000 units @ 3.00 each) Leather (200 ten-hide bales @ 456) Packing materials etc. Direct labour (5,000 hours @ 6.00 ph) Total variable costs Fixed costs: Administrative expenses Salaries Total fixed costs Budgeted Net Profit 6,000 200 5,000 3.00 456.00 6.00 18.000 91,200 7,800 30,000 (147,000) 25,434 49,566 (75,000) 66,000 6,000 48.00

288,000

Due to an unexpected machine breakdown during March, Alphasport was only able to manufacture 60% of the budgeted production time (5,000 hours) and was unable to sanction any overtime, although the direct labour force was paid in full for the original budgeted hours. Actual costs and output during March were recorded as follows: Actual for March, 2011 Sales (4000 units at 54 each) Variable costs: Bladders (4000 units at 4.20 each) Leather (100 ten hide bales at 800 each) Sundry and packaging materials Direct labor (5000 hours at 6.50 per hour) Total Variable costs Fixed Costs 4000 54.00 216,000

4000 4.20 16,800 100 800.00 80,000 5,200 5000 6.50 32,500 134,500

26,000 Administrative expenses Salaries Total Fixed costs Actual Net Profit Required: (a) Prepare a statement reconciling the budgeted profit with the actual profit and state the variances in the way you consider would be most helpful to management. (18 marks) (b) Comment briefly on any apparent (i.e. plausible) inter-relationships between variances. (12 marks) (c) Consider the following statement: There are more comprehensive models of management control and performance measurement than variance analysis available now such as the balanced score card that tries to incorporate other methods of observing good management practice. With reference to the above statement, compare and contrast variance analysis and balanced scorecard approaches as management tools for cost control and performance evaluation. (20 marks) Total 50 marks 49,000 75,000 6,500

SECTION B There are three questions in this section you are to select and answer ONLY TWO from this section. QUESTION TWO
A company based in Sheffield makes microwave ovens for supplying to retailers in the UK. Two models called Mayor (M) and Corriento (C) are produced at the factory. A traditional costing system using direct labor hours has been applied to date, but this year the management has decided to implement an activity based costing system to replace the former traditional costing system. The following cost data are available and are given below. Note that the overheads expenses have not been broken down into selling, administrative and general overheads.

Traditional costing Product Annual production volume (units) Selling price per unit Direct labor and material cost per unit Annual direct labor hours M 8,000 350.00 170.00 20 000 C 24,000 140.00 60.00 60 000

Total annual overhead is 2,480,000

Activity Based Costing Data

Activity Engineering and Maintenance Setups Machine related set up Packaging and Shipping Total overhead

Budgeted Cost 155,000 350,000 1,800,000 175,000 2,480,000

Cost Driver Engineering hours Number of setups Number of machine hours Number of shipments

All cost driver volumes are based on estimates for one year.

Cost driver Engineering hours Number of Setups Machine hours Number of shipments

M 6,000 300 80,000 7 000

C 8 000 50 80 000 9 000

Required: (a) Calculate the unit cost for the two models, M and C, based on the data available for the traditional costing system. (6 marks) (b) Calculate the unit costs for the M and C models based on the data available for the activity based costing system. (10 marks) (c) Using the data available measure and discuss the most significant differences between the traditional costing system and the activity based costing system in cost allocations for products M and C. (9 marks) Total 25 marks

QUESTION THREE A company which makes sophisticated financial calculators has designed a new casing for its product which requires a different finish to the previous casing because the material type is a recently developed synthetic material and much stronger and more scratch-resistant than the previous plastic material used for the product casing. It is the first time the workforce will have to work with this new synthetic material. The design department selected a team of experienced workers to manufacture a trial batch of 10 calculators using the new material. After due consideration, management has decided to assume an 80% learning curve for production of the product, which is given below: X ( batches of 100 units) 1 2 3 4 5 6 7 Y(%) 100 80 70.2 64.0 59.6 56.2 53.4 X (continued) 8 9 10 12 14 20 40 Y(%) (continued) 51.2 49.3 47.7 44.9 42.8 38.1 30.5

Also, a task analysis of the processes used to produce this first batch of calculators indicated the following direct inputs and average costs per calculator: Direct material 300 Direct labor 200 Each direct labor hour costs 90 Required:

(a) Estimate how many direct labor hours will be required to produce the fourth batch of calculators. (5 marks) (b) What is the prime cost per calculator for the fourth batch? (2 marks) (c) Assume after completing and selling the first 4 batches, the company receives an order from a wholesaler for a batch of 100 calculators. How many direct labor hours will be required to produce this batch of calculators?

(4 marks) (d) If the company uses a cost plus margin approach to price its products, what is the price per calculator for the batch in part (c) if the company, in addition to material and labor costs also incurs variable overheads which are 75% of direct labor cost. (4 marks) (e) Critically assess some of the typical purposes for which learning curve estimations may be used by the management accounting department. (10 marks)

Total marks 25

QUESTION FOUR
(a) Explain the difference between a push and pull manufacturing system as it related to the Just-In-Time (JIT) inventory system. (9 marks) (b) Suppose a company operates a just-in-time (JIT) inventory system and has a dedicated set of production facilities for component X. The JIT system in place is designed in such a way that no stock of materials or finished goods is held. At start of period 1 the planned information relating to production of component X through the dedicated facilities is as follows: Each unit of X has input materials: 3 units of material A at 18 per unit and 2 units of material B at 9 per unit. Variable cost per unit of component X (excluding materials) is 15 per unit worked on. Fixed costs of the dedicated facilities for the period are 162,000. It is anticipated that 5% of the units X worked on in the process will be defective and will be scrapped. It is estimated that customers will require, free of charge, replacement of faulty units of X at a rate of 2% of the quantity invoiced to them in fulfilment of orders. The company is pursuing a total quality management (TQM) philosophy. As a consequence of this philosophy, all losses will be treated as abnormal in recognition of a zero-defects policy and will be valued at variable cost of production. Actual statistics for period 1 are given below: Period 1 54,000 61,200 () 4,406,400 918,000 1,620,000

Invoiced to customers (units) WIP (units) Total costs: Materials A & B Other Variable cost of production Fixed costs Required:

(i) Prepare an analysis to show that the period 1 actual results were achieved at the planned level in respect of: quantities and losses and unit cost levels for materials and variable costs.

(10 marks) (ii) Use your analysis from (i) above to calculate the value of the planned level of each of the internal and external failure costs for period 1 and comment on your results. (6 marks) Total marks 25

END OF QUESTION PAPER