ACCA Paper F5 Performance Management

Final Mock Examination

Commentary, Marking scheme and Suggested solutions

ACF5PM13(D) EFM Solutions The examination has been prepared for the December 2013 sitting

Commentary
Tutor guidance on improving performance on the exam paper

General
Your script is the only evidence you will provide to convince an ACCA marker that you should pass this paper and therefore progress through your qualification. Even very talented students can fall down at this paper because of poor examination technique. The first question should be the question you feel most comfortable with. Give the marker the impression that you are comfortable with the syllabus as early as possible. Make it clear which question it is you are answering too! Make sure you answer ALL questions even if you have to guess. It is amazing how a stab in the dark can generate the 50th mark the one you need to pass again it shows the marker that you can think about the question (albeit in simple terms).

Q1 Larsson
This is a relatively straightforward question that requires regurgitation and then application of knowledge. The well prepared student should do very well indeed here. If you are not one, then note the gaps in your knowledge, and learn it!

Q2 Francis
This question has all the hallmarks of a standard linear programming model question. Get the easy marks in part (a) and make sure that you manage your time between the various requirements. Also note that part (b) is a standalone requirement and could be tackled first.

Q3 Forssell
A big sprawling question covering more than one syllabus area. Candidates in the real exam often run out of time. Exam technique is important here. Work out the time for each part of the question and then stick to it. Note that there are actually two separate requirements in part (c) and that part (d) is only 5 marks. Stick to the allocated time on part (d) even if you could write for hours on it - you must not over run.

Q4 Bowyer
A pure number crunching question. If you are not sure about a particular number make an assumption and move on. The markers will give follow on marks.

Q5 Big Heath School

The final question is an application question. Make sure that you relate your answers to the scenario set. If you are searching for relevant points to make, you have four sources the scenario, your text book knowledge, your general business knowledge and your personal experiences.

2 ACF5PM13(D) EFM Solutions The examination has been prepared for the December 2013 sitting

Larsson
Marking scheme
Marks (a) Steps in target costing Full cost-plus pricing Discussion of differences Step 2 Step 3 Step 4 Step 6 Any valid technique (not limited to model answer below) 1 mark per point 4 1 3 8 (b) 1.5 1.5 1 1 5 (c) (d) 0.5 Max 4 Max 3 20

Suggested solution
(a) Target costing involves the following stages. First the company needs to determine a product specification of which an adequate sales volume is estimated. Next it should set a selling price at which the organisation will be able to achieve a desired market share. Then it needs to estimate the required profit based on return on sales or return on investment. This can be used to calculate the target cost = target selling price target profit. The next step is to compile an estimated cost of the product based on the anticipated design specification and current cost levels. This is then used to calculate the target cost gap = estimated cost target cost. If the target cost is higher than the estimated cost then production of the product can commence. If, however the target cost is below the estimated cost then the company should make efforts to close the gap. If the gap cannot be closed then production should not start and the product may have to be abandoned. Full cost-plus pricing is a method of determining a sales price by calculating the full cost of a product and then adding a percentage mark-up. The main differences between target costing and full-cost pricing are as follows: Target costing is used to decide whether a product can be produced for a set cost given a selling price and a profit margin, whereas full cost-plus pricing is used to set a selling price given a set cost and a profit margin. With full cost-plus pricing the company has more control over setting a selling price, but with target costing the company will be faced with a set price:demand relationship and cannot control the selling price. Full cost-plus pricing is suitable for businesses that carry out a large amount of contract work or jobbing work, for which individual job or contract prices must be quoted regularly. Target costing is more suitable for products that are likely to be sold in the market for a relatively long time.

ACF5PM13(D) EFM Solutions 3 The examination has been prepared for the December 2013 sitting

(b)

Step 2 (from Steps in part a) Calculate the selling price if Larsson want to sell 100,000 units: P1 = 100 0.5X1 P1 = 100 (0.5 100) P1 = 50 Target selling price = $50 Step 3 Required return on investment = $15.6 million 11% = $1,716,000 Required profit per unit = $1,716,000 / 100,000 = $17.16 per unit Target profit = $17.16 Step 4 Target cost = target selling price target profit Target cost = $50 $17.16 = $32.84 Step 6 Target cost gap = estimated cost target cost Target cost gap = ($33.23 + $1.56) $32.84 = $1.95

(c)

Steps to reduce target cost Larsson could reduce the number of parts in the train set. Alternatively they could use standard components whenever possible. For example, by using the same wheels that they might use for toy cars. Another method could be to change the production process to manufacture the product more efficiently. Larsson may also wish to look into using cheaper materials or employing less expensive unskilled staff for parts of the production process. They may also want to train existing staff to be more efficient if they feel staff are likely to work for them for the long term. This could be done alongside acquiring new more efficient production techniques. If any non-value adding activities can be identified then these could be removed. If possible, Larsson could try to reduce the investment required so as to reduce the required profit and therefore the target cost will also be lower. If the required return of investors can be reduced then this will, in turn, reduce the target cost.

(d)

Possible adverse effects of target costing on Larsson Longer product development times because of the numerous changes to designs and costings. This may be very significant to a children's toy manufacturer, as fashions may change quickly. Employee demotivation as a result of pressure to meet targets. Organisational conflict between different individuals within the organisation striving for different objectives. For example, some designers seeking to design out costs, while others may be more concerned with aesthetics.

4 ACF5PM13(D) EFM Solutions The examination has been prepared for the December 2013 sitting

Francis
Marking scheme
Marks (a) Define variables Objective function Constraints (0.5 each) Graph: Each constraint plotted correctly (0.5 each) Identify optimal point Identify feasible region General layout, title, presentation, etc. Conclusion on optimal production Calculation of maximum contribution Conclusion on maximum contribution (b) 1 mark per valid point NB must relate to scenario Max 6 20 3 1 1 1 1 1 1 14 1 1 3

Suggested solution
(a) Define variables Let p = batches of pasties c = batches of cakes Construct objective function Maximise contribution C = 30p + 60c Subject to: 0.25p + 0.5c 1000 35p + 100c 140,000 0.3p + 0.4c 960 p 500 c 500 p,c 0 (Kitchen time) (Suet) (Market space) (Minimum amount of pasties) (Minimum amount of cakes) (Non negativity constraint)

ACF5PM13(D) EFM Solutions 5 The examination has been prepared for the December 2013 sitting

Plot graph 0.25p + 0.5c = 1,000 35p + 100c = 140,000 0.3p + 0. 4c = 960 p=0 c=0 p=0 c=0 p=0 c=0 C (contribution) = 30p + 60c Let C = 30,000
Cakes (batches) Minimum pasties

c = 2,000 p = 4,000 c = 1,400 p = 4,000 c = 2,400 p = 3,200

p= 0 c= 0

c = 500 p = 1,000

3000

Linear Programme for Francis

2000

Market space

Feasible region = ABCD Optimal point = C

b 1000 Minimum cakes 500 a c d ISO-contribution 1000 2000 3000 4000 Suet Kitchen time Pasties (batches)

Optimal point is where market space and suet constraints intersect: 0.3p + 0.4c = 960 (1) 35p + 100c = 140,000 (2)

6 ACF5PM13(D) EFM Solutions The examination has been prepared for the December 2013 sitting

(1) x 250 Less (2)

75p + 100c = 240,000 35p + 100c = 140,000 40p p = 100,000 = 2,500

Sub in (1) (0.3 x 2,500) +0.4c = 960 0.4c = 210 c = 525 (Check: Substitute into (2), (35 2,500) + (100 525) = 140,000) To maximise contribution Francis should produce 2,500 batches of pasties and 525 batches of cakes. Contribution (C) = (2,500 30 ) + (525 60) = $106,500 The maximum contribution that Francis can earn is $106,500 (b) There are numerous difficulties with applying the linear programming technique in practice for Francis: Francis has assumed that he will be able to sell all of his output and the price he will receive. In practice, given that baked products may deteriorate after a short time, he may be forced to discount towards the end of a market day. The model assumes that Francis is interested in maximising contribution. The technique takes no account of other non-financial objectives. For example, pride in producing a traditional product. The model takes no account of any other products that Francis could produce. There are obviously more than two bakery products! The model assumes certainty in estimates of time taken to produce a batch of output. This may be unrealistic. The variable costs of production are assumed not to change and to be known with certainty. Again, this is unrealistic in practice. The constraints on Francis may be artificial. For example, it might be possible to hire additional commercial kitchen space. In conclusion, the linear programming model provides a theoretical solution, but in practice it would appear to have limited value.

ACF5PM13(D) EFM Solutions 7 The examination has been prepared for the December 2013 sitting

Forssell
Marking scheme
(a) Cumulative time for 8 units Cumulative time for 7 units Calculation of difference between above Each reason explained 1 mark MR = MC Market 1 Market 2 Each condition explained 1 mark Penetration pricing Market Skimming (Up to 2.5 marks) (Up to 2.5 marks) 1 2 2 Max 3 8 (d) 5 20 1.5 1.5 1 Marks

4 (b) (c) Max 3

Suggested solution
(a) Expected time for the eighth unit Calculation for total time for eight units Yx = aXb Y8 = 10 8-0.3219 Y8 = 10 0.5120 = 5.12 hours Therefore eight units take 8 5.12 hours = 40.96 hours Calculation for total time for seven units Yx = aXb Y7 = 10 7-0.3219 Y7 = 10 0.5345 = 5.35 hours Therefore seven units take 7 5.35 hours = 37.45 hours Eighth unit takes 40.96 hours 37.45 hours = 3.51 hours

8 ACF5PM13(D) EFM Solutions The examination has been prepared for the December 2013 sitting

(b)

There will come a time when no further improvements can be made. This is known as the steady state. This may be due to: Any machinery that Forssell uses reaching its capacity. At this point labour begins to wait for machinery. Forssells workforce reaching its physical limit to how much it can produce. The workforce agreeing to work no faster than a certain rate. Regardless of production conditions and potential for improvements, learning rates will not increase without workforce co-operation.

(c)

Profit maximisation occurs when Marginal Revenue (MR) = Marginal Cost (MC) In both markets, MC = $120. Market 1 165 0.3 X1 = 120 45 = 0.3 X1 X1 = 150 P1 = 165 0.15X1 = 165 (0.15 150) = $142.50 Hence the price in Market 1 should be $142.50 per unit and 150 units should be produced. Market 2 600 1.2 X2 = 120 480 = 1.2 X2 X2 = 400 P2 = 600 0.6 X2 = 600 (0.6 400) = $360.00 Hence the price in Market 1 should be $360.00 per unit and 400 units should be produced. Total number of units produced = 550 units. The prices in each market are very different. Price discrimination can only be effective for Forssell if a number of conditions apply: The market demands must be stable, as price discrimination relies on different elasticities in Market 1 and Market 2. There must be no leakage between markets. This is arbitrage which would result in prices falling in Market 2. There must be no chance of competitors entering the higher priced market. The cost of segmenting the market must be lower than the extra revenue derived from the pricing policy.

ACF5PM13(D) EFM Solutions 9 The examination has been prepared for the December 2013 sitting

(d)

Penetration pricing This is a strategy of low prices when the product is first launched, in order to gain significant penetration into the market. The aim is to discourage new entrants into the market and to secure a substantial market share. Forssell could deliberately build in excess production capacity. As demand for the product increases, the spare capacity will be gradually used up, and unit costs will fall. The company could even reduce prices further, as costs fall. In this way, early losses will enable Forssell to dominate the market and have lower costs. Market skimming This is a strategy of charging high prices when the product is first launched and spending heavily on advertising and sales promotion to obtain sales. As the product is innovative, customers may be willing to pay a high price, so as to be one of the first to own the product. This may be seen for many electrical consumer goods. As the product moves into the later stages of its life cycle, progressively lower prices can be charged, so that the profitable cream is skimmed off in stages until sales can only be sustained at lower prices. The aim of market skimming is therefore to gain high unit profits early in the product's life. High unit prices make it more likely that competitors enter the market than if lower prices were to be charged.

10 ACF5PM13(D) EFM Solutions The examination has been prepared for the December 2013 sitting

Bowyer
Marking scheme
(a) Price variance W,X,Y,Z (1 mark each) Mix variance Standard mix of actual usage, W,X,Y,Z (1 mark each) Yield variance Planning variable processing cost efficiency variance Expenditure variance Efficiency variance 2 2 4 5 4 13 (b) (c) 3 4 20 Marks

Suggested solution
(a) Price variance Chemical W X Y Z Actual volume Should have cost $ 19,000 25.00 = 475,000 22,000 12.50 = 275,000 13,000 35.00 = 455,000 21,500 10.00 = 215,000 1,420,000 19,000 27.00 = 22,000 12.50 = 13,000 30.00 = 21,500 10.25 = but did cost $ 513,000 275,000 390,000 220,375 1,398,375 0 65,000 (F) 5,375 (A) 21,625 (F) Price variance $ 38,000 (A)

Mix variance Standard mix of actual usage Litres W 25/110 75,500 X 35/110 75,500 Y 20/110 75,500 Z 30/110 75,500 = = = = 17,159 24,023 13,727 20,591 75,500

ACF5PM13(D) EFM Solutions 11 The examination has been prepared for the December 2013 sitting

Chemical

Mix should have been litres 17,159 24,023 13,727 20,591 75,500

But was litres

Variance litres

standard price $ 25.00 12.50 35.00 10.00

Variance $

W X Y Z

19,000 22,000 13,000 21,500 75,500

1,841 (A) 2,023 (F) 727 (F) 909 (A) 0

46,025.00 (A) 25,287.50 (F) 25,445.00 (F) 9,090.00 (A) 4,382.50 (A)

Yield variance Input of 1100 ml should yield 1 litre Input of 75,500 litres should yield ( 100 / 110) But did yield Yield variance in litres weighted average price per litre of output (W1) 68,636 litres 62,000 litres 6,636 litres (A) $20.625 $136,867.50 (A)

Working (W1) Chemical W X Y Z

Volume ml 250 350 200 300

Standard cost/litre $ 25.00 12.50 35.00 10.00

Standard cost $ 6.25 4.375 7.00 3.00 20.625

(b)

Planning variable processing cost efficiency variance Using the original standard processing time should have been (62,000 6/60 hours) Using the revised standard processing time should have been (62,000 5/60 hours) Planning variable processing cost efficiency variance in hours standard cost per hour Planning variable processing cost efficiency Variance in $ 6,200 hours 5,167 hours 1,033 hours (F) $100 $103,333 (F)

12 ACF5PM13(D) EFM Solutions The examination has been prepared for the December 2013 sitting

(c)

Operating variable processing cost expenditure variance 6,000 hours should have cost ( $100) But did cost Operating variable processing cost expenditure variance Operating variable processing cost efficiency variance 62,000 litres should have taken (using revised standard) 62,000 5/60 hours but did take standard cost per hour Operating variable processing cost Efficiency variance $ 600,000 650,000 50,000 (A)

5,167 hours 6,000 hours 833 hours (A) $100 $83,300 (A)

Big Heath School

Marking scheme
Marks (a) Multiple objectives Measuring outputs Lack of profit measure Nature of service provided Financial constraints Political, social and legal considerations 1 mark for each point Explanation of each E Examples of each E (c) (d) Discussion of conflicts 1 mark each Perspectives Customer 1 mark Perspectives Internal 1 mark Perspectives Innovation and learning 1 mark Perspectives Financial 1 mark 4 20 1 1 1 1 1 Max 3 1 mark each (2 each at 0.5 marks each)

8 3 3 2

(b)

ACF5PM13(D) EFM Solutions 13 The examination has been prepared for the December 2013 sitting

Suggested solution
(a) Problems with performance measurement for not-for-profit organisations Multiple objectives The various stakeholders in an organisation may have differing or even conflicting objectives. For BHS, the stakeholders will include teachers, unions and local businesses, who may have very differing objectives for the school. Measuring outputs It may be hard to measure output in a way that is meaningful. For example, the output of BHS may include well rounded individuals who contribute to society - this may prove challenging to measure! Lack of profit measure If an organisation is not expected to make a profit, or if it has no sales, traditional financial measures are meaningless. BHS has neither sales, nor is it expected to make a profit.. Nature of service provided Many not-for-profit organisations provide services for which it is difficult to define a cost unit. It may be hard to produce a single meaningful cost per unit measure for BHS. Financial constraints Although every organisation operates under financial constraints, these are more pronounced in notfor-profit organisations. BHS will be constrained in its borrowing more than a commercial organisation, indeed its charter may not allow borrowing at all. Political, social and legal considerations Unlike commercial organisations, public sector organisations are subject to strong political influences. For example, the school will be required to implement government policies. The public may have higher expectations of public sector organisations than commercial organisations. This may be exacerbated if the public has no choice in service provider. For example, there may be no choice for local residents, as to where they can send their children to school without paying fees. The school will be required, through legislation, to provide a range of services. Most commercial organisations are not subject to such constraints. (b) VFM Audit A VFM audit examines whether an organisation, usually in the public sector, provides a service in a way which is economical, efficient and effective. Economy Economy is concerned with the cost of inputs, and is achieved by obtaining these inputs, everything else being equal, at the lowest acceptable cost. Examples for BHS may include: the average salaries of teachers employed at the school the cost of a kilowatt hour of heating

14 ACF5PM13(D) EFM Solutions The examination has been prepared for the December 2013 sitting

Efficiency Efficiency means either maximising output for a given level of input or minimising input for a given level of output. Basically, it is how well resources are used to produce output. It is sometimes referred to as doing things right. Examples for BHS may include: the number of hours taught per full-time teacher the number of kilowatt hours of heating per classroom per year

Effectiveness Effectiveness relates to the quality of output. Effectiveness is sometimes referred to as doing the right things, that is, producing the output that the stakeholders want. Examples for BHS may include: (c) the public exam results of pupils the average school-time temperature of a classroom during the winter

Attempts to achieve VFM in all three areas may lead to conflicting results. If an organisation merely tries to reduce the costs of its inputs then the quality of these inputs may be lower. This may result in lower output which is less efficient. In addition it may lead to lower quality output. In a similar vein, if an organisation focuses purely on effectiveness, then the cost of its inputs may rise and hence it may not meet its economy targets.

(d)

The balanced scorecard approach to performance measurement focuses on four different perspectives and uses financial and non-financial indicators. Customer perspective This focuses on what existing and new customers value. It will give rise to targets that matter to customers, such as cost, quality, delivery, inspection, handling and so on. Internal perspective This focuses on what processes an organisation must excel at to achieve financial and customer objectives. It will give rise to targets on internal processes, such as efficiency measures. Innovation and learning perspective. This focuses on how an organisation can improve and create future wealth. It will consider the organisation's capacity to maintain its competitive position through the acquisition of new skills and the development of new products. Financial This focuses on wealth creation for shareholders. It will give rise to targets, such as measures of growth, profitability and shareholder value.

ACF5PM13(D) EFM Solutions 15 The examination has been prepared for the December 2013 sitting

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ACF5PM13(D) EFM Solutions www.bpp.com/learningmedia The examination has been prepared for the December 2013 sitting