London School of Business & Finance ACCA Paper F5 Performance Management Tuition Mock June and December 2009 Question Paper Reading and Planning 15 minutes Writing 3 hours ALL FIVE questions are compulsory and MUST be attempted During reading and planning time only the question paper may be annotated DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION. CONDITIONSGet into good exam habits now! Take a moment to focus on the right approach for this exam. Effective time management . ‘Watch the clock, allocate time to each mark and move on if you get behind. ‘+ Take a few moments to think what the requitements are asking for and how you are going to answer them. ‘+ Remember one mark is usually allocated for each point you give in discursive question, ‘+ This paper is in exactly the same format as the real exam. You should read through the paper ‘and plan the order in which you will tackle the questions, Always start with the one you feel Most confident about, ‘+ Read the requirements carefully: focus on mark allocation, question words (see below) and Potential overlap between requirements ‘+ Identify and make sure you pick up the easy marks avaiable in each question. ‘+ Present your numerical solutions using the standard layouts you have seen. Show and reference your workings clearly © With written elements try and make a number of dstinct points using headings and short paragraphs, You should aim to make a separate point for each mark, ‘+ Ensure that you explain the points you are making ie wity is the point a strength, criticism or opportunity? ‘+ Give yourself plenty of space to add extra lines as necessary, it will also make it easier for the ‘examiner to mark, Common terminology State Express, fully or clearly, the details offfacts of Define Give the exact meaning of Describe Communicate the key features of Distinguish Highlight the differences between Explain ‘Make clear or intelligible/state the meaning of Identify Recognise, establish or select after consideration Illustrate Use an example to describe or explain something Calculate/compute To ascertain or reckon mathematically Demonstrate To prove with certainty or to exhibit by practical means. Prepare To make or get ready for use Analyse Examine in detail the structure of Compare and contrast Show the similarities and/or differences Discuss To examine in detall by argument Produce To create or bring into existence aise To counsel, inform or notify Evaluate ‘To appraise or assess the value of Recommend To advise on a course of actionAll FIVE questions are compulsory and MUST be attempted Fourstones Fourstones currently produces two products, the Stone and the Haugh. It currently uses a standard absorption costing system to caloulate inventory values and cost of sales. It has, up to now, used a labour hour basis to absorb fixed production overheads into the cost of production Budget data relating to the compary’'s two products are as follows. Stone Haugh Material cost per unit $450 $560 Direct Labour cost per unit $1,260 $625 Labour rate per nour $8 $25 Fixed production overheads $50 $50 per hour Selling price $9,000 $4,525 Production and sales volumes 14,000 12500 Fourstones is considering moving towards an Activity Based Costing (ABC) system. Ithas identified the following actvties undertaken within the factory and has allocated its overheads to each activity Activity Overheads 8 Production set ups 20,125,000 Delivery to customers 3,900,000 Component receipts/storage 13:992,500 Other activities 12807 500 Total overheads 50,625,000 Other relevant data Stone Haugh Production runs 1.025 3,000 Daliveries to customers 14,000 25,000 Different components per unit 620 425 Ata recent meeting of the Board the change in costing system was considered and the following ‘comments were made: Chief Executive ‘The change in costing system is pointless unless it improves the profitability of the company. | would like to see how this change to ABC improves company performance Marketing Director ‘ABC sounds like the way forward. | do not understand why itis not used by all companies. Required (@) Caloulate the full production cost per unit and net profit for each product using () Absorption costing (il) Activity Based costing (13 marks) {b) _Dratta memorandum as Financial Controller to the rest of the Board addressing the concerns ‘of the two Directors. You should explain the advantagas of activity based costing over the current absorption costing system, (7 marks) (Total: 20 marks)Ride Co Ride Co is engaged in the manufacturing and marketing of bicycles, Two bicycles are produced, These are the ‘Roadster’ which is designed for use on roads and the ‘Everest’ which isa bicycle designed for Use in mountainous areas, The following information relates to the year ending 31 December 20x5, (1) Unit selling price and cost data is as follows. Roadster Everest $ $ Selling price 200 280 Material cost 80 400 Variable production conversion costs 20 60 (2) Fixed production overheads attributable tothe manufacture of the bioycles will amount to $4,050,000 (3) Expected demand is as follows, Roadster 150,000units Everest. 70,000units (4) Each bicycle is completed in the finishing department. The number of each type of bioycle that ‘can be completed in one hour in the finishing department is as follows, Roadster 625 Everest 5.00 There area total of 30,000 hours available within the finishing department. (6) Ride Go operates a just in me (JIT) manufacturing system with regard to the manufacture of bicycles and aims to hold very litle work-in-progress and no finished goods inventories whatsoever Required (@) Using marginal costing principles, calculate the mix (unis) of each type of bioycle which will ‘maximise net profit and state the value ofthat profit. (4 marks) (b) (i) Calculate the throughput accounting ratio for each type of bicycle (i) Briefly discuss when itis worth producing a product where throughput accounting principles are in operation. Your answer should assume that the variable overhead cost amounting to $4,800,000 incurred as a result of the chosen product mix in part (a) is fixed inthe short term, (8 marks) (6) Using throughput accounting principles, advise management ofthe quantities of each type of bicycle that should be manufactured which will maximise net profit and prepare a projection of the net profit that would be earned by Ride Coin the year ending 31 December 20X6, (4 marks) (2) Explain two aspects in which the concept of ‘contribution’ in throughput accounting differs {rom its use in marginal costing (4 marks) (Total: 20 marks)Textile Co ‘Textile Co has recently shut down @ factory which used to make cushions, although all the inventories of raw materials and machinery are stil there awaiting disposal. A former customer has just asked ‘whether he could be supplied with one last delivery of 500 cushions. You ascertain the following facts. (1) There is sutficiont covering material in inventory. This originally cost $400 but has a disposal value of $190. (2) There is sufficient stuffing in inventory. This originally cost $350. It was to have been shipped ‘to another factory at a cost of $80, The other factory would pay $500 for this quantity (3) Labour costs would be $450. (4) Asupervisor could be spared from the other factory for the week needed to produce the ‘cushions. His normal wage is $160 and his rail fare and hotel bill would amount to $136. (6) Before the factory was closed, fixed overheads were absorbed at 200% of direct labour cost. Required (@) Caloulate the minimum price that could be quoted. (6 marks) Textile Co also manufactures and sells fabric, but the purchasing ranager has been asked to investigate the prices of an overseas producer. She provides the following cost and price information Fabric Damask Sik Linen Production (rolls) 20.000 40.000 80.000 s s s Direct material cost, per roll 080 1.00 0.40 Direct labour cost, per roll 1.80 1.80 0.80 Direct expense cost, per roll 040 0.80 0.20 Fixed cost per roll 080 1.00 0.40 Selling price each 4.00 5.00 2.00 Imported price 275 420 2.00 (b) Calculate whether any of the fabrics should be purchased on the basis of cost only. (S marks) (©) Calculate the new profit and the amount of the change in profits if Textile Co purchase Damask. (6 marks) (@) Identity matters that should be considered before making a decision to purchase fabric (6 marks) (Total: 20 marks)Hillstar Hillstar has received a request from a new customer for the manufacture ofa specialised piece of ‘equipment. This is 2 one-off order and the company has calculated that the lowest cost estimate, prepared on @ relevant cost basis, is $1,050.60, Now that the cost estimates have been prepared itis considered that there is some doubt about the unskilled labour rates per hour and the machine maintenance costs per hour. The company has ‘analysed the risks and the estimated probabilities for each value are: Unskilled labour Maintenance costs $ per hour Probability $ per hour Probability 16 020 280 030 1 055 2.00 080 Q 028 1.60 020 ‘The following two-way data table shows the effects ofthese possible changes on the lowest cost estimate Unskited fabour Maintenance costs per hour rate per hour 2.80 2.00 150 18 +140.40 4126.60 4117975 " +13.80 00 =8.625 8 ~4950 -83.30 - 71925 Required (2) () Explain the meaning of the two-way table given and show how this can be used to assess the risk of the quotation price (6 marks) (il) Whatare the limitations of using expected values as a guide to decision making? (8 marks) Analysis has been undertaken for a new product that Hillstar is considering launching ‘The variable cost per unit could be $70, $66 or $60 and itis estimated thata flexible pricing policy will result in the following outcomes Price ($) Domand 110 45,000 100 58,000 90 80,000 Required (©) {) Prepare summary which shows the budgeted contribution foreach ofthe nine possible outcomes. (5 marks) (ii) State the pricing strategy which will result from each of the following decision rules: rmaximax, maximin and minimax regret Explain the basis of operation of each decision rule. Use your answer to (i) where relevant (7 marks) (Total: 20 marks)First Edition First Edition Limited is @ company that prides itself on being the first to deliver advanced technology products to the market, ‘The management of First Edition are considering whether to introduce a system of target costing in the future as it has been suggested to them that this would be a more beneficial way of pricing and achieving the desired returns for their products. Required (@) Briefly describe the stages in the target costing process. (6 marks) (©) Explain to the management of First Edition why this process might be a better way of achieving their desired returns, (6 marks) Analysis has been performed as to the expected costs of a new product Edition X” ‘The main component cost is expected to be $43.00 per unit ‘The delivery cost of this component is $250 and the components are delivered in batches of 100 ata time. Other materials (cabling) required will cost $48 par 100m. Each unit needs 0.4m of cable, ‘The final material, type Z will be purchased in batches of 250 with 5 being needed for each unit. The ‘cost per batoh is $1,260. ‘The materials for packaging are $0.75 per unit but its envisaged that a wastage rate of 5% of packaging material wil be experianced due to the unusual dimensions of the Edition X Labour costs are expected to be $45,000 if 10,000 units are produced and $97 500 if 25,000 units are produced Variable overheads are $3.50 per unit CCurrenty factory fixed overheads are 180,000 per annum, Specific fixed overheads are anticipated being $30,000. First Edition is planning to produce 50,000 units witha seling price of $95. They demand a profit margin of 25% Required (©) Caloulate the expected cost for Edition X and identity any cost gap. (10 marks) (Total: 20 marks)Student self-assessment Having completed this paper take a few minutes to consider what you did well and what you found difficult Use this as @ basis to focus your future study on effectively improving your performance, CT Cd 19 and planning Did you finish too early? YIN Did you overrun? YN Did you waffle? YIN Layout ‘Was your answer dificult to follow? YIN Did you fail to explain each point clearly? YIN id you fail to show any workings or were ‘your workings unclear? YIN Content Did you struggle with Interpreting the questions? YIN Understanding the subject? YIN Remembering the notes/text? YIN Future emphasis if you answi Focus your planning time on generating rmore ideas, Use models to help develop width to your thinking Focus on allocating your time better Practise questions under strit timed conditions. it you get behind leave space and move on. Focus your planning time on developing a logical structure toyour answer. Use headings and subheadings, Use numbering sequences when identifying points Leave space between each point ‘Show why the point identified answers the question set Give yourselt time and space to make the rmarkers job easy. Learn the meaning of question words (inside front cover), Learn subject jargon (study text glossary) Read questions carefully noting al the parts Practise as many questions es possible. Review your notesitext ‘Work through easier examples firs. Contact ACCA queries for help Quiz yourself constantly as you study. You need to develop your memory as well as your understanding of a subject.