ACCA

Paper F5 Performance Management

Tuition Mock Examination June 2012 Question Paper
ALL questions are compulsory and MUST be attempted Time Allowed 15 minutes 3 hours Reading and planning Writing

Formulae sheet is at the end of the question paper

DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS

 Interactive World Wide Ltd, April 2012 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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ALL questions are compulsory and MUST be attempted

1
Alexi operates a central distribution warehouse which it classifies as a cost centre. The warehouse can store up to 600,000 units of finished goods per month. If demand for warehouse space exceeds this amount in any given month extra capacity can be purchased from a nearby factory for fixed payments of $30,000 for each capacity increase of up to 40,000 additional units per month. Inventory is picked from shelves by hourly paid labourers who are paid $16 per hour and in this time are expected to pick 20 inventory units. Picked units are loaded on to customer vehicles by fork-lift trucks. Budgeted costs per month throughout 2012, at two different capacity levels are as follows: Warehouse space required for 200,000 units 500,000 units $ $ 160,000 160,000 160,000 400,000 500,000 1,100,000

Cost element Warehouse rental Inventory picking costs Fork-lift costs

Behaviour of cost Stepped fixed Variable Semi-variable

During May 2012, when demand was for 724,000 units and 36,250 labour hours were worked, actual costs for each cost element were reported as: Warehouse rental Inventory picking costs Fork-lift costs Required: (a) (b) Prepare a flexed budget statement of warehouse costs for May 2012 for an activity level of 724,000 units. (5 marks) Using the flexed budget and other information provided above, calculate the following variances for May 2012: (i) (ii) direct picking labour rate variance; direct picking labour efficiency variance; (6 marks) $284,000 $622,640 $1,528,822

(iii) the fork-lift total cost variance. (c)

Define the terms cost centre, profit centre and investment centre. Describe ONE appropriate performance measure for each and state ONE difficulty of each of your suggested measures. (9 marks) (20 marks)

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ABC Ltd is manufacturing three products, details of which are set out below: Product: Selling price per unit ($) Direct material/unit ($) Direct Labour/unit ($) Batch size (units) Machine hrs per unit Set ups per batch Purchase orders per batch Annual production (units) Alpha 4.75 1.00 2.50 100 2 4 2 100,000 Bravo 3.70 0.50 1.50 50 3 4 3 100,000 Charlie 5.00 0.75 1.75 25 4 6 1 50,000

Currently, ABC Ltd operates an absorption costing system where all overheads are absorbed based on machine hours. The management is not very happy with the current costing and pricing policies and therefore wants to review the current policies. They believe that some products are losing sales in the market. The management accountant has been asked to reconsider the internal systems. An activity based costing system is under consideration, and the management accountant has collected some more data in this regard. Three cost pools have been identified. Their costs for the year are as follows: Machine running costs: Set up costs: Purchase order costs: Required: Calculate the total cost for each product using: (a) (b) the current absorption costing method; (8 marks) $140,000 $150,000 $60,000

an activity based costing method based on the cost drivers identified above. (12 marks) (20 marks)

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Daveybike Company has identified an opportunity to develop a new product. Further development funds of $750,000 are required immediately to complete the product development. Once the development phase is complete, the product is expected to deliver net further benefits of $1,500,000. However, there is a 40% chance that the new product fails in the market, in which case Daveybike could only recover $150,000 from selling off the equipment used in the development process. ITK Co can provide advance analysis of the expected market for the product. It does not guarantee 100% accuracy and has a track record of being correct with 80% of its forecasts. ITK Co has offered to provide a forecast of Daveybikes market for a fee of $40,000. ITK Co has given Daveybike an estimate that the likelihood of a positive market forecast (predicting successful development and launch of the product) would be 56%. Required: (a) (b) (c) (d) Draw a decision tree to illustrate the courses of action open to Daveybike. (10 marks) Using expected value analysis, advise Daveybike whether it should use the services of ITK Co. (4 marks) Briefly discuss any reservations you have in providing the advice above. (3 marks) Calculate the maximum fee that Daveybike would pay for the market analysis from ITK Co. (3 marks) (20 marks)

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The following report has been prepared for MJ Limiteds main product the Claxton. This has been sent to the appropriate product manager as part of the monitoring procedures. Monthly variance report May 2011 Actual Budget Variance Production volume (units) 9,905 10,000 95 A Sales volume (units) 9,500 10,000 500 A Sales revenue ($) 27,700 30,000 2,300 A Direct material (kgs) 9,800 10,000 200 F Direct material ($) 9,600 10,000 400 F Direct labour (hours) 2,500 2,400 100 A Direct labour ($) 8,500 8,400 100 A Contribution ($) 9,600 11,600 2,000 A (F = Favourable, A = Adverse) % 0.95 A 5.00 A 7.67 A 2.00 F 4.00 F 4.17 A 1.19 A 17.24 A

The product manager has complained that the report ignores the principle of flexible budgeting and is unfair as it does not reflect the true performance of the product. He requested the holding of a review meeting to discuss his concerns. Before the meeting, the financial director asked the management accountant to review above findings and submit him a report. Required: (a) Prepare a report addressed to the management team which comments critically on the monthly variance report. Include as an appendix to your report the layout of a revised monthly variance report which will be more useful to the product manager. Include row and column headings, but DO NOT calculate the contents of the report. (10 marks) The following data has been calculated from the monthly output of their other product the Hampton. Output (X) is measured in hundreds of units and total cost (Y) in hundreds of $. Month 1 2 3 4 5 Output (in hundreds of units) 40 35 32 36 45 Total cost (in hundreds of $) 120 110 109 115 129 6 37 112 7 43 122 8 39 117 9 42 120 10 38 116 11 40 118 12 41 122

A standard computer program has calculated the linear regression of total costs to be the following equation: Total cost = 59.8 + (1.48 output) Required: (b) (c) Explain the meaning of the term 59.8 and 1.48 in the regression equation; (3 marks) Predict the total costs of the factory next month, given that output is planned to be 4,400 units; (3 marks)

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(d)

Suggest TWO factors, other than past trends in industry sales, which MJ Ltd should take into account when forecasting its own sales. (4 marks) (20 marks)

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Venus and Pluto 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 on marginal costing basis to be submitted to the parent company. Relevant data for these two divisions for January are shown below. Results for January: Venus $000 900 345 95 338 $9.76m Pluto $000 555 312 42 180 $1.26m

Sales revenue Variable costs Controllable fixed costs (includes depreciation on divisional assets) Apportioned head office costs Total divisional capital employed

The company currently has a target return on capital employed 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). Required: (a) Calculate the annual Return on Investment (ROI) for divisions Venus and Pluto, and discuss the relative performance of the two divisions using the ROI data and other information given above. (9 marks) Calculate the annual Residual Income (RI) for divisions Venus and Pluto, and explain the implications of this information for the evaluation of the divisions performance. (6 marks) Briefly discuss the strengths and weaknesses of ROI and RI as methods of assessing the performance of divisions. Explain two further methods of assessment of divisional performance that could be used in addition to ROI or RI. (5 marks) (20 marks)

(b)

(c)

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Formulae Sheet

Learning curve
Y = ax b

Where:

y = average cost per batch a = cost of first batch x = total number of batches produced b = learning factor (log LR/log 2) LR = the learning rate as a decimal

Regression analysis

y = a + bx

b=

n xy x y n x 2 ( x )
y b x n n
2

a=

r =

n xy x y n x 2 ( x ) n y 2 ( y )
2

Demand curve

P = a bQ
b= change in price change in quantity

a = price when Q = 0

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