ACCA

Paper F5

Performance Management Tuition Mock Examination

June 2012

Question Paper

ALL questions are compulsory and MUST be attempted

Time Allowed 15 minutes Reading and planning

3 hours 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

2 www.studyinteract ive.org

© 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.

www.studyinteractive.org 3

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

Cost element Behaviour of cost $ $ Warehouse rental Stepped fixed 160,000 160,000 Inventory picking costs Variable 160,000 400,000 Fork-lift costs Semi-variable 500,000 1,100,000

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 $284,000

Inventory picking costs $622,640 Fork-lift costs $1,528,822

Required:

(a) Prepare a flexed budget statement of warehouse costs for May

2012 for an activity level of 724,000 units. (5 marks)

(b) Using the flexed budget and other information provided above,

calculate the following variances for May 2012:

(i) direct picking labour rate variance;

(ii) direct picking labour efficiency variance;

(iii) the fork-lift total cost variance. (6 marks)

(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)

4 www.studyinteract ive.org

2 ABC Ltd is manufacturing three products, details of which are set out below:

Product: Alpha Bravo Charlie Selling price per unit ($) 4.75 3.70 5.00 Direct material/unit ($) 1.00 0.50 0.75

Direct Labour/unit ($) 2.50 1.50 1.75 Batch size (units) 100 50 25 Machine hrs per unit 2 3 4 Set ups per batch 4 4 6

Purchase orders per batch 2 3 1 Annual production (units) 100,000 100,000 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: $140,000 Set up costs: $150,000 Purchase order costs: $60,000

Required:

Calculate the total cost for each product using:

(a) the current absorption costing method; (8 marks)

(b) an activity based costing method based on the cost drivers

identified above. (12 marks)

(20 marks)

www.studyinteractive.org 5

3 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 Daveybike’s 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) Draw a decision tree to illustrate the courses of action open to

Daveybike. (10 marks)

(b) Using expected value analysis, advise Daveybike whether it

should use the services of ITK Co. (4 marks)

(c) Briefly discuss any reservations you have in providing the advice

above. (3 marks)

(d) Calculate the maximum fee that Daveybike would pay for the

market analysis from ITK Co. (3 marks)

(20 marks)

6 www.studyinteract ive.org

4 The following report has been prepared for MJ Limited’s 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 0.95 A

Sales volume (units) 9,500 10,000 500 A 5.00 A Sales revenue ($) 27,700 30,000 2,300 A 7.67 A Direct material (kgs) 9,800 10,000 200 F 2.00 F Direct material ($) 9,600 10,000 400 F 4.00 F

Direct labour (hours) 2,500 2,400 100 A 4.17 A Direct labour ($) 8,500 8,400 100 A 1.19 A Contribution ($) 9,600 11,600 2,000 A 17.24 A (F = Favourable, A = Adverse)

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 6 7 8 9 10 11 12

Output (in hundreds of units) 40 35 32 36 45 37 43 39 42 38 40 41 Total cost (in hundreds of $) 120 110 109 115 129 112 122 117 120 116 118 122

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) Explain the meaning of the term ‘59.8’ and ‘1.48’ in the

regression equation; (3 marks)

(c) Predict the total costs of the factory next month, given that

output is planned to be 4,400 units; (3 marks)

www.studyinteractive.org 7

(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)

8 www.studyinteract ive.org

5 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 Pluto

$000 $000 Sales revenue 900 555

Variable costs 345 312 Controllable fixed costs (includes depreciation on divisional assets)

95 42

Apportioned head office costs 338 180

Total divisional capital employed $9.76m $1.26m

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)

(b) 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)

(c) 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)

www.studyinteractive.org 9

Formulae Sheet

Learning curve

baxY =

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

bxay +=

( )∑ ∑−

∑ ∑ ∑−=

22 xxn

yxxynb

n

xb

n

ya

∑−

∑=

( ) ( )( )∑ ∑ ∑−∑−

∑ ∑ ∑−=

2222 yynxxn

yxxynr

Demand curve

bQaP −=

quantity in change

price in changeb =

0Q when pricea ==