acca f5 revision mock - answers j12

ACCA

Paper F5

Performance Management

June 2012

Revision Mock – Answers

To gain maximum benefit, do not refer to these answers until you have completed the revision mock questions and submitted them for marking.

ACCA F5: PERFORMANCE MANAGEMENT

2 KAPLAN PUBLISHING

© Kaplan Financial Limited, 2012

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REVISION MOCK ANSWERS

KAPLAN PUBLISHING 3

ANSWER 1

(a)

Product Revenue, in Variable costs Contribution C/S ratio $000 $000 $000 $000 J 200 140 60 0.30 K 400 80 320 0.80 L 200 210 (10) (0.05) M 200 140 60 0.30 1,000 570 430

(b)

Product Contribution, in

Cumulative Profit / (Loss)

Revenue Cumulative Revenue

$000 $000 (240) 0 K 320 80 400 400 J 60 140 200 600 M 60 200 200 800 L (10) 190 200 1,000

The products are plotted in the order of their C/S ratios. The fixed costs of the company are $240,000. The chart reveals that if only product K is produced, the company will generate a profit of $80,000. The profit of the company is maximised at $200,000. This is achieved by producing Products K, J and M only.

0

(250)

Product K

Product M

Break even point

Product J

X

X

X

X

X

200

150

100

50

Product L

Profit/(loss) $000

(50) 100 200 300 400 500 600 700 800 900 1,000

(100) Revenue ($000)

(150)

(200)


4 KAPLAN PUBLISHING

If all four products are produced then BSE can expect a profit of $190,000 from sales revenue of $1,000,000. If all four products are sold in the budget sales mix then the company will break even when revenue reaches $558,140. This point has been indicated on the graph. This point can also be calculated. Thus:

Average contribution/sales ratio = 430/1,000 = 43%

Break-even point = ratio C/S Average

costs Fixed

= 0.43

$240,000 = $558,140

(d) The overall C/S ratio could be improved by:

• Changing the product mix in favour of products with above-average C/S ratios. In this example that would mean increasing production of Product K.

• Increasing sales revenue. • Deleting product L.

ACCA marking scheme Marks

(a) Each test 1 mark, total 1 mark 4

(b) X- and Y-axis clearly labelled 2

Total profit line present 1

Fixed cost point on Y-axis 1

BEP 1

Kinked line 0.5 per product

Bonus presentation mark (1)

2

(c) BEP stated 1

Valid comment or explanation 1 mark each maximum 4 4

(d)

Total

Each way 1 mark

3

–––

20

––––


KAPLAN PUBLISHING 5

ANSWER 2

(a) 16 units

Average skilled hours per unit (W1) 491.52 Average unskilled hours per unit (W1) 1180.98

_______ Average skilled and unskilled hours per unit 1,672.5

_______

Average cost per unit (16 units) $

Skilled hours 491.52 × $20 9,830.40

Unskilled hours 1,180.98 × $15 17,714.70

Materials 20,000.00

Overheads (1,672.5 × $10) 16,725.00 ________

Average cost 64,270.10 Mark-up @ 25% of the average cost 16,067.53

________ Selling price 80,337.63

________

(W1) Cumulative average hours per unit

Units Cumulative average unit time (skilled)

Cumulative average unit time (unskilled)

1 1,200 × 0.8 1,800 × 0.9

2 960 1,620

4 768 1,458

8 614.4 1,312.2

16 491.52 1,180.98

Alternative approach

Using the learning curve formula from the formula sheet:

Cumulative average time per unit, y = axb

Where a = time for the 1st unit

b = rate of learning (given in question)

x = cumulative output in units

Skilled labour

Cumulative average time per unit for 16 units

= 1,200 × 16-0.3219

= 491.56 (as above, small rounding difference)

Unskilled labour

Cumulative average time per unit for 16 units

= 1,800 × 16-0.1520

= 1,180.99 (as above, small rounding diff)


6 KAPLAN PUBLISHING

(b)

2 units 4 units

Average skilled hours per unit (W1) 960 768

Average unskilled hours per unit (W1) 1,620 ______ 1,458 ______

2,580 ______ 2,226 ______

Average cost per unit $ $

Skilled hours × $20 per hour 19,200 15,360

Unskilled hours × $15 per hour 24,300 21,870

Materials 20,000 20,000

Overheads × $10 per hour 25,800 ______ 22,260 ______

Average cost per unit 89,300 79,490

Total cost for 2/4 units 178,600 317,960

Cost of 3rd & 4th unit = total cost of 4 units – total cost 2 units 139,360

Sales revenue 3rd & 4th unit ($80,337.63 × 2 units) 160,675.26 __________

Profit 3rd & 4th unit 21,315.26 __________

(c) Logic

The logic behind the learning curve model is that labour efficiency increases with the level of output. A simple form of mathematical modelling can be used to show this increase in labour efficiency. The model assumes that the increase in efficiency follows a curvilinear pattern with the increase in efficiency tending to become less pronounced as progressively higher levels of output are considered.

Uses

The model can be used in all areas of budgeting, business planning, standard costing and business decision making.

Limitations

The limitations of the model fall under two headings. Firstly, it only applies where labour skill is a critical element in the production process and output is relatively low. Secondly, like all models, the learning curve is a simple representation of a complex reality.


KAPLAN PUBLISHING 7


(a) Calculation of cumulative average hours per unit 4

Calculation of labour, material and overhead costs 4

Calculation of selling price 1

––––

9

(b) Calculation of average labour cost per unit 2

Calculation of material and overhead costs per unit 1

Calculation of total cost for 2 and 4 units 1

Calculation of cost for the 3rd and 4th unit 1

Calculation of sales revenue for the 3rd and 4th unit 1

Calculation of profit for the 3rd and 4th unit 1

––––

7

(c) 1 mark per relevant point. The 3 areas must be covered to get maximum marks

4

––––

Total 20

––––

ANSWER 3

(a) The management of AV could attempt to measure the value for money of its operating activities in terms of economy, efficiency and effectiveness.

Economy

Economy is concerned with inputs acquired by AV, and is achieved by obtaining those inputs at the lowest acceptable cost.

For example, the prices at which the replacement fitted kitchens are purchased ($2,610) could be compared with those obtainable from other vendors in order to assess whether the lowest acceptable cost is being achieved for the required level of quality.

It is important that the management of AV realise that economy is measured by reference to quality of resource inputs. They need to recognise that the purchase of poor quality materials and inferior services represents ‘false economy’.

Efficiency

Efficiency is focused upon output, i.e. maximising output for a given level of input. For example with regard to the replacement fitted kitchens, AV could use the tendering process in an attempt to maximise the number of fitted kitchens that would be installed for a given amount of money by the contractor awarded the tender.

Effectiveness

Effectiveness is focused upon the achievement of objectives.

A not-for-profit organisation will invariably have a number of objectives. For example AV may have the following objectives:

• To meet housing needs.

• To provide quality well managed homes.


8 KAPLAN PUBLISHING

• To provide the services that clients want.

• To provide an effective care and repair service.

• To support the communities within which it operates.

The management of AV should be mindful that the three performance measures require individual consideration since for example, the degree to which effectiveness is achieved gives no indication about how much was spent to achieve it.

The management of AV should also recognise that these performance measures may conflict with one another and should also give consideration to benchmarking against other similar charities whose primary objective is the provision of accommodation to the communities in which they operate.

(b) (i) Timeliness

Average waiting time for a house to become available to a tenant.

Average waiting time to re-house a tenant in a different sized house after receipt of a request from a tenant.

Service quality

The time required in order to undertake repairs of an emergency nature, after notification of the requirement by a tenant.

The friendliness of staff employed by AV which could be measured via the completion of questionnaires by tenants.

Note: Other relevant measures would be acceptable.

(ii) The management of AV could use the following performance measures:

Measures AV BW

(1) Average cost of staff and management per house per week (W1)

Economy $9.62 _____

$29.81 ______

(2) Average cost of day-to-day repairs (W2)

• Emergency • Urgent • Non-urgent

Economy

$140 $120 $116

_____

$100 $100 $100

______

(3) Percentage occupancy of houses (W3) Efficiency 98.5% _____

100% ______

Comments and workings

(W1) Average cost of staff management per house per week

AV = $450,000 staff and management costs ÷ 900 properties ÷ 52 weeks

= $9.62

BW = $620,000 staff and management costs ÷ 400 properties ÷ 52 weeks

= $29.81


KAPLAN PUBLISHING 9

Comment

Although the same number of staff (25) are employed by each organisation, staff and management costs incurred by BW are significantly higher than those of AV. The average cost of staff and management per house per week in BW is over three times the equivalent cost in AW. This could result from different pay structures and management policies regarding remuneration that are likely to be employed within a profit-seeking organisation such as BW.

(W2) Average cost of day-to-day repairs

AV: Emergency = $134,400 ÷ 960 repairs = $140 per repair

Urgent = $225,600 ÷ 1,880 repairs = $120 per repair

Non-urgent = $118,320 ÷ 1,020 repairs = $116 per repair

BW: Same cost for all repairs = $127,600 ÷ 1,276 repairs = $100 per repair

Comment

AV currently pays, on average, $140 for each emergency repair, $120 for each urgent repair and $116 for each non-urgent repair. BW has benefited from the fact that each repair undertaken by BW costs the same (i.e. $100), irrespective of the classification of repair. This might be a result of a contractual arrangement with a subcontractor that each repair undertaken is charged at the same fee in return for guaranteed business volumes for the subcontractor. If this were the case, then AV would benefit from entering into such an arrangement for the supply of repair services.

(W3) Percentage occupancy of houses

AV: Available rent = No. of properties × Average weekly rent × 52 weeks

= (80 × $40 × 52) + (160 × $45 × 52) + (500 × $50 × 52) + (160 × $70 × 52)

= $2,423,200

Actual rent received = $2,386,852

% occupancy = $2,386,852 ÷ $2,423,200

= 98.5 %

BV: Available rent = No. of properties × average weekly rent × 52 weeks

= (40 × $90 × 52) + (80 × $101 × 52) + (280 × $130 × 52)

= $2,500,160

Actual rent received = $2,500,160

% occupancy = 100%

Comment

BW did not have any unoccupied properties at any time during the year. This would seemingly indicate a high level of demand for its properties. AV had potential gross rents receivable during the year of $2,423,200. Unoccupied properties resulted in lost revenues of $36,348 which amounted to 1.5% of gross rents receivable.

Further information is required in order to assess whether the lost revenue is attributable to ‘void periods’ i.e. properties becoming vacant or perhaps due to tenants who have defaulted.

Note: Other ratios and relevant comments would have been acceptable.


10 KAPLAN PUBLISHING

(c) BW objectives

The primary objective of any commercial organisation such as BW is to maximise profit. Management may have to choose between available options, each of which might help them to achieve this objective. However, whilst many decisions may have to be made, the objective remains clear and identifiable.

The management of BW will most probably be concerned with the provision of high quality accommodation in order to generate higher revenues and profits. The management of BW are probably trying to appeal to those who are willing to pay high rents for high quality accommodation. The fact that replacement fitted kitchens and replacement windows and doors purchased by BW cost 100% and 50% respectively, more than those purchased by AV may be an indication of this.

AV objectives

The objectives of not-for-profit organisations such as AV can vary significantly. AV’s primary objective is ‘to meet the accommodation needs of persons within its locality’. This might distil down to ensuring that any person, who is in need of accommodation, is in fact provided for.

The absence of a profit measure makes it more difficult to measure whether objectives are in fact being achieved. It is difficult to judge whether non-quantitative objectives such as meeting the accommodation needs of people have been met. This does not mean however, that such an assessment should be placed on the ‘too difficult pile’ and left unattended. A number of suitable measures need to be devised by the management accountant in order to assess the extent to which non-quantitative objectives have been met.

The management of AV would probably be better served in comparing the performance of their organisation with a similar non-profit seeking organisation that provides accommodation to meet the needs of society.

Additional information

Additional information that would assist in appraising the performance of BW during the year ended 31 May 2009 includes the following:

• Estimates of the financial effects of changes in demand for different levels of rents charged.

• Estimates of the financial effects of changes in demand for different costs/quality levels of accommodation provision.

• A detailed analysis of net interest payable – $749,840.

• A detailed analysis of sundry operating costs – $235,000.

• Management accounts for the current and prior years.

• Budget information for 2010, 2011 and, if available, 2012.

Note: Marks will be awarded for other relevant points.


KAPLAN PUBLISHING 11


(a) 1 mark for each relevant point 7

––––

7

(b) (i) 0.5 marks for each performance measure 2

(ii) Calculation of performance measure – 1 mark each 3

Comment on performance measures – 1 mark each 3

––––

6

(c) Explanation of why differing objectives make comparison difficult –

1 mark per relevant point 3

Additional information – ½ mark for each point 3

––––

5

––––

Total 20

––––

ANSWER 4

(a) Increasing the transfer price of internal sales from $10 per unit to $20 per unit, results in sales of Division X increasing by $30,000 and variable costs of Division Y increasing by a corresponding amount. Revised profit is calculated as follows:

Division X Division Y

Sales 100,000 270,000

Variable cost 50,000 144,000

Contribution 50,000 126,000

Fixed cost 15,000 100,000

Profit 35,000 26,000

RI 29,000 15,000

ROCE 58.33% 23.64%

Operating profit margin 35.00% 9.63%

Asset turnover 1.67 2.45

(b) Changing the transfer price to $20 per component results in an improvement in many of the performance measures of Division X and a deterioration in the performance measures of Division Y.

The sales revenue of Division X increases by $30,000 with no corresponding change in costs, so profit increases by the same amount. This leads to an improvement in all of the profit measures so RI, ROCE and the operating profit margin all improve. Asset turnover also improves as this measures the level of sales generated by the capital employed.

The variable cost of Division Y increases by $30,000. This leads to a fall in all of the profit measures, but asset turnover remains the same as sales do not change.

If profit measures are used to evaluate managerial performance and rewards, changing the transfer price would be unfair as appears to impact on performance whereas in reality overall profit is unchanged.



(c) (i) If full autonomy was given to Divisional Managers, then the manager of Division X would prefer to satisfy external demand at a price of $20 than supply Division Y at a marginal cost of $10. This would result in only 2,000 units being available for internal transfer and Division Y would have to buy externally or lose sales. Division X will be reluctant to transfer internally at marginal cost as no contribution towards fixed cost or profit will be earned. Division Y will be reluctant to pay a price above marginal cost as this will have a detrimental effect on existing performance measures as shown in (a).

From a group perspective, if Division X charges the external price for all components, then this will lead to a reduction in profit for the group as a whole.

(ii) The problems could be resolved by allowing divisions to set the transfer price at full external cost for the first 3,000 units. As Division X faces excess demand, any price below market price would be unacceptable for the first 3,000 units. The remaining 2,000 units could be transferred at a price at marginal cost plus a contribution towards fixed cost and profit. This could be negotiated or a two-part tariff could be used.

Performance targets should be adjusted to reflect the change in the share of profits.


(a) 1 mark for each performance measure (4 measures × 2 divisions) 8

(b) Improvement performance measures in X 1

Deterioration performance measures in Y 1

Any other relevant comment or illustration 1 mark each, max 4 4

(c) (i) Problem for X 1

Problem for Y 1

Problem for Group 1

(ii) Any acceptable suggestion worth 1 mark 3

––––

Total 20

––––



ANSWER 5

Key answer tips

The planning variances may be based upon budget or actual level of activity, depending upon at what point the sales volume variance was calculated. If the first calculation is sales volume variance, then ALL variances AFTER this should be based upon the actual output of 9,000 units. However, if the first calculations are the planning variances, these would be based upon the budget volume of 10,000 units. Full marks should be obtained using either approach.

The mix variance may be calculated using either the individual units method or the weighted average price method. The total result, which is the important figure in this question, will be the same.

$000 $000

Original budgeted contribution (10,000 × $158) 1,580

Planning variances

Material A price ($25 – $21) × 5 kg × 10,000 200 F

Material B price ($22 – $19) × 3 kg × 10,000 90 F –––– 290 F –––– Revised budgeted contribution (10,000 × $187) (W1) 1,870

Operational variances

Sales volume (contribution) (10,000 – 9,000) × $187 187 A

Selling price ($400 – $495) × 9,000 855 F

Material A price (35,000 × $21) – $910,000 175 A

Material B price (50,000 × $19) – $1,050,000 100

A

Mix variance (W2) 36.25 F Yield variance (W3) 263.25 A

Direct labour rate (30,000 hr × $10) – $385,000 85 A

Direct labour efficiency (9,000 × 3 – 30,000) × $10 30 A

Variable overhead expenditure (30,000 hr × $7) – $230,000 20 A

Variable overhead efficiency (9,000 × 3 – 30,000) × $7 21 A

–––– Total operational variances 10 A –––– 1,880 ––––



The above variances can also be calculated as follows:

Material A variance

$ AQSP 35,000 kg × $21/kg = 735,000 AQAP $175,000 A = 910,000 Price Material B variance $ AQSP 50,000kg × $19/kg = 950,000 AQAP $100,000 A = 1,050,000 Price

Labour variances $ SHSR 3 hrs/unit × 9,000 units × $10/hr = 270,000 Efficiency AHSR $30,000 A 30,000 hrs × $10/hr = 300,000 AHAR $85,000 A = 385,000 Rate

Variable overhead variances $ SHSR 3 hrs/unit × 9,000 units × $7/hr = 189,000 Efficiency AHSR $21,000 A 30,000 hrs × $7/hr = 210,000 AHAR $20,000 A = 230,000 Rate

Sales price variance $ Std selling price 400 Actual selling price $4,455,000/9,000 units 495 ––––––– 95 F × Actual no of units sold × 9,000 ––––––– $855,000 F ––––––– Sales volume contribution variance Units Budgeted sales 10,000 Actual sales 9,000 ––––––– 1,000 A × Std contribution per unit × 187 ––––––– $187,000 A –––––––



Workings

(W1) Revised contribution per unit

$ Selling price 400

Material A 5 kg × $21 (105)

Material B 3 kg × $19 (57)

Direct labour 3 hr × $10 (30)

Variable overhead 3 hr × $7 (21)

–––– Contribution 187

––––

(W2) Mix variance

Note: A method is not specified. Use individual units method if given a choice as it is quicker and easier than the weighted average price method.

Material Standard mix

Actual mix

Difference @ Standard

price

Variance

000s 000s 000s $000

A 53.125 35 18.125 F $21 380.625 F

B 31.875 50 18.125 A $19 344.375 A

85 85 Nil 36.25 F

Standard mix of A : B is 5 kg : 3 kg

Hence, standard mix of actual input is:

A = 85 × 8

5 = 53.125

B = 85 × 8

3 = 31.875

(W3) Yield variance

Standard yield from actual input 85,000 kg ÷ 8 kg pu 10,625 units

Actual yield (output) 9,000 units ––––––– 1,625 units

@ Average price per unit of output (5 kg × $21) + (3 kg × $19) $162

––––––– Variance $263,250 A –––––––



(W4)

$000 Sales revenue 4,455 Less: Material A (910) Material B (1,050) Labour cost (385) Variable overhead (230) ––––– 1,880 –––––

ACCA marking scheme

Marks

1 mark for each variance/line of the operating statement; mix and yield variances worth 2 marks each

17

Layout 1

Bonus mark 1

––––

Total 20

––––

acca f5 revision mock - answers j12

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