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P5

ADVANCED PERFORMANCE MANAGEMENT (INT)

QUESTION BANK

ACCA

A

GTG

Get

Through

Guides

Edition 3,Version 1

ISBN No. 978-1-84808-250-2

Published by

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l

About the paper

Question

number

P5 - ADVANCED PERFORMANCE

Topic

Name

Marks

Section A

Strategic Planning and Control

1

Strategic Management Accounting

2

Zero Based Budgeting

3

Beyond Budgeting Model

4

Strategic planning

5

External environment

National Electronics

Ltd

Hope and Fraser

Diverse Holdings Pic

25

20

20

20

20

MANAGEMEN T

1

-

(INT)

vi

Page Numbers

Question

bank

1

1

- 1

- 1

2 - 2

2 - 3

3 - 3

Solution

bank

45-47

47- 49

49-5 1

52-53

54- 56

Section B

External Influences on Organisational Performance

6 Ethical issues and Mendelow's matrix

Section C

7

8

9

10

11

Toyworld Ptc

20

5 - 6

7 - 7

7 - 8

8 - 9

10-1 0

10-

10

Performance Measurement System and Design

BPR

Astrodome Sports Ltd

Ochilpark Pic

Moffat Ltd

INA Ltd

20

20

35

20

20

Contingency theory.

Behavioural aspects in performance measurement

Internal and external aspects of performance measurement

Information requirement

Benchmarking and information system

Section D

Strategic Performance and Measurement

12 Mission Statement

13 Usage of standards in decision- making

14 Performance analysis

15 Evaluation of strategies

16 Strategic performance measurement

17 Measures of performance

18 Performance analysis

19 Strategic performance measurement

20 Measures of performance

21 Divisional performance

Sunflower Hospital

20

15

35

40

11 -

11

11 - 11

11 - 13

13-1 4

Big Bucks Bank Pic

40

14 - 16

20

Taliesin Ltd

20

Pack and Dispatch Co

Tannadens Division 35

Galaxy pic and Milky- way group

25

16-16

17- 18

20 18-19

19-20

20-21

57-5 9

61-6 3

63-6 5

65-6 8

68-7 0

71-7 3

75-7 6

77-78

78-8 0

80-8 5

85-8 8

88-91

91 - 94

94-95

95-97

97-101

I

j

Question

number

Topic

P5 - ADVANCED PERFORMANCE MANAGEMENT

(INT)

Name

Marks

Page Numbers

Question

bank

Solution bank

SGCtion D

Strategic Performance and Measurement

- Continued

22 Divisional performance

NAW

Group

40

22-2 4

23 Product Vs. Customer

profitability

NAW

Group

20

24-2 5

24 Transfer pricing- Able and Baker

 

20

25- 26

25 Transfer pricing - Alpha and Beta division

6

26-26

26 Not-for-profit organisation

AVand BW

20

26- 28

27 Not-for-profit

organisation

GA and EA

40

28-3 0

28 Behavioural aspects of performance management

15

30-30

29 Performance measurement

Sportstown and

30-32

Totaleisure

40

102-108

109-112

113-115

115-117

117-119

120-124

124-125

126-130

Section E

Performance Evaluation and Corporate Failure

30 Balanced scorecard and Building blocks

31 Performance measurement systems

20

15

33-3 3

33-3 3

32 Key performance indicators

33 Performance

measurement

34 Performance

measurement

35 Performance

measurement

36 Performance

measurement

37 Performance

measurement

The Eatwell

Restaurant

BLA Ltd

Compuaid Ltd

Mack-King

The Dental Health Partnership

Alisha Pic

20

20

35

20

20

40

33-34

34-3 5

35-3 6

37-3 8

38 - 39

40-4 1

131 - 132

132-134

134-135

136-139

140-145

145-149

149-153

153-157

38 Corporate failure

Fashion Plus

25

41

-4 2

157-159

oeciion r

q

a-

p

Current Developments and Emerging Issues in Performance Management

39 Contemporary management accounting techniques

40 Traditional vis-a-vis modern management accounting

20

43-43

161-164

15

44-44

164-165

Appendix

I

I Present Value Table

1

- 1

[Annuity Table

1

- 1

|

Total Page Count:176|

Examination structure

The examination will be a three hour paper in two sections:

Section A

Section A will comprise two compulsory questions comprising between 50 and 70 marks in total. Each question will comprise of between 25 and 40 marks

Section B

In section B candidates will be asked to answer two from three questions comprising of between 15 and 25 marks each

Total 100 marks

Reading and planning time

For all three hour examination papers. ACCA has introduced 15 minutes reading and planning time.

This additional time is allowed at the beginning of each three-hour examination to allow candidates to read the questions and to begin planning their answers before they start writing in their answer books. This time should be used to ensure that all the information and exam requirements are properly read and understood.

Dunng reading and planning time candidates may only annotate their question paper. They may not write anything in their answer booklets until told to do so by the invigilator.

Effective time management - a key to success

Remember you have 1.8 minutes per mark. Aim to solve a 20 marks question in 36 minutes.

About the GTG Question Bank

This Question Bank of 40 questions covers all important topics of the syllabus.

The Solution Bank has the following features, in addition to solutions to the questions:

Strategy

Callouts and tips

Score More

Answer plan

to help you tackle the question

to give you additional guidance

where students lose marks even when they have the required knowledge and notes how to avoid these mistakes

to help you plan the answers for longer questions

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QUESTION

BANK

STRATEGIC PLANNING AND CONTROL

J L

MX

1.

Strategic management

accounting

(a)

Identify and discuss the circumstances that have brought about the proposition that traditional management accounting control systems have lost their 'relevance' to today's manufacturing and organisational environment.

 

(10 marks)

(b)

Evaluate strategic cost management initiatives which may be used in order to restore the 'relevance' of management accounting control systems in today's manufacturing and organisational environment. (15 marks) (25 marks) (Adapted from June 2004)

2.

Zero Base Budgeting -

National Electronics

Ltd

National Electronics Ltd manufactures and markets a range of electronic office equipment. The company currently has a turnover of $50 million per annum. The company has a functional structure and currently operates an incremental budgeting system. The company has a budget committee that is comprised entirely of members of the senior management team.

No other personnel are involved in the budget-setting process.

Each member of the senior management team has enjoyed an annual bonus of between 12% and 24% of their annual salary for each of the past five years. The annual bonuses are calculated by comparing the actual costs attributed to a particular function with budgeted costs for that function during the twelve month period ended 31 December in each year.

A new Finance Director, who previously held a senior management position in a "not for profit' health organisation, has recently been appointed. Whilst employed by the health service organisation, the new Finance Director had been the manager responsible for the implementation of a zero-based budgeting system which proved highly successful.

Required:

(a) As the new Finance Director, prepare a memorandum to the senior management team of National

Electronics Ltd which identifies and discusses:

(i)

factors to be considered when implementing a system of zero-based budgeting within National Electronics Ltd;

(10 marks)

(ii)

the behavioural problems that the management of National Electronics Ltd might encounter in implementing a system of zero-based budgeting, recommending how best to address such problems in order that they are overcome.

(6 marks)

(b) Explain how the implementation of a zero-based budgeting system in National Electronics Ltd may differ from the implementation of such a system in a "not for profit' health organisation.

(4 marks) (20 marks) (Adapted from June 2004)

2: Strategic Planning and Control

3. Beyond Budgeting Model

€ C.TG

Better budgeting in recent years may have been seen as a movement from 'incremental budgeting' to alternative budgeting approaches.

However, academic studies (e.g. Beyond Budgeting - Hope & Fraser) argue that the annual budget model may be seen as

(i)

having a number of inherent weaknesses and

(ii)

acting as a barrier to the effective implementation of alternative models for use in the accomplishment of strategic change.

Required:

0)

(b)

Identify and comment on FIVE inherent weaknesses of the annual budget model irrespective of the budgeting approach that is applied.

(8 marks)

(c)

Discuss ways in wtiich the traditional budgeting process may be seen as a barrier to the achievement of the aims of EACH of the following models for the implementation of strategic change:

(i)

benchmarking;

(ii)

balanced scorecard; and

(iii)

activity-based models.

(12 marks)

(20 marks)

(June 2005)

4.

Strategic planning - Diverse Holdings Pic

Diverse Holdings Pic has five wholly-owned subsidiary companies. These are:

(i)

Organic Foods Ltd (OFL) which is involved in the production and sale of organically grown fruit and vegetables. OFL has built up a very good reputation as a supplier of quality produce,

(ii)

Haul-Trans Ltd (HTL) which was acquired on 1 December 2005 and is involved in transporting a range of products on behalf of third parties,

(iii)

Kitchen Appliances Ltd (KAL) which is involved in the manufacture and sale of small, manually-operated kitchen appliances. KAL has recently suffered from squeezed margins as a consequence of competition from low cost imports.

(iv)

Paper Supplies Ltd (PSL) which manufactures and sells a narrow range of stationery products to two distributors,

(v)

Office Products Ltd (OPL) which manufactures and sells computer workstations with unique design features which are highly regarded by health and safety experts.

The management accountant of Diverse Holdings Pic has gathered the following actual and forecast information relating to the five subsidiaries:

Year ending 30 November

 

2003

2004

2005

2006

2007

(OFL)

Market size (Sm)

Actual

Actual

Actual

Forecast

Forecast

Market size (Sm)

100.00

120.00

150.00

180.00

225.00

Turnover (SSm)

5.00

8.00

10.0

13.50

18.00

Operating Profit ($m)

1.00

1.80

2.50

3.00

3.60

(HTL) Market size (Sm)

Unknown

Unknown

Unknown

Unknown

Unknown

Turnover (Sm)

40.00

40.00

41.00

42.00

42.00

Operating Profit (Sm)

4.00

4.00

4.00

5.00

5.60

(KAL)

252.00

250.00

245.00

242.00

240.00

Turnover (Sm)

37.50

37.50

35.50

32.00

29.00

Operating Profit/(loss) Sm) (PSL)

1.50

1.10

0.70

0.30

(0.20)

Market size (Sm)

60.00

65.00

70.00

77.00

84.00

€ C.TG

Question Rank: 3

Turnover (Sm)

2.00

2.00

2.00

2.00

2.10

Operating Profit (Sm)

0.60

0.60

0.60

0.50

0.50

(OPL)

Market size ($m)

200.00

220.00

240.00

260.00

280.00

Turnover ($m)

15.00

16.00

16.50

17.00

17.50

Operating Profit (Sm)

1.50

1.60

1.65

1.70

1.75

The management accountant has also collated the following information relating to the market share held at 30 November 2005 by the market leader in those markets in which each subsidiary operates:

Subsidiary

Market

Market share (%) held by market leader

Organic Foods Ltd

Food Production

6.66

Haul-Trans Ltd

Transport

Unknown

Kitchen Appliances Ltd

Kitchen appliances

16

Paper Supplies Ltd

Stationery

35

Office Products Ltd

Workstations

25

The management has decided not to undertake any further acquisitions during the next two years due to a shortage of funds.

Required:

(a) Identify and comment on FOUR advantages that may be gained as a result of the adoption of a formal system of strategic planning.

(4 marks)

(b) Explain how the use of SWOT analysis may be of assistance to the management of Diverse Holdings Pic. (3 marks)

(c)

(i)

Using ONLY the above information, assess the competitive position of Diverse Holdings Pic.

 
 

(7 marks)

(ii)

Explain THREE strategies that might be adopted in order to improve the future prospects of Diverse Holdings Pic.

 

(6 marks)

(20 marks)

(December 2005)

5.

External

environmen t

You are responsible for managing the preparation of all revenue and cost budgets for a motor component manufacturer. You are aware that the external environment has a significant impact on the business activity and financial performance of your company and that the current information systems are underdeveloped and ineffective in this respect.

Required:

(a)

Identify which aspects of the external environment you are likely to consider and give reasons for your choice. (10 marks)

(b)

Identify where you might find the relevant sources of information.

(5 marks)

(c)

Suggest how an external environment information system could be introduced into your company. (5 marks) (20 marks) (December 2002)

4: Strategic Planning and Control

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QUESTION BANK

OQ

Z EXTERNAL INFLUENCES ON

p o

111 o

(0

ORGANISATIONAL PERFORMANCE

B

6. Ethical issues and Mendelow's matrix - Toyworld pic

Toyworld Pic is a private company which has been manufacturing plastic toys for the last three years. Its factory is located in a city called Farland. It sells goods worldwide. In spite of having many competitors, the company has been making good profits since its first year of operation. Toyworld's strategy is to keep its costs at a minimum and compete on the basis of price.

Grace has recently been appointed as the CEO of Toyworld after retiring as the CEO of a very successful toy making company. In Toyworld, she has observed the following:

^ A substandard material is used in making the toys. This material may be dangerous to health if children put the toys in their mouths. However, the company has not given any warning on the packaging of the toys. Rather, Toyworld products are advertised as being safe and are claimed to improve children's memory and motor skills at a faster rate than the toys manufactured by other companies (which has not been scientifically proven).

> All the workers (including child labourers) are required to work for more than 100 hours a week which is far above the maximum working hours prescribed through legislation. Since unemployment is high in Farland. people staying there are prepared to work for lower wage rates. Toyworld is successful in keeping its costs at a minimum by employing people in Farland at minimum cost (without paying fair wages or bonuses).

> Every year Toyworld donates 525,000 to a political party whose leader is Robert. This is because Robert is also the chairman of Easy-money, a financing company, which provides finance to Toyworld at low interest rates.

Furthermore, the company has recently received adverse publicity through a local newspaper which reported that the emissions from the factory are polluting the environment of Farland. There is no emission treatment plant in Toyworld. In addition, the material used by Toyworld is bad for the environment. The newspaper has also highlighted, and published photographic evidence of, the poor hygiene conditions in Toyworld and the fact that female workers who have young children are allowed to bring their children inside the factory, which could be dangerous.

After becoming aware of all the above facts and reading the newspaper, Grace immediately called a board meeting and communicated her view that "our dream is for the company to grow by leaps and bounds and become a market leader. However, this can only be achieved by incurring some cost in the short term and therefore we should stamp out all unethical practices."

However, Tony, the finance director disagreed, stating that "we are running the business for profit. If we give up all these practices, our costs will increase and will directly affect our performance. In addition, although we are asking workers to work for more than the maximum working hours, this helps them to earn more money, without which they might not be able to provide for their families."

About 80% of the shares in Toyworld are held by the directors (excluding Grace) and the remaining 20% of the shares are held by people outside Toyworld. There is no substantial holding by any shareholder: rather many people each hold a few shares. As a result, the directors are in a dominant position when it comes to taking strategic decisions (the external shareholders are dormant).

ft: Economic, Fiscal an d Environmenta l Factor s

Required:

€ GTG

(i)

Discuss the ethical issues with reference to the case given above and their impact on the performance of Toyworld (long-term as well as short-term).

(10 marks)

(ii)

Using Mendelow's matrix, map the following stakeholders of Toyworld:

> employees

> customers

> directors of Toyworld

> shareholders (other than directors)

> the government

(10 marks)

(20 marks)

QUESTION

BANK

C

7.

Contingency theory, BPR

 

(a)

Explain the contingency theory of management accounting and expand on ways in which its components highlight and allow explanations of differences in management accounting control systems.

 

(10 marks)

(b)

 

(i)

Explain the term 'Business process re-engineering' and how its application might enable overall business performance to be improved.

 

(7 marks)

 

(ii)

Briefly discuss potential problems which may be encountered in the implementation of a business re- engineenng programme.

 

(3 marks)

(20 marks)

(December 2004)

8.

Behavioural aspects in performance measurement - Astrodome sports

Ltd

Astrodome Sports Ltd was formed in December 2000 by seven engineers who comprise the board of directors of the company. The seven engineers previously worked together for Telstar", a satellite navigation company. In conjunction with one of the three largest construction companies within their country they constructed the '365 Sports Complex' which has a roof that opens and uses revolutionary satellite technology to maintain grass surfaces within the complex. The complex facilities, which are available for use on each day of the year, include two tennis courts, a cricket pitch, an equestrian centre and six bowling greens. The tennis courts and cncket pitch are suitable for use as venues for national competitions. The equestrian centre offers horse-riding lessons to the general public and is also a suitable venue for show-jumping competitions. The equestrian centre and bowling greens have increased in popularity as a consequence of regular television coverage of equestrian and bowling events.

In spite of the high standard of the grass surfaces within the sports complex, the directors are concerned by reduced profit levels as a consequence of both falling revenues and increasing costs. The area in which the "365 Sports Complex' is located has high unemployment but is served by all public transport services. The directors of Astrodome Sports Ltd have different views about the course of action that should be taken to provide a strategy for the future improvement in the performance of the complex. Each director's view is based on his/her individual perception as to the interpretation of the information contained in the performance measurement system of the complex. These are as follows:

Director

(a)

'There is no pcwnt whatsoever in encouraging staff to focus on interaction with customers in efforts to create a 'user friendly' environment. What we need is to maintain the quality of our grass surfaces at all costs since that is the distinguishing feature of our business.'

(b)

'Buy more equipment which can be hired out to users of our facilities. This will improve our utilisation ratios which will lead to increased profits.'

(c)

'We should focus our attention on maximising the opening hours of our facilities. Everything else will take care of itself.'

8: Performance Measurement System and Design

€> fiTfi

(d)

'Recent analysis of customer feedback forms indicates that most of our customers are satisfied with the facilities.ln fact, the only complaints are from three customers - the LCA University which uses the cricket pitch for matches, the National Youth Training Academy which held training sessions on the tennis courts, and a local bowling team.'

(e)

'We should reduce the buildings maintenance budget by 25% and spend the money on increased advertising of our facilities which will surely attract more customers.'

(f)

'We should hold back on our efforts to overcome the shortage of bowling equipment for hire. Recent rumours are that the National Bowling Association is likely to offer large financial grants next year to sports complexes who can show they have a demand for the sport but have deficiencies in availability of equipment.'

(g)

'Why change our performance management system? Our current areas of focus provide us with all the information we need to ensure that we remain a profitable and effective business.'

As management accountant of Astrodome Sports Ltd you have recently read an article which discussed the following performance measurement problems:

(i)

Tunnel vision

(ii)

Sub-optimisation

(iii)

Misinterpretation

(iv)

Myopia

(v)

Measure fixation

(vi)

Misrepresentation

(vii)

Gaming

(viii)

Ossification

Required:

(a)

Explain FOUR of the above-mentioned performance measurement problems (i-viii) and discuss which of the views of the directors (a-g) illustrate its application in each case.

 

(12 marks)

(b)

Discuss the relevance of each of the following actions as steps in trying to remedy performance measurement problems relating to the '365 Sports Complex' and suggest examples of specific problem classifications that may be reduced or eliminated by each action:

(i)

Focusing on and improving the measurement of customer satisfaction.

(ii)

Involving staff at all levels in the development and implementation of performance measures.

(iii)

Being flexible in the extent to which formal performance measures are relied on.

(iv)

Giving consideration to the auditing of the performance measurement system.

 

(8 marks)

(20 marks)

(December 2005)

9.

Internal and external aspects of performance measurement - Ochilpark

Pic

Ochilpark Pic has identified and defined a market in which it wishes to operate. This will provide a 'millennium' focus for an existing product range. Ochilpark Pic has identified a number of key competitors and intends to focus on close co-operation with its customers in providing products to meet their specific design and quality requirements. Efforts will be made to improve the effectiveness of all aspects of the cycle from product design to after sales service to customers. This will require inputs from a number of departments in the achievement of the specific goals of the 'millennium' product range. Efforts will be made to improve productivity in conjunction with increased flexibility of methods.

An analysis of financial and non-financial data relating to the 'millennium' proposal is shown in Schedule 3.1.

€ C.TG

Required:

Question Bank

:*)

(a)

(i)

Prepare a table (Sm) of the total costs for the 'millennium' proposal for each of years 2000, 2001 and 2002 (as shown in Schedule 3.1), detailing target costs, internal and external failure costs, appraisal costs and prevention costs. The following information should be used in the preparation of the analysis:

 

2000

2001

2002

 

Target costs

- variable (as % of sales)

40%

40%

40%

- fixed (total)

S2m

S2m

S2.5m

Internal failure costs

(% of total target cost)

20%

10%

5%

External failure costs (% of total target cost)

25%

12%

5%

Appraisal costs

S0.5m

S0.5m

S0.5m

Prevention costs

S2m

51m

S0.5m

 

(4 marks)

(ii)

Explain the meaning of each of the cost classifications in (i) above and comment on their trend and inter- relationship. You should provide examples of each classification.

 

(8 marks)

(b)

Prepare an analysis (both discursive and quantitative) of the 'millennium' proposal for the period 2000 to 2002. The analysis should use the information provided in the question, together with the data in Schedule 3.1. The analysis should contain the following:

(i)

A definition of corporate 'vision or mission' and consideration of how the millennium proposal may be seen as identifying and illustrating a specific sub-set of this 'vision or mission'.

(5 marks)

(ii)

Discussion and quantification of the proposal in both marketing and financial terms.

(6 marks)

(iii)

Discussion of the external effectiveness of the proposal in the context of ways in which I. Quality and 2. Delivery are expected to affect customer satisfaction and hence the marketing of the product.

(4 marks)

(iv)

Discussion of the internal efficiency of the proposal in the context of ways in which the management of I. Cycle Time and 2. Waste are expected to affect productivity and hence the financial aspects of the proposal.

(4 marks)

(v)

Discussion of the links between internal and external aspects of the expected trends in performance. (4 marks) (35 marks) (December 1999)

Schedule 3.1.

 

2000

2001

2002

Total market size (Sm)

120

125

130

Ochilpark

Pic sales (Sm)

15

18

20

Ochilpark

Pic - total costs (Sm)

14.1

12.72

12.55

Ochilpark Pic sundry statistics:

 

Production achieving design quality standards (%)

95%

97%

98%

Returns from customers as unsuitable (% of deliveries)

3.0%

1.5%

0.5%

Cost of after sales service (Sm)

1.5

1.25

1

Sales meeting planned delivery dates (%)

90%

95%

99%

Average cycle time (customer enquiry to delivery) (weeks)

6

5.5

5

Components scrapped in production (%)

7.5%

5.0%

2.5%

Idle machine

capacity (%)

10%

6%

2%

10:

Performance Measurement System and Design

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10. Informatio n requiremen t - Moffat Ltd

Moffat Ltd. which commenced trading on 1 December 2002, supplies and fits tyres and exhaust pipes and services motor vehicles at thirty locations. The directors and middle management are base-d at the Head Office of Moffat Ltd. Each location has a manager who is responsible for day-to-day operations and is supported by an administrative assistant. All other staff at each location are involved in fitting and servicing operations.

The directors of Moffat Ltd are currently preparing a financial evaluation of an investment of S2 million in a new IT system for submission to its bank. They are concerned that sub-optimal decisions are being made because the current system does not provide appropriate information throughout the organisation. They are also aware that not all of the benefits from the proposed investment will be quantitative in nature.

Required:

(a)

Explain the characteristics of THREE types of information required to assist in deasion-making at different levels of management and on diffenng timescales within Moffat Ltd. providing TWO examples of information that would be appropriate to each level.

 

(10 marks)

(b)

Identify and explain THREE approaches that the directors of Moffat Ltd might apply in assessing the QUALITATIVE benefits of the proposed investment in a new IT system.

 

(6 marks)

(c)

Identify TWO QUALITATIVE benefits that might arise as a consequence of the investment in a new IT system and explain how you would attempt to assess them.

 

(4 marks)

(20 marks)

(Dec 2005)

11.

Benchmarking & information system -

INA Ltd

INA Ltd manufactures and distributes generic paper-based products and currently has an annual turnover of $100 million.

At present, the management of INA Ltd are uncertain whether the purchasing department is maximising its potential in terms of purchasing efficiency and effectiveness. The management are currently considering the introduction of a system of benchmarking to measure the performance of the purchasing department.

Required:

(a)

Explain the term benchmarking' and briefly discuss the potential benefits that can be obtained as a result of undertaking a successful programme of benchmarking.

(6 marks)

(b)

Descnbe how a system of benchmarking could be introduced to measure the performance of the purchasing department.

(8 marks)

(c)

Discuss the problems that the management of INA Ltd might encounter in implementing a system of benchmarking and recommend how such problems should be successfully addressed.

(6 marks)

(20 marks)

(Dec 2003)

QUESTION

BANK

Q

STRATEGIC PERFORMANCE P AND MEASUREMENT

Z

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12.

Mission Statement

(a)

Explain the role and content of a Mission Statement.

 
 

(5 marks)

(b)

Explain how a Mission Statement could contnbute towards the planning and performance measurement process.

 

(9 marks)

(c)

Identify the potential problems arising from using a Mission Statement to manage performance.

 

(6 marks)

(20 marks)

(December 2002)

13.

Usage of standards in decision-making

(a)

Discuss ways in which standards may be seen as useful aids in management accounting decision-making. (6 marks)

(b)

Suggest ways in which the use of standards may be seen as having a dysfunctional effect in relation to decision making about each of materials, labour and overhead cost.

 

(9 marks)

(15 marks)

(June 2001)

14.

Performance analysis - Sunflower

Hospital

Sunflower Hospital is partially government-funded. It specialises in the provision of orthopaedic surgery and physiotherapy treatments. It is well-known for providing high quality services to all of its patients, who include both private fee-paying patients and government funded patients.

Some statistics regarding Sunflower Hospital for the year ended 30 June 2007 are as follows:

1.

Budgeted operations

Orthopaedic surgery (25% of which are major surgeries)

60%

Physiotherapy treatments

40%

2.

Fees payable by each patient who received treatment from the hospital (40% of the fees are funded by the government on behalf of patients)

Fees payable by government

Type of

service

Amount S

Fees payable by private patients Amount $

Orthopaedic minor surgery

1,000

1,600

Orthopaedic major surgery

2,200

3,000

Physiotherapy treatments

3.500

4,500

12:

20: Strategic Performance and Measurement

€> fiTG

3. Total yearly costs according to budget for Sunflower Hospital

Costs

Amount $'000

Fixed costs

Variable costs

Surgical costs

40,000

80%

20%

Nursing costs

10,000

65%

35%

Depreciation on equipment & operation accessories

2,500

100%

-

Administration costs

5,000

100%

-

Miscellaneous costs

6,000

50%

50%

Total yearly costs according to actual results for Sunflower Hospital

 

Costs

Amount S'000

Fixed costs

Variable costs

Surgical costs

42,000

32,000

10,000

Nursing costs

10,500

6.500

4.000

Depreciation on equipment & operation accessones

2,500

2.500

-

Administration costs

5,800

5,800

-

Miscellaneous costs

6.300

3,500

2.800

5. Sunflower Hospital did not receive any grant, donation or loan during the year.

6. Variable budgeted surgical costs include a total amount of S1,250,000 related to emergency operations undertaken.

7. Variable actual surgical costs of emergency operations undertaken were $1,300,000.

8. The proportion of emergency operations as a percentage of total operations was according to budget.

9. Other statistics relating to Sunflower Hospital

Capacity utilisation (%) Patient mix for each type of operation and treatments:

90%

Privately-funded patients

Orthopaedic surgery (40% of which are major surgeries)

30%

Government funded patients

70%

Operation mix:

55%

Physiotherapy treatments

45%

Additional:

Moonlight Hospital is privately owned and also specialises in the provision of orthopaedic surgery and physiotherapy treatments. (Assume that it does not carry out emergency operations). Summary of income statement of Moonlight Hospital:

 

Amount

$'000

Fees earned

45,000

Less: Costs Surgery

12,000

Nursing

18.000

Depreciation

4.000

Interest on loan

600

Management

5,000

Sundry

1,000

Net profit

4.400

Each hospital comprises 20 wards, each of which can accommodate 6 patients. The average patient stay in both hospitals was 2 days. Each hospital is open for 365 days per annum.

 

€ C.TG

Question Bank :I3

Required:

(a)

Prepare a statement which shows comparative analysis of actual and budgeted results for Sunflower Hospital for the year ended 30 June 2007.

 

(14 marks)

(b)

State four performance measures to assess the quality of surgical treatments provided by a hospital, indicating how each measure may be assessed.

 

(6 marks)

(c)

Give your suggestions to Sunflower Hospital regarding the ethical issues which may arise as a result of considering patient mix as a key determinant of profitability.

 

(3 marks)

(d)

Is it appropriate to make a direct companson of the financial performance of Sunflower Hospital and Moonlight Hospital? Explain four reasons for your view.

 

(6 marks)

(e)

Using only information contained in the question, make three adjustments to the income statements you have prepared in your solution to (a) that you consider would assist in the development of a more appropriate comparison of the financial performance of both hospitals.

 

(6 marks) (35 marks) (Adapted from Pilot Paper)

15.

Evaluation of strategies

A motor car manufacturer has been specialising in the production and sale of one model of car. The model is

somewhat dated, and the current sales forecast indicates that the sales will decline from the current level (2003)

of 170,000 cars per annum to 150,000 in 2004, 130.000 in 2005 and 110,000 in 2006. The company supplies to

order and no stocks are held. Carbon monoxide emission regulations will prevent the model being manufactured and sold after December 2006.

The compan/s current estimates of the selling price and costs in 2004 are as follows:

Per car $

Selling Price Production costs:

9,500

Material and labour (vary with production volume)

3.600

Assembly*

4,000

*75% of the assembly costs are fixed and the remainder vary with production volume. In addition, the company estimates that it will incur the following non-production costs:

Marketing costs of $60 million. 50% of these vary with sales volume. Delivery costs of $75 million. 20% of these vary with sales volume. The Administration costs of S10 million are fixed. The selling price, variable costs per car and total fixed costs are expected to remain constant throughout the period from 2004 to 2006.

The compan/s Managing Director is unhappy with the current annual profit forecasts for 2004-2006 based upon the information above and believes that the company has the potential to increase the profit to $280m in each of the years 2004 to 2006. The Managing Director has undertaken a strategic review and developed the following

strategies:

Strategy 1

A marketing proposal will enable the company to enter a new overseas market with the result that the total

(including the overseas market) sales level will be stabilised at 160,000 cars per annum from 2004 to 2006. The market entry costs will be S30 million for each of the three years.

Strategy 2

A re-design of the car will enhance its sales appeal and will permit the company to increase its selling price to

$10,000. The re-design costs are $30 million and are to be amortised over three years on a straight line basis.

14: Strategic Performance and Measurement

Strategy 3

€> fiTG

A radical cost reduction programme will improve efficiency and lower all variable costs by 20%. This will add

$70 million to the annual fixed overheads each year from 2004 to 2006.

Required:

(a)

Prepare a financial analysis showing the current annual forecast of costs, revenues and profits for each of the years 2004 to 2006 and briefly comment on the figures. Ignore inflation.

 

(6 marks)

(b)

Estimate the profit in 2004 if:

(i)

Strategy 1 was implemented;

 

(2 marks)

 

(ii)

Strategy 2 was implemented;

 

(2 marks)

 

(iii)

Strategy 3 was implemented.

 

(2 marks)

(c)

Estimate the profit in 2004 if all three strategies were implemented.

 

(4 marks)

(d)

Explain why the total of the increase in profit arising from the three strategies implemented separately in (b) is different from the total profit calculated in (c). Illustrate your answer with a numerical reconciliation of the differences in the two profit figures.

 

(5 marks)

(e)

Explain how "Gap Analysis' can be used to assist a company to plan the achievement of its strategic profit objective. Illustrate your answer with a diagram which quantifies the effect of your calculations in (a), (b), (c) and(d)above.

(')

(7 marks)

(i)

Explain how sensitivity analysis could be used in conjunction with the profit estimates that you have made for the company and illustrate your answer with reference to each of the strategies;

(ii)

Calculate and comment on the percentage change in the key variable in each of strategies 1, 2 and 3 from its original forecast level in order that the desired profit level of £280m for 2004 will be achieved in each case

(8 marks)

(g) What major external environmental factors need to be considered in assessing the success of the three strategies?

16. Strategic performance measurement -

Big Bucks Bank Pic

(4 marks)

(40 marks)

(June 2003)

Big Bucks Bank Pic (the Bank) is a clearing bank in the UK. It has 2,000 retail branches. It classifies its business into retail and corporate banking. Each type of business currently accounts for more or less half of the Bank's turnover.

Big Bucks Bank Pic's retail banking business provides banking facilities for retail customers and small businesses

to which it does not lend in excess of $2,000,000 in any one year. On the other hand, the Bank defines 'corporate

business' as "

where

lending (both domestic and international) would exceed $2,000,000 in any one year."

Corporate lending is traditionally the most profitable business for the Bank, contributing 70% of the profit before taxation. Corporate lending operations comprise eight regional offices and a department at the head office in London. The London office is also responsible for international lending. There are 250 staff employed in corporate lending.

€ C.TG

Question Bank :I5

On the other hand, the retail and small business customer strength ranges from 1,000 to 15,000 per branch, mean customer numbers being 7,500.

The

Bank has the following mission statement for its retail banking:

"To

deliver a high-quality service to customers based on our managers' personal knowledge of customers'

affairs."

The policy of the Bank is to cross-subsidise its retail banking operations (since this is a less profitable venture than corporate banking) in the hope that some retail customers will become corporate ones. The Bank has assigned its branch managers the responsibility of assisting in this process because of their financing expertise

and deep knowledge of their customers.

Each branch of the Bank operates as a cost centre. The managers of each branch need to record and compare committed expenditure and budgeted expenditure on a quarterly basis. The Bank does not follow an accrual accounting system as regards branch expenditures for these quarterly reports. However, year-end adjustments reconcile committed, actual and budgeted expenditures. These accounting activities are performed by management accounting staff based at head office.

The managers' remit is to operate within their expenditure budgets. Moreover, they are set targets (e.g. number of new accounts opened, amount of holiday insurance sold, level of bad debts).

The managers are not consulted about the size of their budgets or their targets. These are imposed by head

office.

Proposals for change

The Bank is reviewing its corporate attitude. Its corporate lending business has shown a dedining trend in

profitability as a result of problems with international debt and movements in foreign exchange rates. The Bank

has also become concerned about the attitudes which it believes have become dominant in its retail banking

business. Most of its managers have found their targets relatively easy to achieve. They have been criticised for a lack of entrepreneurial awareness and for not taking sufficient account of environmental forces. The managers have defended their behaviour by arguing that, as soon as a retail customer becomes a corporate customer, they lose their business. Therefore there is no incentive for them to convert retail customers into corporate customers. Due to these factors, the Bank has decided upon the following changes:

Retail banking must, in future, contribute 50% of the Bank's profit before taxation.

^

A programme of branch rationalisation will be entered into in which half the branches will close.

>

A new type of branch, referred to as "superbranches", will be introduced. These will be at the centre of a network of 4 to 6 existing branches. The superbranch manager will make all major decisions for the network of branches. He will be assisted in this by two assistant managers who will probably be drawn from the existing managers in the network.

>

Each superbranch will be designated an investment centre and must earn a return of 15%. No target has been set for residual income, although the Bank intends to set such targets after it has gained some experience of the superbranches' operations.

r

An expenditure budget has been allotted to each superbranch. The budgets are set based on the cumulative total spent by the superbranch's network branches in the previous year. No extra funds have been allocated for the establishment of the superbranches. The manager of the superbranch has the power to decide where the superbranch will be located. This could be inside an existing branch or in new premises.

>

The manager of the superbranch will be responsible for the design and operation of all of the network's information systems. They will be accountable to the head office. The head office will continue to draw up the statutory accounts.

^

The manager of the superbranch will be responsible for deciding the number of employees working in the network. If there are to be any redundancies, head office will negotiate nationally to determine the terms for redundant staff. The superbranch will need to bear the costs, if any, of redundancies in its network.

The CMD of the Bank has described the new philosophy for retail banking thus: "We are operating in a very

competitive environment. In order to survive, we must change. We must never forget that earning profit is our ultimate objective. Retail banking has been subsidised for a long time and as a result, has become inefficient.

Our proposed steps will enable us to deliver an efficient, low-cost service. However, I arn afraid the days of the

bank manager being a personal friend and adviser are over"

16: Strategic Performance and Measurement

Required:

€> fiTG

(a)

Explain the implications

of

the

new

philosophy

for

retail

banking

for

the

staff,

customers

and

shareholders of the Bank. You should contrast the new philosophy with the mission statement of the organisation.

 

(12 marks)

(b)

Discuss

the

advantages

and

disadvantages

of

the

proposal

to

make

superb ranches

investment

centres.

 

(8 marks)

(c)

(i)

Describe the reports you believe will be necessary for the manager of a superbranch to manage successfully. Your answer should include the reasons for your suggestions.

(12 marks)

(ii)

Suggest, and fully justify, THREE qualitative performance indicators you consider would be of assistance to a superbranch manager.

(8 marks)

(40 marks)

17. Measures of performance

A large conglomerate with diverse business activities is currently considering whether it should commence a

project and has gathered the following data:

Project data

An initial investment of S60 million will be required on 1 January, year 1. The project has a three-year life with a

nil residual value. Depreciation is calculated on a straight line basis.

The project is expected to generate annual revenue flows of S90m in year 1. S100m in year 2 and S110m in year 3. These values may vary by ±5%.

The incremental costs will be $60m in year 1, $70m in year 2 and $80m in year 3. These may also vary by ±5%.

The most likely cost of capital is 12%.This may vary from 10% to 14% for the life of the project.

Additional information:

Assume that all cash flows other than the initial investment take place at the end of each year.

Use the written down value of the asset at the start of each year to represent the value of the asset for the year.

Note: Ignore taxation

Required:

(a)

Prepare two tables showing net profit, residual income and return on investment for each year of the project and also net present value (NPV) for:

(i) the best outcome; (ii)the worst outcome.

(8 marks)

(b)

(c)

Explain the distinctive features of residual income, return on investment and net present value in measuring financial performance. Your answer should include a critique of the strengths and weaknesses of each measure.

(8 marks)

What broader issues are likely to be considered when deciding whether the company should proceed with a particular project?

(4 marks) (20 marks) (Adapted from June 2003)

C.TG

18.

Performance analysis - Taliesin Ltd

Qupsilon Bank :l<)

Taliesin Ltd manufactures a range of ice-cream based confectionery products, which it sells to national supermarket chains which market the products under their own brand labels. The board of directors is committed to a policy of achieving growth. However because the company is a relatively small player within the industry the board of directors is focused solely upon internal development as opposed to growth by acquisition and has further agreed that it wishes to confine operations to the home market. Summary financial statements for the year ended 31 May 2005 together with prior year comparative figures are as follows:

Profit and Loss Account

 

2005

2004

$'000

$'000

Sales (note 1)

48,000

40,000

Cost of sales (note 2)

28,800

24.000

Gross Profit

19,200

16.000

Operating expenses

10,200

8.000

Interest

1,000

0

Depreciation

4,000

4,000

Net Profit

4.000

4.000

Balance Sheet

 

2005

2004

$'000

$'000

Fixed Assets (net book value)

42,000

40,000

Net Current Assets

24.000

12,000

Total Assets less Current Liabilities

66,000

52,000

Loan Finance

10.000

Net Assets

56,000

52,000

Capital Employed:

Ordinary Share Capital (£1 each)

30,000

30,000

Retained Earnings

26.000

22,000

Capital Employed

56.000

52.000

Other information relating to Taliesin Ltd is as follows:

(1) Sales information in respect of the years ended 31 May 2005 and 2004 is as follows:

 

2005

2004

Sales revenue

$•000

$'000

1 June-30 November

33,300

26,000

1 December-31 May

14,700

14,000

(2) Cost of sales information:

 

2005

2004

$'000

$000

Materials

9.360

7.800

Labour

4.620

4.200

Manufacturing overheads

14.820

12.000

Cost of sales

28.800

24.000

18: Strategic Performance and Measurement

€> fiTG

(3)

Other Information:

 

2005

2004

 

Number of employees:

Permanent

204

200

Temporary

288

240

Number of customers

5

6

Number of new

6

5

(i)

Temporary employees are hired on a full-time basis between 1 June and 30 November in each year. They were paid at the same rate as permanent employees.

(ii)

Six new product lines were launched during the year ended 31 May 2005. The manufacture of each new product line required an investment in capital equipment of $1 million.

Required:

(a)

Using the above information, appraise the performance of Taliesin Ltd during the year ended 31 May 2005 and evaluate the extent to which the objective of growth has been achieved.

(11 marks)

(b)

Explain the major benefits of pursuing a policy of internal development.

(4 marks)

(c)

Explain how the use of activity-based techniques may benefit Taliesin Ltd.

(5 marks)

(20 marks)

(June 2005)

19. Strategic performance measurement -

Pack and Dispatch Co

Pack and Dispatch Co (PADC) is a well-known company in food products packaging. The management of PADC is currently considering whether to enter the fast food market. On average, fast food packs make up between 3% and 5% of the total cost of the purchaser's finished product.

The following information has been gathered by senior management:

(1)

The machines used to manufacture fast food packs would differ on the basis of size as well as efficiency. The lowest cost machine is priced at S70.000 and requires only one operator. A one-day training course is required in order that an unskilled person can then operate such a machine in an efficient and effective manner.

(2)

Fast food packs are made from high quality plastic which has been in short supply during recent years.

(3)

The cardboard packs are made from specially formulated paper which, during recent years, has occasionally been in short supply.

(4)

Currently, the six major manufacturers of fast food packs have an aggregate market share of about 75%. Among them, the current market leader has a 25% market share. The remaining five major manufacturers' market shares are equal in size. The product ranges offered by them are similar in terms of quality, size and price. In recent years, the market has grown by 2.8% per annum (approx.)

(5)

There is an assumption in the present market that a foreign-based multinational company will expand its operations by opening a packaging division overseas. The company possesses large-scale automated machinery for manufacturing fast food packs of various sizes.

(6)

Another company. Soft Packaging, produces cardboard packs for regular household products. Soft Packaging is increasing its goodwill in the market more quickly than any other company. However, Soft Packaging's prices are comparatively expensive. In fact, its prices are 25% higher than equivalent sized plastic packs available in the market.

€ C.TG

Required:

Qupsilon Bank :l<)

(a) Using Porter's five forces model, assess the attractiveness of the option to enter the market for fast food packs as a performance improvement strategy for PADC.

(10 marks)

A rival company was the market leader with a share of 29% three years ago. The managing director of that company stated at a recent meeting of the board of directors that: "our loss of market share during the last three years might lead to the end of this organisation and therefore we must address this issue immediately".

Required:

(b)

Discuss the statement of the managing director of the nval company and discuss six performance indicators, other than decreasing market share, which might indicate that the rival company will fail as a corporate entity.

(10 marks) (20 marks) (Adapted from Dec 2007)

20.

Measures of performanc e - Tannadens Divisio n

Tannadens Division is considering an investment in a quality improvement programme for a specific product group which has an estimated life of four years. It is estimated that the quality improvement programme will increase saleable output capacity and provide an improved level of customer demand due to the enhanced reliability of the product group. Forecast information about the programme in order that it may be evaluated at each of best, most likely and worst scenario levels are as follows:

(i)

There will be an initial investment of S4.000.000 on 1 January, year 1, with a programme life of four years and nil residual value. Depreciation will be calculated on a straight line basis.

(ii)

Additional costs of staff training, consultancy fees and the salary of the programme manager are estimated at a most likely level of $100,000 per annum for each year of the proposal. This may vary by it 2.5%. This is the only relevant fixed cost of the proposal.

(iii)

The most likely additional output capacity which will be sold is 1,000 standard hours in year I with further increases in years 2, 3 and 4 of 300. 400 and 300 standard hours respectively. These values may vary by

5%.

(iv)

The most likely contribution per standard hour of extra capacity is S1,200. This may vary by 10%.

(v)

The most likely cost of capital is 10%. This may vary from 8% to 12%.

Assume that cash flows other than the initial investment take place at the end of each year. Ignore taxation.

Required:

(a) Present a table (including details of relevant workings) showing the net profit, residual income and return on investment for each of years 1 to 4 and also the net present value (NPV) for the BEST OUTCOME situation of the programme.

(10 marks)

Using the information provided above, the net profit, residual income (Rl), and return on investment (ROI) for each year of the programme have been calculated for the most likely outcome and the worst outcome as follows:

Most likely outcome:

Year 1

Year 2

Year 3

Year 4

Net profit (S)

100,000

460,000

940,000

1,300,000

Residual income ($)

300.000

160.000

740.000

1,200,000

Return on investment

2.5%

15.3%

47.0%

130.0%

Worst outcome:

Year 1

Year 2

Year 3

Year 4

Net profit (S)

(-76.500)

231.300

641,700

949,500

Residual income (S)

(-556.500)

(-128,700)

401.700

629,500

Return on investment

(-1.9%)

7.7%

32.10%

95.0%

20: Strategic Performance and Measurement

€> fiTG

In addition, the net present value (NPV) of the programme has been calculated as most likely outcome:

$1,233,700 and worst outcome: $214,804. It has been decided that the programme manager will be paid a bonus in addition to the annual salary of $40,000 (assume that this salary applies to the best, most likely and worst scenarios).The bonus will be paid on ONE of the following bases:

(A)

Calculated and paid each year at 1.5% of any profit in excess of $250,000 for the year.

(B)

Calculated and paid each year at 5% of annual salary for each $100,000 of residual income in excess of

$250,000.

(C)

Calculated and paid at 15% of annual salary in each year in which a positive ROI (%) is reported.

(D)

Calculated and paid at the end of year 4 as 2.5% of the NPV of the programme.

Required:

(b)

Prepare a table showing the bonus to be paid in each of years 1 to 4 and in total for each of methods (A) to (D) above, where the MOST LIKELY outcome situation applies.

 

(9 marks)

(c)

Discuss which of the bonus methods is likely to be favoured by the programme manager at Tannadens Division. You should refer to your calculations in (b) above as appropriate. You should also consider the total bonus figures for the best outcome and worst outcome situations which are as follow:

 

Total Bonus

 

Best

Worst

outcome

outcome

$

$

 

Net profit basis

43,890

16.368

Residual income basis

48,150

14,624

ROI basis

24,000

18,000

NPV basis

60,323

5,370

 

(11 marks)

(d)

The achievement of the quality improvement programme will be influenced by the programme manager's:

(i)

level of effort

(ii)

attitude to risk and

(iii)personal expectations from the programme'.

Discuss this statement.

21. Divisional performance - Galaxy pic and Milky-way

group

(5 marks)

(35 marks)

(December 1999)

Galaxy Pic is considering measurement of divisional management performance and divisional economic performance. It considers the following performance measures for evaluation:

(i)

Contribution margin = Sales - Variable costs

(ii)

Controllable profit = Contribution margin - Controllable fixed costs

(iii)

Divisional profit = Controllable profit - Non-controllable avoidable costs

Required:

(a) Discuss the relevance of all the measures mentioned above.

(9 marks)

Note: The following can be considered in the discussion of the measures:

r internal transfers to the other divisions of Galaxy Group

> costs fixed in short term such as labour costs

> depreciation on non-current assets finance costs not directly related to the division

€ C.TG

Question Bank :21

Sun and Moon are the different divisions of Galaxy Group. The managers of Sun and Moon are considering two different projects, S and M. The following information is related to the projects:

Project S

Project M

Average

annual profit (before interest & tax)

550,000

S35.000

Average investment (assets employed)

$300,000

$300,000

Profit given is calculated after considering the depreciation on assets employed.

The cost of capital to Galaxy is 15%. The current ROI of Sun division is 20% and of Moon division is 11%.

(b) Evaluate the projects considering the ROI and comment on the decisions the divisional managers are likely to take regarding the projects and the impact of these decisions on the overall performance of the organisation.

 

(8 marks)

Note:

Remember.

Galaxy

Pic gives

bonuses to the divisional

managers

based on

the

year's

divisional

performance.

The following information is related to Milky-way Group (another group):

 

20X6

20X7

Sm

Sm

Sales

492

557

Profit before interest and tax

112.5

137.5

Interest

7.5

7.5

Profit before tax

105.0

130.0

Income tax

31.5

39.0

Profit after tax

73.5

91.0

Dividend

30.0

35.0

Retained earnings

43.5

56.0

20X6

20X7

Sm

Sm

Non-current assets

190

171

Current assets

205

289

395

460

Equity

300

350

Long-term debt

95

110

395

460

Additional information

^

Capital employed at the beginning of 20X6 was S311 m.

r-

Milky-way amortises $5m every year including 20X6 and 20X7. Accumulated amortised goodwill (during the years prior to 20X6) amounted to S60m.

>

Cost of equity for the year 20X6 is 15% and for 20X7 is 17%.

>

Cost of debt (before tax) is 10%.

>

Target capital structure is 60% debt and 40% equity.

>

Tax rate is estimated as 30%.

>

Accounting and economic depreciation are the same.

^

Other non-cash expenses amounted to S14m in 20X6 and $15 in 20X7.

(c)

Measure the performance of Milky-way Group for the years 20X6 and 20X7 using EVA as a measure.

(8 marks) (25 marks) (Adapted from December 2007)

22:

Strategic Performance and Measurement

€> fiTG

22. Divisional performance -

NAW

group

The NAW Group manufactures healthcare products which it markets both under its own brand and in unbranded packs. The group has adopted a divisional structure. Division O. which is based in a country called Homeland, manufactures three pharmaceutical products for sale in the domestic market. Budgeted information in respect of

Division O for the year ending 31 May 2005 is as follows:

Product

NAW Brand

'Painfree'

'Digestisalve'

'Awaysafe'

Sales packs (000's)

5.000

5,000

15,000

Unbranded

15,000

20,000

-

Selling price

per pack ($)

NAW Brand

2-40

4-80

8 0 0

Unbranded

1-20

3-60

-

Cost of sales information

Variable manufacturing

Variable manufacturing

Material and

Packaging

costs per pack

costs per pack

conversion cost

$

cost

$

Painfree'

NAW Brand

0-85

0-15

Unbranded

0-85

0 0 5

'Digestisalve'

NAW Brand

1 85

0-25

Unbranded

1 85

0-15

'Awaysafe'

NAW Brand

2-80

0-40

Other relevant information is as follows:

1. Each of the three products is only sold in tablet form in a single pack-size which contains 12 tablets. During the year to 31 May 2005 it is estimated that a maximum of 780 million tablets could be manufactured. All three products are manufactured by the same process therefore management have the flexibility to alter the product mix. Management expect that sales volume will increase by 10% in the year ending 31 May 2006.

2. Advertising expenditure has been committed to under a fixed term contract with a leading consultancy and is therefore regarded as a fixed cost by management. Advertising expenditure in respect of the turnover of branded products in the year ending 31 May 2005 is apportioned as follows

Product

Advertising expenditure as a % of turnover

Painfree

5%

Digestisalve

10%

Awaysafe

12%

3. The average capital employed in the year to 31 May 2005 is estimated to be $120 million. The company's cost of capital is 10%.

4. The management of the NAW Group use both Return on Investment (ROI) and Residual Income (Rl) to assess divisional performance.

5. Budgeted fixed overheads (excluding advertising) for Division O during the year ended 31 May 2005 amount to S81.558.000.

6. There is no planned change in manufacturing capacity between the years ended 31 May 2005 and 31 May

2006.

C.TG

Qupsilon Bank :l<)

Required:

(a)

(i)

Prepare a statement of budgeted profit in respect of Division O for the year ending 31 May 2005. Your answer should show the annual budgeted contribution of each branded and unbranded product. Calculate BOTH the residual income (Rl) and Return on Investment (ROI) for Division O.

(7 marks)

(ii)

Name and comment on THREE factors, other than profit maximisation, that the management of the

NAW Group ought to consider when deciding upon the product mix strategy for »he year ending 31 May

2006.

(3 marks)

(iii)

Suggest THREE reasons why the management of the NAW Group may have chosen to use Residual Income (Rl) in addition to Return on Investment (ROI) in order to assess divisional performance. (3 marks)

Division L of the NAW Group is based in Farland. The management of Division L purchases products from vanous sources, including other divisions of the group, for subsequent resale. The manager of Division L has requested two alternative quotations from Division O in respect of the year ended 31 May 2005:

1. Quotation 1 - Purchasing five million packs of 'Awaysafe'.

2. Quotation 2 - Purchasing nine million packs of 'Awaysafe'.

The management of the NAW Group has made a decision that a minimum of 15 million packs of 'Awaysafe' must be reserved for Homeland customers in order to ensure that customer demand can be satisfied and the producfs competitive position is further established in the Homeland market.

The management of the NAW Group is willing, if necessary, to reduce the budgeted sales quantities of other products in order to satisfy the requirements of Division L. They wish, however, to minimise the loss of contribution to the group.

The management of Division L is aware of the availability of another product that competes with 'Awaysafe' which could be purchased at a local currency price that is equivalent to £5-50 per pack. The NAW Group's policy is that all divisions are allowed the autonomy to set transfer prices and purchase from whatever sources they choose. The management of Division O intend to use market price less 30% as the basis for each of the quotations.

Required:

(b) (i) From the viewpoint of the NAW Group, comment on the appropriateness of the decision by the management of Division O to use an adjusted market price as a basis for the preparation of Quotations 1 and 2, and the implications of the likely decision by the management of Division L.

(3 marks)

(c)

(ii)

(iii)

(i)

Recommend the prices that should be quoted by Division O for 'Awaysafe'. in respect of Quotations 1 and 2, which will ensure that the profitability of the NAW Group as a whole is not adversely affected by the decision of the management of Division L.

(3 marks)

Discuss the proposition that transfer pnces should be based on opportunity costs.

(4 marks)

After much internal discussion concerning Quotation 2 by the management of the NAW Group. Division

O is not prepared to supply nine million packs of 'Awaysafe' to Division L at a price lower than market

price less 30%. All profits earned in Farland are subject to taxation at a rate of 20%. Division O pays tax

in Homeland at a rate of 40% on all profits.

Advise the management of the NAW Group whether the management of Division L should be directed to purchase 'Awaysafe' from Division O, or purchase a similar product from a local supplier. Supporting calculations should be provided.

(6 marks)

24: Strategic Performance and Measurement

€> fiTG

(ii) Identify and comment on the major issues that can arise with regard to transfer pricing in a multinational organisation.

(5 marks)

(d)

Evaluate the extent to which the management of the NAW Group could make use of the product life cycle model in the determination of its product pricing strategy.

 

(6 marks)

(40 marks)

(June 2004)

23.

Product vs. Customer profitability -

NAW Group

Candidates are advised that information contained in Question 24 is also relevant to this question.

The management of the NAW Group has divided the customers of Division O into four customer groups: large pharmaceutical stores, independent specialist pharmacies, supermarkets and other retail outlets (such as petrol stations, newsagents, etc). The management accountant of the NAW Group has reviewed internal records relating to customer ordering, shipping and distribution patterns and also extracted information from the budget file for the year ended 31 May 2005.

Budgeted sales statistics (% of sales volume)

Large

Pharmaceutical

stores

Independent

Specialist

pharmacies

Other

retail

Customer group

Supermarkets

outlets

10

10

70

-

20

10

70

-

20

10

Supermarkets

Other

retail

outlets

800

3,000

100

1,000

Product

'Painfree'

NAW Brand

60

Unbranded

30

'Digestisalve'

NAW Brand

40

Unbranded

30

'Awaysafe'

NAW Brand

40

Other budgeted statistics

Customer group

No. of delivenes

No. of purchase orders

Promotion and exhibition events

Average kilometres per delivery No. of times delivery requirements were changed

20

-

30

30

Independent

Specialist

pharmacies

2,400

300

Large

Pharmaceutical

stores

400

100

4

300

30

-

-

-

150

400

150

10

The following information is available:

(1) The review of internal records undertaken by the management accountant has revealed new information. It has been established that S33.558.000 of the total of $81,558,000 costs which were categorised as fixed overheads in Question 1, do in fact vary with activities.

Note: Candidates need only consider this new information with regard to their answers to Question 2.

(2) The budgeted overheads of £33,558,000 for the year ending 31 May 2005 may be charged to the four customer groups using the following costs per unit of activity:

€ C.TG

Question Bank :25

Activity

Cost

Delivery

$6-40

per kilometre

Changed delivery requirements

$20000

per change

Order processing

$2000

per order

Promotion and exhibition

$27,500

per event

(3) NAW Group pays a retrospective rebate based on annual sales revenue to each customer group as follows:

Customer groups

Large pharmaceutical stores Independent specialist pharmacies Supermarkets Other retail outlets

Required:

% rebate

based on

sales value

10

5

15

(a)

Prepare a statement of budgeted customer profitability for the year ending 31 May 2005 which shows the profit before fixed overheads for each of the four customer groups. Your answer should be based on the original budgeted sales volumes i.e. excluding Quotations 1 and 2.

 

(9 marks)

(b)

 

(i)

Discuss the proposition that 'customer profitability is as critical as product profitability.'

 

(5 marks)

 

(ii)

Discuss the initiatives that managers should consider in order to improve customer profitability.

 

(6 marks)

(20 marks)

(June 2004)

24. Transfer pricing - Able and Baker

(a) The transfer pricing system operated by a divisional company has the potential to make a significant contribution towards the achievement of corporate financial objectives.

Required:

Explain the potential benefits of operating a transfer pricing system within a divisionalised company.

(6 marks)

(b) A company operates two divisions, Able and Baker. Able manufactures two products X and Y. Product X is sold to external customers for S42 per unit. The only outlet for product Y is Baker.

Baker supplies an external market and can obtain its semi finished supplies (product Y) from either Able or an external source. Baker currently has the opportunity to purchase product Y from an external supplier for $38 per unit. The capacity of division Able is measured in units of output, irrespective of whether product X. Y or a combination of both are being manufactured. The associated product costs are as follows:

X

Y

Variable costs per unit

32

35

Fixed overheads per unit

5

5

26: Strategic Performance and Measurement

€> fiTG

Required:

Using the above information, provide advice on the determination of an appropriate transfer price for the sale of product Y from division Able to division Baker under the following conditions:

(i)

when division Able has spare capacity and limited external demand for product X:

(3 marks)

(ii)

when division Able is operating at full capacity with unsatisfied external demand for product X.

(4 marks)

(c)

The design of an information system to support transfer pncing decision making necessitates the inclusion of specific data.

Identify the data that needs to be collected and how you would expect it to be used.

(7 marks) (20 marks) (December 2001, Pilot paper)

25.

Transfer pricing - Alpha and Beta division

(a) Alpha division has an external market for product A which fully utilises its production capacity.

(i)

Explain the principle which would suggest that Alpha division should transfer product A to Beta division of

(ii)

Explain the circumstances in which Alpha division may offer to transfer product A to Beta division at less than the external market price and yet report the same total profit.

(4 marks)

(b)

The transfer pricing method to be used for an intermediate product between two divisions in a group is under debate.

The supplying division wishes to use actual cost plus a 25% profit mark-up. The receiving division suggests the use of standard cost plus a 25% profit mark-up. A suggested compromise is to use revised standard cost plus 25% profit mark-up.

The revised standard cost is arrived at after taking into account the appropriate elements of a planning and operational variance analysis at the supplying division.

Discuss the impact of EACH of the above transfer pncing methods and their acceptability to the supplying and receiving divisions.

(6 marks)

(Dec 1999)

26.

Not-for-profit organisation - AV & BW

AV is a charitable organisation, the primary objective of which is to meet the accommodation needs of persons within its locality. BW is a profit-seeking organisation which provides rented accommodation to the public.

Income and Expenditure accounts for the year ended 31 May 2004 were as follows:

 

AV

BW

$

$

Rents received Less:

2.386,852

2,500,000

Staff and management costs

450.000

620.000

Major repairs and planned maintenance

682.400

202.200

Day-to-day repairs

478,320

127,600

Sundry operating costs

305.500

235,000

Net interest payable and other similar charges

526,222

750.000

Total costs

2.442,442

1,934,800

Operating (deficit) / surplus

(55,590)

565,200

€>GTG

Quesilon Bank :27

Operating information in respect of the year ended 31 May 2004 was as follows:

(1) Property and rental information:

Size of

Property

Number

Rent

Number

of

payable

of

Properties

per week

Properties

 

AV

S

BV

1 bedroom

80

40

40

2 bedrooms

160

45

80

3 bedrooms

500

50

280

4 bedrooms

160

70

nil

AV had certain properties that were unoccupied during part of the year. The rents lost as a consequence of unoccupied properties amounted to S36.348. BW did not have any unoccupied properties at any time during the year.

(2) Staff salaries were paid as follows:

 

AV

BW

Number of

Salary per

Number of

Salary per

staff

staff member ($) per annu m

staff

staff member (S) per annum

2

35.000

3

50,000

2

25,000

2

35,000

3

20,000

20

20,000

18

15,000

-

-