Paper F5 Performance Management First Mock Exam June 2013 Session

Time allowed: Reading and Planning: Writing: 15 minutes 3 hours

All five questions are compulsory and must be attempted Total Marks: 100

1|Page

This is a blank page. The question paper begins on page 3

2|Page

Question # 1 Mango Inc. is a profit seeking hi-tech company that is located in Technoland. Mango was founded 20 years ago by John Robertson; a creative, scholar and renowned person in that industry. The company has expanded rapidly and now sells a range of products both in its domestic market as well as foreign markets. Mango has established itself as a small but profitable player in its chosen market. The emphasis of the organization has always been on product innovation backed up by a small but dynamic sales team. The company uses full cost plus pricing. In the words of one of the directors to the bookkeeper- tell us how much it costs and well add a bit, sometimes a small bit and sometimes a large bit, to make sure we make some money. One of the products that Mango sells is Product Uphone. Last quarter the company sold each Uphone for $20 and sold 45,000 units. This quarter the company reduced the price to $15 and 50,000 units were sold. Mango is now considering the launch of a new generation of product Uphone, the Uphone 3D. The product will have a short life cycle and has incurred a huge research and development cost in the preproduction stage. An opportunity has arisen for the company to buy from a leading market research company a consumer list costing $20,000. The directors estimate that if the list were bought, resulting sales could be high, average or low with equal probability. If no list were bought, it is estimated that sales could be average or low, with the odds 4:1 in favour of low sales. Whenever sales turn out to be low, the directors have a contingency plan, in which they could decide whether or not to place advertisements in newspaper, at a cost of $9,000, offering special purchases. The changes of high, average or low sales of special purchases are estimated to be 50%, 25% and 25% respectively. The contribution from the various sales levels ($000) are shown below. Sales levels Normal business Special purchases Required: a) Given that cost plus pricing has limited theoretical benefits, briefly reasons why it is widely used in practice. (3 marks) (b) Assuming demand is linear and that price is the only factor affecting demands determine the demand equation for Uphone. (3 marks) (c) Calculate the price elasticity of demand (PED) for the Uphone and comment on whether the revenue will increase or decrease if the price is increased. (3 marks) (d) Recommend with reasons an appropriate pricing strategy for Uphone 3D. (2 marks) High 200 40 Average 160 16 Low 110 -20

(e) Draw a decision tree for the Uphone 3D including all probabilities and payoffs. (4 marks) (f) Analyse the tree and recommend a course of action with reasons. (5 marks) (Total 20 marks)

3|Page

Question # 2 A pharmaceuticals company has recently developed a new drug called Bellerophon, which is made using a continuous microbiological process. The process manager is responsible for material procurement. Four material ingredients (A, B, C and D) are used in the processing of Bellerophon, all of which are obtainable from variety of sources. The standard material requirements of 1 unit of Bellerophon are as follows. Kg $ A 0.33 @$104.00 per kg 34.32 B 0.28 @$49.00 per kg 13.72 C 0.23 @$186.00 per kg 42.78 D 0.24 @$72.50 per kg 30.45 Total 1.26 121.27 Process losses occur at even rate throughout the processing operation and tend to rise if impurities are present in the ingredients. The effectiveness of Bellerophon depends on the quality of the ingredients being used and the maintenance of the ingredient mixture within close limits of that specified above. The results from the first two periods were as follows: Price Variance Usage Variance Mix Variance Yield Variance Required: (a) Critically comment upon the following statement made by the companys finance director in response to the results. This is an excellent report which tells us all we need to know for both financial and quality control purposes. We should pay the process manager a monthly performance bonus on the cost variances that are reported (5 marks) The following materials were acquired and input to the process in period 3. A B C D 291.6kg at a cost of $30,006 242.6kg at a cost of $12,421 198.2kg at a cost of $37,262 392.0kg at a cost of $26,719 Period 1 $1,225 F $4,805 F $936 F $3,869 F Period 2 $1,105 F $4,307 F $842 F $3,465 F

During recent period, 930fully processed units of Bellerophon were transferred from the division to stores. The existing management information system was purchased at the time that the company commenced trading. The directors are now considering investing in an enterprise resource planning system (ERPS). Required: As management accountant to the pharmaceuticals company: (b) in regard the material input in period 3, calculate the following variances: (i) the material price variances (ii) the material usage variances (iii) the material mix variances (iv) the material yield variances

(11 marks)

(c) Explain how the introduction of ERPS could impact on the role of management accountants. (4 marks) (Total 20 marks)

4|Page

Question # 3 Hometown is a rapidly expanding coastal town of about one million people. It has a wide number of bus services across the city including The Torongo bus service and a new BRTC bus service. Both of the services connect Hometown with the nearest city called Watertown within the country. The Torongo is a profit oriented and privately owned firm. The BRTC is publicly funded and managed, and is non-profit seeking. The BRTC was launched after considerable delays caused by opposition from local tax payer groups with a mission statement of to provide efficient, reliable and affordable public transport to all the citizens of the country by the city corporation. Attempting to achieve its mission often involves operating services that would be considered uneconomic by private sector bus companies, due either to the small number of passengers travelling on the route or the low fares charged. The majority of the city corporation members are happy with this situation as they wish to reduce traffic congestion and air pollution on Hometowns road by encouraging people to travel by bus rather than by car. However, one member of the corporation has recently criticised the performance of the BRTC as compared to the Torongo bus service. She produced the following information. Income and Expenditure accounts for the last year were as follows: BRTC 2012 $000 Income: Govt. Grants Ticket Sales Total Less: Staff Cost Maintenance and repairs Fuel cost Operating Costs Total Costs Operating surplus / deficit 800 1800 2600 2012 $000 0 3200 3200 Torongo 2011 $000 0 2600 2600

1000 800 500 500 (2800) (200)

1200 500 600 600 (2900) 300

900 300 450 400 (2050) 550

Other information of last year: BRTC 2012 Number of staffs Number of passengers carried Total passenger miles travelled Number of customer complain Total number of buses Number of new services launched Number of accidents per year Number of delaying in departure Average bus occupancy Average number of days in use 250 1.5m 5m 1200 40 0 6 0 60% 350 days 2012 175 1.2m 4m 600 30 4 4 12 85% 320 days Torongo 2011 120 1.0m 3.5m 800 20 1 7 22 95% 300 days

5|Page

Required: (a) Prepare a detail analysis of Torongos performance using the balanced scorecard format. Your answer should include two performance measures relating to each of the four perspectives of the balanced scorecard. (10 marks) (b) What are the problems faced by the BRTC when measuring its performance? (4 marks) (c) Comment on how the BRTC could measure the Value for money of its service provision for the year. Calculate appropriate performance measures that the BRTC could use and contrast with Torongo. (6 marks) (Total: 20 marks)

Question # 4 NN manufactures and markets a range of electronic office equipment. The company currently has $40 million revenue per annum. The company has a functional structure that is currently operates an incremental budgeting system. The company has a budget committee that is compromised 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 10% and 20% 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 twelvemonth period ended 31 December in each year. A new finance director, who previously held a senior management position in a not for profit organization, has recently been appointed. Whilst employed by the health service organization, the new finance director had been the manager responsible for the implementation of a zero-based budgeting system which proved highly successful. Required: (a) Discuss the factors to be considered when implementing a system of zero-based budgeting within NN. (10 marks) (b) Explain the behavioural problems that the management of NN 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) (c) Explain how the implementation of zero-based budgeting system in NN may differ from the implementation of such system in a not for profit organization. (4 marks) (Total 20 marks)

6|Page

Question # 5 Caterpillar makes three products P, L and R. All three products must be offered for sale each month in order to be able to provide a complete market service. The products are fragile and their quality deteriorates rapidly once they are manufactured. The products are produced on two types of machine and worked on by a single grade of direct labour. Five direct employees are paid $8 per hour for a guaranteed minimum of 160 hours each per month. All of the products are first moulded on a machine type 1 and then finished and sealed on a machine type 2. The machine hour requirements for each of the products are as follows. Product P Hours per unit 1.5 1.0 Product L Hours per unit 4.5 2.5 Product R Hours per unit 3.0 2.0

Machine type 1 Machine type 2

The capacity of the available machines type 1 and 2 are 600 hours and 500 hours per month respectively. Details of the selling prices, unit costs and monthly demand for the three products are as follows. Product P $ per unit Selling price Component cost Other direct material cost Direct labour cost at $8 per hour Overheads Profit Max. monthly demand (units) 91 22 23 6 24 ---16 120 Product L $ per unit 174 19 11 48 62 ---34 70 Product R $ per unit 140 16 14 36 52 ---22 60

Although Caterpillar uses marginal costing and contribution analysis as the basis for its decision making activities, profits are reported in the monthly management accounts using the absorption costing basis. Finished goods inventories are valued in the monthly management accounts at full absorption cost. Required (a) Calculate the machine utilisation rate for each machine each month and explain which of the machines is the bottleneck/limiting factor. (4 marks) (b) Using the current system of marginal costing and contribution analysis, calculate the profit maximising monthly output of the three products. (4 marks) (c) Explain why throughput accounting might provide more relevant information in Caterpillars circumstances. (4 marks) (d) Using a throughput approach, calculate the throughput-maximising monthly output of the three products. (4 marks) (e) Explain the throughput accounting approach to optimising the level of inventory and its valuation. Contrast this approach to the current system employed by Caterpillar. (4 marks) (Total 20 marks)

7|Page