Mock Examination

: ACCA Paper F5

Performance Management
Session Set by y : June 2011 : Mr Ian Lim

Your Lecturer Mr Chow Kim Tai Mr Ian Lim Your Mailing Address : ______________________________________ ______________________________________ Your Contact Number : ______________________________________

I wish to have my script marked by my lecturer and collect the marked script at the SAA-GE Reception Counter have the marked script returned to me by mail p y (Please submit your script latest by 6th May 2011 for marking)

SAA GLOBAL EDUCATION CENTRE PTE LTD

Company Registration No. 201001206N 20 Aljunied Road, #01-04, CPA House, Singapore 389805 Tel: (65) 6744 9700 Fax: (65) 6744 9796 Website: www.saa.org.sg Email: acca@saa.org.sg

F5 Performance Management

Mock exam June 2011

ALL FIVE questions are compulsory and MUST be attempted Question 1

Montreal Ltd. manufactures firelighters under contract for a major supermarket chain. Under the contract Montreal receives a price of $1.70 per kilogram. The company normally produces 30,000 kilograms of firelighters for the supermarket chain each month, but it occasionally varies this quantity slightly if asked to do so. Montreal operates a standard absorption costing system. Fixed production overheads are budgeted at $9,600 per month. The standards for the direct materials required to produce a kilogram of firelighters are as follows: Direct Material Type A Direct Material Type B Direct Material Type C 0.6 kg.@ $0.25 per kilogram 0.45 kg.@ $0.40 per kilogram 0.15 kg. @ $0.80 per kilogram

The only other cost is a cardboard packaging box, which Montreal purchases from a subcontractor at an agreed price of $0.05 per kilogram of firelighters sold. During January 2007 actual activity was as follows: Montreal Ltd. produced 31,000 kilograms of firelighters and supplied them to the supermarket chain at the agreed price of $1.70 per kilogram. Fixed overheads amounted to $11,520. Direct materials purchased and used in production were: Direct Material Type A: 16,700 kg.@ $0.25 per kilogram Direct Material Type B: 11,900 kg.@ $0.42 per kilogram Direct Material Type C: 3,800 kg.@ $0.80 per kilogram Cardboard packaging boxes were purchased at standard cost.

REQUIRED: (a) Calculate the standard profit per kilogram of firelighters, and the companys total budget and actual profits for January 2007. (3 marks) Calculate the following variances and use them to reconcile the companys total budget and actual profits for January: Direct materials price, mix and yield variances. Fixed overhead volume and expenditure variances. Sales volume variance. (12 marks) The management accountant of Montreal Ltd. has stated: In interpreting these variances, we need to bear in mind that we carried out major preventive maintenance work on our production equipment at the beginning of January, and this greatly improved its efficiency in converting direct materials into finished product. (i) Discuss whether the variances which you have calculated in answer to part (b) support this view. (3 marks) (ii) Briefly explain any changes which may be required to the company's standard costing system in consequence. (2 marks) ( 20 marks)

(b)

(c)

Page 1

F5 Performance Management

Mock exam June 2011

Question 2
Click Co is a photographic printing company. It prints photographs for customers, mainly the general public, generating sales revenue of $1,800,000 per annum. All of the companys printing machines are hired rather than owned outright. The current rate of rejects (i.e. prints of unacceptable quality) is 10%. Click Co is now considering replacing the machines with more technically advanced ones, which would eliminate rejects altogether. The companys standard costs for one photograph are as follows: $ $ Direct materials Paper: 004 Ink: 003 007 Direct labour 001 Variable overheads 002 Cost per unit produced 010 Cost of rejects 001 Variable cost per unit sold (good units) 011 Currently, the company sells 12,000,000 photos per annum. The companys xed overheads are $35,000 per month. If the new machines were hired to replace the old machines, machine rental costs would increase by $5,000 per month. However, the new machines would reduce variable overheads by 30%. The ink used by the new machines is 10% cheaper than the ink being currently used. Required: (a) Calculate the current annual break-even point in good units. (3 marks) (b) Calculate the annual break-even sales revenue if the new machines are hired. (5 marks) (c) Calculate the annual level of good quality photos that would have to be demanded and sold for Click Co to become indifferent about using the old or the new machines. Briey explain the basis of your calculation. (6 marks) (d) Briey outline THREE advantages and THREE disadvantages of using marginal costing, as compared to absorption costing. (6 marks) (20 marks)

Page 2

F5 Performance Management

Mock exam June 2011

Question 3
Ride Ltd is engaged in the manufacturing and marketing of bicycles. Two bicycles are produced. These are the Roadster which is designed for use on roads and the Everest which is a bicycle designed for use in mountainous areas. The following information relates to the year ending 31 December 2005: (1) Unit selling price and cost data is as follows: Roadster Everest $ $ Selling price 200 280 Material cost 80 100 Variable production conversion costs 20 60 (2) Fixed production overheads attributable to the manufacture of the bicycles will amount to $4,050,000. (3) Expected demand is as follows: Roadster 150,000 units Everest 70,000 units (4) Each bicycle is completed in the finishing department. The number of each type of bicycle that can be completed in one hour in the finishing department is as follows: Roadster 6.25 Everest 5.00 There are a total of 30,000 hours available within the finishing department. (5) Ride Ltd operates a just in time (JIT) manufacturing system with regard to the manufacture of bicycles and aims to hold very little work-in-progress and no finished goods stocks whatsoever. Required: (a) Using marginal costing principles, calculate the mix (units) of each type of bicycle which will maximise net profit and state the value of that profit. (6 marks) (b) Calculate the throughput accounting ratio for each type of bicycle and briefly discuss when it is worth producing a product where throughput accounting principles are in operation. Your answer should assume that the variable overhead cost amounting to $4,800,000 incurred as a result of the chosen product mix in part (a) is fixed in the short-term. (5 marks) (c) Using throughput accounting principles, advise management of the quantities of each type of bicycle that should be manufactured which will maximise net profit and prepare a projection of the net profit that would be earned by Ride Ltd in the year ending 31 December 2005. (5 marks) (d) Explain two aspects in which the concept of contribution in throughput accounting differs from its use in marginal costing. (4 marks) (20 marks)

Page 3

F5 Performance Management

Mock exam June 2011

Question 4
You are a member of a project team in Kenada Co. The company produces light fittings, and has a reputation for constant design innovation. As a result, its products are seen as highly fashionable, but have a short product market life cycle. To date, the selling price for new products has been calculated on a cost plus basis, and a market skimming approach to pricing has been applied. The newly appointed CEO has decided that a target cost approach should be applied to the development and marketing of a new product. Details of the product are: (i) a three year product market life cycle is anticipated, with sales volumes estimated to be: 400,000 units in year 1; 450,000 units in year 2; and 380,000 units in year 3. (ii) output will be eight units per labour hour in the first year. As staff become more familiar with the production process, it is expected that productivity will increase by 3% in the second year and a further 2% in the third year. (iii) Labour is currently charged to products at a rate of $60 per hour. A three-year remuneration package has been negotiated with the workforce. This provides for a 5% increase in year 2 and a further 4% increase in year 3. (iv) Material costs are estimated to be $9 per unit of output in year 1. As a result of longterm supply contracts with suppliers, these will be reduced by 2% at the beginning of year 2. There will be no further changes. (v) Variable overheads are charged to products on a labour hours basis at a rate of $80 per hour in year 1. Variable overhead costs are expected to rise by 5% in year 2 and a further 4% in year 3. (vi) Fixed overheads allocated to the products are estimated at $2,170,000 in year 1, and are expected to increase by 4% in each of the following two years. (vii) Research has indicated that a selling price of $3850 per unit for the first two years and $3550 per unit in the third year will lead to the sales volumes referred to in point (i) being achieved. (viii) A target profit margin of 20% is required. Required: (a) Explain each of the following approaches to pricing: (i) Cost plus pricing; and (ii) Target cost pricing. (6 marks) (b) Using a target cost approach, calculate: (i) total cost per unit for each year; (ii) cost gap per unit for each year; and (iii) the total cost saving which must be achieved in the three years of the product life cycle. (14 marks) (20 marks)

Page 4

F5 Performance Management

Mock exam June 2011

Question 5
Perry plc is a large conglomerate company structured on a divisional basis. It seeks to maximise investor wealth. Head office avoids day to day involvement in divisional affairs and only intervenes if performance is considered unsatisfactory. Divisional performance is measured by residual income. One of Perrys larger divisions operates a chain of high class hotels throughout the United Kingdom. The divisions mission statement is To be the hotel of first choice for business users and tourists. Although the chain has generally been popular with tourists it is not proving quite so popular with business users and conference organisers. Competition in the top segment of the hotel market is fierce, with customers expecting the highest standards of facilities, service and catering. Over the last two years the division has invested a large amount of money in modernising its hotels including the improvement of bedrooms and public rooms, installation of gymnasia and swimming pools and the information technology features required by business travellers. A large amount of money has also been spent on staff training to improve service levels and on a television advertising campaign to promote the improved hotels to business users. Head office is concerned that the performance of the hotel chain appears to have declined over the last few years despite this expenditure. The following figures are available:

Required: (a) Calculate the residual income for the hotel chain for each of the three years. (3 marks) (b) Discuss the advantages and disadvantages of residual income as a divisional performance measure. (5 marks) (c) Explain the advantages to Perry plc of a balanced scorecard approach to divisional performance measurement. (4 marks) (d) Suggest for each of the following headings two critical success factors suitable for the hotel chain: (i) financial success; (ii) customer satisfaction; (iii) process efficiency; (iv) organisational learning and growth. For each critical success factor suggest one key performance indicator suitable for the hotel chain. (8 marks) (20 marks)

Page 5