‘In the broadest sense, all accounting is management accounting. All financial and cost information generated by accountants is of some interest to management. But, in practice, where management accounting differs from financial accounting ..

. ’ (from An Insight into Management Accounting by John Sizer) Required: (a) (b) Give a brief definition of management accounting. 6 marks) Give a discussion of the major differences between management and financial accounting. (20 marks) (Total: 25 marks) 2 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS A COLLEGE A college offers a range of degree courses. The college organisation structure consists of three faculties, each with a number of teaching departments. In addition, there is an administrative/management function and a central services function.

The following cost information is available for the year ended 30 June 20X7: (1) Occupancy costs Total ? 1,500,000.Such costs are apportioned on the basis of area used which is: Square feet Faculties 7,500 Teaching departments 20,000 Administration/management 7,000 Central services 3,000 (2) Administration/management costs Direct costs: ? 1,775,000. Indirect costs: an apportionment of occupancy costs. Direct and indirect costs are charged to degree courses on a percentage basis. (3) Faculty costs Direct costs: ? 700,000.

Indirect costs: an apportionment of occupancy costs and central service costs. Direct and indirect costs are charged to teaching departments. (4) Teaching departments Direct costs: ? ,525,000. Indirect costs: an apportionment of occupancy costs and central service costs plus all faculty costs. Direct and indirect costs are charged to degree courses on a percentage basis. (5) Central services Direct costs: ? 1,000,000. Indirect costs: an apportionment of occupancy costs. Direct and indirect costs of central services have in previous years been charged to users on a percentage basis.

A study has now been completed which has estimated what user areas would have paid external suppliers for the same services on an individual basis.For the year ended 30 June 20X7, the apportionment of the central services cost is to be recalculated in a manner which recognises the cost savings achieved by using the central services facilities instead of using external service companies. This is to be done by apportioning the overall savings to user areas in proportion to their share of the estimated external costs.

KAPLAN PUBLISHING 3 PAPER F5 : PERFORMANCE MANAGEMENT The estimated external costs of service provision are as follows: ? 00 Faculties 240 Teaching departments 800 Degree courses: Business studies 32 Mechanical engineering 48 Catering studies 32 All other degrees 448 ____ 1,600 ____ (6) Additional data relating to the degree courses are as follows: Degree course Business Mechanical Studies Engineering Number of graduates 80 50 Apportioned costs (as % of totals) Teaching departments 3% 2. 5% Administration/management 2. 5% 5% Central services are to be apportioned as detailed in (5) above.

The total number of graduates from the college in the year to 30 June 20X7 was 2,500.Required: (a) (b) Prepare a flow diagram which shows the apportionment of costs to user areas. No values need be shown. (5 marks) Calculate the average cost per graduate, for the year ended 30 June 20X7, for the college and for each of the degrees in business studies, mechanical engineering and catering studies, showing all relevant cost analysis.

(15 marks) Suggest reasons for any differences in the average cost per graduate from one degree to another, and discuss briefly the relevance of such information to the college management. (5 marks) (Total: 25 marks) Catering Studies 120 7% 4% c) 4 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS ADMER Admer owns several home furnishing stores. In each store, consultations, if needed, are undertaken by specialists, who also visit potential customers in their homes, using specialist software to help customers realise their design objectives. Customers visit the store to make their selections from the wide range of goods offered, after which sales staff collect payment and raise a purchase order. Customers then collect their self-assembly goods from the warehouse, using the purchase order as authority to collect.Administration staff process purchase orders and also arrange consultations. Each store operates an absorption costing system and costs other than the cost of goods sold are apportioned on the basis of sales floor area. Results for one of Admer’s stores for the last three months are as follows: Department Kitchens $ Sales Cost of goods sold Other costs Profit/(loss) 210,000 63,000 130,250 _______ 16,750 _______ Bathrooms $ 112,500 137,500 81,406 _______ (6,406) _______ Dining Rooms $ 440,000 176,000 113,968 _______ 150,032 _______ Total $ 762,500 276,500 325,624 _______ 160,376 _______The management accountant of Admer is concerned that the bathrooms department of the store has been showing a loss for some time, and is considering a proposal to close the bathrooms department in order to concentrate on the more profitable kitchens and dining rooms departments.

He has found that other costs for this store for the last three months are made up of: $ Employees Sales staff wages Consultation staff wages Warehouse staff wages Administration staff wages General overheads (light, heat, rates, etc. ) 164,800 124,960 130,240 130,624 175,000 _______ 325,624 _______ 12 4 6 4 KAPLAN PUBLISHING 5PAPER F5 : PERFORMANCE MANAGEMENT He has also collected the following information for the last three months: Department Number of items sold Purchase orders Floor area metres) Number consultations (square of Kitchens 1,000 1,000 16,000 798 Bathrooms 1,500 900 10,000 200 Dining Rooms 4,000 2,500 14,000 250 The management accountant believes that he can use this information to review the store’s performance in the last three months from an activity-based costing (ABC) perspective. Required: (a) (b) Discuss the management accountant’s belief that the information provided can be used in an activity-based costing analysis. 4 marks) Explain and illustrate, using supporting calculations, how an ABC profit statement might be produced from the information provided. Clearly explain the reasons behind your choice of cost drivers. (8 marks) Evaluate and discuss the proposal to close the bathrooms department. (6 marks) (c) (d) Discuss the advantages and disadvantages that may arise for Admer from introducing activity-based costing in its stores.

(7 marks) (Total: 25 marks) 6 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS QP PLC QP plc is a food processing company that produces pre-prepared meals for sale to consumers through a number of different supermarkets.The company specialises in three particular preprepared meals and has invested significantly in modern manufacturing processes to ensure a high quality product. The company is very aware of the importance of training and retaining high quality staff in all areas of the company and, in order to ensure their production employees’ commitment to the company, the employees are guaranteed a weekly salary that is equivalent to their normal working hours paid at their normal hourly rate of ? 7 per hour. The meals are produced in batches of 100 units.

Costs and selling prices per batch are as follows: Meal Selling price Ingredient K (? /kg) Ingredient L (? 10/kg) Ingredient M (? 15/kg) Labour (? 7/hour) Factory costs absorbed Required: (a) (b) State the principles of throughput accounting and the effects of using it for short-term (6 marks) decision making. QP plc is preparing its production plans for the next three months and has estimated the maximum demand from its customers to be as follows: TR PN BE 500 batches 400 batches 350 batches TR ? /batch 340 150 70 30 21 20 PN ? /batch 450 120 90 75 28 80 BE ? /batch 270 90 40 45 42 40 QP plc has adopted throughput accounting for its short-term decisions.These demand maximums are amended figures because a customer has just delayed its request for a large order and QP has unusually got some spare capacity over the next three months.

However, these demand maximums do include a contract for the delivery of 50 batches of each to an important customer. If this minimum contract is not satisfied, then QP plc will have to pay a substantial financial penalty for nondelivery. The Production Director is concerned at hearing news that two of the ingredients used are expected to be in short supply for the next three months. QP plc does not hold inventory f these ingredients and, although there are no supply problems for ingredient K, the supplies of ingredients L and M are expected to be limited to: Ingredient L Ingredient M 7,000 kilos 3,000 kilos The Production Director has researched the problem and found that ingredient V can be used as a direct substitute for ingredient M. It also costs the same as ingredient M. There is an unlimited supply of ingredient V. Required: Prepare calculations to determine the production mix that will maximise the profit of QP plc during the next three months.

(10 marks) KAPLAN PUBLISHING 7 PAPER F5 : PERFORMANCE MANAGEMENT c) The World Health Organization has now announced that ingredient V contains dangerously high levels of a chemical that can cause life-threatening illnesses. As a consequence it can no longer be used in the production of food. As a result, the production director has determined the optimal solution to the company’s production mix problem using linear programming. This is set out below: Objective function value TR value PN value BE value TR slack value PN slack value BE slack value L shadow price value M shadow price value Required: Explain the meaning of each of the values contained in the above solution.

9 marks) (Total: 25 marks) 110,714 500 357 71 0 43 279 3 28 8 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS MN LTD MN Ltd manufactures automated industrial trolleys, known as TRLs. Each TRL sells for ? 2,000 and the material cost per unit is ? 600. Labour and variable overhead are ? 5,500 and ? 8,000 per week respectively.

Fixed production costs are ? 450,000 per annum and marketing and administrative costs are ? 265,000 per annum. The trolleys are made on three different machines. Machine X makes the four frame panels required for each TRL.Its maximum output is 180 frame panels per week. Machine X is old and unreliable and it breaks down from time to time.

It is estimated that, on average, between 15 and 20 hours of production are lost per month. Machine Y can manufacture parts for 52 TRLs per week and Machine Z, which is old but reasonably reliable, can process and assemble 30 TRLs per week. The company has recently introduced a just-in-time (JIT) system and it is company policy to hold little work-in-progress and no finished goods stock from week to week. The company operates a 40-hour week, 48 weeks a year (12 months ? weeks) but cannot meet demand. The demand for the next year is predicted to be as follows.

This is expected to be typical of the demand for the next four years: Units per week January February March April May June 30 30 33 36 39 44 July August September October November December Units per week 48 45 42 40 33 30 The production manager has suggested that the company replaces Machine Z with either Machine F or Machine G. Machine F can process 36 TRLs per week and costs ? 330,000. It is expected that labour costs would increase by ? ,500 per week if Machine F were installed. Machine G can process 45 TRLs per week and costs ? 550,000. It is estimated that the variable overhead cost per week will increase by ? 4,500 if TRLs are made on Machine G. The maintenance manager is keen to spend ? 100,000 on a major overhaul of machine X – he says this will make it 100% reliable.

The management of MN Ltd is wondering whether it should now install a full standard costing and variance analysis system. At present, standard costs are calculated only as part of the annual budgeting process.Management is concerned about implementing so many changes in a short space of time, but feels the system could be very useful. The company’s cost of capital is 10% per annum.

It evaluates projects over four years and depreciates its assets over five years. Required: Using the case of MN Ltd in the scenario above: (a) (b) (c) Explain the concept of throughput accounting. (6 marks) To what uses do advocates of throughput accounting suggest that the throughput ratio be put? (6 marks) Explain how the concept of contribution in throughput accounting differs from that in marginal costing. 7 marks) KAPLAN PUBLISHING 9 PAPER F5 : PERFORMANCE MANAGEMENT (d) If MN Ltd has decided to purchase Machine G and spend ? 100,000 on a major overhaul of Machine X, the management accountant and the production manager should collaborate to ensure a new focus for monitoring and reporting production activities.

What is the new focus? Explain what should be monitored and reported. 6 marks) (Total: 25 marks) 10 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS BML BML has three product lines: P1, P2 and P3.Since its creation the company has been using a single direct labour cost percentage to assign overhead costs to products. Despite P3, a relatively new line, attracting additional business, increasing overhead costs and a loss of market share, particularly for P2, a major product, have convinced the management that the costing system is in need of some development. A team, led by the management accountant was established to develop an improved system of costing based on activities. The team spent several weeks collecting data (see tables below) for the different activities and products.

For the accounting period in question, given in the tables below is data on BML’s three product lines and overhead costs: P1 7,500 units ? 4 ? 18 ? 47 4 0. 5 1 30% 1 P2 12,500 units ? 8 ? 25 ? 80 25 0. 5 5 20% 7 P3 4,000 units ? 6. 40 ? 16 ? 68 50 0. 2 10 50% 22 Overhead cost ? 150,000 390,000 18,688 100,000 60,000 ___________ Production volume Direct labour cost per unit Material cost per unit Selling price per unit Materials movements (in total) Machine hours per unit Set-ups (in total) Proportion of engineering work Orders packed (in total) ActivitiesMaterial receiving and handling Machine maintenance and depreciation Set-up labour Engineering Packing Total Required: (a) (b) 718,688 ___________ Calculate the overhead rate and the product unit costs under the existing costing system. (5 marks) Identify for each overhead activity, an appropriate cost driver from the information supplied, and then calculate the product unit costs using a system that assigns overheads on the basis of the use of activities. (11 marks) Comment on the results of the two costing systems in (a) and (b) above. 9 marks) (Total: 25 marks) (c) KAPLAN PUBLISHING 11 PAPER F5 : PERFORMANCE MANAGEMENT ABC PLC ABC plc, a group operating retail stores, is compiling its budget statements for 20X8.

In this exercise revenues and costs at each store A, B and C are predicted. Additionally, all central costs of warehousing and a head office are allocated across the three stores in order to arrive at a total cost and net profit of each store operation. In earlier years the central costs were allocated in total based on the total sales value of each store.But as a result of dissatisfaction expressed by some store managers alternative methods are to be evaluated. The predicted results before any re-allocation of central costs are as follows: A B ? 000 ? 000 Sales 5,000 4,000 Costs of sales 2,800 2,300 ____ ____ Gross margin Local operating expenses Variable Fixed Operating profit The central costs which are to be allocated are: ? 000 Warehouse costs: Depreciation Storage Operating and despatch Delivery Head office: Salaries Advertising Establishment Total 100 80 120 300 200 80 120 2,200 660 700 ___ 840 ___ 1,700 730 600 ___ 370 ___ C ? 00 3,000 1,900 ____ 1,100 310 500 ___ 290 ___ ________ ________ 1,000 The management accountant has carried out discussions with staff at all locations in order to identify more suitable ‘cost drivers’ of some of the central costs. So far the following has been revealed: A B C Number of despatches 550 450 520 Total delivery distances (thousand miles) 70 50 90 Storage space occupied (%) 40 30 30 1 2 3 An analysis of senior management time revealed that 10% of their time was devoted to warehouse issues with the remainder shared equally between the three stores.It was agreed that the only basis on which to allocate the advertising costs was sales revenue.

Establishment costs were mainly occupancy costs of senior management. This analysis has been carried out against a background of developments in the company, for example, automated warehousing and greater integration with suppliers. 12 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONSRequired: As the management accountant prepare a report for the management of the group which: (i) computes the budgeted net profit of each store based on the sales value allocation base originally adopted and explains ‘cost driver’, ‘volume’ and ‘complexity’ issues in relation to cost allocation commenting on the possible implications of the dissatisfaction expressed; (7 marks) computes the budgeted net profit of each store using the additional information provided, discusses the extent to which an improvement has been achieved in the information on the costs and profitability of running the stores and comments on the results. 14 marks) (ii) (b) Explain briefly how regression analysis and coefficient of determination (r2) could be used in confirming the delivery mileage allocation method used in (a) above. (4 marks) (Total: 25 marks) KAPLAN PUBLISHING 13 PAPER F5 : PERFORMANCE MANAGEMENT KEY FACTORS AND THROUGHPUT ACCOUNTING Sunglow Estates Company (SEL) has acquired a 600-hectare site comprising the following: Land groups (1) Agricultural land in current use (2) Derelict land formerly occupied by factories (3) Contaminated land formerly used for chemical storage 280 hectares 250 hectares 70 hectaresIt is possible for SEL to develop this site with a combination of houses, apartments and shops.

The associated development costs per hectare are as follows: Houses Land group (1) (2) (3) $000 370 340 ? Apartments $000 715 640 ? 820. 52 It is not possible to use land group (3) for houses or apartments, but this land can be used for the development of shops without first decontaminating it. Income per hectare generated by the three types of development are: Sale of leases $000 Houses Apartments Shops 230 480 ? Annual ground rent $000 40 70 200 Shops $000 790 698SEL’s planning consent for the development specifies that no more than 40 hectares of the development should be occupied by shops and no less than 200 hectares should be occupied by houses.

Land developed for houses in excess of the minimum specified by the planning consent will qualify for a government subsidy in the form of an interest-free loan of $200,000 per hectare developed, repayable in four annual instalments of $50,000. It is possible to decontaminate all or part of land group (3) at a cost of $80,000 per hectare. Such decontaminated land is, for development purposes, the same as agricultural land.

SEL appraises investments using DCF evaluation, a 10% cost of money for low-risk investments (including development of houses and apartments), a 15% cost of money for high-risk investments (including the development of shops) and an eight-year time horizon. ‘I remember being told about the useful decision-making technique of limiting factor analysis (also known as ‘contribution per unit of the key factor’). If an organisation is prepared to believe that, in the short run, all costs other than direct materials are fixed costs, is this not the same thing that throughput accounting is talking about?Why rename limiting factor analysis as throughput accounting? ’ 14 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS Required: (a) Explain what a limiting (or ‘key’) factor is and what sort of things can become limiting factors in a business situation. Which of the factors in the scenario could become a limiting factor? (8 marks) Explain the techniques that have been developed to assist in business decision-making when single or multiple limiting factors are encountered. (7 marks) Explain the management idea known as throughput accounting.State and justify your opinion on whether or not throughput accounting and limiting factor analysis are the same thing.

Briefly comment on whether throughput accounting is likely to be of relevance to SEL. (10 marks) (Total: 25 marks) (b) (c) KAPLAN PUBLISHING 15 PAPER F5 : PERFORMANCE MANAGEMENT DECISION MAKING TECHNIQUES JB LTD JB Ltd is a small specialist manufacturer of electronic components and much of its output is used by the makers of aircraft for both civil and military purposes. One of the few aircraft manufacturers has offered a contract to JB Ltd for the supply, over the next 12 months, of 400 identical components.The data relating to the production of each component is as follows: (1) Material requirements 3 kg material M1 – see note (i) below 2 kg material P2 – see note (ii) below 1 part no. 678 – see note (iii) below Notes: (i) Material M1 is in continuous use by the company. 1,000 kg are currently held in stock at a book value of ? 4. 70/kg but it is known that future purchases will cost ? 5.

50/kg. 1,200 kg of material P2 are held in stock. The original cost of this material was ? 4. 30/kg but, as the material has not been required for the last two years, it has been written down to ? 1. 50/kg scrap value.The only foreseeable alternative use is as a substitute for material P4 (in current use) but this would involve further processing costs of ? 1. 60/kg. The current cost of material P4 is ? 3.

60/kg. It is estimated that the part no. 678 could be bought for ? 50 each. (ii) (iii) (2) Labour requirements Each component would require five hours of skilled labour and five hours of semiskilled.

An employee possessing the necessary skills is available and is currently paid ? 5/hour. A replacement would, however, have to be obtained at a rate of ? 4/hour for the work which would otherwise be done by the skilled employee.The current rate for semi-skilled work is ? 3/hour and an additional employee could be appointed for this work. (3) Overhead JB Ltd absorbs overhead by a machine hour rate, currently ? 20/hour, of which ? 7 is for variable overhead and ? 13 for fixed overhead. If this contract is undertaken, it is estimated that fixed costs will increase for the duration of the contract by ? 3,200. Spare machine capacity is available and each component would require four machine hours. A price of ? 145 per component has been suggested by the large company which makes aircraft.

Required: (a) (b) State whether or not the contract should be accepted and support your conclusion with (16 marks) appropriate figures for presentation to management; Comment briefly on three factors which management ought to consider and which may influence their decision. (9 marks) (Total: 25 marks) 16 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS EXE AND WYE A firm manufactures two products, EXE and WYE, in departments dedicated exclusively to them. There are also three service departments, stores, maintenance and administration. No stocks are held as the products deteriorate rapidly.Direct costs of the products, which are variable in the context of the whole business, are identified to each department. The step-wise apportionment of service department costs to the manufacturing departments is based on estimates of the usage of the service provided.

These are expressed as percentages and assumed to be reliable over the current capacity range. The general factory overheads of ? 3. 6m, which are fixed, are apportioned based on floor space occupied. The company establishes product costs based on budgeted volume and marks up these costs by 25% in order to set target selling prices.

Extracts from the budgets for 20X8 are provided below: Annual volume (units) EXE WYE 200,000 100,000 150,000 70,000 EXE Costs (? m) Material costs Other variable costs Departmental usage (%) Maintenance Administration Stores Floor space (sq m) Required: Workings may be ? 000 with unit prices to the nearest penny. (a) (b) Calculate the budgeted selling price of one unit of EXE and WYE based on the usual mark up. (6 marks) Discuss how the company may respond to each of the following independent events, which represent additional business opportunities: (i) (ii) an enquiry from an overseas customer for 3,000 units only of WYE where a price of ? 5 per unit is offered an enquiry for 50,000 units of WYE to be supplied in full at regular intervals during 20X8 at a price which is equivalent to full cost plus 10%. 1. 8 0.

8 50 40 60 640 WYE 0. 7 0. 5 25 30 40 480 Stores 0. 1 0.

1 25 20 240 Maintenance 0. 1 0. 2 Admin – 0. 2 Maximum capacity Budget 10 80 160 In both cases support your discussion with calculations and comment on any assumptions or matters on which you would seek clarification. (13 marks) (c) Explain the implications of preparing product full costs based on maximum capacity rather than annual budget volume. (6 marks) (Total: 25 marks) KAPLAN PUBLISHING 7 PAPER F5 : PERFORMANCE MANAGEMENT PLASTIC TOOLS A small company is engaged in the production of plastic tools for the garden. Sub-totals on the spreadsheet of budgeted overheads for a year reveal the following: Moulding department 1,600 2,500 0,800 1,200 Finishing department 500 850 600 800 General factory overhead 1,050 1,750 Variable overhead ? 000s Fixed overhead ? 000s Budgeted activity Machine hours (000s) Practical capacity Machine hours (000s) For the purposes of reallocation of general factory overhead it is agreed that the variable overheads accrue in line with the machine hours worked in each department.General factory fixed overhead is to be reallocated on the basis of the practical machine hour capacity of the two departments.

It has been a long-standing company practice to establish selling prices by applying a mark-up on full manufacturing cost of between 25% and 35%. A possible price is sought for one new product which is in a final development stage. The total market for this product is estimated at 200,000 units per annum. Market research indicates that the company could expect to obtain and hold about 10% of the market.It is hoped the product will offer some improvement over competitors’ products, which are currently marketed at between ? 90 and ? 100 each. The product development department have determined that the direct material content is ? 9 per unit. Each unit of the product will take two labour hours (four machine hours) in the moulding department and three labour hours (three machine hours) in finishing.

Hourly labour rates are ? 5. 00 and ? 5. 50 respectively. Management estimate that the annual fixed costs which would be specifically incurred in relation to the product are: supervision ? 20,000, depreciation of a recently acquired machine ? 20,000 and advertising ? 27,000. It may be assumed that these costs are included in the budget given above. Given the state of development of this new product, management do not consider it necessary to make revisions, to the budgeted activity levels given above, for any possible extra machine hours involved in its manufacture. Required: (a) (b) (c) Briefly explain the role of costs in pricing.

(8 marks) Prepare full cost and marginal cost information which may help with the pricing decision. (10 marks) Comment on the cost information and suggest a price range which should be considered. marks) (Total: 25 marks) 18 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS BIL MOTOR COMPONENTS PLC (a) In an attempt to win over key customers in the motor industry and to increase its market share, BIL Motor Components plc have decided to charge a price lower than their normal price for component TD463 when selling to the key customers who are being targeted. Details of component TD463’s standard costs are as follows: Standard cost data Machine Group 1 ? Materials (per unit) 26. 00 Labour (per unit) 2.

00 Variable overheads (per unit) 0. 65 Fixed overheads (per unit) 3. 00 _____ 31. 5 _____ Setting-up costs per batch of 200 units Required: Compute the lowest selling price at which one batch of 200 units could be offered, (9 marks) and critically evaluate the adoption of such a pricing policy. (b) The company is also considering the launch of a new product, component TDX489, and have provided you with the following information. Product TDX489 Standard cost per box ? 6. 20 1. 60 ____ 7.

80 ____ Market research ? forecast of demand Selling price (? ) 13 12 11 10 9 Demand (boxes) 5,000 6,000 7,200 11,200 13,400 The company only has enough production capacity to make 7,000 boxes.However, it would be possible to purchase product TDX489 from a sub-contractor at ? 7. 75 per box for orders up to 5,000 boxes, and ? 7 per box if the orders exceed 5,000 boxes.

Required: Prepare and present a computation which illustrates which price should be selected in order to maximise profits. (10 marks) (c) Where production capacity is the limiting factor, explain briefly the ways in which management can increase it without having to acquire more plant and machinery. (6 marks) (Total: 25 marks) ? 10 Component TD463 Batch size 200 units Machine Group 7 ? 17. 00 1. 60 0. 72 2.

50 _____ 21. 82 _____ ? 6 Machine Group 29 ? 0. 75 0. 80 1.

50 ____ 3. 05 ____ ? 4 Assembly ? 3. 00 1. 20 0. 36 0. 84 ____ 5. 40 ____ ? Variable cost Fixed cost KAPLAN PUBLISHING 19 PAPER F5 : PERFORMANCE MANAGEMENT MOV COMPANY MOV Company produces custom-built sensors. Each sensor has a standard circuit board (SCB) in it.

The current average contribution from a sensor is ? 400. MOV Company’s business is steadily expanding and in the year just ending (2001/2002), the company will have produced 55,000 sensors. The demand for MOV Company’s sensors is predicted to grow over the next three years: Year 2008/09 2009/10 2010/11 Units 58,000 62,000 65,000The production of sensors is limited by the number of SCBs the company can produce.

The present production level of 55,000 SCBs is the maximum that can be produced without overtime working. Overtime could increase annual output to 60,500, allowing production of sensors to also increase to 60,500. However, the variable cost of SCBs produced in overtime would increase by ? 75 per unit. Because of the pressure on capacity, the company is considering having the SCBs manufactured by another company, CIR Company. This company is very reliable and produces products of good quality. CIR Company has quoted a price of ? 16 per SCB, for orders greater than 50,000 units a year.

MOV Company’s own costs per SCB are predicted to be: Direct material Direct labour Variable overhead Fixed overhead Total cost ? 28 40 20 24 112 (based on labour cost) (based on labour cost and output of 55,000 units) The fixed overheads directly attributable to SCBs are ? 250,000 a year; these costs will be avoided if SCBs are not produced. If more than 59,000 units are produced, SCBs’ fixed overheads will increase by ? 130,000. In addition to the above overheads, MOV Company’s fixed overheads are predicted to be: Sensor production in units: Fixed overhead: 54,001 to 59,000 ? ,600,000 59,001 to 64,000 ? 2,900,000 64,001 to 70,000 ? 3,100,000 MOV Company currently holds a stock of 3,500 SCBs but the production manager feels that a stock of 8,000 should be held if they are bought-in; this would increase stockholding costs by ? 10,000 a year. A purchasing officer, who is paid ? 20,000 a year, spends 50% of her time on SCB duties.

If the SCBs are bought-in, a liaison officer will have to be employed at a salary of ? 30,000 in order to liaise with CIR Company and monitor the quality and supply of SCBs. At present, 88 staff are involved in the production of SCBs at an average salary of ? 5,000 a year: if the SCBs were purchased, 72 of these staff would be made redundant at an average cost of ? 4,000 per employee. The SCB department, which occupies an area of 240 ? 120 square metres at the far end of the factory, could be rented out, at a rent of ? 45 per square metre a year. However, if the SCBs were to be bought-in, for the first year only MOV Company would need the space to store the increased stock caused by outsourcing, until the main stockroom had been reorganised and refurbished. From 2009/10, the space could be rented out; this would limit the annual production of sensors to 60,500 units.Alternatively, the space could be used for the production of sensors, allowing annual output to increase to 70,000 units if required.

20 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS Required: (a) Critically discuss the validity of the following statement. It was produced by Jim Elliott, the company’s accountant, to show the gain for the coming year (2008/2009) if the SCBs were to be bought-in. Saving in Manufacturing staff – salaries saved: 72 staff ? ?25,000 Purchasing officer – time saved Placing orders for SCB materials: 1,000 orders ? ?20 per order Transport costs for raw materials for SCBs Cost saved Additional cost per SCB: (? 16 – ? 112) ? 58,000 units Net gain if SCBs purchased ? 1,800,000 10,000 20,000 45,000 ____________ 1,875,000 232,000 ____________ 1,643,000 ____________ (10 marks) (b) (i) Produce detailed calculations that show which course of action is the best financial option for the three years under consideration. (Ignore the time value of money. ) (12 marks) Advise the company of the long-term advantages and disadvantages of buying-in SCBs. (3 marks) (Total: 25 marks) (ii) KAPLAN PUBLISHING 21 PAPER F5 : PERFORMANCE MANAGEMENT PRIVATE HOSPITAL A private hospital is reviewing its requirements for nursing care.It wishes to maintain its high quality service at the lowest cost, consistent with a variety of constraints. Two categories of nurse are employed – ‘qualified’ and ‘student’.

Past experience has shown that at least 100 qualified nurses, or equivalent, are required. Because of knowledge, experience and training, the work of one qualified nurse is deemed equivalent to that of two student nurses. On average, a qualified nurse costs the hospital $13,000 a year and a student nurse $6,000 (inclusive of pay, food, accommodation, etc). The student nurses’ hall can accommodate 50 student nurses.

For successful working practices there must be at least as many qualified nurses as student nurses. To meet the requirements of a local charity that donates substantial sums to the hospital, at least 30 student nurses must be under training. The hospital personnel manager’s assessment of the current job market is that a maximum of 140 trained nurses could be recruited. Required: (a) (b) (c) (d) State mathematically the hospital’s objective function and its constraints. Draw a graph for this problem, shading the feasible region. Recommend the optimum combination of nurses to employ.Comment briefly on your recommendation. (7 marks) (10 marks) (5 marks) (3 marks) (Total: 25 marks) 22 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS BUDGETING ACCOUNTING TYPE CONTROL INFORMATION FOR MANAGEMENT The effective use of the control information provided by an organisation’s accounting department might be reduced by the behaviour of its operating managers.

Required: Explain the main motivation or attitudes of operating managers that would tend to result in less effective use of the control information and to suggest actions that the accounting department might take to improve the situation. Total: 25 marks) KAPLAN PUBLISHING 23 PAPER F5 : PERFORMANCE MANAGEMENT SYCHWEDD PLC Sychwedd plc manufacture and sell three products R, S, and T which make use of two machine groups, 1 and 2. The budget for period 1, the first quarter of their next accounting year, includes the following information: Machine Group Fixed overhead absorption rates: 1 2 Rate per machine hour ? 10. 00 ? 11. 20 ____ ____ Sales (kilos) Sales Variable costs Fixed overheads Budgeted net profit Product R 12,000 ? 120,000 ______ 73,560 19,752 ______ 26,688 ______ Product S 25,000 ? 50,000 ______ 164,250 38,300 ______ 47,450 ______ Product T 40,000 ? 360,000 ______ 284,400 42,400 ______ 33,200 ______ For the second quarter (period 2), it is estimated that the budgeted machine hours and direct labour hours needed to produce 1,000 kilos of each of the products are: Machine Group Machine hours 1 2 Product R 75 80 S 30 110 T 50 50 Direct labour hours Product R 30 40 S 10 50 T 20 20 Budgeted fixed overheads (to be absorbed using a machine hour rate) ? 40,800 ? 68,365 ? 7. 50 ? 8. 50 Budgeted variable labour and overheads, (rate per direct labour hour) Product R ? ,508 10,000 Product S ? 5,096 25,000 No change Product T ? 6,125 50,000 No change Budgeted material costs per 1,000 kilos Expected sales (kilos) Planned price changes: Compared with period 1 10% increase A sales commission of 4% of the sales value will be paid.

Required: (a) (b) (c) There are no budgeted opening or closing stocks i. e. , all production is expected to be sold. Compute the machine hour rate for each machine group for period 2. (4 marks) Calculate the budgeted contribution and net profit for each of the three products for period 2.

12 marks) Assuming that the sales trend shown over the two periods is forecast to continue, comment briefly on the figures and advise management accordingly. (9 marks) (Total: 25 marks) 24 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS BUDGET COMPILATION A product manager has responsibility for a single product and is in the process of submitting data to be compiled into budgets for 20X9. The manager has performance targets set in relation to sales volume, profitability levels and a target cash surplus from the product. Shown below are the agreed budgeted sales for the product for December 20X8 to May 20X9.Dec Jan Feb Mar April May Units 14,000 16,000 22,000 17,000 20,000 24,000 The company policy is that, at each month end, the closing stock of finished goods should be 25% of the following month’s forecast sales and the stock of raw material should be sufficient for 10% of the following month’s production. Stock levels currently conform to this policy.

One unit of raw material makes one unit of finished stock, there is no wastage. Raw material purchases are paid for during the month following the month of purchase. All other expenses are paid for as incurred.All sales are made on credit and the company expects cash receipts for 50% of sales in the month of sale and 50% in the following month.

The company operates an absorption costing system which is computed on a monthly basis. That is, in addition to direct costs it recovers each month’s fixed and variable manufacturing overhead expenses in product costs using the budgeted production and budgeted expenditure in the month to establish an absorption rate. This cost is used to place a value on the stock holding. Opening stock is valued at the unit cost which was established in the previous month.At 1 January 20X9 finished stock should be assumed at ? 40 per unit. A flow of cost based on FIFO is assumed. Sales are made at a price of ? 58 per unit. Estimated costs to be used in the budget preparation for the product are: Manufacturing costs: Material ? 10.

00 per unit produced Variable overhead and labour ? 16. 00 per unit produced Fixed overhead costs ? 210,000 per month (including depreciation of ? 54,000 per month) Selling costs: Variable ? 7. 00 per unit sold Fixed ? 164,000 per month Required: (a) (b) (c) (d) Compute the monthly budgeted production and material purchases for January to March 20X9. 6 marks) Prepare a budgeted profit and loss account and a statement of cash receipts and payments for January 20X9.

(10 marks) Explain briefly the implications of the company’s treatment of fixed manufacturing overheads compared to a predetermined overhead rate prepared annually. (4 marks) The preparation of budget data may be assisted by the use of a time series. Explain (5 marks) what a time series is and the various components which comprise one. (Total: 25 marks) KAPLAN PUBLISHING 25 PAPER F5 : PERFORMANCE MANAGEMENT ACRED LIMITED Acred Ltd manufactures a single product.It is preparing monthly budgets for the six months from July to December 20X4. The following standard revenue and cost data is available: Selling price Materials Labour Direct expenses • ? 12. 00 per unit 2 kg per unit at ? 2.

40 per kg ? 1. 80 per unit ? 1. 20 per unit Sales in June 20X4 and July 20X4 are forecast to be 10,000 units in each month. As a direct result of marketing expenditure of ? 95,000 in August 20X4, sales are expected to be 11,000 units in August 20X4 and to increase by 1,000 units in each month from September to December.Sales after December 20X4 are expected to remain at the December 20X4 level. 25% of sales are paid for when they occur and 75% of sales are paid for in the month following sale.

Stocks of finished goods at the end of each month are required to be 20% of the expected sales for the following month. Stocks of materials at the end of each month are required to be 50% of the materials required for the following month’s production. Materials are paid for in the month following purchase. Labour and direct expenses are paid for in the month in which they occur.Overheads for production, administration and distribution will be ? 34,000 per month, including depreciation of ? 12,000 per month.

These overheads are payable in the month in which they occur. Acred Ltd has a ? 750,000 bank loan at 8% per annum on which it pays interest twice per year, in March and September. The cash balance at the end of June 20X4 is expected to be ? 50,000. Prepare the following budgets for Acred Ltd on a month by month basis for the six month period from July to December 20X4: (i) (ii) production budget (units) cash budget. 13 marks) • • • (a) Required: (b) (c) Critically discuss the relative merits of periodic budgeting and continuous budgeting. (7 marks) Discuss the consequences of budget bias (budgetary slack) for cost control. (5 marks) (Total: 25 marks) (Note: It is unlikely that you will be asked to produce a full month-by-month budget in the F5 exam. However, this question gives excellent practice of key calculations and will help you appreciate the bigger picture.

) 26 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS ACCOUNTING SYSTEMS A competent management accounting system should endeavour to enhance the performance of a company. It should, in particular, consider the behavioural consequences of the system. ’ Required: (a) (b) Explain why it is necessary when designing a management accounting system to consider the behavioural consequences of its application. (7 marks) Explain the potential behavioural issues that may arise in the application of performance monitoring, budgeting and transfer pricing and suggest how problems may be overcome. (18 marks) (Total: 25 marks) KAPLAN PUBLISHING 27 PAPER F5 : PERFORMANCE MANAGEMENTBUDGETARY PLANNING FRD Ltd is a manufacturer of industrial control systems. It has designed a new system called the X7 and expects to produce the X7 in a continuous operation over an 18 month period. During this period, it is expected that a total of sixteen X7s will be produced and sold. The production of the X7 is a labour intensive operation and units are produced one after another.

The costs of producing the first X7 are as follows: Skilled Labour – 1,200 hours at a rate of ? 20 per hour Unskilled Labour – 1,800 hours at a rate of ? 15 per hour Materials – ? 20,000 Overheads – ? 0 per labour hour worked (total of Skilled and Unskilled) It is known that in producing any product, Skilled Labour usage experiences an 80% learning curve effect and Unskilled Labour usage experiences a 90% learning curve effect. FRD has decided to set the selling price per unit of the X7 as the average production cost per unit (for the full sixteen unit production run) plus a 25% addition thereon for profit. Note: When appraising the impact of the learning curve, you should use the cumulative average time model, where doubling output reduces the cumulative average hours per unit by a factor of 80% or 90% (whichever is applicable).Required: (a) (b) Calculate the selling price per unit of the X7. (10 marks) Calculate the forecast total production cost of the third and fourth X7 produced (that is, the cost of the third and fourth units together).

Calculate the profit or loss arising from the sale of the third and fourth units using the unit selling price you have calculated in answer to (a). (10 marks) Explain the logic, uses and limitations of the learning curve model. (5 marks) (Total: 25 marks) (c) 28 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS STANDARD COSTING AND VARIANCES Q LTD a) Q Ltd operates a system of standard costing and in respect of one of its products which is manufactured within a single cost centre, the following information is given. For one unit of product the standard material input is 16 litres at a standard price of ? 2.

50 per litre. The standard wage rate is ? 5 per hour and 6 hours are allowed in which to produce one unit. Fixed production overhead is absorbed at the rate of 120% of direct wages cost. During the last four-week accounting period: The material price variance was extracted on purchase and the actual price paid was ? .

45 per litre. Total direct wages cost was ? 121,500. Fixed production overhead incurred was ? 150,000. Variances Direct material price Direct material usage Direct labour rate Direct labour efficiency Fixed production overhead expenditure You are required to calculate for the four-week period: (i) (ii) (iii) (iv) (v) (vi) (b) budgeted output in units; number of litres purchased; number of litres used above standard allowed; actual units produced; actual hours worked; average actual wage rate per hour. 18 marks) ‘Physical measures of output and technical measures of production efficiency are often more useful than financial measures, particularly at the lower levels of an organisation. ’ You are required, in the context of variance analysis, to discuss and expand on the above statement. (7 marks) (Total: 25 marks) Favourable ? 8,000 6,000 4,500 3,600 6,000 Adverse ? KAPLAN PUBLISHING 29 PAPER F5 : PERFORMANCE MANAGEMENT HAIRDRESSING A company operates a number of hairdressing establishments, which are managed on a franchise arrangement.The franchisor offers support using a PC package, which deals with profit budgeting and control information.

Budget extracts of one franchisee for November 20X7 are shown below analysed by male and female clients. For the purposes of budget projections average revenue rates are used. At the month end these are compared with the average monthly rates actually achieved using variance analysis. Sales price, sales quantity, sales mix and cost variances are routinely produced in order to compare the budget and actual results.Staff working in this business are paid on a commission basis in order to act as an incentive to attract and retain clients. The labour rate variance is based on commission payments, any basic pay is part of the monthly fixed cost. Budget Clients Average revenue (per client) Average commission (per client) Total monthly fixed cost Actual results Clients Average revenue (per client) Average commission (per client) Total monthly fixed cost Required: (a) Reconcile the budgeted and actual profit for November by calculating appropriate price, quantity, mix and cost variances, presenting the information in good form.You should adopt a contribution style, with mix variances based on units (i.

e. clients). (13 marks) Write a short memorandum to the manager of the business commenting on the result in (a) above (5 marks) Comment on the limitations associated with generating sales variances as in (a) above. (7 marks) (Total: 25 marks) Male 4,000 ? 7.

5 3. 0 ? 20,000 Male 2,000 ? 8. 0 3. 5 ? 24,000 Female 2,000 ? 20. 0 11.

0 Female 1,000 ? 18. 0 10. 0 (b) (c) 30 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS FOOD MANUFACTURER A food manufacturer specialises in the production of frozen cakes and sweet products, selling mainly to supermarkets.

The following monthly budget applies to one of its products. Original budget ? 000 ? 000 Sales 1,000 Costs: Ingredients 400 Labour and energy 100 Fixed overheads 300 ___ 800 ___ Profit 200 ___ For the ingredients, a standard quantity of 5 kg per pack is required; a standard price of 40p per kg applies in the original budget. Considerable attention has been given to increasing the market share of this product whilst attempting to maintain its profitability. Consequently, since the preparation of the budget the management team implemented some changes to the manufacture and sale of this product.These changes were as follows: (i) (ii) (iii) The product was budgeted to sell for ? 5.

00 per pack but, to promote sales, a price reduction on all sales to ? 4. 50 per pack was made. The supplier of ingredients was changed and this secured a price reduction to 37. 5p per kg on all ingredient supplies in return for a long-term contract. The method of working was changed in order to reduce the direct labour and energy costs which are regarded as variable.

All of the above changes applied for the whole of the month just ended and are reflected in the actual results shown below.The management intend, however, to use the original budget, for both cost and volume, as a reference point until the effect of the changes has been evaluated. The following actual results have just been reported for the month: Actual results ? 000 ? 000 Sales 1,080 Costs: Ingredients 520 Labour and energy 110 Fixed overheads 340 ___ 970 ___ Profit Required: (a) (b) (c) Prepare a flexible budget (for the actual quantity sold in the month just ended) based on the original budgeted unit costs and selling price. (5 marks) Using variances, reconcile the original budget profit with the actual profit.You should use a contribution approach to variance analysis. (10 marks) Provide a commentary on the variances you have produced. Within this commentary refer to possible interrelationships between the variances and how the level of fixed overheads may be reduced.

(10 marks) (Total: 25 marks) KAPLAN PUBLISHING 110 ___ 31 PAPER F5 : PERFORMANCE MANAGEMENT MERMUS PLC Mermus plc is comparing budget and actual data for the last three months. Budget ? Sales Cost of sales Raw materials Direct labour Variable production overheads Fixed production overheads 133,000 152,000 100,700 125,400 __________Actual ? 130,500 153,000 96,300 115,300 __________ ? 950,000 ? 922,500 511,100 438,900 __________ __________ 495,100 427,400 __________ __________ The budget was prepared on the basis of 95,000 units produced and sold, but actual production and sales for the three-month period were 90,000 units. Mermus uses standard costing and absorbs fixed production overheads on a machine hour basis. A total of 28,500 standard machine hours were budgeted.

A total of 27,200 machine hours were actually used in the three-month period.Required: (a) (b) Prepare a revised budget at the new level of activity using a flexible budgeting approach. (4 marks) Calculate the following: (i) (ii) (iii) (iv) (v) (c) (i) (ii) (iii) (d) raw material total cost variance; direct labour total cost variance; fixed overhead efficiency variance; fixed overhead capacity variance; fixed overhead expenditure variance. raw materials total cost variance; fixed overhead efficiency variance; fixed overhead expenditure variance. Explain three key purposes of a budgeting system. (6 marks) (7 marks) (Total: 25 marks) (8 marks)Suggest possible explanations for the following variances: 32 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS ASH PLC Ash plc recorded the following actual results for Product RS8 for the last month: Product RS8 2,100 units produced and sold for $14.

50 per unit Direct material M3 1,050 kg costing $1,680 Direct material M7 1,470 kg costing $2,793 Direct labour 525 hours costing $3,675 Variable production overhead $1,260 Fixed production overhead $4,725 Standard selling price and cost data for one unit of Product RS8 is as follows.Selling price $15. 00 Direct material M3 0. 6 kg at $1. 55 per kg Direct material M7 0. 68 kg at $1. 75 per kg Direct labour 14 minutes at $7.

20 per direct labour hour Variable production overhead $2. 10 per direct labour hour Fixed production overhead $9. 00 per direct labour hour At the start of the last month, 497 standard labour hours were budgeted for production of Product RS8. No inventories of raw materials are held. All production of Product RS8 is sold immediately to a single customer under a just-in-time agreement.Required: (a) Prepare an operating statement that reconciles budgeted profit with actual profit for Product RS8 for the last month.

You should calculate variances in as much detail as allowed by the information provided. (17 marks) Discuss how the operating statement you have produced can assist managers in: (i) (ii) controlling variable costs; controlling fixed production overhead costs. (8 marks) (Total: 25 marks) (b) KAPLAN PUBLISHING 33 PAPER F5 : PERFORMANCE MANAGEMENT LINSILLinsil has produced the following operating statement reconciling budgeted and actual gross profit for the last three months, based on actual sales of 122,000 units of its single product: Operating statement Budgeted gross profit $ $ $ 80 0,0 00 352,000 –––––––– 1,152,000 19,200 (61,000) ––––––– (41,800) –––––––– 1,110,200 Favourable Adverse 23, 99 1 81,333 203,350 ––––––– 308,674 ––––––– Adverse 31,086 19,032 135,355 –––––––– 149,806 –––––––– ––––––– 50,118 ––––––– (352,000) 27,000 ––––––– (325,000) –––––––– 618,304 –––––––– Budgeted fixed production overhead Budgeted contribution Sales volume contribution variance Sales price varianceActual sales less standard variable cost of sales Planning variances Variable cost variances Direct material price Direct material usage Direct labour rate Direct labour efficiency 42,090 ––––––– 42,090 ––––––– Operational variances Variable cost variances Direct material price Direct material usage Direct labour rate Direct labour efficiency Favourable 14,451 (266,584) Actual contribution Budgeted fixed production overhead Fixed production overhead expenditure variance Actual fixed production overhead Actual gross profit 99,688 –––––––– 943,304 34 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONSThe standard direct costs and selling price applied during the three-month period and the actual direct costs and selling price for the period were as follows: Standard Selling price ($/unit) Direct material usage (kg/unit) Direct material price ($/kg) Direct labour efficiency (hrs/unit) Direct labour rate ($/hr) 31. 50 3. 00 2.

30 1. 25 12. 00 Actual 31. 00 2.

80 2. 46 1. 30 12. 60 After the end of the three-month period and prior to the preparation of the above operating statement, it was decided to revise the standard costs retrospectively to take account of the following: 1 2 3 A 3% increase in the direct material price per kilogram.A labour rate increase of 4%. The standard for labour efficiency had anticipated buying a new machine leading to a 10% decrease in labour hours; instead of buying a new machine, existing machines had been improved, giving an expected 5% saving in material usage. Required: (a) (b) (c) (d) Using the information provided, demonstrate how each planning and operational variance in the operating statement has been calculated. (11 marks) Calculate direct labour and direct material variances based on the standard cost data applied during the three-month period.

4 marks) Explain the significance of separating variances into planning and operational elements, using the operating statement above to illustrate your answer. (5 marks) Discuss the factors to be considered in deciding whether a variance should be investigated. (5 marks) (Total: 25 marks) KAPLAN PUBLISHING 35 PAPER F5 : PERFORMANCE MANAGEMENT PERFORMANCE MEASUREMENT CARR LTD (a) Planning is expressed by the budgets which are prepared, but, prior to this, it is necessary to go through a forecasting exercise.Required Discuss briefly five problems that are likely to arise when forecasting for a business. (10 marks) (b) C Ltd employs 300 people and has sales of ? 9 million. It has five producing departments, two service departments and manufactures one product. No effective planning or financial control system has been established but after one of the directors had attended a course on ‘Finance for Non-Financial Managers’ he decided to introduce a budget system and performance reports related to responsibilities.Other directors and management had some reservations about the introduction of this system but they were persuaded to allow its introduction.

After the end of April, which was the first month of the current financial year, departmental performance reports were issued to all departmental supervisors. These took the form of that illustrated below for Production Department ‘D’ which was produced by the office manager – the senior person on the administrative staff. (A separate report was issued relating to direct material and direct labour. Monthly report: Department ‘D’ – April 20X0 Actual Planning Variance budget 1,100 1,000 100 ? Salaries and wages Indirect labour Maintenance Overhead allocated Consumable stores Depreciation Insurance Sundries 10,000 8,000 3,500 3,000 1,600 2,500 1,100 1,000 ______ 30,700 ______ ? 10,500 7,000 2,750 2,750 1,500 2,500 1,000 500 ______ 28,500 ______ ? 500 1,000* 750* 250* 100* 0 100* 500* _____ 2,200 _____ Units produced *Note: Considerable inefficiency; action should be taken to improve cost control in this department.J, the supervisor for Department D, was not pleased on receiving her report and declared she did not have time to bother with such paperwork and, in any case, the report was inaccurate and unfair. Her comment was typical of others who had received similar reports. Required: (i) (ii) State what changes ought to be made to the report and why; (10 marks) Assess the situation as it now stands in May and indicate what should be done in respect of the budget system and the departmental performance reports. (5 marks) (Total: 25 marks) 36 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS SPRING PLCAt a recent board meeting of Spring plc, there was a heated discussion on the need to improve financial performance.

The Production Director argued that financial performance could be improved if the company replaced its existing absorption costing approach with an activitybased costing system. He argued that this would lead to better cost control and increased profit margins. The Managing Director agreed that better cost control could lead to increased profitability, but informed the meeting that he believed that performance needed to be monitored in both financial and non-financial terms.He pointed out that sales could be lost due to poor product quality or a lack of after-sales service just as easily as by asking too high a price for Spring plc’s products. He suggested that while the board should consider introducing activity-based costing, it should also consider ways in which the company could monitor and assess performance on a wide basis. Required: (a) Describe the key features of activity-based costing and discuss the advantages and disadvantages of adopting an activity-based approach to cost accumulation. 14 marks) Explain the need for the measurement of organisational and managerial performance, giving examples of the range of financial and non-financial performance measures that might be used.

(11 marks) (Total: 25 marks) (b) KAPLAN PUBLISHING 37 PAPER F5 : PERFORMANCE MANAGEMENT DIVISIONS A AND B An organisation has two divisions A and B which make sole use of the output of a service division which provides printing and stationery services. Estimated information for the divisions for the year ending 31 December 20X1 s as follows: (1) Capital employed Profit (before service division costs) Total costs: Each division has a 15% target return on capital employed. Division A ? m 40 10 Division B ? m 25 8 Service Division ? m 14 7 (2) (3) An activity based costing study has revealed the following additional analysis for the service division: Service provided to: Sales Advertising Production Administration Cost driver No. of customers No. of product types No. of batches No. of employees Division A B 10,000 5,000 8 12 60,000 60,000 800 200 Service cost ? m 1. 8 2.

4 0. 8 2. 0 (4)Management at each division has determined independently that the stationery and print service could be obtained from external suppliers for a fee per annum of ? 2m and ? 4. 5m for division A and division B respectively.

Prepare a summary which shows the return on capital employed reported at each of divisions A, B and the service division for EACH of the following transfer price bases from the service division: (i) (ii) (iii) (iv) Total cost on 50/50 basis Total cost on 50/50 basis plus profit mark-up of 30% Total cost using an activity based cost approach External supplier prices. (16 marks)Required: (a) (b) Discuss the acceptability of each of the charge bases in (a) to the management at each division and to the organisation as a whole. (9 marks) (Total: 25 marks) 38 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS NOT-FOR-PROFIT SECTOR During the last 20 years, successive British governments have sought to promote efficiency and effectiveness in all areas of the public sector. Actions taken to promote these ends have included the development and use of appropriate performance indicators. However, both the nature and use of these indicators has been subject to widespread criticism.Required: (a) (b) (c) Explain the concepts of efficiency and effectiveness within the context of the public sector and distinguish between the two. (8 marks) Explain the use of performance indicators in the public sector with particular reference to benchmarking and the balanced scorecard. (9 marks) Explain the problems that may be encountered in the use of performance indicators in the public sector.

(8 marks) (Total: 25 marks) KAPLAN PUBLISHING 39 PAPER F5 : PERFORMANCE MANAGEMENT PERFORMANCE MANAGEMENT (a) (b) Discuss ways in which benchmarking may be used by an organisation as part of a performance measurement and improvement focus. 6 marks) ‘The measurement of performance in a not-for-profit organisation may have value for money as its focus. ’ Expand on this statement incorporating comment on economy, efficiency and effectiveness into your answer. Note: You should select a not-for-profit situation of your own choosing as the basis of your discussion.

(9 marks) (c) Discuss the advantages which may be claimed for Kaplan and Norton’s balanced scorecard as a basis for performance measurement over traditional management accounting views of performance measurement.Your answer should include specific examples of quantitative measures for each aspect of the balanced scorecard. (10 marks) (Total: 25 marks) 40 KAPLAN PUBLISHING LECTURER RESOURCE PACK – QUESTIONS WINDERMERE Windermere operates a divisional organisation structure. The performance of each division is assessed on the basis of the Return on Capital Employed (ROCE) that it generates. For this purpose the ROCE of a division is calculated by dividing its ‘trading profit’ for the year by the ‘book value of net assets’ that it is using at the end of the year. Trading profit is the profit earned excluding non-recurring items.Book value of net assets excludes any cash, bank account balance or overdraft because Windermere plc uses a common bank account (under the control of its head office) for all divisions. At the start of every year each division is given a target ROCE.

If the target is achieved or exceeded than the divisional executives are given a large salary bonus at the end of the year. In 20X1, Windermere plc’s division A was given a target ROCE of 15%. On 15 December 20X1 A’s divisional manager receives a forecast that trading profit for 20X1 would be $120,000 and net assets employed at the end of 20X1 would be $820,000. This would give an ROCE of 14. % which is slightly below A’s target. The divisional manager immediately circulates a memorandum to his fellow executives inviting proposals to deal with the problem. By the end of the day he has received the following proposals from those executives (all of whom will lose their salary bonus if the ROCE target is not achieved): (1) (2) from the Works Manager: that $100,000 should be invested in new equipment resulting in cost savings of $18,000 per year over the next fifteen years; from the Chief Accountant: that payment of a $42,000 trade debt owed to a supplier due on 16 December 20X1 be deferred until 1 January 20X2.

This would result in a $1,000 default penalty becoming immediately due; from the Sales Manager: that $1,500 additional production expenses be incurred and paid in order to bring completion of an order forward to 29 December 20X1 from its previous scheduled date of 3 January 20X2. This would allow the customer to be invoiced in December, thereby boosting 20X1 profits by $6,000, but would not accelerate customer payment due on 1 February 20X2.From the Head of Internal Audit: That a regional plant producing a particular product be closed allowing immediate sale for $120,000 of premises having a book value of $90,000. This would result in $50,000 immediate redundancy payments and a reduction in profit of $12,600 per year over the next fifteen years. Assess each of the above four proposals having regard to: their effect on divisional performance in 20X1 and 20X2 as measured by Windermere plc’s existing criteria, their intrinsic commercial merits, any ethical matters that you consider relevant.You should ignore taxation and inflation.

(b) (20 marks) Discuss what action Windermere plc’s Finance Director should take when the situation at division A and the above four proposals are brought to his attention. (5 marks) (Total: 25 marks) (3) (4) Required: (a) (i) (ii) (iii) KAPLAN PUBLISHING 41 PAPER F5 : PERFORMANCE MANAGEMENT 42 KAPLAN PUBLISHING


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