F5 RM Answers

ACCA Paper F5 Performance Management Revision Mock Examination December 2014 Answer Guide Health Warning! How to pass

Attempt the examination under exam conditions BEFORE looking at these suggested answers. Then constructively compare your answer, identifying the points you made well and identifying those not so well made. If you got basic definitions and rules wrong: rerevise by re-writing them out until you get them correct.

How to fail

Simply read or audit the answers congratulating yourself that you would have answered the questions as per the suggested answers.

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Section A 1. A

2. C

3. C

4. D

5. A

6. B

7. C

8. B

9. D

10.

A

11.

A

12.

B

13.

Target cost $120, Cost gap $20

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14.

B

15.

C

16.

C

17.

A

18.

D

19.

$683,761

20.

$4.30

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Section B Question 1

Tutorial help and key points This is a fairly straightforward performance evaluation question, similar to questions that have been asked many times in past F5 exams. Although the calculations required are simple, make sure you show how you have performed them. The emphasis on this type of question is on interpretation – key to the role of the management accountant is the ability to interpret the information they produce for other managers, and this is what the examiner is testing here. You can make life easier for your marker by using headings for the points you make. Although not mentioned in the question, you should recognise the non-financial headings required in part (b) as those of the balanced scorecard. This is a key model for performance management – make sure you are adept at using it!

Marking scheme (a) One mark per reasonable point, 1 mark for a relevant correct ratio, 2 max per heading, up to 9 marks. (b)1 mark per sensible point, 2 max per heading, up to 6 marks. (max 15 marks)

(a) The financial performance of the office manager: Sales revenue Sales revenue has increased by 10.5% [(420 − 380)/380] over the previous year's figure. Given that inflation was running at only 5% for the period, this represents a real-terms increase in revenue. This indicates good marketing performance by the office. Net profit The net profit has increased by 5.3% during 2010, which initially seems to be a good performance. However, closer examination of the figures show that net profit margin fell from 25% in 2009 to only 23.8% in 2010. This indicates a slight worsening in control over operating costs by the office during 2010. Cash balance The average cash balance has increased by 20% during 2010, which indicates good and improving liquidity for the office. Again, since this is higher than the inflation rate of 5%, there has been a real-terms increase in liquidity.

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Trade receivables Trade receivables days have remained below the industry average for the office, which suggests good performance by the credit collection department of the office. However, care should be taken to ensure that in reducing the amount of trade credit offered by 12% over the year, the office does not damage its competitiveness by alienating customers that prefer to take all trade credit offered to them.

(b) The non-financial performance of the office manager: (i) Customer satisfaction The number of customers has fallen alarmingly during the year, down by over 26%. This is particularly worrying as the consultancy market is expanding for the office. In 2009 the total market size was 475 clients [190/40%]; in 2010 the total market size was 560 clients [140/25%]. The office manager needs to quickly establish and address the reasons for this loss of competitiveness if the office market share is to be restored. (ii) Internal process efficiency The client error rate may look low at only 4%, but this represents a 100% increase (ie a doubling) of the error rate from 2009. Coupled with the fact that the average time taken to complete client assignments has risen by 25%, this seems to indicate a deterioration in the internal process efficiency of the office. This could also account for some of the fall in competitiveness of the office indicated above. (iii) Learning and growth The average level of experience of consultants in the office has declined during 2010, as indicated both by the average amount of training offered to office employees which has fallen by 25% during the period and also by the rise of 25% in staff turnover at the office. These may help to account for the increase in error rate mentioned above.

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Question 2

Tutorial help and key points Part (a) now discusses the basic features of another budgeting type ZBB, detailing the process, key advantages and some limitations, all to be written in a memo format. Part (b) requires basic application of the high–low method to forecast expenditure for the next year.

Marking scheme (a)

See within the answer

(b)

(a) Memo: [1 mark for presentation] To: Manager of OPD From: Management Accountant Date: aa/bb/cccc Subject: Zero-based budgeting (ZBB) Zero-based budgeting is an approach to modern budgeting in service organisations where a budget is prepared from scratch. Every item of expenditure has to be justified in its entirety before approval is granted in the budget. ZBB ignores the assumption that next year’s activities will remain the same as the last year with the same level or with same volume. If we look at the last five years’ results of OPD it is obvious that activities were widely fluctuating in the past. Therefore every aspect of the budget is to be examined in terms of its costs and benefits associated, and focus is always to select any alternative better than the current one. [1 mark for description]

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Steps involved in ZBB: [1/2 mark for each step] 1.Prepare decision packages. 2. Rank decision packages in order of importance, starting with mandatory requirements. 3.Consider funding. 4.Utilise funds in order of the ranking until exhausted. Advantages of ZBB: [2 marks] 1.Emphasis on future need, not past actions. 2.ZBB eliminates past errors that may be perpetuated in an incremental analysis. 3.A positive disincentive for management to introduce slack into their budget. 4.A considered allocation of resources in order of priority. 5.It encourages cost reduction and control. Limitations of ZBB: [2 marks] 1.ZBB can be costly and time consuming. 2.It may lead to increased stress for management. 3.It may re-invent the whole wheel each year. 4.It may lead to short term planning. I hope that this has been a helpful summary of ZBB. If you have any questions on this or any other matters please don’t hesitate to contact me. (b) Highest Lowest Difference

Patient numbers 72,000 48,000 24,000

Expenditure ($) 82,000 80,000 2,000

Variable cost per patient = $2,000/24,000 = $0.0833 [1 mark] Fixed cost = $82,000 – ($0.0833 x 72,000) = $76,000 (approx.) Forecast expenditure for 65,000 patients: Fixed cost Variable cost ($0.0833 x 65,000) Total

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$76,000 $5,417 $81,417

[1 mark]

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Question 3

Tutorial help and key points A very likely exam question in decision making under uncertainty as it has not been examined yet under revised syllabus. First of all you have to draw up a decision tree, clearly showing the decision point and all possible courses of actions and outcomes. Then you have to calculate the expected values of each outcome under all courses of actions, using joint probabilities. Then you will select the highest expected value to go with, as recommendation to the management.

Marking scheme Drawing of decision tree with complete possibilities and proper labelling

6 marks

Calculation of expected values of all possible outcomes

4 marks (10 marks)

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Further demand 60%

A

Poor 70% B No more demand 40%

Further demand 25% Adverse

Good 30%

C

D No more demand 75%

Don’t advertise

E

Poor 70%

Good 30%

F

Analysis: Point A B C D EV of Advertise ∑px = E F EV of Don’t Advertise ∑px =

Tickets 7,000 5,000 13,000 10,000

Profit (x) $000 20 (35) 135 75

p 0.42 0.28 0.075 0.225

5,000 10,000

(20) 90

0.7 0.3

px $000 8.4 (9.8) 10.125 16.875 25.6 (14) 27 13

Therefore the company should advertise as it generates the highest expected value.

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Question 4

Tutorial help and key points Target costing questions appear in F5 exams on a semi-variable basis, mainly to test basic management accounting knowledge and skills. In this question we have to apply basic steps on target costing along with some adjustments of losses, idle time, high–low method, etc. which are fundamental management accounting skills.

Marking scheme Raw materials: Part 1 mark

½

Part 2

½ mark

Delivery charge

½ mark

Other materials

½ mark

Labour

1½ marks

Production overheads: Variable

1½ marks

Fixed

1½ marks

Total current expected cost

1 mark

Calculation of target cost Target selling price

½ mark

Target profit required

1 mark

Target cost

1 mark (10 marks)

Expected current cost per stereo: Raw materials: Part 1 Part 2 Delivery charge Other materials Labour(2 hours /0.8 x $8 per hour) Production overheads (see W1) Variable ($2.00 x 2 hours)

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$ 10.00 15.00 1.50 5.00

$

31.50 20.00

4.00

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Fixed($1.00 x 2 hours) Total current expected cost

2.00

6.00 57.50

Calculation of target cost Target selling price Target profit required ($50 x 10%) Target cost

$50.00 ($5.00) $45.00

As we can see that our current expected cost per unit is greater than the target cost, so cost gap of $12.50 exists and the business needs to investigate as to how this cost gap maybe closed. Cost control is a continuous process, therefore management should review the production process and apply various steps involved in closing the cost gap so as to further reduce the cost if possible, without any deterioration in quality.

W1 High–low method: Variable rate per hour:

$7,000  $6,200 2,300 hrs  1,900 hrs

=

$2.00 per hour.

Fixed overheads = Total overheads − Variable overheads. At 1,900 hours = $6,200 - $3,800 ($2.00 x 1,900 hours) = $2,400. Fixed overheads absorption rate:

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$2,400 2,400 hours

=

$1.00 per hour.

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Question 5

Tutorial help and key points This question addresses two key topics, namely performance management and standard costing mix and yield calculations. It is important that you can calculate mix and yield variances for the F5 exam, and also comment upon their implications for performance management. In part (a) of the question, make sure you bear in mind the controllability of each of the variances in the question. There are also marks available for questioning the suitability of using a standard costing system of control for JustCheez-Spud, due to the variability of each potato served to the customers. Some students find calculations such as those in part (b) of the question difficult; if this applies to you, then practice these questions, thinking through what you are doing, until you can do them confidently. Also keep going – there are marks available throughout the answer, so even if you make a mistake or two you can still pick up enough marks to pass the question.

Marking scheme (a) (i) 1 mark per point, 2 max per variance, up to 4 (ii) 1 mark per point, 1.5 max per variance, up to 3 max 7 marks (b) (i) Mix variance: 4 marks (ii) Yield variance: 4 marks 8 marks (15 marks)

(a) (i) The performance of the kiosk operator in managing product cost: The food material cost variances are getting more and more favourable each month, which suggests the kiosk operator is improving control over food product cost: 

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The mix variance is favourable, and getting more so. A mix variance is caused by substituting one material for another. This is controllable by the kiosk operator as he assembles the product for the customer from the three food ingredients used.

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

The yield variance is also favourable, and getting more so. A favourable yield variance suggests that more products are being produced from a given level of food input than expected. This could be due to the operator being more careful with the food he uses, wasting less of it than expected, which would be a good thing.



The price variance has become favourable. A suggests that less is being paid to suppliers expected. This could be due to keen price between the kiosk operator and the supplier of

favourable price variance for food ingredients than negotiation taking place food.

(ii) The performance of the kiosk operator in managing product quality: Mr Khan has experienced customer complaints regarding the quality of the potatoes served from the kiosk. This could be linked to the reported variances in the following ways: 

A favourable mix variance is caused by substituting cheaper materials for more expensive ones in the product served to the customer. Cheese and butter is more expensive per kilogram than potato, therefore by using more potato and less cheese and butter per unit a favourable mix variance is caused. However, cheese and butter are the ingredients that make bland baked potato taste good - therefore the favourable mix variance is likely to be at the expense of product quality.



A favourable yield variance is caused by achieving more units of sold product to customers for a given level of food materials than expected. This could be due to the kiosk operator 'shorting' the portions of potato, cheese and butter in each unit sold to a customer, therefore leaving the customer feel upset that they have not gotten the product size that they have paid for.



A favourable price variance could be achieved by buying cheaper types of raw material than expected from suppliers. This is particularly important in the cheese used in the baked potatoes. Cheese which is cheaper per kilogram than that expected in the standard cost card is likely to not taste as good as that expected by the customer.

(b)Material variances SQ(SM) x SP P:1420 x 0.32 B:1420 x 0.15 C: 1420 x 1.73 AQ(SM) x SP P:836 x .4/.615 x 0.8 B:836 x .015/.615 x 10 C:836 x .2/.615 x 8.65 AQ(AM) x SP P:578 x 0.8 B:18 x 10 C: 240 x 8.65 AQ(AM) x AP Price variances

P 454.4

B 213

C 2456.6

Total 3124

Yield variance = 3124 – 2990.57 = 133.43Fav 434.99

203.9

2351.67

2990.57

Mix variance = 2990.57 – 2718.4 = 272.17Fav 462.4

180

2076

2718.4

Price variance = 2718.4 – 2682.8 = 35.6Fav 491.3 28.9 A

175.5 4.5 F

2016 60 F

2682.8 35.6 F

Note: Material price variance is only calculated to fill in the whole proforma of variances, it was not required in the question.

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