F5 RM Questions

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ACCA Paper F5 Performance Management Revision Mock Examination December 2014 Question Paper Time Allowed

15 minutes

Reading and planning

3 hours

Writing

ALL questions are compulsory and MUST be attempted. Formulae are at the end of the paper. Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor.

© Interactive World Wide Ltd, August 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Interactive World Wide Ltd.

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Section A – ALL TWENTY questions are compulsory and MUST be attempted. 1. Which of the following are characteristics of management accounting information? (i) Non-financial as well as financial (ii) Used by all stakeholders (iii) Concerned with cost control only (iv)Not legally required

A. (i) and (iv) only B. (ii) and (iii) only C. (i), (ii) and (iii) only D. (ii), (iii) and (iv) only

2. The budgeted overheads of Coleman Ltd for the next year have been analysed as follows: Machine running costs Purchase order processing costs Production run setup costs

$000 640 450 180

In the next year, it is anticipated that machine will run for 32,000 hours, 6,000 purchase orders will be processed and there will be 450 production runs. One of the company’s products is produced in batches of 500. Each batch requires a separate production run, 30 purchase orders and 750 machine hours. Using activity-based costing, what is the overhead cost per unit of the product? A. $0.99 B. $1.59 C. $35.30 D. $495.00

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3. Your company regularly uses material X and currently has in inventory 500 kg for which it paid $1,500 two weeks ago. If this were to be sold as raw material, it could be sold today for $2.00 per kg. You are aware that the material can be bought on the open market for $3.25 per kg, but it must be purchased in quantities of 1,000 kg. You have been asked to determine the relevant cost of 600 kg of material X to be used in a job for a customer. The relevant cost of the 600 kg is: A. $1,325 B. $1,825 C. $1,950 D. $3,250

4. A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For the coming period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows: Products X $20 Y $40 Variable cost per unit X $12 Y $30 Skilled labour hours per unit X 2 Y 4 Maximum demand (units) per period X 800 Y 400 In order to maximise profit in the coming period, how many units of each product should the company manufacture and sell? A. 200 units of X and 400 units of Y B. 400 units of X and 300 units of Y C. 600 units of X and 200 units of Y D. 800 units of X and 100 units of Y

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5. A company makes a single product which it sells for $16 per unit. Fixed costs are $76,800 per month and the product has a profit/volume ratio of 40%. In a period when actual sales were $224,000, the company’s safety margin, in units, was: A. 2,000 B. 12,000 C. 14,000 D. 32,000

6. A company incurs the following costs at various activity levels: Total cost $ 250,000 312,500 400,000

Activity level Units 5,000 7,500 10,000

Using the high–low method what is the variable cost per unit? A. $25 B. $30 C. $35 D. $40

7. Consider the following three combinations: (i) Basic standards; motivational (ii) Ideal standards; include allowance for losses (iii) Attainable standards; tough but achievable

Which combination(s) is/are correct? A. (i) B. (ii) C. (iii) D. (i) and (ii)

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8. Select the correct combination from the following: (i) Zero-based budgets; amendments in past activity (ii) Incremental budgets; amendments in past activity (iii) Participatory budgets; impose budgets (iv)Non-participatory budgets; involve middle managers

A. (i) only B. (ii) only C. Both (iii) and (iv) D. Both (i) and (ii)

9. Select the correct combination from the following: (i) Zero-based budgets; amendments in past activity (ii) Incremental budgets; no amendments in past activity (iii) Participatory budgets; impose budgets (iv)Non-participatory budgets; impose budgets

A. (i) only B. (ii) only C. (iii) only D. (iv) only

The following information relates to questions 10 and 11. Amazing Plc manufactures automated toys for children. Due to the nature of work being repetitive there is a learning curve with a 75% rate which occurs until 15 units. The first toy takes 5 hours to finish. At the 75% learning rate b = −0.415. Labour is paid $10 per hour.

10.Calculate the average labour cost of a toy when 15 toys are produced. A. $16.25 B. $17.25 C. $18.25 D. $19.25

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11.Calculate the time it would take to produce the 15th toy. A. 0.964 hours B. 1.5 hours C. 1.625 hours D. 5 hours

12.Identify the correct statement representing the balanced scorecard. (i) Its entire focus is on financial performance of the organisation. (ii) It considers both internal and external areas concerning the organisation.

Which of the above statements is/are true? A. (i) only B. (ii) only C. Neither (i) nor (ii) D. Both (i) and (ii)

The following details apply to questions 13 and 14. A company is producing satellite dish antennas in a very competitive market. A standard antenna has the following details: Direct materials Direct labour Overheads

$80 per unit $35 $25 per unit

Sales and research departments have established a price of $150 per unit in the local market with a margin of 20% of the selling price.

13.What is the target cost per antenna? Identify the cost gap if any.

14.Which of the following may be used to close the target cost gap for the antenna? A. Use overtime to complete work ahead of schedule. B. Substitute current raw materials with cheaper versions. C. Raise the selling price of the antenna. D. Negotiate cheaper rent for the company’s premises.

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15.An office manager of Harris Plc wishes to minimise the cost of telephone calls made. 40% of calls in peak hours cost £1 each and the remainder of such calls cost £1.50 each. 30% of calls at other times cost 80p each, 50% of them cost 90p each and 20% of them cost £1 each. This proportion cannot be varied, though the total number of calls made in peak hours and of calls made at other times can be. If X = the numbers of calls made each day in peak hours, and Y = the number of calls made each day at other times, the official manager’s objective is to: A. Minimise 120X + 89Y B. Minimise 120X + 90Y C. Minimise 130X + 89Y D. Minimise 130X + 90Y

16.A flexible budget describes which of the following: A. A budget which shows variable production costs only B. A monthly budget which is changed to reflect the number of days in the month C. A budget which shows sales revenue and costs at different levels of activity D. A budget that is updated halfway through the year to incorporate the actual results for the first half of the year

17.Hold-on has a 40% chance to make a profit of $300,000 next year and a 60% chance of making a loss of $400,000. What is the expected profit or loss for next year? A. $120,000 Loss B. $20,000 Loss C. $20,000 Profit D. $120,000 Profit

18.Bottom-up budgets are likely to be effective in which of the following situations? (i) In very large organisations (ii) During periods of economic affluence (iii) When an organisation’s different units act autonomously (iv)In newly formed organisations

A. All of the above B. None of the above C. (iii) and (iv) D. (i), (ii), and (iii)

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19.Beauty Co makes two products, nail polish and lipsticks. Nail polish sales make up 30% of total sales and their variable costs are 45% as a percentage of sales value. Lipsticks sales are 70% of the total sales and their variable costs are 40% as a percentage of sales value. Total fixed costs are $400,000 for the company. Calculate the breakeven revenue for Beauty Co.

20.Wong Ltd is trying to decide the selling price for a product. Three prices are under consideration and expected sales volume and costs are as follows: Price per unit Expected sale volume (unit): Best possible Most likely Worst possible

$4

$4.30

$4.40

16,000 14,000 10,000

14,000 12,500 8,000

12,500 12,000 6,000

Variable cost is $2 per unit. Which price should be chosen using maximax criterion?

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Section B – ALL FIVE questions are compulsory and MUST be attempted. 1. Goodison Consulting is a multinational management consulting organisation, with offices all around the world. The clients of Goodison are mainly small and medium size businesses, in a variety of different market sectors, and Goodison's consultants carry out bespoke assignments on behalf of clients. Each office is run as an autonomous business unit by the office manager. This autonomy is considered very important by the directors of Goodison as it allows local managers to develop highly innovative business solutions for their clients. Table 1 shows a selection of statistics that have been extracted from Goodison's management accounting system regarding one of their offices: Table 1: Financial information Year 2009 2010 380 420 95 100 10 12 25 22 30 30 5 5

Sales revenue ($000) Net profit ($000) Average cash balance ($000) Average trade receivables days (days) Industry average trade receivables days (days) Local inflation rate (% pa) Required:

(a) Using only the data provided in Table 1, discuss the performance of the office manager for 2010. Calculate relevant ratios to support your answer. (9 marks) Table 2 shows a selection of statistics that have been extracted from Goodison's other management control systems regarding the same office as that of Table 1: Table 2: Non-financial information

Number of clients Share of local consulting market Client assignment error rate Average time taken per client assignment (weeks) Average days training received per consultant Staff turnover rate

Year 2009 2010 190 140 40% 25% 2% 4% 4 5 8 6 8% 12%

(b)Using the data provided in Table 2, discuss the performance of the office manager for 2010. You should use the following headings in constructing your answer: (i) customer satisfaction

(2 marks)

(ii) internal process efficiency

(2 marks)

(iii)learning and growth

(2 marks) (15 marks)

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2. Barnsley Hospital is a state-funded hospital, established 25 years ago. Due to its mid-city location it is very popular among the local residents. Besides, it provides free of cost services to its patients. A full range of health services are provided to the patients, in various departments. The managers report to the board of governors. The hospital is also a teaching institution for local university students. Due to this fact the hospital is very innovative in clinical areas. Decision-making is centralised and leads to a bureaucratic style of management, sometimes delaying the decision-making process. One of its major departments is the outpatients department (OPD). The management accountant working in the hospital has collected the following data during the last five years. Year 2002 2003 2004 2005 2006

Patients number 48,000 64,000 72,000 52,000 60,000

Expenditure ($) 80,000 72,000 82,000 58,000 100,000

The manager of OPD is now in the process of budget preparation for the year 2007. Over the past few years the manager has been using the incremental style of budgeting. Being a new management accountant for the hospital, you have been asked to provide help in budgeting. Required: (a) You are thinking about suggesting the use of zero-based budgeting (ZBB) to the manager. Describe the principles of ZBB, with its advantages and limitations in a memo addressed to the manager. (8 marks) (b)Forecast the total expenditure for 2007 if the manager expects 65,000 patients in the next year, using high–low method. (2 marks) (10 marks)

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3. Exelcier Co., an events management company, is trying to decide whether or not to advertise an outdoor concert. The sale of tickets is dependent on the weather. If the weather is poor it is expected that 5,000 tickets will be sold without advertising. There is a 70% chance that the weather will be poor. If the weather is good it is expected that 10,000 tickets will be sold without advertising. There is a 30% chance that the weather will be good. If the concert is advertised and the weather is poor, there is a 60% chance that the advertising will stimulate further demand and ticket sales will increase to 7,000. If the weather is good there is a 25% chance the advertising will stimulate demand and ticket sales will increase to 13,000. The profit expected, before deducting the cost of advertising, at different levels of ticket sales are as follows: Number of tickets sold 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000

Profit $ (20,000) (5,000) 35,000 55,000 70,000 90,000 115,000 130,000 150,000

The cost of advertising the concert will be $15,000. Required: Demonstrate, using a decision tree, all courses of actions and all possible outcomes and recommend whether the concert should be advertised by Exelcier Co. (10 marks)

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4. Barons plc has been in the business of manufacturing state-of-the-art stereos for many years, and is now considering developing a new model and the board members are considering the reliability of the existing management accounting system. At present products are produced by workers assembling a variety of components. Production overheads are currently absorbed into product costs on a labour hour basis. Barons plc is considering introducing a target costing system for costing and pricing their new stereos. A selling price of $50 has been as per market research considering prices being charged by the competitors with similar features. A target profit of 10% has been approved by the board. The following is the cost information of the new stereo: Part 1 – The suppliers have agreed a price of $10.00 per unit. Part 2 – 5 units of part 2 are assembled in a stereo, and cost $3.00 per unit along with delivery charge of 10% of the purchase price which is to be added to the invoice. Other materials – $5.00 per stereo. Factory labour – it takes 2 hours to produce one stereo, excluding idle time of 20% which has to be considered reflecting existing efficiencies of the workforce. All workers are paid a constant rate of $8 per hour. Production overheads – The following information has been recorded over the past two months, fixed overheads being charged on the basis of labour hours. Normal production hours per month are estimated to be 2,400.

Month 1 Month 2

Total production overhead $ 6,200 7,000

Labour hours 1,900 2,300

Required: Calculate the current expected cost per stereo, and identify any cost gap that may exist. (10 marks)

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5. Just-cheez-spud operates a chain of take-away baked potato kiosks, situated in busy commercial districts of a major capital city. Hungry customers go into a Justcheez-spud kiosk, and order a buttered baked potato with a cheese filling, which they then take to eat elsewhere. Kiosks are operated by an individual operator who buys ingredients locally before cooking and assembling each potato at the kiosk. The owner of Just-cheez-spud, Mr Khan, operates a standard costing system to evaluate the performance of the operator of each kiosk. Performance-related pay with bonuses based upon variances calculated from the standard costing system is used to motivate each kiosk operator. An extract from the standard cost card of one filled potato is as follows: Food element: Potato Butter Cheese Standard food cost per sold unit

$/unit 0.32 0.15 1.73 2.20

0.4 kg x $0.8 per kg 0.015 kg x $10 per kg 0.2 kg x $8.65 per kg

Recently one particular kiosk has been causing concern for Mr Khan. Although the profitability of the kiosk has been rising for months, several customer complaints have reached Mr Khan's office about the potatoes sold from the kiosk. Mr Khan cannot understand this, as the kiosk operator has been paid increasing levels of bonus for the past few months. Table 1 shows the output from the standard costing system for the kiosk in question for the three months to August 2010: Table 1: Variance Food material mix Food material yield Food material price

June $188.45 F $40.65 F $37.50 A

July $213.80 F $90.20 F $5.50 A

August $246.50 F $117.80 F $15.50 F

The actual number of potatoes sold at the kiosk was almost constant for the three months. Required: (a) Comment upon the performance of the kiosk operator for the three months to August 2010, suggesting possible performance reasons for the variances reported, in the areas of: (i) managing food material cost

(4 marks)

(ii) managing product quality

(3 marks)

Table 2 below shows actual results for the kiosk for September 2010: Table 2: Potatoes made and sold: 1,420 Material purchased and used: Potato Butter Cheese

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578 kg at $0.85 per kg 18 kg at $9.75 per kg 240 kg at $8.40 per kg

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(b) For the month of September 2010, and working to two decimal places, calculate: (i) Total food material mix variance

(4 marks)

(ii) Total food material yield variance

(4 marks)

Note: You are not required to comment upon your calculations. (15 marks)

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Formulae Sheet

Learning curve Y  axb

Where:

y = cumulative average time to produce X units a = the time taken for the first unit of output x = the cumulative number of units produced b = the index of learning (log LR/log 2) LR = the learning rate as a decimal

Demand curve

P  a  bQ b

changein price changein quantity

a  price when Q  0 MR = a – 2bQ

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