FINAQUEST PROFESSIONALS TRAINING

ACCA
PAPER F5
PERFORMANCE MANAGEMENT
Mock Examination 1

Time allowed
Reading and planning: 15 minutes
Writing: 2 hours
ALL FIVE questions are compulsory and MUST be attempted.

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.
Saturday 1 May 2010

COMPILED BY: AMG

1 JESSY Co assembles and sells many types of radio. It is considering extending its product
range to include digital radios. These radios produce a better sound quality than traditional radios
and have a large number of potential additional features not possible with the previous
technologies (station scanning, more choice, one touch tuning, station identification text and
song identification text etc).

A radio is produced by assembly workers assembling a variety of components. Production

overheads are currently absorbed into product costs on an assembly labour hour basis.

Edward Co is considering a target costing approach for its new digital radio product.

Required:
(a) Briefly describe the target costing process that Jessy Co should undertake. (3 marks)

(b) Explain the benefits to Jessy Co of adopting a target costing approach at such an early
stage in the product development process. (4
marks)

(c) Assuming a cost gap was identified in the process, outline possible steps Jessy Co could
take to reduce this gap. (5
marks)

A selling price of $44 has been set in order to compete with a similar radio on the market that has
comparable features to Jessy Co’s intended product. The board has agreed that the acceptable
margin (after allowing for all production costs) should be 20%.

Cost information for the new radio is as follows:

Component 1 (Circuit board) – these are bought in and cost $4·10 each. They are bought in
batches of 4,000 and additional delivery costs are $2,400 per batch.

Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each completed

radio. However, there is some waste involved in the process as wire is occasionally cut to the
wrong length or is damaged in the assembly process. Jessy Co estimates that 2% of the
purchased wire is lost in the assembly process. Wire costs $0·50 per metre to buy.

Other material – other materials cost $8·10 per radio.

Assembly labour – these are skilled people who are difficult to recruit and retain. Jessy Co has
more staff of this type than needed but is prepared to carry this extra cost in return for the
security it gives the business. It takes 30 minutes to assemble a radio and the assembly workers
are paid $12·60 per hour. It is estimated that 10% of hours paid to the assembly workers is for
idle time.

Production Overheads – recent historic cost analysis has revealed the following production
overhead data:
Total production overhead Total assembly labour
$ hours
Month 1 620,000 19,000
Month 2 700,000 23,000

Fixed production overheads are absorbed on an assembly hour basis based on normal annual
activity levels. In a typical year 240,000 assembly hours will be worked by Edward Co.

Required:

(d) Calculate the expected cost per unit for the radio and identify any cost gap that might
exist. (7marks)
(20 marks)

2 Bunmi Co manufactures and sells its standard perfume by blending a secret formula of
aromatic oils with diluted alcohol. The oils are produced by another company following a
lengthy process and are very expensive. The standard perfume is highly branded and successfully
sold at a price of $39·98 per 100 millilitres (ml).

Bunmi Co is considering processing some of the perfume further by adding a hormone to appeal
to members of the opposite sex. The hormone to be added will be different for the male and
female perfumes. Adding hormones to perfumes is not universally accepted as a good idea as
some people have health concerns. On the other hand, market research carried out suggests that a
premium could be charged for perfume that can ‘promise’ the attraction of a suitor. The market
research has cost $3,000.

Data has been prepared for the costs and revenues expected for the following month (a test
month) assuming that a part of the company’s output will be further processed by adding the
hormones.

The output selected for further processing is 1,000 litres, about a tenth of the company’s normal
monthly output. Of this, 99% is made up of diluted alcohol which costs $20 per litre. The rest is
a blend of aromatic oils costing $18,000 per litre. The labour required to produce 1,000 litres of
the basic perfume before any further processing is 2,000 hours at a cost of $15 per hour.

Of the output selected for further processing, 200 litres (20%) will be for male customers and 2
litres of hormone costing $7,750 per litre will then be added. The remaining 800 litres (80%) will
be for female customers and 8 litres of hormone will be added, costing $12,000 per litre. In both
cases the adding of the hormone adds to the overall volume of the product as there is no resulting
processing loss.
Bunmi Co has sufficient existing machinery to carry out the test processing.

The new processes will be supervised by one of the more experienced supervisors currently
employed by Bunmi Co. His current annual salary is $35,000 and it is expected that he will
spend 10% of his time working on the hormone adding process during the test month. This will
be split evenly between the male and female versions of the product.

Extra labour will be required to further process the perfume, with an extra 500 hours for the male
version and 700 extra hours for the female version of the hormone-added product. Labour is
currently fully employed, making the standard product. New labour with the required skills will
not be available at short notice.

Bunmi Co allocates fixed overhead at the rate of $25 per labour hour to all products for the
purposes of reporting profits.

The sales prices that could be achieved as a one-off monthly promotion are:
– Male version: $75·00 per 100 ml
– Female version: $59·50 per 100 ml

Required:

(a) Outline the financial and other factors that Bunmi Co should consider when making a
further processing decision.

Note: no calculations are required. (4 marks)

(b) Evaluate whether Bunmi Co should experiment with the hormone adding process using
the data provided. Provide a separate assessment and conclusion for the male and the
female versions of the product. (10 marks)

(c) Calculate the selling price per 100 ml for the female version of the product that would
ensure further processing would break even in the test month. (2 marks)

(d) Bunmi Co is considering outsourcing the production of the standard perfume. Outline
the main factors it should consider before making such a decision.
(4 marks)
(20 marks)

3 TOO SIMPLE is a new business, selling high quality imported men’s ties via the internet. The
managers, who also own the company, are young and inexperienced but they are prepared to take
risks. They are confident that importing quality ties and selling via a website will be successful
and that the business will grow quickly. This is despite the well recognised fact that selling
clothing is a very competitive business.
They were prepared for a loss-making start and decided to pay themselves modest salaries
(included in administration expenses in table 1 below) and pay no dividends for the foreseeable
future.

The owners are so convinced that growth will quickly follow that they have invested enough
money in website server development to ensure that the server can handle the very high levels of
predicted growth. All website development costs were written off as incurred in the internal
management accounts that are shown below in table 1.

Significant expenditure on marketing was incurred in the first two quarters to launch both the
website and new products. It is not expected that marketing expenditure will continue to be as
high in the future.

Customers can buy a variety of styles, patterns and colours of ties at different prices.

The business’s trading results for the first two quarters of trade are shown below in table 1.

Table 1
Quarter 1 Quarter 2
$ $ $ $
Sales 420,000 680,000
less Cost of Sales (201,600) (340,680)
–––––––– ––––––––
Gross Profit 218,400 339,320
less expenses
Website development 120,000 90,000
Administration 100,500 150,640
Distribution 20,763 33,320
Launch marketing 60,000 40,800
Other variable expenses 50,000 80,000
–––––––– ––––––––
Total expenses (351,263) (394,760)
–––––––– ––––––––
Loss for quarter (132,863) (55,440)
–––––––– ––––––––
Required:
(a) Assess the financial performance of the business during its first two quarters using only
the data in table 1 above. (10 marks)

(b) Briefly consider whether the losses made by the business in the first two quarters are a
true reflection of the current and likely future performance of the business.
(3 marks)

The owners are well aware of the importance of non-financial indicators of success and therefore
have identified a small number of measures to focus on. These are measured monthly and then
combined to produce a quarterly management report.
The data for the first two quarters management reports is shown below:

Table 2
Quarter 1 Quarter 2
Website hits* 690,789 863,492
Number of ties sold 27,631 38,857
On time delivery 95% 89%
Sales returns 12% 18%
System downtime 2% 4%
* A website hit is automatically counted each time a visitor to the website opens the home page
of Ties Only.

The industry average conversion rate for website hits to number of ties sold is 3·2%. The
industry average sales return rate for internet-based clothing sales is 13%.

Required:

(c) Comment on each of the non-financial data in table 2 above taking into account, where
appropriate, the industry averages provided, providing your assessment of the
performance of the business. (7 marks)
(20 marks)

4 Aisha Co processes and sells brown rice. It buys unprocessed rice seeds and then, using a
relatively simple process, removes the outer husk of the rice to produce the brown rice. This
means that there is substantial loss of weight in the process. The market for the purchase of seeds
and the sales of brown rice has been, and is expected to be, stable.

There has been some concern about the interpretation of the variances that have been calculated
in month 1.
1. The purchasing manager is adamant, despite criticism from the production director, that he has
purchased wisely and saved the company thousands of dollars in purchase costs by buying the
required quantity of cheaper seeds from a new supplier.

2. The production director is upset at being criticised for increasing the wage rates for month 1;
he feels the decision was the right one, considering all the implications of the increase. Morale
was poor and he felt he had to do something about it.

3. The maintenance manager feels that saving $8,000 on fixed overhead has helped the
profitability of the business. He argues that the machines’ annual maintenance can wait for
another month without a problem as the machines have been running well.

The variances for month 1 are as follows:

$
Material price 48,000 (Fav)
Material usage 52,000 (Adv)
Labour rate 15,000 (Adv)
Labour efficiency 18,000 (Fav)
Labour idle time 12,000 (Fav)
Variable overhead expenditure 18,000 (Adv)
Variable overhead efficiency 30,000 (Fav)
Fixed overhead expenditure 8,000 (Fav)
Sales price 85,000 (Adv)
Sales volume 21,000 (Adv)
Fav = Favourable, Adv = Adverse
Aisha Co uses labour hours to absorb the variable overhead.

Required:

(a) Comment on the performance of the purchasing manager, the production director and
the maintenance manager using the variances and other information above and reach a
conclusion as to whether or not they have each performed well.
(8 marks)

In month 2 the following data applies:

Standard costs for 1 tonne of brown rice

– 1·4 tonnes of rice seeds are needed at a cost of $60 per tonne
– It takes 2 labour hours of work to produce 1 tonne of brown rice and labour is normally paid
$18 per hour. Idle time is expected to be 10% of hours paid; this is not reflected in the rate of $18
above.
– 2 hours of variable overhead at a cost of $30 per hour
– The standard selling price is $240 per tonne
– The standard contribution per tonne is $56 per tonne

Budget information for month 2 is

– Fixed costs were budgeted at $210,000 for the month

– Budgeted production and sales were 8,400 tonnes

The actual results for month 2 were as follows:

Actual production and sales were 8,000 tonnes

– 12,000 tonnes of rice seeds were bought and used, costing $660,000
– 15,800 labour hours were paid for, costing $303,360
– 15,000 labour hours were worked
– Variable production overhead cost $480,000
– Fixed costs were $200,000
– Sales revenue achieved was $1,800,000

Required:
(b) Calculate the variances for month 2 in as much detail as the information allows and
reconcile the budget profit to the actual profit using marginal costing principles. You are
not required to comment on the performance of the business or its managers for their
performance in month 2. (12marks)
(20 marks)

5 Abuja’s major towns and cities are maintained by local government organisations (LGO),
which are funded by central government. The LGOs submit a budget each year which forms the
basis of the funds received.

You are provided with the following information as part of the 2010 budget preparation.

Overheads

Overhead costs are budgeted on an incremental basis, taking the previous year’s actual
expenditure and adding a set % to allow for inflation. Adjustments are also made for known
changes. The details for these are:

Overhead cost category 2009 cost ($) Known changes Inflation adjustment
between 2009 and 2010
Property cost 120,000 None +5%
Central wages 150,000 Note 1 below +3%
Stationery 25,000 Note 2 below 0%

Note 1: One new staff member will be added to the overhead team; this will cost $12,000 in
2010
Note 2: A move towards the paperless office is expected to reduce stationery costs by 40% on
the 2009 spend.

Road repairs
In 2010 it is expected that 2,000 metres of road will need repairing but a contingency of an extra
10% has been agreed.

In 2009 the average cost of a road repair was $15,000 per metre repaired, but this excluded any
cost effects of extreme weather conditions. The following probability estimates have been made
in respect of 2010:

Weather type predicted Probability Increase in repair cost

Good 0·7 0
Poor 0·1 +10%
Bad 0·2 +25%
Inflation on road repairing costs is expected to be 5% between 2009 and 2010.

New roads
New roads are budgeted on a zero base basis and will have to compete for funds along with other
capital projects such as hospitals and schools.

Required:
(a) Calculate the overheads budget for 2010. (3 marks)

(b) Calculate the budgets for road repairs for 2010. (6 marks)

(c) Explain the problems associated with using expected values in budgeting by an LGO
and explain why a contingency for road repairs might be needed.
(8 marks)

(d) Explain the process involved for zero based budgeting. (3 marks)
(20 marks)

Comment:OPENTUITION FORUM F5 www.amgmlearning.com