ACCA PAPER F5 PERFORMANCE MANAGEMENT

FINAL MOCK EXAM

Fundamentals Paper F5

Performance Management

Final Mock Examination

Question Paper

Time allowed 3 hours 15 min.

Answer ALL four questions

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 ACCA PAPER F5 PERFORMANCE MANAGEMENT
FINAL MOCK EXAM

Answer ALL four questions

Question 1

X Ltd uses an automated manufacturing process to produce an industrial chemical, Product P. X

Ltd operates a standard marginal costing system. The standard cost data for Product P is as
follows:

Standard cost per unit of Product P:

Materials
A 10 kgs @ $15 per kilo $150
B 8 kgs @ $8 per kilo $64
C 5 kgs @ $4 per kilo $20
23 kgs
Total standard marginal cost $234

Budgeted fixed production overheads $350,000

In order to arrive at the budgeted selling price for Product P the company adds 80% mark-up to
the standard marginal cost. The company budgeted to produce and sell 5,000 units of Product P
in the period. There were no budgeted inventories of Product P.

The actual results for the period were as follows:

Actual production and sales 5450 units
Actual sales price $445 per unit
Material usage and cost
A 43,000 kgs $688,000
B 37,000 kgs $277,500
C 23,500 kgs $99,875
103,500 kgs
Fixed production overheads $385,000

Required:
(a) Prepare an operating statement which reconciles the budgeted profit to the actual
profit for the period. (The statement should include the material mix and material yield
variances). (12 marks)

(b) The Production Manager of X Ltd is new to the job and has very little experience of
management information. Write a brief report to the Production Manager of X Ltd that
interprets the material price, mix and yield variances; discusses the merits, or otherwise,
of calculating the materials mix and yield variances for X Ltd.
(8 marks)

(c) Briefly explain the problems associated with using traditional standard costing in
today s business environment (5 marks)

(25 marks)

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 ACCA PAPER F5 PERFORMANCE MANAGEMENT
FINAL MOCK EXAM

Question 2

A company has developed a new product which it is about to launch on its local market.
The new product will be in competition with a large number of products from some 25 to 30
companies and particulars from one product selling at $65 per unit in quantities of 6,000 per
month which represents some 30% of the potential market for this new product. The company
manufactures and sells other product, none of whose local market share is less than 5% or more
than 35%. Prices in this local market have been fairly steady for some years.

The new product involves an advanced technology and is demonstrably better in performance
and quality than its major competitor. The company believes that it has at least 12 to 18 months
before competitors could achieve a comparable quality of product.

The company estimates that its production costs for the new product will be as follows.

Direct materials $12 per unit*

Direct labour $28 per unit*

For each of its three production departments, the following data applies.

Production Unit of Full cost Normal Fixed and/or Department

department measurement overhead monthly allocated time on new
rate (x) volume on overhead in product*
which (x) is (x)
based
X Machine $2.40 12,500 $5000 2
hours
Y Direct labour $1.80 15,000 $6000 1.5
hours
Z Direct labour $0.80 25,000 $7500 3
hours

*All these estimates are subject to an error of + 10%.

Selling and administration expenses for the new product are expected to be $20,000 per month
and will be virtually unaffected by the price or sales level achieved by the new product.

The company generally sets its selling prices by adding a mark-up on factory cost of between
30% and 45%, mostly towards the upper end.

Required:
(a) Advise, with brief explanations, what type of pricing strategy the company should
adopt for its new product. (8 marks)

(b) Recommend a selling price for the new product, with supporting figures,
explaining briefly the reason fort your recommendation. (17 marks)
(25 marks)

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 ACCA PAPER F5 PERFORMANCE MANAGEMENT
FINAL MOCK EXAM

Question 3

Heighway Co is a railway company. Heighway Co operates a passenger railway service

and is responsible for the operation of services and the maintenance of track signalling
equipment and other facilities such as stations. In recent years it has been criticised for
providing a poor service to the travelling public in terms of punctuality, safety and the
standard of facilities offered to passengers. In the last year Heighway Co has invested
over $20 million in new carriages, station facilities and track maintenance programmes in
an attempt to counter these criticisms. Summarised financial results for Heighway Co for the
last two years are given below.

Summarised income statement for the year ended 31 December

20X3 20X4
$ million $ million
180.0 185.0
Sales revenue
Earnings before interest and tax 18.0 16.5
Interest (3.2) (4.7)
Tax (4.4) (3.5)
Earnings available to ordinary shareholders 10.4 8.3

Summarised balance sheet as at 31 December

20X3 20X4
$m $m $m $m
Non-current assets (net) 100.4 120.5
Current assets
Inventory 5.3 5.9
Receivables 2.1 2.4
Cash 6.2 3.6
13.6 11.9
114.0 132.4
Ordinary share capital ($1 shares) 25.0 25.0
Reserves 45.6 48.2
Amounts payable after more than one year
8% Debenture 20X9 15.0 15.0
Bankloan 20.0 35.0
Payables due within one year 8.4 9.2
114.0 132.4

Required
(a) Calculate the following ratios for Heighway Co for 20X3 and 20X4, clearly showing
your workings.
(i) Return on capital employed (also known as return on investment) based
upon closing capital employed)
(ii) Net profit margin
(iii) Asset turnover
(iv) Current ratio, and
(v) Gearing ratio (8 marks)

(b) Briefly comment on the financial performance of Heighway Cc in 20X3 and 20X4 as
revealed by the above ratios and suggest causes for any changes. (You are not
required to calculate any other ratios.) (6 marks)

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 ACCA PAPER F5 PERFORMANCE MANAGEMENT
FINAL MOCK EXAM

(c) Suggest THREE non-financial indicators that could be useful in measuring the
performance of a passenger railway company and explain why your chosen indicators
are important. (6 marks)

(d) Explain what is meant by short-termism and suggest ways in which a long-term
view can be encouraged. (5 marks)

(25 marks)

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 ACCA PAPER F5 PERFORMANCE MANAGEMENT
FINAL MOCK EXAM

Question 4

AME 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 overheads costs and a
loss of market share, particularly for P2, a major product, have convinced management that the
costing system is in need of some development. A team spent several weeks collecting data (see
table below) for the different activities and products. For accounting period in question, given in
the tables below is data on AME's three products lines and overhead costs:

P1 P2 P3
Production volume 7500 units 12,500 units 4,000 units
Direct labour cost per unit $4 $8 $6.4
Material cost per unit $18 $25 $16
Selling price per unit $47 $80 $68
Materials movements (in total) 4 25 50
Machine hour per unit 0.5 0.5 0.2
Set ups (in total) 1 5 10
Proportion of engineering work 30% 20% 50%
Orders packed (in total) 1 7 22

Activities Overhead cost

Material handling and receiving $150,000
Machine maintenance and depreciation 390,000
Set up labour 18,688
Engineering 100,000
Packing 60,000
Total 718,688

Required

(a) Calculate the overhead rate and the product unit costs under existing costing
system. (4 marks)

(b) 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. (9 marks)

(c) Comment on the results of the two costing systems in (a) and (b).
(7 marks)

(d) Explain why ABC might lead to a more accurate assessment of management
performance than absorption costing. (5 marks)

(25 marks)

END OF QUESTION PAPER