Performance Management

PART 3 FRIDAY 9 DECEMBER 2005

QUESTION PAPER Time allowed 3 hours This paper is divided into two sections Section A BOTH questions are compulsory and MUST be answered TWO questions ONLY to be answered

Section B

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

The Association of Chartered Certified Accountants

Paper 3.3

Section A BOTH questions are compulsory and MUST be attempted 1 KCB is a business services group which owns a software house that develops and markets application software to meet the manufacturing, distribution and accounting requirements of its clients. Kickstart Ltd is a subsidiary company within KCB, whose consultants provide the following three services: Project management Implementation support Product education and training. The following information is relevant for the year ending 31 December 2006. (1) The government will pay a grant (as per note 2) to Kickstart Ltd based on the number of clients serviced during the year. This is budgeted as follows: Service: Project management Implementation support Product education and training Number of clients 200 400 720

(2) Cost and revenue data are as follows: Department Project management Implementation support Product education and training 1,200,000 150 1,000 300

Salaries 2,500,000 Variable costs per client consultation 4,000 Fee per client consultation 25,000 Government grant per client 5,000

960,000 400 2,000 600

Other fixed costs are budgeted to be 2,827,500 and general administration costs are budgeted to be 390,000. (3) An activity-based costing study recently undertaken on behalf of the management of Kickstart Ltd concluded that 80% of other fixed costs as per note (2) (excluding general administration costs), are determined by time spent on activities as per the following table: Activity Cost driver Project Implementation Product management support education and training 4 2 1 Other fixed costs (000) 956

Pre-contract meetings

Assessment of client needs

Post-implementation monitoring and support

Number of meetings (per consultation) Time taken (days per consultation) Time taken (days per consultation)

225

05

025

650

05

025

656

The budgeted number of consultations is as follows: Service: Number of consultations Project management 300 Implementation support 1,500 Product education and training 1,800 The remaining 20% of other fixed costs (excluding general administration costs) are attributable to the three types of service as follows: Project management 325,500 Implementation support 145,000 Product education and training 95,000 (4) Prior to 1 January 2006, the management of Kickstart Ltd allocated the total (100%) of Other fixed costs (excluding general administration costs) between the three types of service, based on the budgeted number of consultations. Required: (a) (i) Using the findings of the activity-based costing study and based on the budgeted number of consultations, prepare a budgeted Profit and Loss statement for the year ending 31 December 2006 which shows the profit/(loss) attributable to each of the three services undertaken by Kickstart Ltd. (10 marks)

(ii) Using the previous overhead allocation basis (as per note 4), calculate the budgeted profit/(loss) attributable to each type of service for the year ending 31 December 2006 and comment on the results obtained using the previous and revised methods of overhead allocation. (5 marks) (b) Envico Ltd, another subsidiary of the KCB Group, is well established and provides seminars on various aspects of current and recently announced changes in employment legislation. Envico Ltd has decided to enter into a one-year renewable contract with Mieras Business Associates, which owns large premises that are suitable for holding educational seminars in each of eight cities. Envico Ltd has had similar dealings with Mieras Business Associates during recent years. Mieras Business Associates has offered a choice of four different contracts, each of which relates to seminar rooms of differing sizes. These are known as room types A, B, C and D, which are capable of accommodating 100, 200, 300 and 400 delegates respectively. Envico Ltd will charge an all-inclusive fee of 80 per delegate at every seminar throughout the year. The cost incurred by Envico Ltd varies according to room type, as shown in the following table: Room type A B C D No of attendees 100 200 300 400 Cost per seminar () 6,000 10,800 14,400 16,000

Envico must decide in advance of the forthcoming year which size of conference room to contract for. It is not possible to contract for a different size conference room in different cities, i.e. only one size of room can be the subject of the contract with Mieras Business Associates. Due to the rapid growth in interest regarding environmental issues and corporate social responsibility, and the large amount of forthcoming legislative changes, Envico Ltd has decided to hold one seminar in every week of the year in each city. Sometimes a regional government representative will attend and speak at such seminars. On other occasions a national government representative will attend and speak at such seminars. The rest of the time the speakers at seminars are representatives from within Envico Ltd. Envico has estimated the following frequency regarding seminars to be held during the forthcoming year: Category of speaker: Envico representative Regional government representative National government representative % 20 50 30 3 [P.T.O.

Market research has indicated that where a national government representative is in attendance, Envico Ltd can be reasonably assured of selling 400 seminar places and where a regional government representative is in attendance 200 seminar places can be sold. Envico Ltd expects to sell only 100 seminar places when there is no attendance by a government representative. Required: (i) Advise Envico Ltd on the size of seminar room that should be contracted from Mieras Business Associates, using the criterion of expected value. Your answer should show the expected annual contribution from each decision option. (9 marks)

(ii) Determine whether your decision in (b)(i) would change if you were to use the Maximin and Minimax regret decision criteria. Your answer should be supported by relevant workings. (6 marks) Required: (iii) A firm of consultants has offered to undertake a study on behalf of Envico Ltd which will provide perfect information regarding seminar attendance during the forthcoming year. Advise the management of Envico Ltd with regard to the maximum amount that they should pay to consultants for perfect information regarding seminar attendance and comment briefly on the use of perfect information in such decisions. (5 marks) (c) At a recent meeting of the board of directors, the managing director of Envico Ltd said that he considered it essential to be able to assess the value for money of each seminar. He suggested that the quality of the speakers and the comfort of the seminar rooms were two assessment criteria that should be used in order to assess the value for money of each seminar. Required: Discuss SIX separate and distinct assessment criteria (including those suggested by the managing director), that would enable the management of Envico Ltd to assess the value for money of each seminar. (6 marks) (d) Explain the term environmental management accounting and the benefits that may accrue to organisations which adopt it. (4 marks) (45 marks)

(a) Explain the term backflush accounting and the circumstances in which its use would be appropriate. (6 marks) (b) CSIX Ltd manufactures fuel pumps using a just-in-time manufacturing system which is supported by a backflush accounting system. The backflush accounting system has two trigger points for the creation of journal entries. These trigger points are: the purchase of raw materials the manufacture of finished goods. The transactions during the month of November 2005 were as follows: Purchase of raw materials Conversion costs incurred: Labour Overheads Finished goods completed (units) Sales for the month (units) 5,575,000 1,735,000 3,148,000 210,000 206,000

There were no opening inventories of raw materials, work-in-progress or finished goods at 1 November. The standard cost per unit of output is 48. This is made up of 26 for materials and 22 for conversion costs (of which labour comprises 820). Required: (i) Prepare ledger accounts to record the above transactions for November 2005. (6 marks)

(ii) Briefly explain whether the just-in-time system operated by CSIX Ltd can be regarded as perfect. (3 marks) (15 marks)

[P.T.O.

This is a blank page. Question 3 starts on page 7.

Section B TWO questions ONLY to be attempted 3 Moffat Ltd, which commenced trading on 1 December 2002, supplies and fits tyres and exhaust pipes and services motor vehicles at thirty locations. The directors and middle management are based at the Head Office of Moffat Ltd. Each location has a manager who is responsible for day-to-day operations and is supported by an administrative assistant. All other staff at each location are involved in fitting and servicing operations. The directors of Moffat Ltd are currently preparing a financial evaluation of an investment of 2 million in a new IT system for submission to its bank. They are concerned that sub-optimal decisions are being made because the current system does not provide appropriate information throughout the organisation. They are also aware that not all of the benefits from the proposed investment will be quantitative in nature. Required: (a) Explain the characteristics of THREE types of information required to assist in decision-making at different levels of management and on differing timescales within Moffat Ltd, providing TWO examples of information that would be appropriate to each level. (10 marks) (b) Identify and explain THREE approaches that the directors of Moffat Ltd might apply in assessing the QUALITATIVE benefits of the proposed investment in a new IT system. (6 marks) (c) Identify TWO QUALITATIVE benefits that might arise as a consequence of the investment in a new IT system and explain how you would attempt to assess them. (4 marks) (20 marks)

[P.T.O.

Diverse Holdings Plc has five wholly-owned subsidiary companies. These are: (i) (ii) (iii) Organic Foods Ltd (OFL) which is involved in the production and sale of organically grown fruit and vegetables. OFL has built up a very good reputation as a supplier of quality produce. Haul-Trans Ltd (HTL) which was acquired on 1 December 2005 and is involved in transporting a range of products on behalf of third parties. Kitchen Appliances Ltd (KAL) which is involved in the manufacture and sale of small, manually-operated kitchen appliances. KAL has recently suffered from squeezed margins as a consequence of competition from low cost imports. Paper Supplies Ltd (PSL) which manufactures and sells a narrow range of stationery products to two distributors. Office Products Ltd (OPL) which manufactures and sells computer workstations with unique design features which are highly regarded by health and safety experts.

(iv) (v)

The management accountant of Diverse Holdings Plc has gathered the following actual and forecast information relating to the five subsidiaries: 2003 Actual (OFL) Market size (m) Turnover (m) Operating Profit (m) (HTL) Market size (m) Turnover (m) Operating Profit (m) (KAL) Market size (m) Turnover (m) Operating Profit/(loss) (m) (PSL) Market size (m) Turnover (m) Operating Profit (m) (OPL) Market size (m) Turnover (m) Operating Profit (m) 1000 50 10 Unknown 400 40 2520 375 15 600 20 06 2000 150 150 Year ending 30 November 2004 2005 2006 Actual Actual Forecast 1200 80 18 Unknown 400 40 2500 375 11 650 20 06 2200 160 160 1500 100 25 Unknown 410 40 2450 355 07 700 20 06 2400 165 165 1800 135 30 Unknown 420 50 2420 320 03 770 20 05 2600 170 170 2007 Forecast 2250 180 36 Unknown 420 56 2400 290 (02) 840 21 05 2800 175 175

The management accountant has also collated the following information relating to the market share held at 30 November 2005 by the market leader in those markets in which each subsidiary operates: Subsidiary Organic Foods Ltd Haul-Trans Ltd Kitchen Appliances Ltd Paper Supplies Ltd Office Products Ltd Market Food production Transport Kitchen appliances Stationery Workstations Market share (%) held by market leader 666 Unknown 16 35 25

The management has decided not to undertake any further acquisitions during the next two years due to a shortage of funds.

Required: (a) Identify and comment on FOUR advantages that may be gained as a result of the adoption of a formal system of strategic planning. (4 marks) (b) Explain how the use of SWOT analysis may be of assistance to the management of Diverse Holdings Plc. (3 marks) (c) (i) Using ONLY the above information, assess the competitive position of Diverse Holdings Plc. (7 marks) (ii) Explain THREE strategies that might be adopted in order to improve the future prospects of Diverse Holdings Plc. (6 marks) (20 marks)

[P.T.O.

Astrodome Sports Ltd was formed in December 2000 by seven engineers who comprise the board of directors of the company. The seven engineers previously worked together for Telstar, a satellite navigation company. In conjunction with one of the three largest construction companies within their country they constructed the 365 Sports Complex which has a roof that opens and uses revolutionary satellite technology to maintain grass surfaces within the complex. The complex facilities, which are available for use on each day of the year, include two tennis courts, a cricket pitch, an equestrian centre and six bowling greens. The tennis courts and cricket pitch are suitable for use as venues for national competitions. The equestrian centre offers horse-riding lessons to the general public and is also a suitable venue for show-jumping competitions. The equestrian centre and bowling greens have increased in popularity as a consequence of regular television coverage of equestrian and bowling events. In spite of the high standard of the grass surfaces within the sports complex, the directors are concerned by reduced profit levels as a consequence of both falling revenues and increasing costs. The area in which the 365 Sports Complex is located has high unemployment but is served by all public transport services. The directors of Astrodome Sports Ltd have different views about the course of action that should be taken to provide a strategy for the future improvement in the performance of the complex. Each directors view is based on his/her individual perception as to the interpretation of the information contained in the performance measurement system of the complex. These are as follows: Director (a) There is no point whatsoever in encouraging staff to focus on interaction with customers in efforts to create a user friendly environment. What we need is to maintain the quality of our grass surfaces at all costs since that is the distinguishing feature of our business. (b) Buy more equipment which can be hired out to users of our facilities. This will improve our utilisation ratios which will lead to increased profits. (c) We should focus our attention on maximising the opening hours of our facilities. Everything else will take care of itself. (d) Recent analysis of customer feedback forms indicates that most of our customers are satisfied with the facilities. In fact, the only complaints are from three customers the LCA University which uses the cricket pitch for matches, the National Youth Training Academy which held training sessions on the tennis courts, and a local bowling team. (e) We should reduce the buildings maintenance budget by 25% and spend the money on increased advertising of our facilities which will surely attract more customers. (f) We should hold back on our efforts to overcome the shortage of bowling equipment for hire. Recent rumours are that the National Bowling Association is likely to offer large financial grants next year to sports complexes who can show they have a demand for the sport but have deficiencies in availability of equipment. (g) Why change our performance management system? Our current areas of focus provide us with all the information we need to ensure that we remain a profitable and effective business. As management accountant of Astrodome Sports Ltd you have recently read an article which discussed the following performance measurement problems: (i) Tunnel vision (ii) Sub-optimisation (iii) Misinterpretation (iv) Myopia (v) Measure fixation (vi) Misrepresentation (vii) Gaming (viii) Ossification.

10

Required: (a) Explain FOUR of the above-mentioned performance measurement problems (i-viii) and discuss which of the views of the directors (a-g) illustrate its application in each case. (12 marks) (b) Discuss the relevance of each of the following actions as steps in trying to remedy performance measurement problems relating to the 365 Sports Complex and suggest examples of specific problem classifications that may be reduced or eliminated by each action: (i) (ii) (iii) (iv) Focusing on and improving the measurement of customer satisfaction Involving staff at all levels in the development and implementation of performance measures Being flexible in the extent to which formal performance measures are relied on Giving consideration to the auditing of the performance measurement system. (8 marks) (20 marks)

End of Question Paper

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