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ACCA

Paper F5
Performance Management
Revision Mock Examination
March 2016

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Section A

C
First calculate variable cost per unit as difference in costs divided by
difference in units
Then either using highest level or lowest level, substitute variable cost into
the equation (Fixed costs = Total cost – (variable cost × number of units)

D
C
Apply breakeven units formula = total fixed costs / contribution per unit,
substitute information provided and balancing figure will be fixed costs

C
For X = 40% × 100 cents + 60% × \$150cents
For Y apply similar method

B
\$120,000 is sunk cost as spent in the past.
Replacement cost is irrelevant as machine is already owned.
Therefore opportunity cost of \$150,000 is relevant

A
\$50,000 is sunk as spent in the past.
\$10,000 is also sunk.
\$8,000 being a greater option will be opportunity cost or relevant cost to use
on the project.
C
First calculate the break even sales volume, and then apply the formula
budgeted sales minus break even sales units

B
B
\$55 per kg is sunk as spent in the past.
150 kg × \$40 as opportunity cost + 350 kg × \$53

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B
A
Apply the following proforma for both Q11 and Q12.

SQ(SM) × SP
Yield variance Q12
AQ(SM) × SP
Mix variance Q11
AQ(AM) × SP

SQ is the total input quantity which the company should have used to produce
actual output of 12,000 units
SM is the standard mix as 24:36 for A and B respectively
SP is the standard price per kg for each material.

B
A
Throughput return per hour = (Selling price less direct material cost) x 80
units
Factory costs per hour = \$46,000 / 10 hours per day
Now apply TPAR = Throughput return per hour / factory costs per hour

D
B
First calculate cost driver rate = annual machine set up costs / total number
of set ups
Total set ups will be based on number of sets per batch times by total batches
for each product
Now multiply cost driver rate to number of set ups for product Z and divide
by batch size to get costs per unit

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D
First calculate b value as Log LR / Log 2
Now apply formula Y=ax2 twice (first x = 250 and then x=249)
Now calculate cumulative time for 250 units and then 249 units
Difference between cumulative hours of 250 units and 249 units will give you
time of the 250th unit
C
1,600 units x SQ x SP

1,600 units x SQ x RSP

Alternatively this can also be calculated by taking actual usage x (SP – RSP)
Both answers are acceptable to ACCA.

A
Standard usage 1,600 units x SQ x RSP
Actual usage AQ x RSP

A
A

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Section B

Tutorial help and key points

Parts (i) and (ii) are standard questions on absorption and ABC. Simply lay out
cost per unit including three resources and then pick up each resource one by one
showing workings clearly, especially cost driver rates.

Marking scheme

(a) Materials 1, labour 1, and overheads 3 marks (5 marks)

(b) Materials and labour 1, cost driver rates 1 mark each, (10 marks)
linking to each product 4 marks
(15 marks)

Barugan Jen-10 Fonic

\$ \$ \$
Direct materials 1.00 0.50 0.75
Direct labour 2.50 1.50 1.75
Production overheads (W1) 0.70 1.05 1.40
Total cost per unit 4.20 3.05 3.90

=
Total budgeted machine hours*

= \$3,500,000/10,000,000 hours
= \$0.35 per hour

Barugan 1,000,000 units × 2 hours = 2,000,000 hours

Jen-10 2,000,000 units × 3 hours = 6,000,000 hours
Fonic 500,000 units × 4 hours = 2,000,000 hours
Total hours = 10,000,000

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Total cost per unit

Barugan Jen-10 Fonic

\$ \$ \$
Direct materials 1.00 0.50 0.75
Direct labour 2.50 1.50 1.75
Machine running costs (W2) 0.28 0.42 0.56
Set up costs (W3) 0.19 0.38 1.13
Purchase order costs (W4) 0.08 0.23 0.15
Total overheads per unit 0.55 1.03 1.84
Total costs per unit 3.05 3.03 4.34

Barugan \$0.14 × 2 hours = \$0.28 per unit

Jen-10 \$0.14 × 3 hours = \$0.42 per unit
Fonic \$0.14 × 4 hours = \$0.56 per unit

Set-up costs/total number of set-ups

In order to calculate set-ups, we have to calculate number of batches for each product,
and then total number of set-ups:

Barugan 1,000,000 units/1,000 units in a batch = 1,000 batches × 4

= 4,000 set-ups
Jen-10 2,000,000 units/500 units in a batch = 4,000 batches × 4
= 16,000 set-ups
Fonic 500,000 units/250 units in a batch = 2,000 batches × 6
= 12,000 set-ups
Total set-ups = 32,000

Cost driver rate = \$1,500,000/32,000 set-ups = \$46.88 per set-up

Barugan \$46.88 × 4 set-ups/1,000 units = \$0.19 per unit
Jen-10 \$46.88 × 4 set-ups/500 units = \$0.38 per unit
Fonic \$46.88 × 6 set-ups/250 units = \$1.13 per unit

Cost driver rate = \$600,000/16,000 orders = \$37.50 per purchase order

Barugan = \$37.50 × 2 orders/1,000 units = \$0.08 per unit
Jen-10 = \$37.50 × 3 orders/500 units = 0.23 per unit
Fonic = \$37.50 × 1 order/250 units = \$0.15 per unit

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This question relates to a fairly typical decision-making situation faced by self-

employed people like Veronica on a regular basis — at what price should services
be offered for sale? Pricing services is a very important decision as price is related
to volume of demand for services. Set prices too low and demand is too high to
be profitably satisfied; set prices too high and not enough customers will be able
to afford the services offered.

Part (a) involves a reasonably straightforward probabilistic budgeting situation,

involving calculating profit at two different price points under uncertain demand
conditions. As nearly always in decision-making situations, taking a marginal
costing approach is best here.

Part (b), brief explanation of each decision criterion required to get maximum
marks.

(i)
\$/unit
Sales price 30
Variable cost:
Material 12
Labour/Travel 7
11

Demand Low Medium High

Sales units 100 200 300
Unit contribution 11 11 11
Total contribution (\$) 1,100 2,200 3,300
Fixed equipment cost 280 280 280
Fixed advertising cost 400 400 400
Profit 420 1,520 2,620
Probability 0.2 0.5 0.3
Expected value of profit 84 760 786

Expected value of a price of \$30 1,630 (3 marks)

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(ii)
\$/unit
Sales price 40
Variable cost:
Material 12
Labour/Travel 7
21

Demand Low Medium High

Sales units 50 150 250
Unit contribution 21 21 21
Total contribution (\$) 1,050 3,150 5,250
Fixed equipment cost 280 280 280
Fixed advertising cost 600 600 600
Profit 170 2,270 4,370
Probability 0.2 0.5 0.3
Expected value of profit 34 1,135 1,311

Expected value of a price of \$40 2,480 (3 marks)

Maximax refers to maximising the maximum returns. Risk seeking decision maker
chooses maximax criterion to go for the highest risk option in the hope of making
maximum returns. 1 mark

Maximin refers to maximising minimum returns, whereby risk averse decision maker
chooses the best option among the worst available. 1 mark

Expected value refers to the weighted average value of all outcomes. Risk neutral
decision maker chooses to use expected value criterion.

Expected value = ∑px

Where; p refers to probability of an outcome, and
X refers to the value of an outcome (generally in terms of sales revenue, cost or
expenditure, or profit or loss) 2 marks

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Tutorial help and key points

Parts (a) and (b) should both be straightforward theory questions on what the
different types of budgets are and the disadvantages of each.

For part (c) think to yourself what is involved in ZBB and how this would be more
motivating to employees than more traditional approaches.

The main features of incremental budgeting

Incremental budgets use the budgets from the last period and add a given % to the
figure.

This method is very quick and easy to use and therefore a cheap way to prepare
budgets.

Problems that can occur

Incremental budgeting assumes that nothing has changed, other than perhaps the
sales figure or a few price changes. This is unrealistic in an environment where several
factors would result in things changing. It is likely there are parts of the operation that
have ceased/started/changed over the last year. These changes must be incorporated
to make the budgets relevant.

If the current budget has any inefficiencies in it, for example, waste from the
manufacturing process, the new budgets will simply accept this and build it into the
budget. This is inappropriate as the company should be aiming to cut those costs.

If the company uses the budgets to set the targets for its employees it is likely that
the figures are either very easy or very hard to achieve as they will not have been
appraised for reasonableness year to year.

With incremental budgeting it is easier for managers to build slack into their figures
as they do not have to justify each individual figure.

The main feature of zero-based budgeting

The budget will be started from scratch or a “zero base’’ each period. Every figure
included in the budget will have to be justified and approved.

As so much detail is included in the zero-based budget it is very time consuming and
therefore expensive.

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Problems that can occur

As it is very detailed it is unlikely that staff will have the correct level of expertise and
so training will need to be given to staff, costing more time and money.

The process will also mean that management will need to commit more time to the
budgeting process.

Often the system used by companies is not capable of producing the detailed
information required by this approach. It is possible that new systems will have to be
installed/developed, again at a cost to the company.

(i) Training and investing in developing employees can motivate individuals.

(ii) No slack will be built in and so targets will be realistic. This should help motivate
individuals.

(iii)Zero-based budgeting requires a lot of input from the employees. Being

involved in providing information and helping to make decisions can help
motivate individuals.

(iv) Individuals will no longer be able to get away with building inefficiencies into
their budgets. This should remove any animosity between departments/budget

(v) Stakeholders who consider others to be acting unfairly. A more equitable

environment should help motivate individuals.

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This question is fairly a straight forward variance analysis one. It is a simple

variance calculation question which you should solve fairly easily by inputting the
figures provided into the variance formulae.

(a)

SH × SR
900 x 2.5 x \$5 = \$11,250

Planning efficiency variance 0

RSH × SR
900 x 2.5 x \$5 = \$11,250

Planning rate variance \$2,250 A

RSH × RSR
900 x 2.5 x \$6 = \$13,500

Operational efficiency variance \$2,625 F

AH × RSR
1,812.5 x \$6 = \$10,875

AH × AR
\$9.968.75

(2 marks for each variance) total 6

Hence total labour cost variance comes to \$1,281.25 by adding all planning and
operational variances.

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(b)
Planning variances reflect the difference between original budgeted and revised budgeted
results (flexed), and such variances are caused by external / uncontrollable factors.
Performance is not assessed on the basis of planning variances.
Operational variances reflect difference between revised budgeted and actual results and
such variances are caused by internal / controllable factors. Performance of various
managers is assessed on the basis of operational variances.

Basic rate variance in the question is \$906.25 adverse showing that the manager has paid
above the standard rate and has caused overspending, whereas operational rate variance
has shown that rate variance is infect \$906.25 favourable reflecting that manager has paid
less than average labour rate. This proves good performance. Without analysing it into
planning and operational components, original analysis could be demotivating and unfair
for the manager concerned.

Basic efficiency variance in the question is \$2,187.50 favourable whereas operational

efficiency variance calculated \$2,625 favourable. This reflects that basic variance
undermined production manager’s performance which could again be demotivating and
unfair.
Splitting basic variance into planning and operational variances, the aim is to make
variances more fair, acceptable to managers and motivational.

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This is a fairly straightforward performance evaluation question, similar to

questions that have been asked a few times in past F5 exams. Although the
calculations required are simple, make sure you show how you have performed
them: especially building up the return on investment calculation, picking up
correct values.

In parts (a) and (b) make sure you only calculate what is required, and do not
discuss it.

Marking scheme

(a) Calculation of sales 1 mark for each division/max 2

Calculation of costs 0.5 mark for each cost element/max 2
Calculation of profit 0.5 mark for each division/max 1
Calculation of ROI 1 mark for each division/max 2
(7 marks)
(b) Calculation of bonus 1.5 marks for each division/max 3
(3 marks)
(Total = 10 marks)

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Return on Investment = Profit of each division
Investment in each division

Divisions South North Sales

\$ \$ \$
Total Profit 378,000 242,000 130,000
(profit per unit x volume)
÷
Investment 1,500,000 1,000,000 250,000
Return on investment 25.2% 24.2% 52%

Workings

Cost calculation
South North
\$ \$
Direct materials 1.20 0.80
Direct labour 1.00 1.00
Full cost per unit 2.70 2.20
Profit mark-up (10%) 0.27 0.22
Selling price 2.97 2.42

Sales division From South From North

\$ \$
Transferred cost 2.97 2.42
Sales price 3.00 2.50
Profit per unit 0.03 0.08
Volume of units 1,400,000 1,100,000
Total profits \$42,000 \$88,000
Profits by Sales Division: (\$42,000 + \$88,000) = \$130,000

Bonus calculation
Criterion: \$500 for every 1% in excess to 20% target ROI

South ROI 25.2% (5.2 x \$500) = \$2,600

North ROI 24.2 (4.2 x \$500) = \$2,100
Sales ROI 52% (32 x \$500) = \$16,000

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