Paper T7

Certified Accounting Technician Examination

Advanced Level

Planning, Control
and Performance
Management
Tuesday 8 June 2010

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
This paper is divided into two sections:
Section A – ALL 10 questions are compulsory and MUST
be attempted
Section B – ALL FOUR 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.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

Section A – ALL TEN questions are compulsory and MUST be attempted
Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen answer to
each multiple choice question.
Each question is worth 2 marks.

1 Which of the following are benefits of using activity based costing?

(1) It recognises that overhead costs are not always driven by the volume of production.
(2) It does not result in under or over absorption of fixed overheads.
(3) It avoids all arbitrary cost apportionments.
(4) It is particularly useful in single product businesses.
A 1 only
B 1 and 2 only
C 2 and 3 only
D 1 and 4 only

2 A retailer forecasts the following data for the coming period:

Sales $500,000
Opening inventory $40,000
Closing inventory $50,000
Mark-up 25%

What amount should be budgeted for purchases?

A $365,000
B $385,000
C $390,000
D $410,000

3 A company uses production labour hours to absorb its fixed production overheads. A strike by its workforce results in
a loss of 30% of the period’s budgeted production labour hours.

Which of the following variances will occur as a result of the loss in production labour hours?
A Adverse fixed overhead capacity variance
B Adverse fixed overhead efficiency variance
C Adverse direct labour efficiency variance
D Adverse direct labour rate variance

4 A firm with current assets of $40 million and current liabilities of $20 million buys $5 million of inventory on credit
which increases its inventory level to $10 million.

What will the effect be on its current ratio and quick (acid test) ratio?
Current Ratio Liquidity Ratio
A Increase by 25% Unchanged
B Reduce by 10% Unchanged
C Increase by 25% Reduce by 20%
D Reduce by 10% Reduce by 20%

2
5 A publishing company is researching the reading habits of the United Kingdom’s population. It randomly selects a
number of locations from around the United Kingdom and then interviews everyone who lives in these locations.

What is this approach to sampling known as?

A Systematic sampling
B Stratified sampling
C Quota sampling
D Cluster sampling

6 A company has a single product with a selling price of $12 per unit, which is calculated as variable cost per unit, plus
20%. At an output level of 5,000 units it makes a loss of $8,000.

What is the company’s total fixed cost?

A $2,000
B $4,000
C $18,000
D $20,000

Use the following information to answer questions 7 and 8.

The following data are available for product X.
Period Period
Budget Actual
Sales units 5,000 5,200
–––––––
––––––– –––––––
–––––––
$ $
Sales revenue 50,000 57,200
Manufacturing cost 30,000 31,200
––––––– –––––––
Profit 20,000 26,000
–––––––
––––––– –––––––
–––––––

7 What is the sales price variance?

A $5,200 adverse
B $5,000 favourable
C $5,200 favourable
D $7,200 favourable

8 What is the sales volume profit variance?

A $800 favourable
B $1,000 favourable
C $6,000 favourable
D $7,200 adverse

3 [P.T.O.
9 A firm has used linear regression analysis to establish the relationship between total cost and activity in units.

What does the slope of the regression line represent?

A the variable cost per unit
B the fixed cost per unit
C the average cost per unit
D total variable costs

10 A division has a capital employed of $2,000,000 and earns an operating profit of $600,000. It is considering a project
that will increase operating profit by $20,000 but would increase its capital employed by $80,000. A rate of 15% is
used to compute interest on capital employed.

What will be the effect on residual income and return on capital employed if the division accepts the project?
Residual income Return on investment
A Increase Increase
B Increase Decrease
C Decrease Increase
D Decrease Decrease

(20 marks)

4
Section B – ALL FOUR questions are compulsory and MUST be attempted

1 Luca Co uses a standard marginal costing system to control its costs and revenues. The following variances have been
calculated for one of its products for May 2010.
Variance Favourable Adverse
$ $
Sales volume contribution 3,950
Sales price 4,500
Direct material price 270
Direct material usage 180
Direct labour rate 1,100
Direct labour efficiency 200
Variable overhead expenditure 750
Variable overhead efficiency 600
Fixed overhead expenditure 1,350
–––––– ––––––
6,950 5,950
––––––
–––––– ––––––
––––––
The following information is also available for May 2010.
Budgeted sales and production 500 units
Budgeted profit $14,500
Budgeted fixed costs $25,000

Required:
(a) Using the above information prepare a marginal costing based profit reconciliation statement for May 2010.
The statement should be in a format that will be of use to Luca Co’s managers in controlling costs and
revenues. It should begin with budgeted profit and show the following figures
(i) Budgeted contribution; (2 marks)
(ii) Standard contribution for actual sales volume; (2 marks)
(iii) Actual contribution; (3 marks)
(iv) Actual fixed costs; (2 marks)
(v) Actual profit. (3 marks)

(b) Briefly explain four factors that should be considered in deciding whether or not to investigate a variance.
(8 marks)

(20 marks)

5 [P.T.O.
2 Vito Co wishes to analyse the behaviour of its costs. The following information is available.
Year Average index Output Total cost
value * (units) ($)
2007 150 1,500,000 12,450,000
2008 180 1,600,000 15,840,000
2009 70 1,700,000 6,510,000
2010 (forecast) 80 1,800,000 7,840,000
* these are values of a price index appropriate to costs in Vito Co’s industry

Required:
(a) Use the industry price index to restate Vito Co’s total costs for each year in terms of 2010 price levels.
(4 marks)

(b) Using the graph paper provided, draw a graph to represent the relationship between output and total cost
expressed in 2010 price levels. (4 marks)

(c) Use the high low technique to estimate the fixed and variable elements of Vito Co’s total cost expressed in
2010 price levels. (4 marks)

(d) Forecast Vito Co’s total cost for 2011 when output is forecast to be 2,000,000 units and the industry price
index is expected to rise to 95. (2 marks)

(e) The company accountant has produced the following component bar chart analysing Vito Co’s sales revenue over
its three markets, 1, 2 and 3.
Sales
000’
units Vito Co Sales by market, 2007–2009
2,000

1,500 3 2

3
1,000 2

2
500

1 1 1

2007 2008 2009 Year

Required:
Identify three trends in Vito Co’s sales revenue apparent from the bar chart. (6 marks)

(20 marks)

6
3 Barzini Co is experiencing a shortage of the highly skilled labour that it uses to produce its only product, the Sollozzo.
It wishes to prepare budgets for the year ending 31 December 2011. The standard cost card for the Sollozzo for
2011 and other relevant information are given below.
Standard cost card
Product: the Sollozzo
Usage
Per unit Cost Cost per unit
$
Direct material A 6 kg $2 per kg 12·00
Skilled labour 2 hours $25 per hour 50·00
Unskilled labour 4 hours $15 per hour 60·00
––––––––
Prime cost 122·00
Variable production overhead 6 hours $5 per hour 30·00
Fixed production overhead 6 hours $4 per hour 24·00
––––––––
Standard full cost of production $176·00
––––––––
––––––––
Notes relevant to budget preparation
(i) Direct material A is freely available.
(ii) 20 skilled workers are employed. Each is contracted to work for 40 hours per week for 48 weeks per year and in
addition will work overtime, up to a maximum of 8 hours per week, for a premium of 50% per hour.
(iii) There is no shortage of unskilled labour and all of their hours will be paid at basic rate.
(iv) The standard fixed overhead absorption rate was set based upon 150,000 standard labour hours per year.
(v) The Sollozzo will be sold at $250 per unit, and demand at this price is estimated to be 30,000 units per
annum.
(vi) Barzini Co carries no inventory of raw materials or finished goods at any time.

Required:
(a) Construct a budget for skilled labour for the year ending 31 December 2011, assuming that the maximum
amount of overtime is worked. Your budget should show basic hours, overtime hours, basic pay and overtime
premium paid. (4 marks)

(b) Assuming that the principal budget factor for Barzini Co is 46,080 skilled labour hours, and that the company
wishes to maximise its profits, calculate the following budgeted figures for the year ending 31 December
2011:
(i) Production in units; (1 mark)
(ii) Unskilled labour (in hours and $); (2 marks)
(iii) Direct material usage (in kg and $); (2 marks)
(iv) Sales (in units and $). (2 marks)

(c) Prepare a budgeted income statement for the year ending 31 December 2011. (7 marks)

(d) Suggest two ways by which a company could overcome shortages of skilled labour. (2 marks)

(20 marks)

7 [P.T.O.
4 (a) It is generally acknowledged that when preparing budgets human behaviour should be taken into consideration.

Required:
Write notes that
(i) explain the participative approach to budgeting and identify two advantages and two disadvantages of
such an approach; (6 marks)
(ii) explain the effect that the level of difficulty built into budget targets can have on motivation; (4 marks)
(iii) define goal congruence; (2 marks)
(iv) explain how a lack of goal congruence can lead to dysfunctional decision-making. (2 marks)

(b) The Clemenza Co is a long established hotel business, which operates 10 luxury hotels located in capital cities
throughout the world. It has an international reputation for excellence. The company management structure
comprises three main board directors (a chairman, a managing director and a finance director) and 10 hotel
general managers. Recently Clemenza Co appointed a new managing director who, in an attempt to increase
profitability, made the following changes to the company’s budgeting system:
(i) Budgets for each hotel were to be set by and approved by the managing director and finance director. Hotel
general managers were required to achieve all sales and cost targets included in the budgets. Previously hotel
managers had drafted their own budgets, which, subject to main board approval, became the budgets for the
period.
(ii) Large increases in profitability were required and as a consequence budget targets became more difficult. This
was despite the adverse market conditions faced by hotel operators around the world.
(iii) Hotel restaurant cost budgets (mainly ingredients and staff costs) were reduced by 20% as compared to
previous years. Hotel general managers’ salary packages were altered to include a large element of performance
related pay which was linked to the achievement of cost budgets.

Required:
Explain three potential problems with the new managing director’s approach to budgeting. (6 marks)

(20 marks)

End of Question Paper