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									                                                                   Final Assessment




     ACCA FINAL ASSESSMENT


           Performance
           Management


DECEMBER 2009




QUESTION PAPER

Time allowed   Reading time: 15 minutes    Writing time: 3 hours

Answer all questions




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



           Kaplan Publishing/Kaplan Financial

      KAPLAN PUBLISHING                                               Page 1 of 10
ACCA F5 Performance Management




© Kaplan Financial Limited, 2009




Page 2 of 10                       KAPLAN PUBLISHING
                                                                                Final Assessment


Answer all questions

QUESTION 1
F company supplies pharmaceutical drugs to drug stores. Although the company makes a
satisfactory return, the directors are concerned that some orders are profitable and others are
not. The management has decided to investigate a new budgeting system using activity-
based costing principles to ensure that all orders they accept are making a profit.

Each customer order is charged as follows. Customers are charged the list price of the drugs
ordered plus an additional charge for overheads. A profit margin is also added, but that does
not form part of this analysis and can therefore be ignored.

Currently F company uses a simple absorption rate to absorb these overheads. The rate is
calculated based on the budgeted annual overhead costs divided by the budgeted annual
total list price of the drugs ordered.

An analysis of customers has revealed that many customers place frequent small orders with
each order requesting a variety of drugs. The management of F company has examined more
carefully the nature of its overhead costs, and the following data have been prepared for the
budget for next year:


      Total list price of drugs supplied          $8m
      Number of customer orders                  8,000


      Overhead costs                             $000       Cost driver
      Invoice processing                         280        See Note 2
      Packing                                    220        Size of package – see Note 3
      Delivery                                   180        Number of deliveries – see Note 4
      Other overheads                            200        Number of orders
                                                 ___
      Total overheads                             880
                                                  ___


Notes:

1        Each order will be shipped in one package and will result in one delivery to the
         customer and one invoice (an order never results in more than one delivery).

2        Each invoice has a different line for each drug ordered. There are 28,000 invoice
         lines each year. It is estimated that 25% of invoice processing costs are related to the
         number of invoices, and 75% are related to the number of invoice lines.

3        Packing costs are $32 for a large package, and $25 for a small package.

4        The delivery vehicles are always filled to capacity for each journey. The delivery
         vehicles can carry either 6 large packages or 12 small packages (or appropriate
         combinations of large and small packages). It is estimated that there will be 1,000
         delivery journeys each year, and the total delivery mileage that is specific to particular
         customers is estimated at 350,000 miles each year. $40,000 of delivery costs are
         related to loading the delivery vehicles, and the remainder of these costs are related
         to specific delivery distance to customers.



KAPLAN PUBLISHING                                                                    Page 3 of 10
ACCA F5 Performance Management


      The management has asked for two typical orders to be costed using next year’s
      budget data, using the current method, and the proposed activity-based costing
      approach. Details of two typical orders are shown below:


                                                       Order A             Order B
               Lines on invoice                           2                   8
               Package size                             Small               Large
               Specific delivery distance              8 miles             40 miles
               List price of drugs supplied            $1,200               $900


Required:

(a)    Calculate the charge for overheads for Order A and Order B using:

       (i)     the current system; and                                                 (3 marks)
       (ii)    the activity-based costing approach.                                   (12 marks)

(b)    Write a report to the management of F company in which you assess the strengths
       and weaknesses of the proposed activity-based costing approach for F company; and
                                                                                (5 marks)

                                                                            (Total: 20 marks)




Page 4 of 10                                                       KAPLAN PUBLISHING
                                                                                  Final Assessment


QUESTION 2
Windermere operates a divisional organisation structure. The performance of each division is
assessed on the basis of the Return on Investment (ROI) that it generates.
For this purpose the ROI of a division is calculated by dividing its ‘trading profit’ for the year by
the ‘book value of net assets’ that it is using at the end of the year. Trading profit is the profit
earned excluding non-recurring items. Book value of net assets excludes any cash, bank
account balance or overdraft because Windermere uses a common bank account (under the
control of its head office) for all divisions.
At the start of every year each division is given a target ROI. If the target is achieved or
exceeded than the divisional executives are given a large salary bonus at the end of the year.
In 20X1, Windermere’s division A was given a target ROI of 15%. On 15 December 20X1 A’s
divisional manager receives a forecast that trading profit for 20X1 would be $120,000 and net
assets employed at the end of 20X1 would be $820,000. This would give an ROI of 14.6%
which is slightly below A’s target.
The divisional manager immediately circulates a memorandum to his fellow executives
inviting proposals to deal with the problem. By the end of the day he has received the
following proposals from those executives (all of whom will lose their salary bonus if the ROI
target is not achieved):

(1)     from the Works Manager: that $100,000 should be invested in new equipment at the
        end of the year resulting in cost savings, starting the following year, of $18,000 per
        year over the next fifteen years. Depreciation is on a straight line basis;
(2)     from the Chief Accountant: that payment of a $42,000 trade debt owed to a supplier
        due on 16 December 20X1 be deferred until 1 January 20X2. This would result in a
        $1,000 default penalty becoming immediately due;
(3)     from the Sales Manager: that $1,500 additional production expenses be incurred and
        paid in order to bring completion of an order forward to 29 December 20X1 from its
        previous scheduled date of 3 January 20X2. This would allow the customer to be
        invoiced in December, thereby boosting 20X1 profits by $6,000, but would not
        accelerate customer payment due on 1 February 20X2.
(4)     From the Head of Internal Audit: That a regional plant producing a particular product
        be closed allowing immediate sale for $120,000 of premises having a book value of
        $90,000. This would result in $50,000 immediate redundancy payments and a
        reduction in profit of $12,600 per year over the next fifteen years.

Required:
(a)     Assess each of the above four proposals having regard to:
(i)     their effect on divisional performance in 20X1 and 20X2 as measured by
        Windermere’s existing criteria,
(ii)    their intrinsic commercial merits,
(iii)   any ethical matters that you consider relevant.
        You should ignore taxation and inflation.                                   (16 marks)
(b)     Discuss FOUR possible actions Windermere’s Finance Director should take when the
        situation at division A and the above four proposals are brought to his attention.
                                                                                    (4 marks)

                                                                              (Total: 20 marks)




KAPLAN PUBLISHING                                                                     Page 5 of 10
ACCA F5 Performance Management


QUESTION 3
County Preserves produce jams, marmalade and preserves. All products are produced in a
similar fashion: the fruits are low temperature cooked in a vacuum process and then blended
with glucose syrup with added citric acid and pectin to help setting.

Margins are tight and the firm operates a system of standard costing for each batch of jam.

The standard material cost data for a batch of raspberry jam are:

        Fruit extract                    400 kg @ $0.16 per kg
        Glucose syrup                    700 kg @ $0.10 per kg
        Pectin                            99 kg @ $0.332 per kg
        Citric acid                        1 kg @ $2.00 per kg
        Standard processing loss         3%

The summer of 20X7 proved disastrous for the raspberry crop with a late frost and cool,
cloudy conditions at the ripening period, resulting in a low national yield. As a consequence,
normal prices in the trade were $0.19 per kg for fruit extract although good buying could
achieve some savings. The impact of exchange rates on imports of sugar has caused the
price of syrup to increase by 20%.

The actual results for the batch were:

        Fruit extract                    428 kg @ $0.18 per kg
        Glucose syrup                    742 kg @ $0.12 per kg
        Pectin                           125 kg @ $0.328 per kg
        Citric acid                        1 kg @ $0.95 per kg

Actual output was 1,164 kg of raspberry jam.

Required:

(a)     Calculate the ingredient planning variances that are deemed uncontrollable. (6 marks)

(b)     Calculate the ingredients operating variances that are deemed controllable. (4 marks)

(c)     Comment on ONE advantage and ONE disadvantage of variance analysis using
        planning and operating variances.                              (2 marks)

(d)     Calculate the mixture and yield operating variances.                        (6 marks)

(e)     Suggest possible reasons for the mix and yield variances.                   (2 marks)

                                                                            (Total: 20 marks)




Page 6 of 10                                                          KAPLAN PUBLISHING
                                                                            Final Assessment


QUESTION 4
The following monthly budgeted cost values have been taken from the budget working papers
of MZ Limited for the year ended 30 September 20X8.


       Activity level                     60%                 70%                  80%
                                            $                  $                    $
       Direct materials                 30,000              35,000               40,000
       Direct labour                    40,500              47,250               54,000
       Production overhead              46,000              52,000               58,000
       Selling overhead                 15,000              17,000               19,000
       Administration overhead          28,000
                                       _______              28,000
                                                           _______               28,000
                                                                                _______
                                        159,500             179,250              199,000
                                       _______             _______              _______


During September 20X8, actual activity was 1,292 units (which was equal to 68% activity) and
actual costs were:


                                            $
       Direct materials                 33,500
       Direct labour                    44,000
       Production overhead              46,250
       Selling overhead                 16,150
       Administration overhead          27,800
                                       _______
                                        167,700
                                       _______


Required:

(a)    Prepare a budgetary control statement for MZ Limited on a flexible budget basis for
       the month of September 20X8. The statement should include the flexed budget, the
       actual results and the variance for each of the five costs.             (12 marks)

(b)    Explain the difference between fixed and flexible budgets, and state when each
       should be used to control costs.                                      (4 marks)

(c)    The preparation of budgets is an important task that relies on the identification of the
       principal budget factor. Explain the term ‘principal budget factor’ and state its
       importance in the budget preparation process.                                 (4 marks)

                                                                            (Total: 20 marks)




KAPLAN PUBLISHING                                                               Page 7 of 10
ACCA F5 Performance Management


QUESTION 5
BLA Ltd is a design consultancy that provides advice to clients regarding property
maintenance and improvements. BLA Ltd does not undertake building work on behalf of its
clients but will recommend contractors that undertake the type of work requested.
The following information is also relevant:

(i)     Each chargeable consultation is charged at a rate of $150 per consultation.


(ii)    The consultants are each paid a fixed annual salary of $45,000. In addition they
        receive a bonus of 40% of the fee income generated in excess of budget.


(iii)   In an attempt to gain new business, consultants may undertake consultations on a
        ‘no-fee’ basis. Such consultations are regarded as Business Development Activity by
        the management of BLA Ltd.


(iv)    Consultants will sometimes undertake remedial consultations with clients who
        experience problems at the time when work commences on each client’s site.
        Remedial consultations are also provided on a non-chargeable, i.e. ‘no fee’ basis.


(v)     BLA Ltd has a policy of maintaining staff at a level of 45 consultants on an ongoing
        basis, irrespective of fluctuations in the level of demand. Also, BLA Ltd has retained
        links with retired consultants and will occasionally subcontract work to them, if current
        full-time consultants within a particular category are fully utilised. During the year
        subcontractors only undertook non chargeable client consultations. BLA Ltd pays
        these subcontractors $150 per consultation.


(vi)    In November 20X2, BLA Ltd purchased ‘state of the art’ business software for use by
        its consultants in simulating design improvements. The software was used throughout
        the year by consultants who specialise in landscape and garden design. It is now
        planned to introduce the use of the software by the other categories of consultant
        within BLA Ltd.


(vii)   Other operating expenses (excluding the salaries of the consultants) were budgeted
        at $2,550,000 for the year to 31 October 20X3. The actual amount incurred in respect
        of the year to 31 October 20X3 was $2,805,000, which excludes payments to
        subcontractors.




Page 8 of 10                                                            KAPLAN PUBLISHING
                                                                          Final Assessment


BLA Ltd: Sundry statistics for year ended 31 October 20X3

                                                          Budget           Actual
       Total client enquiries:
            New business                                   67,500          84,000
            Repeat business                                32,400          28,000
       Number of chargeable client consultations:
            New business                                   24,300          22,400
            Repeat business                                16,200          19,600
       Number of non-chargeable client consultations
       undertaken by BLA consultants:
       Number of business development consultations         1,035           1,200
            Number of remedial consultations                   45             405
       Number of non-chargeable client consultations                          120
       undertaken by subcontractors:
       Other statistics:
            Number of complaints                              324             630


Required:

Fitzgerald and Moon have suggested that business performance should be measured in a
number of ways. Assess the performance of BLA with respect to the following dimensions:

(a)    Financial performance                                                     (5 marks)

(b)    Service quality                                                           (4 marks)

(c)    Flexibility                                                               (3 marks)

(d)    Resource utilisation                                                      (4 marks)

(e)    Innovation                                                                (4 marks)

                                                                         (Total: 20 marks)




KAPLAN PUBLISHING                                                             Page 9 of 10
ACCA F5 Performance Management




Page 10 of 10                    KAPLAN PUBLISHING

								
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