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ACCA
Paper F5
Performance Management
Revision Mock Examination
March 2016
Question Paper

15 minutes Reading and planning


Time Allowed
3 hours Writing

ALL questions are compulsory and MUST be attempted.


Formulae are at the end of the paper.
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.

DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS.

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Interactive World Wide Ltd, January 2016

All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior written permission of Interactive
World Wide Ltd.

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Section A ALL FIVE questions are compulsory and MUST be


attempted.

1. Sierra Limited has recorded the following data in the two most recent periods.

Total costs of Volume of


production ($) production (units)
135,000 700
183,000 1,100

What is the best estimate of the companys fixed costs per period?

A. $135,000
B. $132,000
C. $51,000
D. $48,000

2. Absorption costing is related to with which of the following items of cost?

A. Direct materials
B. Direct labour
C. Fixed costs
D. Variable and fixed costs

3. Newells current level to breakeven is 6,000 units per annum. The selling price is $90
per unit and the variable cost is $40 per unit.

What are the companys annual fixed costs?

A. $120
B. $240,000
C. $300,000
D. $540,000

4. An office manager of Harris Plc wishes to minimise the cost of telephone calls made.
40% of calls in peak hours cost $1 each and the remainder of such calls cost $1.50
each. 30% of calls at other times cost $0.80 each, 50% of them cost $0.90 each, and
20% of them cost $1 each. This proportion cannot be varied, though the total number
of calls made in peak hours and of calls made at other times can be.

If X = the numbers of calls made each day in peak hours, and Y = the number
of calls made each day at other times, the official managers objective is to:

A. Minimise 120X + 89Y


B. Minimise 120X + 90Y
C. Minimise 130X + 89Y
D. Minimise 130X + 90Y

w w w . s t ud y i nt e r a c t i v e . o r g 3

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5. Usman Co is considering its option with regard to a machine which cost $120,000 four
years ago.

The machine can generate scrap proceeds of $150,000 if the firm wants to sell. This
machine would generate net income of $180,000 if used on a project.

The current replacement cost for this machine is $210,000.

The relevant cost of the machine on using the project is:

A. $120,000
B. $150,000
C. $180,000
D. $210,000

6. Bruno purchased some equipment several years ago for $50,000. Its net book value
is now $10,000. The equipment is no longer in normal use and it could be sold now for
$8,000.

Bruno has been offered a one-off contract which would make use of this piece of
equipment for six months. After this time the equipment would be sold for $5,000.

What is the relevant cost of the equipment to the contract?

A. $8,000
B. $3,000
C. $5,000
D. $10,000

7. Mr Branning plans to produce and sell 140 units of a product.

Fixed costs absorbed are $20 per unit

Contribution per unit is $24.

What is the margin of safety?

A. 14,000 units
B. 11,667 units
C. 28 units
D. 23 units

8. A flexible budget describes which of the following?

A. A budget which shows variable production costs only.


B. A monthly budget which is changed to reflect the number of days in the month.
C. A budget that shows sales revenue and costs at different levels of activity.
D. A budget that is updated halfway through the year to incorporate actual results for
the first half of the year

4 w w w . s t ud yi nt e r a c t i ve . o r g

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9. Jack Lee is considering a project and has asked you for help. This project requires 400
kg of raw materials X. The Company has 150 kg of X in stock that were purchased six
months ago for $55 per kg. The company no longer has any use for X. The inventory
of X could be sold for $40 per kg. The current purchase price for X is $53 per kg.

What is the total relevant cost of raw material X for the project?

A. $17,950
B. $19,250
C. $21,200
D. $21,500

10.The Sales Director has prepared a manpower plan to ensure that sales quotas
for the forthcoming year are achieved. This is an example of:

A. Strategic planning
B. Tactical planning
C. Operational planning
D. Corporate planning

The following information is given for questions 11 and 12 below.

A company produces a product that requires two materials, Material A and Material B.
Details of the material quantities and costs for August are given in the table below.

Material A Material B
Budget Actual Budget Actual
Quantity (kg) 24,000 23,000 36,000 38,000
Cost per kg ($) 2.40 2.30 1.30 1.38

Budgeted and actual output of the product for August was 12,000 units.

11.The material mix variance for August is:

A. $1,540 Favourable
B. $1,540 Adverse
C. $1,288 Favourable
D. $1,288 Adverse

12.The material yield variance for August is:

A. $200 Adverse
B. $1,740 Adverse
C. $200 Favourable
D. $1,740 Favourable

w w w . s t ud y i nt e r a c t i v e . o r g 5

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13.Details of two products are as follows:

A B
Selling price per unit ($) 180 150
Direct material cost per unit ($) 120 100
Output per hour (units) 80 90

Factory costs are $46,000 per day. There are 10 hours available on the bottleneck
machine every day.

Throughput accounting ratio for product A will be:

A. 1.04
B. 2.04
C. 3.04
D. 4.04

14.Which of the following are methods used in environmental management


accounting?

Flow cost accounting


Input/output method
Life-cycle costing
Activity based costing

A. (i) and (ii)


B. (iii) and (iv)
C. (i), (ii) and (iii)
D. All of the above

15.ABC Plc uses an activity based costing system. Three products are manufactured,
details of which are as follows:

Annual Production Batch size Machine set-


(units) (units) ups per batch
Product X 90,000 100 5
Product Y 70,000 35 7
Product Z 60,000 30 3

What is the machine set-up cost per unit of product Z (to the nearest cent) if
the annual machine set-up costs are $250,000?

A. $1.20
B. $1.02
C. $66.22
D. $2.00

6 w w w . s t ud yi nt e r a c t i ve . o r g

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16.Designs plc has just developed a new product, XL. It took 36 minutes to produce the
first batch of five XLs. Designs estimates that it can enjoy an 85% learning effect on
production of the product. In order to set a price for the product, a standard cost card
is being formulated.

How much time per unit should be included for the production of the 201st to
250th items?

A. 7.20 minutes
B. 2.88 minutes
C. 3.10 minutes
D. 2.26 minutes

The following information relates to questions 17 and 18.

Jones Ltd operates a standard absorption costing system. The following information has
been extracted from the standard cost card for one of its products:
Budgeted production 1,500 units

Direct material cost: 7 kg $4.10 = $28.70 per unit

Actual results for the period were as follows:

Production 1,600 units

Direct material (purchased and used): 12,000 kg for $52,200

It has subsequently been noted that due to a change in economic conditions the best price
that the material could have been purchased for was $4.50 per kg during the period.

17.Calculate the material price planning variance.

A. $4,200 Adverse
B. $4,800 Adverse
C. $4,480 Adverse
D. $4,520

18.Calculate the operational material usage variance.

A. $3,600 Adverse
B. $3,280 Adverse
C. $4,200 Adverse
D. $3,820 Adverse

w w w . s t ud y i nt e r a c t i v e . o r g 7

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19.Most companies have a Management Information System (MIS) set up to monitor


actual monthly spending against budgeted monthly spending.

This is for the purposes of which of the following?

A. Control
B. Planning
C. Decision-making
D. All the above

20.A Transaction Processing System is:

A. A basic information system set-up to record data on debits and credits


B. A basic information system set-up to provide standardised reports based on internal
data
C. A more advanced information system set up to include external data as an aid to
decision-making
D. An information system that allows summary reports to be provided easily.

8 w w w . s t ud yi nt e r a c t i ve . o r g

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Section B ALL FIVE questions are compulsory and MUST be


attempted.

1. Uni-craft is a toy manufacturer producing more than 30 product lines for disabled
children. The products are specialised and in high demand all over Europe. Recently
they are facing stronger competition due to increased flux of products from the Chinese
market. Uni-craft is considering introducing an ABC system in an effort to build a fair
cost structure and a more competitive price for its products. Details of its three
products from the latest budget working papers are set out below:

Product Barugan Jen-10 Fonic


Annual production (units) 1,000,000 2,000,000 500,000
Selling price per unit $4.75 $3.70 $5.00
Direct material/unit $1.00 $0.50 $0.75
Direct Labour/unit $2.50 $1.50 $1.75
Batch size (units) 1,000 500 250
Machine hrs per unit 2 3 4
Set ups per batch 4 4 6
Purchase orders per batch 2 3 1

Three cost pools have been identified. Their costs for the year are as follows:

$
Machine running costs: 1,400,000
Set up costs: 1,500,000
Purchase order costs: 600,000

Currently, Uni-craft operates an absorption costing system where all overheads are
absorbed based on machine hours.

Required:

Calculate the total cost per unit for each product using:

the current absorption costing method; (5 marks)

an activity-based costing method based on appropriate cost drivers for


each cost pool. (10 marks)

(15 marks)

w w w . s t ud y i nt e r a c t i v e . o r g 9

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2. Veronica runs a small business performing beauty services at customer homes in a


small spa town in central England. At present she offers make-up services to ladies
getting ready for a special day, such as weddings or parties, and historically she has
always been very busy her work diary has been consistently full of bookings.

Lately, however, competition in the town's beautician market has become more intense
since a large hairdressing salon in the town centre has started offering make-up
services. In response to this, Veronica has decided to diversify into offering manicure
services as well as make-up services. She has asked for your help in deciding how to
price her manicure services.

Together you and Veronica have performed some market research into home manicure
services in the town. This research suggests that the estimated demand for manicure
services per quarter at two different price points are as follows:

Price $30 per Price $40 per


service service

Demand Sales Probability Demand Sales Probability


volume volume
Low 100 0.2 Low 50 0.2
Medium 200 0.5 Medium 150 0.5
High 300 0.3 High 250 0.3

Further information relating to the manicure services is as follows:

Variable material costs $12 per service.


Variable labour and travel costs $7 per service.
Fixed overheads per service for manicure equipment are $280, which will be
written off immediately.
Advertising manicures will cost $400 at a price point of $30 per service, and $600
at a price point of $40 per service.

Required:

Calculate the expected profit for the manicure services at a price point of:

(i) $30 per service;

(ii) $40 per service. (6 marks)

Explain briefly maximax, maximin and expected value decision rules, with
reference to risk attitudes. (4 marks)

(10 marks)

10 w w w . s t ud yi nt e r a c t i ve . o r g

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3. Southbury Estate is a housing department within a large social services organisation


run by the government from taxpayers money. For many years the budgets have been
set by adjusting for any known changes in activity levels (mostly population
statistics) and adding an inflation adjustment to the previous years expenditure. Up
until now, only senior management have been involved in the budgeting process.

The newly appointed management accountant in Southbury is insisting on a zero-


base approach when the next budget is set, as she believes that recent fluctuations,
like immigration, opening of a number of good schools and a newly constructed hospital
nearby may affect demography of the locality and past history may not provide a
reliable estimate of what is to occur in the future.

Required:

Explain the main features of incremental budgeting and outline the


problems that can occur when using it. (5 marks)

Explain the main features of zero-based budgeting and outline the


problems that can occur when using it. (5 marks)

Explain how the use of zero-based budgeting can motivate employees.


(5 marks)

(15 marks)

w w w . s t ud y i nt e r a c t i v e . o r g 11

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4. Manhattan Engineering (ME) is engaged in manufacturing metal parts for industrial


use. It operates a standard marginal costing system for management accounts. The
newly appointed managing director of ME having very little financial background has
received a variance report for the quarter 3, extracts of which are shown below:

Sales price $13,500 A Sales volume $28,950 F


Direct labour rate $906.25 A Direct labour $2,187.5 F
efficiency
Direct materials price $1,448 F Direct materials $80 A
quantity
Variable overhead rate $453 A Variable ohead $1,093.75 F
efficiency
Fixed ohead $1,000 A
expenditure

Other financial details of the company are as follows:

Budgeted output and sales 750 units


Actual output 900 units

Standard cost card is provided for additional information:

Selling price $150.00


Direct materials (2kg $4) $8.00
Direct labour (2.5 hrs $5) $12.50
Variable overhead (2.5 hrs $2.50) $6.25

The company has budgeted fixed overheads of $12,500 per quarter.

The above figures do not include the effect of a shortage of required skilled workers in
the industry and general average labour rate has gone up to $6 per hour.

In the quarter just ended the company produced and sold 900 units. The direct
materials used were 3,620 kg at total cost of $13,032. The actual direct labour cost
was $9,968.75 for 1,812.5 hours.

Required:

(a) Calculate for labour costs planning and operational variances in as much
detail as information allows. (6 marks)

(b) Explain how analysing variances into planning and operational elements
can help ME. (4 marks)

(10 marks)

12 w w w . s t ud yi nt e r a c t i ve . o r g

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5. Umbrella Company (UC) manufactures two types of umbrellas in two different


factories, the South and the North. After assembly the finished umbrellas are
transferred to the sales division at their cost plus 10% profit mark-up. UCs prices are
set on the basis of the external market in consideration, and current prices for South
umbrellas are $3.00 and of North Umbrellas $2.50. UC sets a target return of 20% on
investment in each division per annum. The heads of all divisions get paid a bonus of
$500 for every 1% return achieved in excess of target return; so if achieved return is
20% no bonus is paid, and for 21%, $500 is paid and so on.

The following are the financial details of the divisions gathered by the company
accountants.

South North
Direct material cost per umbrella ($) 1.20 0.80
Direct labour ($) 1.00 1.00
Overheads ($) 0.50 0.40
Annual capacity (units) 1,500,000 1,250,000
Current capacity utilisation (units) 1,400,000 1,100,000
Investment ($) 1,500,000 1,000,000

Sales division is part of the head office of UC which is responsible for all sales. It mostly
shares the facilities of the head office; therefore the investment in sales division is only
minimal ($250,000). UC operates a just-in-time system.

Required:

Calculate annual return on investment for each division. (7 marks)

Calculate the amount of bonus each division is entitled to. (3 marks)

(10 marks)

w w w . s t ud y i nt e r a c t i v e . o r g 13

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Formulae Sheet

Learning curve

Y axb

Where:

y = cumulative average time to produce X units

a = the time taken for the first unit of output

x = the cumulative number of units produced

b = the index of learning (log LR/log 2)

LR = the learning rate as a decimal

Demand curve

P a bQ

changein price
b
changein quantity

a price when Q 0

MR = a 2bQ

14 w w w . s t ud yi nt e r a c t i ve . o r g

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ACCA
Paper F5
Performance Management
Revision Mock Examination
March 2016
Answer Guide

Health Warning!

How to pass Attempt the examination under exam


conditions BEFORE looking at these suggested
answers. Then constructively compare your
answer, identifying the points you made well
and identifying those not so well made.
If you got basic definitions and rules wrong:
re-revise by re-writing them out until you get
them correct.
How to fail Simply read or audit the answers
congratulating yourself that you would have
answered the questions as per the suggested
answers.

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Interactive World Wide Ltd, January 2016


All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior written permission of Interactive
World Wide Ltd.

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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

Answer 1

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)

Total cost per unit

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

Overhead absorption rate

Total budgeted overhead costs


=
Total budgeted machine hours*

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

*Total budgeted machine hours:

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
Production overheads
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

Machine running costs/total number of machine hours

Cost driver rate = $1,400,000/10,000,000 = $0.14 per hour

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

Purchase order costs/total number of purchase orders

Total number of set ups = (2 1,000 + 3 4,000 + 1 2,000) = 16,000 POs

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

w w w . s t ud y i nt e r a c t i v e . o r g 7

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Answer 2

Tutorial help and key points

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.

The marking scheme is given within the body of the answer.

(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)

8 w w w . s t ud yi nt e r a c t i ve . o r g

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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

w w w . s t ud y i nt e r a c t i v e . o r g 9

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Answer 3

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.

10 w w w . s t ud yi nt e r a c t i ve . o r g

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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.

How zero-based budgeting can motivate employees

(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.

w w w . s t ud y i nt e r a c t i v e . o r g 11

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Answer 4

Tutorial help and key points

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

Operational rate variance $906.25 F

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.

12 w w w . s t ud yi nt e r a c t i ve . o r g

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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 managers 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.

w w w . s t ud y i nt e r a c t i v e . o r g 13

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Answer 5

Tutorial help and key points

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
Overheads 0.50 0.40
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

w w w . s t ud y i nt e r a c t i v e . o r g 15

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