Fundamentals Level – Skills Module

Paper F5
Performance
Management

Time allowed: 3 hours 15 minutes

This question paper is divided into three sections:

Section A – ALL 15 questions are compulsory and MUST be
attempted
Section B – ALL 15 questions are compulsory and MUST be
attempted
Section C – BOTH questions are compulsory and MUST be
attempted

Do NOT open this question paper until instructed by the supervisor.

Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
Section A - ALL 15 Questions are Compulsory and MUST be Attempted

1. Which of the following statements concerning Life Cycle costing are correct?
1) Life cycle costs are the costs incurred on products from their design stage, through development
to market launch, production and sales, and their eventual withdrawal from the market.
2) Whilst Life cycle costing considers costs associated with the launch of products in the market
place, Research and Development Costs are still treated as period costs and not traced to
products.
3) Life cycle costing enables total profitability of any given product to be determined.
4) Life Cycle costing is a traditional costing principle.

A. 1 only
B. 2only
C. 1 and 3 only
D. 2 and 4 only

2. The following data relates to production of A Co's three products in period 6.

Product Product Y Product
X Z
Production and sales (units) 300 200 150
Machine hours per unit 30 10 10
No of production runs 7 2 1
No of deliveries to customers 5 5 5
No of deliveries of material into store 20 19 1

$
Production overhead costs Machining 35,750

Set-up costs 5,250

Materials handling (receiving) 17,500
Packing costs (despatch) 22,500

What is the overhead cost per unit of product Y using activity based costing?
A. $112.91
B. $525
C. $2.86
D. $150.55

3. The management accountant of Duggy Co is considering taking account of the learning

curve effect in department L. Which of the following factors are likely to influence him
against taking account of the learning curve effect when preparing price quotations?
i. Labour is not a significant proportion of total cost.
ii. There is a high rate of labour turnover in department L.
iii. There may be a long delay between successive orders.
A. i only
 B. ii only
C. iii only
D. (i),(ii) and (iii)

4. Which of the following are feedforward control models?

i. A project planning model which uses critical path analysis to identify in advance any delays that
might postpone completion of the project, so that corrective action can be taken if necessary.
ii. A production planning model that accesses information from sales forecasts to identify in advance
any constraints on delivery vehicle capacity. Arrangements can be made to hire additional
vehicles as necessary.
iii. A variance analysis control model that uses pre-determined control limits to identify significant
variances as soon as they arise, so that management action can be taken immediately.
A. (i) and (ii) only
B. (i) and (iii) only
C. All of the above
D. (ii) and (iii) only.

5. Which of the following best describes a system of rolling budgets?

A. An approach to budgeting where next year's budget is based on the current year's results plus
an extra amount for estimated growth or inflation.
B. A system of budgeting whereby a budget allowance is set by top management and then rolled
out to the individual budget holders.
C. A process whereby a number of budgets are prepared from a zero base each year. This is done
on a rolling basis so that each budget is subject to this strict review every four or five years.
D. A process of continuous budgeting whereby regularly each period a new future period is added
to the budget and the earliest period is deleted.

6. A group of companies is divided into three autonomous operating divisions. The group cost of capital
is 15%. In ROCE calculations, the capital employed is taken as the figure at the beginning of the
year. All non-current assets are depreciated on a straight line basis.

If no new capital expenditure transactions take place, the forecast results for the next
year are:
Division Capital Net profit for
employed at year (after
beginning of depreciation)
year
$000 $000
P 410 130
Q 620 175
R 570 132

The managers are proposing the following transactions, all of which take place at the beginning of
the year.

Division P: Invest $50,000 to increase net profit by $11,500 per annum Division
 Q: Sale at net book value of a machine which is budgeted to earn a net profit after depreciation of
$7,000 next year. The original equipment cost $225,000 four years ago with an expected life of five
years and no residual value. The sale proceeds would be remitted to Head Office.

Division R: Sale at net book value of $5,000, of a machine which is forecast to earn an annual profit
after depreciation of $2,000. Head Office would invest a further $14,000 to enable the purchase of
$19,000 of a machine which will earn an annual profit after depreciation of $3,500.

If the proposed transactions went ahead, which divisional managers would receive a
higher bonus, if such bonuses are directly related to the level of Residual Income in the
division?
A. Divisions P only.
B. Divisions Q only.
C. Divisions P and Q only.
D. Divisions Q and R only.

7. Measures used to assess the performance of a manager or division should:

i. distinguish between whether it is the manager or division which is being assessed,
ii. be based only on factors which the manager can control (or the division can be held accountable
for),
iii. achieve long-term as well as short-term objectives,
iv. achieve goal congruence across an organisation.

Which aims are valid?

A. (i), (ii) and (iii).
B. (i) and (ii).
C. (i), (ii), (iii) and (iv).
D. (i) only.

8. A company is deciding whether to invest in a big, medium or small machine. Demand for the
products being made may be high (probability 0.3) medium (probability 0.3) or low (probability 0.4).

The expected profits from production using each of the three machines (in $000) at the three levels
of demand are as follows.
High demand Medium demand Low demand
Big machine 500 100 50
Medium machine 300 250 Nil

Small machine 100 95 90

The machine with the greatest expected value is:

A. Big machine.
B. Small machine.
C. Impossible to determine.
 D. Medium machine.

9. Top has limited factory capacity measured in labour hours and a decision must be made whether to
make or buy product X. Supplies of X can be purchased for $12 per unit. If X is made each unit costs
$5 in raw materials and requires 3 labour hours. Labour is paid at $1.50 per hour. Labour is currently
working to capacity making product Y which earns a contribution of $2 per unit, each unit needing 5
labour hours.

Which of the following statements is true?

A. Top should buy X because it is $5.80 per unit cheaper than making.
B. Top should make X because it is $3.50 per unit cheaper than purchasing.
C. Top should make X because it is $1.30 per unit cheaper than buying X.
D. Top should be indifferent between making or buying X since the labour will be fully utilised in any
case.

10. JB Co makes two products, the JA and the BE. The JA requires 12 minutes of labour time per unit
and 20 kgs of material. The BE requires 15 minutes of labour time per unit and 9 kgs of material.
Each month 60 labour hours are available and 380 kgs of material. Government restrictions are such
that the maximum possible monthly production volume of the JA is 80 units.

The marketing strategy is such that for every JA that is sold, at least two BEs must be sold. The
contribution per unit of JA is $45 while the contribution per unit of BE is $57.

If linear programming is to be used to determine the contribution-maximising production

plan, and if x represents the number of product JA produced and y represents the
number of product BE produced, which of the following correctly describe constraints?
A. 12x + 15y less than or equal to 60.
B. x greater than or equal to 80.
C. x greater than or equal to 2y.
D. 20x + 9y less than or equal to 380.

11. A shadow price is:

i. The increase in value which would be created by having available one extra unit of a limiting
resource at its original cost.
ii. The maximum premium worth paying over the original cost to obtain one extra unit of a limiting
resource.
iii. The internal opportunity cost of a limiting resource.

Are these statements true or false?

A. (i), (ii) and (iii) are true.
B. (i) and (ii) are true and (iii) is false.
C. (i) and (iii) are true and (ii) is false.
D. (i), (ii) and (iii) are false.
12. The price of a good is $1.50 per unit and annual demand is 600,000 units. If an increase
in price of 10c per unit results in a fall in demand of 65,000 units per year, what is the
price elasticity of demand? Give your answer correct to 3 decimal places.
A. 1.625
B. 1.944
C. 1.612
D. 0.615

13. Litton Co has been asked to tender for a one-off contract to build a machine. The costs involved are
detailed below.

Material A is in inventory. It cost $5,000 originally, and it is used continually by the company. The
current purchase price is $6,500.

Material B is in inventory. This was left over from another job, and is unlikely to be used otherwise. It
originally cost $2,800, it can currently be bought for $3,000, and could be sold, net of delivery costs,
for $2,600.

Skilled labour is in short supply and would have to be diverted from other production, with an
estimated loss of contribution of $7,300. The direct cost of the 500 hours skilled labour needed for
the contract would be $4,900.

Unskilled labour is plentiful, and the 300 hours needed could be found without affecting other
production due to spare capacity. Unskilled labour costs are $4 per hour and all workers are paid for
a 40 hour week.

The overhead absorption rate is $2 per labour hour. No additional overheads would be incurred as a
result of accepting this contract.

What is the minimum price that Litton Co should quote for this contract?
A. 21,300
B. 22,300
C. 21,000
D. 24,000

14. Labour time in the packing department is in short supply and limited to 100 hours. Linear
programming has been carried out and the shadow price of an hour of labour time has been
calculated as $7.10.

By employing temporary staff the amount of time available can be increased to 130 hours.

Labour ceases to be a limiting factor on production once an extra 19 hours have been found,
however.
 Which of the following statements are correct?
i. As more and more labour time becomes available, the shadow price becomes larger and larger.
ii. The required maximum supply of labour hours is 119 hours.
iii. As more and more labour time becomes available, the shadow price tends towards zero.
iv. The required increase in labour hours is 30 hours.
A. i only
B. ii and iii only
C. iii and iv only
D. iv only
15. A group of companies is divided into three autonomous operating divisions. The group cost of capital
is 15%. In ROCE calculations, the capital employed is taken as the figure at the beginning of the
year. All non-current assets are depreciated on a straight line basis.

If no new capital expenditure transactions take place, the forecast results for the next year are:
Division Capital employed at Net profit for year (after
beginning of year depreciation)
$000 $000
P 410 130
Q 620 175
R 570 132

The managers are proposing the following transactions, all of which take place at the beginning of
the year.

Division P: Invest $50,000 to increase net profit by $11,500 per annum

Division Q: Sale at net book value of a machine which is budgeted to earn a net profit after
depreciation of $7,000 next year. The original equipment cost $225,000 four years ago with an
expected life of five years and no residual value. The sale proceeds would be remitted to Head Office.

Division R: Sale at net book value of $5,000, of a machine which is forecast to earn an annual profit
after depreciation of $2,000. Head Office would invest a further $14,000 to enable the purchase of
$19,000 of a machine which will earn an annual profit after depreciation of $3,500.

If the proposed transactions went ahead, which divisional managers would receive a
higher bonus, if such bonuses are directly related to the level of ROCE in the division?
A. Managers of divisions P only.
B. Managers of divisions Q only.
C. Managers of divisions Q and R only.
D. Managers of divisions P and Q only.
Section B- All Questions are Compulsory and must be attempted

Following data is related to question no 16 to 20

Solid Ltd has been asked to provide a quotation for an engineering project that will take one year to
complete. An analysis of the project has already been completed and the following resource requirements
have been identified:
1. A specialised machine will be required for a total of 10 weeks. It can be hired in from a reputable
supplier, who would guarantee its availability when it is required, for $2,500 per week.
2. The machinery has a running cost of $720 per week. This cost is incurred by the user of the machine.
3. It is company policy to depreciate non-current assets by 25% per year on a reducing balance basis.
4. Skilled labour would be required for a total of 9,000 hours during the year. The labour required could
be recruited at an hourly rate of $12. Alternatively some of the employees currently working on other
projects within the company could be transferred to this project. Their hourly rate is $10 per hour. If
these existing employees were to be transferred to this project then they would need to be replaced
on their existing project work. Replacements for their existing project work would cost $11 per hour.
5. Unskilled labour would be required for a total of 12,000 hours during the year. These employees
would need to be recruited on a one year contract at a cost of $8 per hour.
6. The project would need to be supervised and it is estimated that there would be a total of 500 hours
of supervision required during the year. One of the existing supervisors could undertake this work,
but if he did so he would have to work a total of 300 hours overtime during the year to carry out the
supervision on this project as well as his existing duties. The supervisor earns a salary of $50,000 per
year for working 2,000 hours and is not paid for overtime work. If this project goes ahead the
supervisor will be paid a bonus of $500, which would not be paid if the project is not undertaken.
7. The direct materials required for the project are Materials A and B. With regards to Material A, the
total amount required for the project would have to be purchased at a cost of $15,000.
8. The total amount of Material B required would be 10,000 square metres. The company purchased
25,000 square metres of this material for a project two years ago at a total cost of $100,000. The
earlier project used 20,000 square metres of the material and the remainder is currently held in
inventory. The company does not foresee any other use for this material in the future and could sell
it for $2 per square metre. The current purchase price of the material is $5 per square metre.
9. The company has already incurred expenditure of $25,000 in analysing the resource requirements of
the project.
10. It is company policy to attribute overhead costs to projects using an absorption rate of 40% of prime
costs.
11. It is company policy to add a 25% profit mark-up to total costs when setting its prices.

16. What is relevant cost of specialised machine?

A. $22,000
B. $25,000
C. $24,500
D. Nil
17. What is relevant cost of skilled labour ?
A. $108,000
B. $96,000
C. $99,000
D. Nil

18. What is relevant cost of supervisor?

A. $50,000
B. $500
C. $12,500
D. Nil

19. What is relevant cost of Material B?

A. $100,000
B. $50,000
C. $35,000
D. $40,000

20. Only relevant costs need to be considered in decision-making situations. Which of the
following are relevant costs?
1) Differential costs
2) Future costs
3) Common costs
4) Unavoidable costs

A. 1 and 2 only.
B. 1, 2 and 3 only.
C. 1, 2, 3 and 4.
D. 2 and 4 only.

Following data is related to question no 21 to 25.

ABC Ltd has a single production process for which the following costs have been estimated for the period
ending 31 December 2010:
$
Material receipt and inspection costs 15,600
Power costs 19,500
Material handling costs 13,650

Three products - X, Y, and Z are produced by workers who perform a number of operations on material
blanks using hand held electrically powered drills. The workers are paid £4 per hour.

The following budgeted information has been obtained for the period ending 31 December 2009:
Product X Product Y Product Z
Production quantity (units) 2,000 1,500 800
Batches of Material 10 5 16
Data per product unit:
Direct material (square metres) 4 6 3
Direct material cost (£) 5 3 6
Direct labour (minutes) 24 40 60
No. of power drill operations 6 3 2

Overhead costs for material receipt and inspection, process power and material handling are presently
each absorbed by product units using rates per direct labour hour.
An activity based costing investigation has revealed that the cost drivers for the overhead costs are as
follows:
Material receipt and inspection: Number of batches of material
Process power: Number of power drill operations
Material handling: Quantity of material (square metres) handled

21. What is power cost of each unit of z?

A. 1.26
B. 2.16
C. 3.16
D. None of the above

22. What is process power cost of each unit of Y?

A. 3.24
B. 2.34
C. 4.32
D. None of the above

23. What is overheads per unit of X using Absorption costing?

A. $14
B. $12
C. $28
D. None of the above

24. What is material handling cost of each unit of Z?

A. $2.10
B. $1.20
C. $3.0
D. None of the above

25. Which of the following statements is/are true?

i. ABC is always beneficial for those organisations which produces more than one products.
ii. ABC is form of Absorption costings
iii. ABC is not useful for service providing business
iv. ABC recognises the fact that overheads are not always volume related.
 A. (i) and (ii)
B. (ii) and (iv)
C. (i) ,(iii) and (iv)
D. All of the above statements

Following data is related to question no 26 to 30

26. Alpha ltd produces and sells three products: X, Y and Z.

The budget information for the coming year is as follows:
X Y Z
Sales (units) 9,600 9,600 24,000
Selling price (per unit) $10 $12 $14
Variable cost (as % of selling price) 75% 87.5% 60%

The total budgeted fixed overheads for the year are $16,000

If R were the only product to be produced and sold, what would be the breakeven
revenue from R?
A. $16,000
B. $15,857
C. $12,333
D. $40,000

27. Alpha ltd produces and sells three products: P, Q and R. The budget information for the coming year
is as follows:
X Y Z
Sales (units) 9,600 9,600 24,000
Selling price (per unit) $10 $12 $14
Variable cost (as % of selling price) 75% 87.5% 60%

The total budgeted fixed overheads for the year are $16,000

Assuming that all three products are produced and sold (and assuming that the budget
mix of the products remains unchanged), what will be the average contribution to sales
(CS) ratio?
A. 28.20%
B. 31.58%
C. 24.17%
D. 45.83%

28. Alpha lts has decided to add a fourth product, S, and has calculated that the new average
contribution to sales (CS) ratio will be 18.2%. The total fixed overheads will remain at $16,000 for
the year, and the new total budgeted revenue is $104,000.
 Assuming that the new product mix will remain as per the new budget, what will be the
margin of safety?
A. 12.83%
B. 18.30%
C. 15.47%
D. 18.60%

29. Which of the following statements are limitation of the graphical approach to solving
linear programming problems?
1) The graphical approach can only be used when there are only two limited resources.
2) The graphical approach can only be used when there are only two products being produced
3) The graphical approach assumes that both sales revenue and variable costs vary linearly with the
level of production and sales
4) The graphical approach is only relevant when the objective is to achieve the maximum
contribution
A. (1) and (2) only
B. (2) and (3) only
C. (1) and (3) only
D. (3) and (4) only

30. The shadow price of a scarce resource is $4.80. Which of the following statements is
correct?
A. Contribution would increase by $4.80 if one extra unit of the scarce resource was made available.
B. The change in contribution of $4.80 per extra unit of the scarce resource made available is only
valid if the organisation is prepared to pay in excess of the normal variable cost for the scarce
resource.
C. Contribution would decrease by $4.80 if one extra unit of the scarce resource was made
available.
D. The organisation should be prepared to pay $4.80 for any extra available units of the scarce
resource.
Section C- Both Questions are Compulsory and Must be Attempted

31. The government of the country of Westeros provides a free national health service for its population.
Public spending on healthcare has increased significantly over the past five years. The government is
keen to assess the benefits of such spending by looking at how well the local hospital trusts can
convert the increased resources into improved outcomes.

Each hospital trust has the following objectives for 20X9:

To deliver excellence for patients

▪ To be one of the best hospitals in the country, providing outstanding healthcare.
▪ To meet patient expectations by achieving waiting time targets.
▪ To support patient choice through a comprehensive range of services.

To deliver excellence for staff

▪ Ensuring a high quality working life.
▪ Treating each other with respect, fairness and dignity.
▪ Supporting the training needs and development of staff.

To deliver excellence for the national health service

▪ To work with other organisations to ensure the most effective local service is available within the
available financial resources.
▪ To lead the way in controlling costs and increasing efficiency in the use of its resources.

In the past, there have been difficulties measuring performance in this sector and, as a result, it is
felt that a more formal value for money framework should be implemented.

Required:
a) Discuss the performance analysis problems that may arise as a result of the local hospital
trust being given a number of non-quantifiable objectives, as stated above.
(4 marks)
b) Explain how the government may determine if the local hospital trusts are effective in
providing value for money (VFM).
(6 marks)

c) Discuss the potential conflicts that may arise as a result of the local hospital trusts
having multiple objectives.
(4 marks)

The population of Westeros can also pay for private healthcare. Health Solutions (HS) owns and runs
twenty private hospitals, all of which are located close to one of Westeros’ major cities. Each hospital is
treated as an investment centre.

Summary financial information is given on the next page for one of the hospitals, the Saving Lives
Hospital.
Summary divisional financial statements for the year to 31 December
Balance sheet Income statement
$000 $000
Non-current assets 3,200 Revenue 8,100
Current assets 1,400 Operating costs 7,200
______ ______
Total assets 4,600 Operating profit 900
______ Interest paid 280
______
Divisional equity 2,200 Profit before tax 620
Long-term borrowings 1,000 ______
Current liabilities 1,400
_____

Total equity and 4,600

liabilities _____

The cost of capital for the division is estimated at 11% each year. The Saving Lives hospital has a target
return on investment (ROI) of 15%.

Required:
d) Calculate the divisional return on investment (ROI) and the divisional residual income
(RI). Based on the figures calculated, briefly comment on the performance of the
hospital.
(6 marks)

(Total: 20 marks)
32. 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.

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

c) Comment on the advantages and disadvantages of variance analysis using planning

and operating variances.
(4 marks)

d) Calculate the mixture and yield operating variances.

(5 marks)

e) Suggest possible reasons for the mix and yield variances. (3 marks)

(Total: 20 marks)