Answers: K Aplan P Ublish in G

ANSWERS
KAPLAN P UBLI S H I N G 21
ACCA PM : PERFORMANCE MA NA GEMEN T
1 D
Statement (1) is correct. High volume products are not complex. Under traditional
absorption costing, those non‐complex products get the same treatment (i.e. inherit the
same amount of, say, overheads per labour hour) than those products that are complex
(and require, for example, 5 different orders from 5 different suppliers)
So, simple products should get fewer overheads than the complex ones, not the same
amount that TAC gives them indiscriminately. Conclusion: TAC over‐estimates overheads
for simple, high‐volume products.
Statement (2) is also true. Some overheads may not be linked to any clear cost driver, and
will likely be apportioned on the basis of volume (number of units.).
2 C
Neither statement is correct. Statement (1) describes the input/outflow analysis technique,
and statement (2) describes an activity‐based costing approach.
Tutorial note
Note that there is a key article on Environmental Management Accounting on the ACCA
website, in the F5 section. A thorough read of this article should be included in your revision.
The four EMA techniques you need to know about are described at the end of the article.
3 B
The only alternative use for the material held in inventory is to sell it for scrap. To use
25 tonnes on the contract is to give up the opportunity of selling it for 25 × $150 = $3,750.
The business must then purchase another 25 tonnes, and assuming this is in the near
future, it will cost $210 per tonne. Therefore, the contract must be charged with:
25 tonnes × $150 $3,750
25 tonnes × $210 $5,250
Total $9,000
4 C
Total fixed costs amount to $137,500 + $27,500 = $165,000.
C/S ratio = $275,000/$500,000 = 0.55
Breakeven sales revenue = fixed costs/C/S ratio
= $165,000/0.55
= $300,000

22 KA PLAN PUBLISHING

ANSWERS
5 D
Profit is maximised where MC = MR
MC = $70. To find MR, use demand function P = a – bX
b = change in price/change in quantity = $10/–100 = –0.1
When P = $100, X = 2,000, therefore 100 = a – (0.1 × 2,000), therefore a = 300
Therefore P = 300 – 0.1X; Therefore MR = 300 – 0.2X.
So profit is maximised where 70 = 300 – 0.2X
Therefore X = (300 – 70)/0.2 = 1,150 units and P = 300 – (0.1 × 1,150) = $185
6 B
There were 3,000 units of Product A and 4,500 units of Product B, so the proportion of joint
costs apportioned to Product A should be 3,000/7,500=40%.
Cost of sales A Cost of sales B
Direct material costs $4,000 $6,000
Direct labour costs $2,000 $3,000
Overheads $1,200 $1,800
Total $7,200 $10,800
7 D
Both statements are true. With zero‐based budgeting, there is often a temptation to focus
on the short‐term budgetary goals, rather than the long‐term objectives.
The ranking process is critically important, because it provides managers with a technique
that helps the allocation of resources to activities within responsibility centres.
8 D
Cumulative Cumulative Average Cumulative Total
Units Time per Unit Time
1 8 8
2 15.5/2 = 7.75 8 + 7.5 = 15.5

Let r = Learning Rate 8 x r = 7.75 So r = 7.75/8 = 0.96875
9 D
The throughput accounting ratio is defined as throughput/total factory costs.
Throughput = sales – all material costs = $9,000 – $3,000 = $6,000
Total factory costs + all other production costs = $2,000 + $1,500= $3,500
TA Ratio = $6,000/$3,500 = 1.70
10 C

KA PLAN PUBLISHING 23

11 B
Division A Division B
Profit (W1) 35m × 19% = 6.65m 24.4m × 15% = 3.66m
Less
Notional Interest (W2) 62m × 12% = 7.44m 28m × 12% = 3.36m

RI –0.79m 0.3m
Invest No Yes
(W1)
Operating Profit Margin = Profit/Sales
Rearranging this gives
Profit = Sales × Operating Profit Margin
(W2)
Residual Income (RI) = Profit – Notional Interest on Capital
Where Notional Interest = Capital Employed x Cost of Capital
12 D
The first statement is true: lifecycle costing may assist management in allocating resources
to non‐production activities. For example, a product which is in the mature stage may
require less marketing support than a product which is in the growth stage.
Statement 2 is also true: All costs (production and non production) will be traced to
individual products over their complete life cycles and hence individual product profitability
can be more accurately measured.
Tutorial note
There is an interesting article on the ACCA website on this topic. It provides an explanation
of target costing and lifecycle costing, with examples as to how and when you would use
these techniques.
13 A
The first statement is true, but statement 2 is not: liquidity is not relevant in an ROI
calculation.


ANSWERS
14 C
Tutorial note
Although the formulae below have been expressed in the normal way, i.e. in hours, the
calculations have been performed in minutes as this is easier.
GL1 GL2 GL3

Throughput per unit 40 12 50 8 60 6
Return per factory hour = =
Bottleneck hrs per unit 2 min 4 min 5 min
= $14 = $10.5 = $10.8

Total factory cost £120,000
Cost per factory hour = =
Total bottleneck hrs 200 hrs  60 min
= $10
Return per factory hr $14 $10.5 $10.8
Throughput accounting ratio = =
Cost per factory hr $10 $10 $10
= 1.4 = 1.05 1.08
15 C
Both statements are true.


SECTION B
16 D
Statement (1) is correct. Unlike companies, not‐for‐profit organisations do not exist
primarily for shareholders. There will be a number of stakeholders, each with their own
objectives and there may be conflict between these objectives. For example, employees
may prefer to work shorter hours but this may lead to staff shortages and, as a result,
patient health could be threatened.
Statement (2) is also correct. The local hospital trust is a not‐for‐profit organisation and
therefore its primary objective will not be to maximise profits. The trust will not generate
revenue but instead they will have a fixed budget for spending. The absence of revenue
and of a profit objective can, however, make performance evaluation difficult.
17 A
It may be possible to cut costs by changing the suppliers of these items whilst still
maintaining the desired level of quality.
18 B
This would measure if the maximum output is being achieved from the resources used.
19 D
ROI = Profit before interest and tax/Capital employed= 500/2,400 = 20.8%
Capital employed is equity + long term debt = 1,500 + 900 = 2,400
Or capital employed is total assets less current liabilities = 3,400 – 1,000 = 2,400
20 A
21 D
Both statements are true. Re statement 2: the theory of constraints is an ongoing process
of improvement, as once the bottleneck has been elevated it is probable that another
bottleneck will appear and the process will continue.


ANSWERS
22 A
Only the first statement is true. ‘Throughput’ refers to throughput contribution, which is
sales less direct material costs.
Tutorial note
There are two interesting articles on the ACCA website on this topic, written by the examiner
herself. The first article covers the basic principles of the theory of constraints and
throughput accounting. The second includes a discussion on the five focusing steps of the
theory of constraints, with examples of how these steps might be applied in practice, or in
the exam.
23 C
Step 1: Calculate the throughput return per hour of bottleneck resource and Step 2: Rank
the products in order of the priority in which they should be produced, starting with the
product that generates the highest return per hour first.

E F G
Throughput (SP – DM) 60 40 45
Hours on bottleneck resource 3 1 3
Direct Materials 20 40 15
Rank 2nd 1st 3rd

24 B
Sales revenue = 5,000 units @ $52 = $260,000
Return on investment required = $1,000,000 × 12% = $120,000
Total cost allowed = = $140,000

Target cost per unit = $140,000/5,000 = $28
25 A
26 D
 Statement (1) is incorrect – An opportunity cost does represent the cost of the best
alternative forgone, however, if it is an historic (past) cost, it would not be relevant.
 Statement (2) is incorrect – a project may result in an increase in fixed costs – e.g. the
cost of an additional manager.
 Statement (3) is correct – an opportunity saving means you are better off doing the
project compared to the next best alternative. Avoiding a cost would be an example
if this.
 Statement (4) is incorrect – a NBV is obtained by deducting depreciation (not a cash
flow) from the original cost (sunk), so is never a relevant cost.

27 A
The costs have already been incurred so are sunk.
28 C
 Material X is in constant use so the relevant cost is the current purchase price.
 Total X = 100 × 14 = 1,400
 Given there is only 60 kg of Y in stock, 140 kg must be purchased at a cost of $16/kg
 The 60 kg in stock will be used, avoiding a cost of $400, giving an opportunity saving
 Total cost for Y = 140 × 16 – 400 = 2,240 – 400 = 1,840
29 C
 Cost of skilled labour = normal cost + lost contribution = 15 + 4 = $19/hour.
 Total skilled = 100 × 19 = 1,900
 With unskilled staff, the spare capacity is effectively free as the workers will be paid
anyway.
 Only 100 hours thus needs to be paid at $10/hour = $1,000
30 $2,000
 All the variable overheads are relevant = 2,000
 None of the fixed overheads are relevant
 Total = 2,000
31 $500A
Material mix variance
Ingredient A Ingredient B Total
1 Actual kgs input 21,500 2,700 24,200
2 Actual kgs in standard 22,000 2,200 24,200
proportions
5/5.5 : 0.5/5.5
––––– ––––– –––––
3 Difference in kgs 500 F 500 A 0
––––– ––––– –––––
4 Standard cost per kg $0.50 $1.50 –
––––– ––––– –––––
5 Mix variance $250 F $750 A $500 A
––––– ––––– –––––


ANSWERS
32 $325F
Material yield variance
Standard cost of Ingredient A per bottle = 5 kg × $0.50 per kg = $2.50
Standard cost of Ingredient B per bottle = 0.5 kg × $1.50 per kg = $0.75
––––––
Standard cost per bottle = $3.25
––––––
1 Standard yield = 24,200 actual kgs/std material of 5.5 kg per bottle 4,400 bottles
2 Actual yield 4,500 bottles
3 Difference in yield 100F bottles
4 Standard cost per bottle (W4) $3.25
––––
5 Yield variance = 100 × $3.25 $325F
––––
33 C
The actual mix has used more Ingredient B and fewer Ingredient A than the standard mix.
Ingredient B is actually more expensive than Ingredient A and resulting in an adverse
variance.
34 C
All of them are correct
35 D
All of them are correct


SECTION C
36 COTTONGATE
(a) The expected value of profits is positive at $11,248 – $10,000 = $1,248. Therefore it is
worthwhile engaging Mrs Amy for the art study day.
(b) The data table shows profit values from each combination of study day sales and
contribution from stationery sales.
So, for example, for 300 people and $3 per person total sales are $8,400 (from the
scenario) – $10,000 fee = $1,600 loss.
Stationery sales $3 per person $5 per person $10 per person
Study day sales
300 people (1,600) (1,000) 500
400 people 1,200 2,000 4,000
500 people 4,000 5,000 7,500
(c) It can be seen that the expected value of the decision is $1,248 but the actual
possible outcomes range from a loss of $1,600 to a profit of $7,500.
Management can use this table to evaluate the likelihood of different scenarios
occurring and so assess risks.
For example, it can be seen that the expected value of the decision is $1,248 but the
actual possible outcomes range from a loss of $1,600 to a profit of $7,500. The
probability of making a loss is 0.4 and the probability of making a profit is 0.6
(i.e. 1–0.4). There is a probability of 0.26 of making a profit above $2,000.
Depending on the management’s attitude to risk the decision may be different. A risk
averse management may choose not to proceed as there is a substantial risk of
making a loss. If management are risk seekers or risk neutral then they are likely to
proceed despite this risk of loss as there is the opportunity to make a good profit and
the expected value is positive.
(d) Perfect information allows management to make the right decision and avoid regret
– i.e. to choose to accept the proposal when it will be profitable but to reject it when
a loss will result.
The value of perfect information is given by the expected value of the best strategy
when the information is possessed less the expected value of the best strategy when
the information is not possessed.
If it were known that study day sales were for 300 attendees and contribution from
stationery sales were $3 or $5, then the management would choose not to proceed.
Otherwise the management would proceed. The expected value would be
$490 higher ($240 + $250, Working 1) with perfect information and this is its value.
Working 1
People/contribution Profit/loss Joint probability Profit probability
($) ($)
300/$3 (3,600) 0.5 × 0.3 =0.15 (240)
300/$5 (1,000) 0.5 × 0.5 =0.25 (250)

ANSWERS
Marking scheme
Marks
(a) Correct expected value of profits (allow 1 mark if calculation error but
student shows total sales – $10,000 fee) 2
––––
(b) Table laid out with correct headings 1
9 cells with values 3
Correct profit values in cells 1
––––
5
––––
(c) Any valid comment worth 1 mark, maximum 8, including:
Table shows range of outcomes 1
Management can use table to evaluate risks 1
Examples of profit / losses by reading the table (maximum 3 marks) 1
Attitude to risk discussion (maximum 3 marks) 1
––––
8
––––
(d) Definition of Perfect Information 1
Price of Perfect information correctly calculated 2
Any other comment re usefulness of PI 1
Cost of capital not taken into account 1
(Any other valid comment award 1 mark)
––––
5
––––
Total 20
––––


37 DLP
(a) The management of an organisation need to exercise control at different levels
within the business. These levels are often characterised as being strategic, tactical
and operational. The information required by management at these levels varies in
nature and content.
Strategic information
Strategic information is required by the management of an organisation in order to
enable management to take a longer term view of the business and assess how the
business may perform during the period. The length of this long term view will vary
from one business to another, being very much dependent on the nature of the
business and the ability of those responsible for strategic decision to be able to scan
the planning horizon.
Strategic information tends to be holistic and summary in nature and would be used
by management when for example undertaking SWOT analysis.
In DLP, strategic information might relate to the development of new services such as
the provision of a home‐based vehicle recovery service or the provision of 24 hour
servicing. Other examples would relate to the threats posed by DLP’ competitors or
assessing the potential acquisition of a tyre manufacturer in order to enhance
customer value via improved efficiency and lower costs.
Tactical information
Tactical information is required in order to facilitate management planning and
control for shorter time periods than strategic information. Such information relates
to the tactics that management adopt in order to achieve a specific course of action.
In DLP, this might involve the consideration of whether to improve the quality of
service provision to its customers.
Operational information
Operational information relates to a very short time scale and is often used to
determine immediate actions by those responsible for day‐to‐day management.
In DLP Ltd, the manager at each location within DLP would require information to
relating the level of customer sales, the number of vehicles serviced and the number
of complaints received during a week. Operational information might be used within
DLP in order to determine whether staff are required to work overtime due to an
unanticipated increase in demand, or whether operatives require further training
due to excessive time being spent on servicing certain types of vehicles.
(b) One of the main qualitative benefits that may arise from an investment in a new IT
system by DLP is the improved level of service to its customers in the form of
reduced waiting times which may arise as a consequence of better scheduling of
appointments and inventory management. This could be assessed via the
introduction of a questionnaire requiring customers to rate the service that they
have received from their recent visit to a location within DLP according to specific
criteria such as adherence to appointed times, time taken to service a vehicle,
cleanliness of the vehicle and attitude of staff.


ANSWERS
Alternatively, a follow‐up telephone call from a centralised customer services

department may be made by DLP’ personnel in order to gather such information.
Another qualitative benefit may arise in the form of competitive advantage.
Improvement in customer specific information and service levels may give DLP a
competitive advantage.
Likewise improved inventory management may enable costs to be reduced thereby
enabling a ‘win‐win’ relationship to be enjoyed with customers.

Marking scheme
Marks
(a) For each level, one mark for definition and two for relevant 12
example(s)/illustration(s) related to scenario
(b) Each valid comment 1 mark, and examples 1 mark, maximum 8 8
–––
Total 20
–––


38 LEATHERBOUND
(a) Materials
Arguments in favour of allowing a revision
The nature of the problem is outside the control of the organisation. The supplier
went in to liquidation; it is doubtful that S Limited could have expected this or
prevented it from happening.
The buyer, knowing that budget revisions are common, is likely to see the liquidation
as outside his control and hence expect a revision to be allowed. He may see it as
unjust if this is not the case and this can be demoralising.
Arguments against allowing a budget revision
There is evidence that the buyer panicked a little in response to the liquidation. He
may have accepted the first offer that became available (without negotiation) and
therefore incurred more cost than was necessary.
A cheaper, more local supplier may well have been available, so it could be argued
that the extra delivery cost need not have been incurred. This could be said to have
been an operational error.
Conclusion
The cause of this problem (liquidation) is outside the control of the organisation and
this is the prime cause of the overspend. Urgent problems need urgent solutions and
a buyer should not be penalised in this case. A budget revision should be allowed.
Labour
Arguments in favour of allowing a revision
The board made this decision, not the departmental manager. It could be argued that
the extra cost on the department’s budget is outside their control.
Arguments against allowing a budget revision
This decision is entirely within the control of the organisation as a whole. As such, it
would fall under the definition of an operational decision. It is not usual to allow a
revision in these circumstances.
It is stated in the question that the departmental manager complained in his board
report that the staff level needed improving. It appears that he got his wish and the
board could be said to have merely approved the change.
The department will have benefited from the productivity increases that may have
resulted in the change of policy. If the department takes the benefit then perhaps
they should take the increased costs as well.
Conclusion
This is primarily an operational decision that the departmental manager agreed with
and indeed suggested in his board report. No budget revision should be allowed.
An alternative view is that the board made the final decision and as such the policy
change was outside the direct control of the departmental manager. In this case a
budget revision would be allowed.

ANSWERS
(b) Total sales variances
Sales price variance = (Actual SP – Std SP) × Act sales volume
= (16.40 – 17.00) × 176,000
= $105,600 (Adverse)
Sales volume variance = (Actual sales volume – Budget sales volume) ×
Std contribution
= (176,000 – 180,000) × 7
= $28,000 (Adverse)
(c) Market size and share variances
Market size variance = (Revised sales volume – budget sales volume) ×
Std contribution
= (160,000 – 180,000) × 7
= $140,000 (Adverse)
Market share variance = (Actual sales volume – revised sales volume) ×
Std contribution
= (176,000 – 160,000) × 7
= $112,000 (Favourable)
(d) Comment on sales performance
Sales price
The biggest issue seems to be the decision to reduce the sales price from $17.00
down to $16.40. This ‘lost’ $105,600 of revenue on sales made compared to the
standard price.
It seems likely that the business is under pressure on sales due to the increased
popularity of electronic diaries. As such, they may have felt that they had to reduce
prices to sustain sales at even the level they achieved.
Volume
The analysis of sales volume into market size and share shows the usefulness of
planning and operational variances. Overall, the sales level of the business is down by
4,000 units, losing the business $28,000 of contribution or profit. This calculation
does not in itself explain how the sales department of the business has performed.
In the face of a shrinking market they seem to have performed well. The revised level
of sales (allowing for the shrinking market) is 160,000 units and the business
managed to beat this level comfortably by selling 176,000 units in the period.
As mentioned above, the reducing price could have contributed to the maintenance
of the sales level. Additionally, the improved quality of support staff may have helped
maintain the sales level. Equally the actions of competitors are relevant to how the
business has performed. If competitors have been active then merely maintaining
sales could be seen as an achievement.
S Ltd should be concerned that its market is shrinking.

Marking Scheme
Marks
(a) Materials discussion 3
Conclusion 1
Labour discussion 3
Conclusion 1
–––
Maximum 8
–––
(b) Sales price variance 2
Sales volume variance 2
–––
Maximum 4
–––
(c) Market size variance 2
Market share variance 2
–––
Maximum 4
–––
(d) Comment on sales price 2
Comment on sales volume 2
–––
Maximum 4
–––
Total 20
–––


Answers: K Aplan P Ublish in G

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ANSWERS

22 KA PLAN PUBLISHING

KA PLAN PUBLISHING 23

24 KA PLAN PUBLISHING

GL1 GL2 GL3

= $14 = $10.5 = $10.8

KA PLAN PUBLISHING 25

26 KA PLAN PUBLISHING

Target cost per unit = $140,000/5,000 = $28

KA PLAN PUBLISHING 27

28 KA PLAN PUBLISHING

KA PLAN PUBLISHING 29

30 KA PLAN PUBLISHING

KA PLAN PUBLISHING 31

32 KA PLAN PUBLISHING

Alternatively, a follow‐up telephone call from a centralised customer services

KA PLAN PUBLISHING 33

34 KA PLAN PUBLISHING

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36 KA PLAN PUBLISHING

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