2011 WINTER EXAMINATION

Module Code: PMC

Module Title: Performance Measurement And Control

Programme(s): MSc/MBA Finance

Student ID: Seat Number:

Exam Date: Exam Duration:

12 January 2011 15 minutes reading time 3 hours writing time

No. of Pages (including cover sheet): 5

ALLOWABLE MATERIALS
Open Book Examination Non-programmable calculator permitted Statistical tables are provided with this examination

INSTRUCTIONS TO CANDIDATES
1. SECTION A: Compulsory question. SECTION B: Answer TWO out of THREE questions. 2. Marks for each question are given in brackets. 3. This exam is worth 50% of the final marks for this module. You are required to achieve a minimum of 40% in this examination to pass. 4. All answers must be written in the answer booklet provided.

This paper MUST NOT BE REMOVED from the examination venue

SECTION A: Compulsory Question

QUESTION 1 Suppose you have recently been appointed as the financial controller of a medium-sized company, PackMaster Limited, which manufactures packaging materials. The head office of the company is located in London but manufacturing is carried out in two divisions, one in Birmingham and the other in Manchester. The company has a target return on capital of 10%. The end of year accounting data has recently been made available and the finance department at the head office have produced profitability figures for the two divisions, calculations of which are shown in the table below. The CEO of the company, Bill Bowden, who is not trained in finance and accounting, is concerned about the relatively poor return on capital employed for the Birmingham division, particularly as this division has recently invested in new plant and machinery, and has asked you to analyse the relative performance of the two company divisions and report back to him. Manchester Division Sales: External Customers Other Divisions Variable costs: Production Selling and distribution 2,200,000 80,000 2,280,000 410,000 180,000 590,000 1,690,000 320,000 210,000 260,000 160,000 950,000 740,000 3,200,000 23.13% Birmingham Division 200,000 1,810,000 2,010,000 236,000 82,000 318,000 1,692,000 730,000 112,000 164,000 290,000 1,296,000 396,000 4,400,000 9.00%

Contribution Less Fixed costs: Production Selling and distribution Administration Apportionment of headquarters costs

Divisional operating profit Divisional capital employed Required on capital employed

Required Write a brief report on the performance of the two company divisions, aimed at the CEO, Bill Bowden, of PackMaster Limited. In your report, ensure that you include the following: a) calculations showing how the returns on capital employed (ROCE) have been made for the two divisions and explain how these measures might be improved, restating the divisional ROCEs, within the constraints of the financial data given; b) show calculations of residual income (RI) for each division and discuss the divisional performance revealed by applying this measure, and explain the advantages and disadvantages of using RI as a divisional measure of performance;
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c) as a further part of your report, incorporate calculations of the following performance indicators, as percentages, of the two divisions: (i) variable production costs: sales revenue (ii) variable selling and distribution costs: sales revenue (iii) contribution: sales revenue (iv) fixed production costs: sales revenue (v) fixed selling & administrative costs: sales revenue (vi) fixed administrative costs: sales revenue (vii) controllable operating profit: sales revenue (viii) sales: capital employed d) In the conclusions to your report discuss the limitations of the inferences that may be drawn from the comparison of the financial performance of the two company divisions of PackMaster Limited. Total of Section A: 50 marks

SECTION B: Answer TWO questions only

QUESTION 2 A curtain manufacturer which produces a standard size unit prepares a detailed variance report at the end of each accounting quarter. The information given below relates to this years third quarter. Standard data per unit: Direct materials Direct labour 5 square metres @ 2.55 per square metre 3 hours @ 5.20 per hour

Revised per unit budgeted Information for the 3rd quarter: Direct materials Direct labour 3 square metres @ 2.80 per square metre 4 hours @ 4.00 per hour

Actual data for the 3rd quarter: Production Direct materials Direct labour Required (a) Compute the planning and operating variances for both direct materials and direct labour. (9 marks) (b) Critically discuss why it is considered desirable to separate the planning and operating variances and compare and contrast this approach to the conventional approach of comparing original budget against actual results. (8 marks) (c) Planning and control activities, in which departmental budgets play a major role, are often undertaken within a structure known as responsibility accounting (RA). Explain what you understand by the concept of RA, and describe at least three potential difficulties encountered when companies operate such a system. (8 marks) 48,000 units 200,000 square metres costing 600,000 135,000 hours costing 810,000

Total 25 marks

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QUESTION 3 A company makes two components, A and B, which are inputs to the manufacture and assembly of printing presses. Information on the unit-volume and costs of manufacture and the overhead costs for these two components for the previous month is given below: Product parts Output in units: Cost per unit: () Direct material () Direct labour Total machine hours Number of production runs Orders executed Number of shipments A 13,000 45 30 B 15,000 55 25

2,500 65 135 40

2,300 75 145 35

The two components, A and B, are normally produced in production runs of 200 units, respectively. The company has been using a machine-hour rate to absorb the overhead costs. These breakdowns of these overhead costs for the month are given in the table below: Annual budgeted cost () 360,000 99,400 25,900 136,800 26,250 668,350

Overhead Machine department costs setup costs Inspection/Quality control Material handling Delivery

Cost driver Machine hours Number of production runs Number of production runs* Orders executed Number of shipments * Quality control inspections are made once per production run.

Required: (a) Apply the activity based cost information and compare the overhead cost per unit in absolute values and in percentages of overhead costs for the two components, A and B. (12 marks) (b) Compare the absorption of overhead costs for the two components, A and B, using the number of units (the traditional approach to overhead cost absorption) and the percentages of overhead costs for the two components. (5 marks) (c) Explain the implications of the differences between the unit overhead costs in percentages you have been required to calculate in (a) and (b) above. (8 marks)

Total 25 marks

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QUESTION 4 Many organisations are now using the balanced scorecard as a device for assessing managerial performance. Required (a) Explain what you understand by the balanced scorecard and critically discuss four perspectives of this approach to performance measurement. (7 marks) (b) With respect to the balanced score card approach to performance measurement, explain the difference between lag measures and lead measures. (6 marks) (c) Discuss what you would regard as three important pitfalls to avoid when implementing a balanced scorecard approach to performance measurement. (6 marks) (d) Describe the three principal internal processes that can be included within the internal business perspective of a balanced scorecard performance measurement system. (6 marks) Total 25 marks Total of Section B: 50 Marks

END OF QUESTION PAPER

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