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F5 ACCA June 2013 Exam: BPP Answers

Question 1
Text reference. Decision trees and the calculating the value of perfect information are covered in Chapter 7 of the BPP
Study Text.
Top tips. Always draw decision trees with a pencil initially, and use a ruler to make the tree as neat as possible. Clearly
label all branches of the decision tree as well as any decision / outcome points. Ensure that you include all probabilities
and cash flows on the tree diagram to assist in your calculations of expected values and to maximise your score.
Easy marks. There are easy marks available in part (c) for discussing the problems associated with the use of
expected values.

Marking scheme

(a) Decision tree diagram:
Start with decision point
Option 1 format
Option 2 format 5
Expected value and decision:
EV at A 1
EV at B 1
EV at C 2
Compare EVs at D 1

Recommendation that follows


(b) Price of perfect information:
EV with 6,000 members 2

EV with 6,500 members 2



(c) Discussion




(a) See decision tree on next page.
Net income per member, per annum
Option 1 = $720 $80 = $640 per annum
Option 2:
If costs $120 per annum = $720 $120 = $600 per annum
If costs $180 per annum = $720 $180 = $540 per annum
Expected values
EV at A = (0.5 $600 6,000) + (0.5 $540 6,000) = $3.42m per annum
EV at B = (0.5 $600 6,500) + (0.5 $540 6,500) = $3.705m per annum
EV at C = (0.4 $3.42m) + (0.6 $3.705m) = $3.591m per annum
At D, compare EV of:
Option 1 = $10.08m (3 years $3.36m per annum)
Option 2 = $10.413m ([3 years $3.591m per annum] $360k)
The expected value is highest under option 2, therefore expand the exercise studio.

F5 ACCA June 2013 Exam: BPP Answers
(b) Maximum price that GB should pay for perfect information
If membership numbers were 6,000 (with perfect information):


EV = $3.42m per annum 3 years


Less capital cost of exercise studio


Therefore, with these membership numbers, GB would choose option 1 instead.
If membership numbers were 6,500 (with perfect information):


EV = $3.705m per annum 3 years


Less capital cost of exercise studio


With these membership numbers, GB would choose option 2.
So, if membership numbers are 6,000, of which there is a 04 probability, EV will be $1008m (option 1) and if
membership numbers are 6,500, of which there is a 06 probability, then EV will be $10755m (option 2).
Therefore EV with perfect information = (04 x $1008m) + (06 x $10755) = $10485m.


EV with perfect information (as above)


EV without perfect information (part (a))


The difference of $72k represents the maximum price that GB should be prepared to pay for the information.
(c) The problems of using expected values
Expected values are used to support a risk-neutral attitude. A risk-neutral decision maker will ignore any
variability in the range of possible outcomes and be concerned only with the expected value of outcomes. We
do not know what the management of Gym Bunnies attitude to risk is, which makes it difficult to assess
whether this criterion is a good one to use in this scenario. It would be useful to see what the best case
scenario and worse case scenario results are, in order to assist decision making.
Expected values are more valuable as a guide to decision making where they refer to outcomes which will occur
many times over. In contrast, the expansion decision is a one-off decision. The actual outcome may not be
very close to the expected value calculated and the technique is therefore not very useful in this scenario.

Question 2
Text reference. The balanced scorecard is covered in Chapter 16 of the BPP Study Text.
Top tips. It is easy to get carried away in part (a) and simply write all you know the balanced scorecard the question
asks you to identify two objectives for each balanced scorecard perspective and a corresponding performance
measure for each objective. Remember to justify the use of each performance measure to avoid losing easy marks.
Present your answer in a table to ensure you answer all of the requirements and make your answer easy to mark.
Some sensible suggestions will score well in part (b).
Easy marks. There are easy marks available throughout this question provided you have a sound knowledge of the
balanced scorecard.

Marking scheme

(a) Balanced scorecard:

Identifying the four perspectives 4

Goals ( per goal) max 4

Performance measures ( per performance measure) max 4

Reasons ( per reason)




(b) Customer retention issue:

Each point discussed 2 marks




(a) Objectives and performance measures
Objective Performance measures Reason
Customer perspective
Improve level of customer service Volume of customer
Squarize transferred its call centre back to its
home country and increased training for call
centre staff. This measure will assess whether
the change has improved the level of service
provided to customers.
Increase number of new customers Volume of sales to new

Squarize made a strategic decision to withdraw
package deals from the market and offer each
product as a standalone product in a bid to
attract new customers. This measure will help to
assess whether the change has been successful.
Internal business perspective

Reduce number of contracts
cancelled due to broadband service
not working
Number of contracts
cancelled within 14 day
cancellation period

This performance measure will enable Squarize
to assess whether investigating and resolving
problems with customers broadband service
has reduced the number of contract

F5 ACCA June 2013 Exam: BPP Answers
Objective Performance measures Reason
Internal business perspective cont

Improve efficiency of call centre Average number of calls
to resolve an issue

Squarizes customer call centre located in
another country appeared inefficient with
customers reporting a high volume of calls to
resolve an issue. This performance measure will
help to assess whether the decision to move the
call centre back to the home country and offer
improved training to staff was the right one.
Innovation and learning perspective

New product introduction such as
new live-sport TV channels in 3D
Uptake of new products
(number of contracts)

Offering a new product / service at an affordable
price is likely to attract new customers. This
performance will enable Squarize to assess if
such a strategy is successful.
Increase employees satisfaction Percentage decrease in
staff turnover
Increasing employee satisfaction is likely to
increase the level of service provided to
customers, reduce the number of customer
complaints and improve the reputation of the
company which should help to attract new
This performance measure will help to monitor
the effect of many of the changes on staff
Financial perspective

Increase market share Percentage increase in
market share

The changes have largely been implemented to
increase market share through attracting new
customers and improving the companys
reputation, thus increasing revenues.
This performance measure is an effective means
of establishing whether the company has
achieved these objectives.
Increase operating profit margin Percentage increase in
operating profit

The changes have been implemented partly to
increase revenues and reduce costs. This profit
measure will enable Squarize to measure the
extent to which operating profit has increased.
Note. Other reasonable suggestions would have scored marks.

(b) Minimum contract term
Currently, Squarize offers a minimum contract term of three months. It is likely that considerable resource is
required to set up new customer accounts, and if customers then choose to leave after only three months then
the company has little time to recoup costs relating to these customers and earn a profit. The company may
consider increasing the minimum contract term to 12 months, or alternatively offering customers a loyalty
reward at certain milestones. For example, 25% off their next invoice for all customers who receive their sixth
Pay-tv boxes
Currently, pay-tv boxes are sold to customers upon setting up a new contract. Due to the economic climate, a
number of customers appear to be cancelling their contract after the minimum term (3 months) and keeping
the pay-tv box so that they can continue to watch a number of pre-set free channels on the box, free of charge.
Squarize may wish to consider loaning the boxes to customers rather than selling them at the beginning of the
Question 3
Text reference. Life cycle costing is covered in Chapter 2c of the BPP Study Text. Pricing strategies are covered in
Chapter 5. The learning curve is covered in Chapter 10.
Top tips. This question may look daunting at first glance, given the volume of information provided and the marks
available for part (a). Focus on each calculation in turn (direct material cost, direct labour cost using the learning
curve, and finally rework cost). Remember to show and label all of you workings to maximise your score.
Aim to write four or five well-explained points in part (b) and make sure that you relate each point back to the scenario.

Marking scheme

(a) Revised lifetime cost:
Direct material cost

Direct unskilled labour cost

Direct skilled labour cost:
Cumulative average time per unit for 100 units 1
Cumulative total time for 100 units

Cumulative average time per unit for 99 units

Cumulative total time for 99 units

Incremental time for 100th unit

Total time for 49,900 units

Total time for 50,000 units

Total labour cost for 50,000 units

Average labour cost per unit

Total labour cost per unit

Machine costs

Quality control costs

Rework cost

Non-manufacturing cost

Total cost

(b) Market skimming:
Explanation max 2

Discussion of each condition (max 1 per condition) max 6






F5 ACCA June 2013 Exam: BPP Answers
(a) Revised target cost

$ $
Manufacturing cost:
Direct material (W1) 21.60
Direct Labour (W2) 10.96
Machine costs 21.00
Quality control costs 10.00

Rework costs (W3)


Product development cost 25.00
Marketing cost

Non-manufacturing costs

Total cost

1 Direct material cost
Parts to be replaced by standard parts = $40 0.8 = $32
New cost of standard parts at 45% (100% 55%) = $14.40
Unique irreplaceable parts (original cost) = $40 20% = $8
New cost = $8 90% = $7.20
Revised direct material cost = $14.40 + $7.20 = $21.60
2 Direct labour
Y = axb
Where Y = cumulative average time per unit 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 / log2)
LR = the learning rate as a decimal
b = 0.152 (given in question)
The question states that a learning curve of 90% is expected to occur until the 100th unit has been
Total labour time for first 100 units
x = 100
The question states that the first unit is expected to take 45 minutes (a = 45)
Y = 45 100 0.152
= 22.346654 minutes
Therefore, labour time for 100 units = 22.346654 100 = 2,234.6654 minutes
Labour time for the 100th unit
Time for 99 units Y = 45 99 0.152
= 22.380818 minutes
Therefore, labour time for 99 units = 22.380818 99 = 2,215.701 minutes
Therefore, time for 100th unit = 2,234.6654 2,215.701 = 18.9644 minutes
Labour time for remaining 49,900 units 18.9644 = 946,323.56 minutes
Total labour time for 50,000 units = 2,234.6654 + 946,323.56 = 948,558.23 minutes
Therefore, total labour cost = (948,558.23 / 60) $34.67 per hour = $548,108.56
Average labour cost per unit = $548,108.56 / 50,000 = $10.96
3 Rework cost
Total cost = 50,000 units 10% $18 = $90,000
Average cost per unit = $90,000 / 50,000 = $1.80
(b) Market skimming
Market skimming is a pricing strategy based on charging high prices when a product is first launched in order
to maximise short-term profitability. Initially there is heavy spending on advertising and sales promotion to
obtain sales. As the product moves into the later stages of its life cycle (growth, maturity and decline)
progressively lower prices are charged.
The existence of certain conditions is likely to make this strategy suitable for Cam Co.
The product is new and different
Customers are often prepared to pay high prices to own a product that is new and different so as to be one up
on other people who do not own it. The Webcam has revolutionary audio sound and visual quality which
differentiates it from other webcams on the market.
The strength of demand and the sensitivity of demand to price is unknown
It is better from the point of view of marketing to start by charging high prices for a product and then reduce
them if the demand for the product turns out to be price elastic than to start by charging low prices and then
attempt to raise them substantially if demand appears to be insensitive to higher prices.
Cam Co has already carried out some market research to establish a price based on customers perceived
value of the product. This would suggest that there is information available about price and demand, although it
is not clear how much information is available.
The company has liquidity issues
Charging high prices in the early stages of a products life may generate high initial cash flows. Cam Co has
recently been suffering from liquidity problems so it would be ideal if sales of the webcam did generate
significant cash flows.
The product has a short life cycle
Market skimming is a popular pricing strategy for products that have a short life cycle, because of the need to
recover development costs and make a profit quickly. The webcam has a rather short life cycle (2 years).
Barriers to entry exist
High selling prices will attract competitors to the market, unless barriers to entry exist. Barriers to entry may
include high start-up costs or patent protection. It is not clear from the information whether this is the case for
Cam Co.

F5 ACCA June 2013 Exam: BPP Answers
Question 4
Text reference. Sales mix and quantity variances are covered in Chapter 12 of the BPP Study Text. Sales planning and
operational variances are covered in Chapter 13.
Top tips. You may have been surprised that this question focussed on sales variances rather than cost variances, but
the principles are very similar. In part (a), the planning and operational variances for Commodity 1 and Commodity 2
have already been calculated and the information is provided to calculate the variances for all three commodities, so
you can check your logic as you calculate the variances for Commodity 3.
The use of a proforma layout in part (b) is essential.
Easy marks. There are easy marks available in part (c) providing you understand what the variances you have
calculated in parts (a) and (b) mean for the business and refer to the scenario throughout your answer.

Marking scheme

(a) Planning and operational variances:

Operational variance


Planning variance



(b) Mix and quantity variances:

Standard profit per unit


Mix variance


Quantity variance



(c) Discussion:

1 mark per valid comment




(a) Sales price operational variance for Commodity 3
Actual sales (25,600 units $40.40)


Revised budget at market price (25,600 units $39.10)



33,280 (F)
Sales price planning variance for Commodity 3
Revised budget (25,600 units $39.10)


Original budget (25,600 units $41.60)


64,000 (A)
(b) Total sales mix variance

'Should' mix

'Did' mix






Std mix (W1)

Actual mix
Commodity 1

30,643 units

29,800 units

843 (A)


9,442 (A)

Commodity 2

28,600 units

30,400 units

1,800 (F)


7,560 (F)

Commodity 3

26,557 units

25,600 units

957 (A)


11,484 (A)

85,800 units

85,800 units

13,366 (A)

Total sales quantity variance

Actual sales

Standard sales




Standard mix

Standard mix

in units

margin $


Commodity 1

30,643 units

30,000 units

643 units (F)


7,202 (F)

Commodity 2

28,600 units

28,000 units

600 units (F)


2,520 (F)

Commodity 3

26,557 units

26,000 units

557 units (F)


6,684 (F)

85,800 units

84,000 units

1,800 units

16,406 (F)

1 Actual sales quantity in standard mix at standard profit margin
Product Actual quantity
in standard
Commodity 1 85,800 30/84 = 30,643

Commodity 2 85,800 28/84 = 28,600

Commodity 3 85,800 26/84 =



2 Standard profit margins per unit
Budgeted machine hours = (30,000 0.2) + (28,000 0.6) + (26,000 0.8) = 43,600
Overhead absorption rate = $174,400 / 43,600 = $4 per hour
Product Commodity 1 Commodity 2 Commodity 3
$ $ $
Standard selling price




Variable production costs




Fixed production overheads




Standard profit margin



(c) Sales price
The total sales price variance is $31,320 adverse. The favourable operational variance of $23,360 is offset by
the adverse planning variance of $54,680. The sales manager can only be held responsible for a variance that
he/she controls. The standard selling prices are set by a consultant, so the sales manager can only be held
responsible for the operational variance.
The favourable operational variance would indicate that the sales manager has performed well and achieved
sales prices which, on average, were higher than the market prices at the time. This is impressive given the
tough market conditions.
In contrast, the consultants market predictions were rather inaccurate, causing an overall adverse variance in
relation to sales price.
Sales volumes
The total sales volume variance is $3,040 favourable. This is made up of an adverse mix variance of $13,366
and a favourable quantity variance of $16,406. Total sales volumes were higher than expected, though it should
be noted that the increased sales relate to Commodity 2, with sales of Commodity 1 and Commodity 3 actually
being lower than expected.
Total sales variance
The total variance relating to sales is $28,280 adverse. This looks poor but is due to the inaccurate market
predications made by the consultant. Block Co is operating in tough market conditions due to the economic
recession so it is not surprising that market prices are lower than originally anticipated.

F5 ACCA June 2013 Exam: BPP Answers
Question 5
Text reference. Budgetary systems are covered in Chapter 9 of the BPP Study Text.
Top tips. This is a relatively straightforward question with a number of easy marks available. You may have decided to
answer this question first in order to score quick marks in the exam.
Remember to clearly show all workings to part (a) and relate each point back to the scenario in part (d).
Easy marks. There are easy marks available for straightforward knowledge in parts (b) and (c).

Marking scheme

(a) Budgeted costs:

Budgeted income


Repairs and maintenance


Teachers salaries 1

Capital expenditure 1

Total expected expenditure



(b) Advantages and Disadvantages:

Two advantages


Two disadvantages



(c) Zero-based budgeting:

Step 1


Step 2


Step 3



(d) Use of ZBB to Newton School:
1 mark for each point made




Budgeted income

Income from pupils registered on 1 June 2013 (given in question)


Expected income from new joiners (W1)

Total expected income

Budgeted expenditure

Repairs and maintenance ($30,000 1.03)
Salaries (W2)
Expected capital expenditure [(0.7 $145,000) + (0.3 80,000)]

Total expected expenditure

Budget deficit

1 Expected income from new joiners
Expected number of new joiners = (0.2 50) + (0.3 20) + (0.5 26) = 29
$900 income from each new joiner 29 = $26,100
2 Salaries
[($620,000 $26,000)/2] + [($620,000 $26,000 1.02)/2] = $599,940
(b) Incremental budgeting bases the budget on the current periods results plus an estimated amount for estimated
growth or inflation in the next period. It is therefore suitable for organisations that operate in a stable
environment where historic figures are reliable and are not expected to change significantly.
Incremental budgeting is very quick compared to other methods of budgeting such as zero based budgeting.
The information required to prepare a budget under this approach is also readily available.
For the above reasons, incremental budgeting is very easy to perform. This makes it possible for an employee
with little accounting training to build a budget.
Incremental budgeting is a reasonable procedure if current operations are as effective, efficient and
economical as they can be. In general however, it is an inefficient form of budgeting as it encourages slack and
wasteful spending to creep into budgets. Past inefficiencies are perpetuated because cost levels are rarely
subjected to close scrutiny.
There is also a risk that errors from one year are carried to the next, since the previous years figures are not
(c) The principle behind zero based budgeting is that the budget for each cost centre should be prepared from
'scratch' or zero. Every item of expenditure must be justified to be included in the budget for the forthcoming
The three steps of ZBB
1 Define decision packages, comprehensive descriptions of specific organisational activities (decision
units) which management can use to evaluate the activities and rank them in order of priority against
other activities. There are two types.
Mutually exclusive packages contain alternative methods of getting the same job done. The best
option among the packages must be selected by comparing costs and benefits and the other
packages are then discarded.
Incremental packages divide one aspect of an activity into different levels of effort. The 'base'
package will describe the minimum amount of work that must be done to carry out the activity
and the other packages describe what additional work could be done, at what cost and for what
2 Evaluate and rank each activity (decision package) on the basis of its benefit to the organisation. This
can be a lengthy process. Minimum work requirements (those that are essential to get a job done) will
be given high priority and so too will work which meets legal obligations. In the accounting department
these would be minimum requirements to operate the payroll, purchase ledger and sales ledger
systems, and to maintain and publish a satisfactory set of accounts.
3 Allocate resources in the budget according to the funds available and the evaluation and ranking of the
competing packages.
(d) Use of ZBB at Newton School
The current system of incremental budgeting in place at Newton School is responsible for the unexpected cash
shortages which are deterring new pupils from joining the school. Implementing ZBB would enable the school
to distinguish between necessary and discretionary expenditure, and allocate resources accordingly.
For example, although some level of sports education is needed, the extent of the different activities offered is
discretionary. As a bare minimum, it is essential that children have somewhere safe and secure to exercise.
ZBB could be used to put together decision packages which reflect the different levels of sports facilities
available to the children. For example, the most basic level could be to continue to hold all sports classes inside
in the existing gym. The next level would be to offer a combination of indoor and outdoor sports classes which

F5 ACCA June 2013 Exam: BPP Answers
would require the sports field to be maintained. Finally, the highest level would be a state of the art gym and
sports pitches. At Newton School the sports staff could prepare the decision packages and they would be
decided upon by the head teacher, who would rank them accordingly.
Similarly, although there is a need for pupils to have somewhere to eat lunch, it is not essential for children to
have a cooked meal every day.
ZBB can a take long time to implement however and would not be appropriate for all categories of
expenditure at the school. Incremental budgeting could still be used as a basis for essential expenditure such
as repairs and maintenance, since the costs of the checks and repairs needed to comply with health and safety
standards seem to stay largely the same year on year, with an inflationary increase.