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ACCA

Paper F5
Performance Management
Revision Mock Examination
December 2014
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: rerevise 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.

Interactive World Wide Ltd, August 2014


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Section A
1. A

2. C

3. C

4. D

5. A

6. B

7. C

8. B

9. D

10.

11.

12.

13.

Target cost $120, Cost gap $20

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14.

15.

16.

17.

18.

19.

$683,761

20.

$4.30

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Section B
Question 1

Tutorial help and key points


This is a fairly straightforward performance evaluation question, similar to
questions that have been asked many times in past F5 exams. Although the
calculations required are simple, make sure you show how you have performed
them. The emphasis on this type of question is on interpretation key to the
role of the management accountant is the ability to interpret the information
they produce for other managers, and this is what the examiner is testing here.
You can make life easier for your marker by using headings for the points you
make.
Although not mentioned in the question, you should recognise the non-financial
headings required in part (b) as those of the balanced scorecard. This is a key
model for performance management make sure you are adept at using it!

Marking scheme
(a) One mark per reasonable point, 1 mark for a relevant correct ratio, 2 max
per heading, up to 9 marks.
(b)1 mark per sensible point, 2 max per heading, up to 6 marks.
(max 15 marks)

(a)
The financial performance of the office manager:
Sales revenue
Sales revenue has increased by 10.5% [(420 380)/380] over the previous year's
figure. Given that inflation was running at only 5% for the period, this represents a
real-terms increase in revenue. This indicates good marketing performance by the
office.
Net profit
The net profit has increased by 5.3% during 2010, which initially seems to be a
good performance. However, closer examination of the figures show that net profit
margin fell from 25% in 2009 to only 23.8% in 2010. This indicates a slight
worsening in control over operating costs by the office during 2010.
Cash balance
The average cash balance has increased by 20% during 2010, which indicates good
and improving liquidity for the office. Again, since this is higher than the inflation
rate of 5%, there has been a real-terms increase in liquidity.

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Trade receivables
Trade receivables days have remained below the industry average for the office,
which suggests good performance by the credit collection department of the office.
However, care should be taken to ensure that in reducing the amount of trade
credit offered by 12% over the year, the office does not damage its
competitiveness by alienating customers that prefer to take all trade credit offered
to them.

(b)
The non-financial performance of the office manager:
(i) Customer satisfaction
The number of customers has fallen alarmingly during the year, down by over
26%. This is particularly worrying as the consultancy market is expanding for
the office. In 2009 the total market size was 475 clients [190/40%]; in 2010
the total market size was 560 clients [140/25%]. The office manager needs to
quickly establish and address the reasons for this loss of competitiveness if the
office market share is to be restored.
(ii) Internal process efficiency
The client error rate may look low at only 4%, but this represents a 100%
increase (ie a doubling) of the error rate from 2009. Coupled with the fact that
the average time taken to complete client assignments has risen by 25%, this
seems to indicate a deterioration in the internal process efficiency of the office.
This could also account for some of the fall in competitiveness of the office
indicated above.
(iii) Learning and growth
The average level of experience of consultants in the office has declined during
2010, as indicated both by the average amount of training offered to office
employees which has fallen by 25% during the period and also by the rise of
25% in staff turnover at the office. These may help to account for the increase
in error rate mentioned above.

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Question 2

Tutorial help and key points


Part (a) now discusses the basic features of another budgeting type ZBB,
detailing the process, key advantages and some limitations, all to be written in a
memo format.
Part (b) requires basic application of the highlow method to forecast
expenditure for the next year.

Marking scheme
(a)

See within the answer

(b)

(a)
Memo:
[1 mark for presentation]
To: Manager of OPD
From: Management Accountant
Date: aa/bb/cccc
Subject: Zero-based budgeting (ZBB)
Zero-based budgeting is an approach to modern budgeting in service organisations
where a budget is prepared from scratch. Every item of expenditure has to be
justified in its entirety before approval is granted in the budget.
ZBB ignores the assumption that next years activities will remain the same as the
last year with the same level or with same volume.
If we look at the last five years results of OPD it is obvious that activities were
widely fluctuating in the past.
Therefore every aspect of the budget is to be examined in terms of its costs and
benefits associated, and focus is always to select any alternative better than the
current one.
[1 mark for description]

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Steps involved in ZBB:


[1/2 mark for each step]
1.Prepare decision packages.
2. Rank decision packages in order of importance, starting with mandatory
requirements.
3.Consider funding.
4.Utilise funds in order of the ranking until exhausted.
Advantages of ZBB:
[2 marks]
1.Emphasis on future need, not past actions.
2.ZBB eliminates past errors that may be perpetuated in an incremental
analysis.
3.A positive disincentive for management to introduce slack into their budget.
4.A considered allocation of resources in order of priority.
5.It encourages cost reduction and control.
Limitations of ZBB:
[2 marks]
1.ZBB can be costly and time consuming.
2.It may lead to increased stress for management.
3.It may re-invent the whole wheel each year.
4.It may lead to short term planning.
I hope that this has been a helpful summary of ZBB. If you have any questions on
this or any other matters please dont hesitate to contact me.
(b)
Highest
Lowest
Difference

Patient numbers
72,000
48,000
24,000

Expenditure ($)
82,000
80,000
2,000

Variable cost per patient = $2,000/24,000 = $0.0833 [1 mark]


Fixed cost = $82,000 ($0.0833 x 72,000)
= $76,000 (approx.)
Forecast expenditure for 65,000 patients:
Fixed cost
Variable cost ($0.0833 x 65,000)
Total

$76,000
$5,417
$81,417

[1 mark]

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Question 3

Tutorial help and key points


A very likely exam question in decision making under uncertainty as it has not
been examined yet under revised syllabus.
First of all you have to draw up a decision tree, clearly showing the decision
point and all possible courses of actions and outcomes.
Then you have to calculate the expected values of each outcome under all
courses of actions, using joint probabilities.
Then you will select the highest expected value to go with, as recommendation
to the management.

Marking scheme
Drawing of decision tree with complete possibilities
and proper labelling

6 marks

Calculation of expected values of all possible outcomes

4 marks
(10 marks)

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Further demand 60%

Poor 70%
B
No more demand 40%

Further demand 25%


Adverse

Good 30%

D
No more demand 75%

Dont advertise

Poor 70%

Good 30%

Analysis:
Point
A
B
C
D
EV of Advertise px =
E
F
EV of Dont Advertise px =

Tickets
7,000
5,000
13,000
10,000

Profit (x)
$000
20
(35)
135
75

p
0.42
0.28
0.075
0.225

5,000
10,000

(20)
90

0.7
0.3

px
$000
8.4
(9.8)
10.125
16.875
25.6
(14)
27
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Therefore the company should advertise as it generates the highest expected value.

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Question 4

Tutorial help and key points


Target costing questions appear in F5 exams on a semi-variable basis, mainly to
test basic management accounting knowledge and skills.
In this question we have to apply basic steps on target costing along with some
adjustments of losses, idle time, highlow method, etc. which are fundamental
management accounting skills.

Marking scheme
Raw materials:
Part 1
mark

Part 2

mark

Delivery charge

mark

Other materials

mark

Labour

1 marks

Production overheads:
Variable

1 marks

Fixed

1 marks

Total current expected cost

1 mark

Calculation of target cost


Target selling price

mark

Target profit required

1 mark

Target cost

1 mark
(10 marks)

Expected current cost per stereo:


Raw materials:
Part 1
Part 2
Delivery charge
Other materials
Labour(2 hours /0.8 x $8 per hour)
Production overheads (see W1)
Variable ($2.00 x 2 hours)

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$
10.00
15.00
1.50
5.00

31.50
20.00

4.00

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Fixed($1.00 x 2 hours)
Total current expected cost

2.00

6.00
57.50

Calculation of target cost


Target selling price
Target profit required ($50 x 10%)
Target cost

$50.00
($5.00)
$45.00

As we can see that our current expected cost per unit is greater than the target
cost, so cost gap of $12.50 exists and the business needs to investigate as to how
this cost gap maybe closed. Cost control is a continuous process, therefore
management should review the production process and apply various steps
involved in closing the cost gap so as to further reduce the cost if possible, without
any deterioration in quality.

W1
Highlow method:
Variable rate per hour:

$7,000 $6,200
2,300 hrs 1,900 hrs

$2.00 per hour.

Fixed overheads = Total overheads Variable overheads.


At 1,900 hours = $6,200 - $3,800 ($2.00 x 1,900 hours) = $2,400.
Fixed overheads absorption rate:

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$2,400
2,400 hours

$1.00 per hour.

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Question 5

Tutorial help and key points


This question addresses two key topics, namely performance management and
standard costing mix and yield calculations. It is important that you can
calculate mix and yield variances for the F5 exam, and also comment upon their
implications for performance management.
In part (a) of the question, make sure you bear in mind the controllability of
each of the variances in the question. There are also marks available for
questioning the suitability of using a standard costing system of control for JustCheez-Spud, due to the variability of each potato served to the customers.
Some students find calculations such as those in part (b) of the question
difficult; if this applies to you, then practice these questions, thinking through
what you are doing, until you can do them confidently. Also keep going there
are marks available throughout the answer, so even if you make a mistake or
two you can still pick up enough marks to pass the question.

Marking scheme
(a)
(i) 1 mark per point, 2 max per variance, up to 4
(ii) 1 mark per point, 1.5 max per variance, up to 3
max 7 marks
(b)
(i) Mix variance: 4 marks
(ii) Yield variance: 4 marks
8 marks
(15 marks)

(a)
(i) The performance of the kiosk operator in managing product cost:
The food material cost variances are getting more and more favourable each
month, which suggests the kiosk operator is improving control over food
product cost:

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The mix variance is favourable, and getting more so. A mix variance is
caused by substituting one material for another. This is controllable by
the kiosk operator as he assembles the product for the customer from
the three food ingredients used.

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The yield variance is also favourable, and getting more so. A favourable
yield variance suggests that more products are being produced from a
given level of food input than expected. This could be due to the operator
being more careful with the food he uses, wasting less of it than
expected, which would be a good thing.

The price variance has become favourable. A


suggests that less is being paid to suppliers
expected. This could be due to keen price
between the kiosk operator and the supplier of

favourable price variance


for food ingredients than
negotiation taking place
food.

(ii) The performance of the kiosk operator in managing product quality:


Mr Khan has experienced customer complaints regarding the quality of the
potatoes served from the kiosk. This could be linked to the reported
variances in the following ways:

A favourable mix variance is caused by substituting cheaper materials for


more expensive ones in the product served to the customer. Cheese and
butter is more expensive per kilogram than potato, therefore by using
more potato and less cheese and butter per unit a favourable mix
variance is caused. However, cheese and butter are the ingredients that
make bland baked potato taste good - therefore the favourable mix
variance is likely to be at the expense of product quality.

A favourable yield variance is caused by achieving more units of sold


product to customers for a given level of food materials than expected.
This could be due to the kiosk operator 'shorting' the portions of potato,
cheese and butter in each unit sold to a customer, therefore leaving the
customer feel upset that they have not gotten the product size that they
have paid for.

A favourable price variance could be achieved by buying cheaper types of


raw material than expected from suppliers. This is particularly important
in the cheese used in the baked potatoes. Cheese which is cheaper per
kilogram than that expected in the standard cost card is likely to not
taste as good as that expected by the customer.

(b)Material variances
SQ(SM) x SP
P:1420 x 0.32
B:1420 x 0.15
C: 1420 x 1.73
AQ(SM) x SP
P:836 x .4/.615 x 0.8
B:836 x .015/.615 x 10
C:836 x .2/.615 x 8.65
AQ(AM) x SP
P:578 x 0.8
B:18 x 10
C: 240 x 8.65
AQ(AM) x AP
Price variances

P
454.4

B
213

C
2456.6

Total
3124

Yield variance = 3124 2990.57 = 133.43Fav


434.99

203.9

2351.67

2990.57

Mix variance = 2990.57 2718.4 = 272.17Fav


462.4

180

2076

2718.4

Price variance = 2718.4 2682.8 = 35.6Fav


491.3
28.9 A

175.5
4.5 F

2016
60 F

2682.8
35.6 F

Note: Material price variance is only calculated to fill in the whole proforma of
variances, it was not required in the question.

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