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Paper F5
Performance Management
Revision Mock Examination
March 2016
Question Paper

15 minutes Reading and planning

Time Allowed
3 hours Writing

ALL questions are compulsory and MUST be attempted.

Formulae are at the end of the paper.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.

Interactive World Wide Ltd, January 2016

All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior written permission of Interactive
World Wide Ltd.

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Section A ALL FIVE questions are compulsory and MUST be

1. Sierra Limited has recorded the following data in the two most recent periods.

Total costs of Volume of

production ($) production (units)
135,000 700
183,000 1,100

What is the best estimate of the companys fixed costs per period?

A. $135,000
B. $132,000
C. $51,000
D. $48,000

2. Absorption costing is related to with which of the following items of cost?

A. Direct materials
B. Direct labour
C. Fixed costs
D. Variable and fixed costs

3. Newells current level to breakeven is 6,000 units per annum. The selling price is $90
per unit and the variable cost is $40 per unit.

What are the companys annual fixed costs?

A. $120
B. $240,000
C. $300,000
D. $540,000

4. An office manager of Harris Plc wishes to minimise the cost of telephone calls made.
40% of calls in peak hours cost $1 each and the remainder of such calls cost $1.50
each. 30% of calls at other times cost $0.80 each, 50% of them cost $0.90 each, and
20% of them cost $1 each. This proportion cannot be varied, though the total number
of calls made in peak hours and of calls made at other times can be.

If X = the numbers of calls made each day in peak hours, and Y = the number
of calls made each day at other times, the official managers objective is to:

A. Minimise 120X + 89Y

B. Minimise 120X + 90Y
C. Minimise 130X + 89Y
D. Minimise 130X + 90Y

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5. Usman Co is considering its option with regard to a machine which cost $120,000 four
years ago.

The machine can generate scrap proceeds of $150,000 if the firm wants to sell. This
machine would generate net income of $180,000 if used on a project.

The current replacement cost for this machine is $210,000.

The relevant cost of the machine on using the project is:

A. $120,000
B. $150,000
C. $180,000
D. $210,000

6. Bruno purchased some equipment several years ago for $50,000. Its net book value
is now $10,000. The equipment is no longer in normal use and it could be sold now for

Bruno has been offered a one-off contract which would make use of this piece of
equipment for six months. After this time the equipment would be sold for $5,000.

What is the relevant cost of the equipment to the contract?

A. $8,000
B. $3,000
C. $5,000
D. $10,000

7. Mr Branning plans to produce and sell 140 units of a product.

Fixed costs absorbed are $20 per unit

Contribution per unit is $24.

What is the margin of safety?

A. 14,000 units
B. 11,667 units
C. 28 units
D. 23 units

8. A flexible budget describes which of the following?

A. A budget which shows variable production costs only.

B. A monthly budget which is changed to reflect the number of days in the month.
C. A budget that shows sales revenue and costs at different levels of activity.
D. A budget that is updated halfway through the year to incorporate actual results for
the first half of the year

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9. Jack Lee is considering a project and has asked you for help. This project requires 400
kg of raw materials X. The Company has 150 kg of X in stock that were purchased six
months ago for $55 per kg. The company no longer has any use for X. The inventory
of X could be sold for $40 per kg. The current purchase price for X is $53 per kg.

What is the total relevant cost of raw material X for the project?

A. $17,950
B. $19,250
C. $21,200
D. $21,500

10.The Sales Director has prepared a manpower plan to ensure that sales quotas
for the forthcoming year are achieved. This is an example of:

A. Strategic planning
B. Tactical planning
C. Operational planning
D. Corporate planning

The following information is given for questions 11 and 12 below.

A company produces a product that requires two materials, Material A and Material B.
Details of the material quantities and costs for August are given in the table below.

Material A Material B
Budget Actual Budget Actual
Quantity (kg) 24,000 23,000 36,000 38,000
Cost per kg ($) 2.40 2.30 1.30 1.38

Budgeted and actual output of the product for August was 12,000 units.

11.The material mix variance for August is:

A. $1,540 Favourable
B. $1,540 Adverse
C. $1,288 Favourable
D. $1,288 Adverse

12.The material yield variance for August is:

A. $200 Adverse
B. $1,740 Adverse
C. $200 Favourable
D. $1,740 Favourable

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13.Details of two products are as follows:

Selling price per unit ($) 180 150
Direct material cost per unit ($) 120 100
Output per hour (units) 80 90

Factory costs are $46,000 per day. There are 10 hours available on the bottleneck
machine every day.

Throughput accounting ratio for product A will be:

A. 1.04
B. 2.04
C. 3.04
D. 4.04

14.Which of the following are methods used in environmental management


Flow cost accounting

Input/output method
Life-cycle costing
Activity based costing

A. (i) and (ii)

B. (iii) and (iv)
C. (i), (ii) and (iii)
D. All of the above

15.ABC Plc uses an activity based costing system. Three products are manufactured,
details of which are as follows:

Annual Production Batch size Machine set-

(units) (units) ups per batch
Product X 90,000 100 5
Product Y 70,000 35 7
Product Z 60,000 30 3

What is the machine set-up cost per unit of product Z (to the nearest cent) if
the annual machine set-up costs are $250,000?

A. $1.20
B. $1.02
C. $66.22
D. $2.00

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16.Designs plc has just developed a new product, XL. It took 36 minutes to produce the
first batch of five XLs. Designs estimates that it can enjoy an 85% learning effect on
production of the product. In order to set a price for the product, a standard cost card
is being formulated.

How much time per unit should be included for the production of the 201st to
250th items?

A. 7.20 minutes
B. 2.88 minutes
C. 3.10 minutes
D. 2.26 minutes

The following information relates to questions 17 and 18.

Jones Ltd operates a standard absorption costing system. The following information has
been extracted from the standard cost card for one of its products:
Budgeted production 1,500 units

Direct material cost: 7 kg $4.10 = $28.70 per unit

Actual results for the period were as follows:

Production 1,600 units

Direct material (purchased and used): 12,000 kg for $52,200

It has subsequently been noted that due to a change in economic conditions the best price
that the material could have been purchased for was $4.50 per kg during the period.

17.Calculate the material price planning variance.

A. $4,200 Adverse
B. $4,800 Adverse
C. $4,480 Adverse
D. $4,520

18.Calculate the operational material usage variance.

A. $3,600 Adverse
B. $3,280 Adverse
C. $4,200 Adverse
D. $3,820 Adverse

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19.Most companies have a Management Information System (MIS) set up to monitor
actual monthly spending against budgeted monthly spending.

This is for the purposes of which of the following?

A. Control
B. Planning
C. Decision-making
D. All the above

20.A Transaction Processing System is:

A. A basic information system set-up to record data on debits and credits

B. A basic information system set-up to provide standardised reports based on internal
C. A more advanced information system set up to include external data as an aid to
D. An information system that allows summary reports to be provided easily.

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Section B ALL FIVE questions are compulsory and MUST be

1. Uni-craft is a toy manufacturer producing more than 30 product lines for disabled
children. The products are specialised and in high demand all over Europe. Recently
they are facing stronger competition due to increased flux of products from the Chinese
market. Uni-craft is considering introducing an ABC system in an effort to build a fair
cost structure and a more competitive price for its products. Details of its three
products from the latest budget working papers are set out below:

Product Barugan Jen-10 Fonic

Annual production (units) 1,000,000 2,000,000 500,000
Selling price per unit $4.75 $3.70 $5.00
Direct material/unit $1.00 $0.50 $0.75
Direct Labour/unit $2.50 $1.50 $1.75
Batch size (units) 1,000 500 250
Machine hrs per unit 2 3 4
Set ups per batch 4 4 6
Purchase orders per batch 2 3 1

Three cost pools have been identified. Their costs for the year are as follows:

Machine running costs: 1,400,000
Set up costs: 1,500,000
Purchase order costs: 600,000

Currently, Uni-craft operates an absorption costing system where all overheads are
absorbed based on machine hours.


Calculate the total cost per unit for each product using:

the current absorption costing method; (5 marks)

an activity-based costing method based on appropriate cost drivers for

each cost pool. (10 marks)

(15 marks)

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2. Veronica runs a small business performing beauty services at customer homes in a
small spa town in central England. At present she offers make-up services to ladies
getting ready for a special day, such as weddings or parties, and historically she has
always been very busy her work diary has been consistently full of bookings.

Lately, however, competition in the town's beautician market has become more intense
since a large hairdressing salon in the town centre has started offering make-up
services. In response to this, Veronica has decided to diversify into offering manicure
services as well as make-up services. She has asked for your help in deciding how to
price her manicure services.

Together you and Veronica have performed some market research into home manicure
services in the town. This research suggests that the estimated demand for manicure
services per quarter at two different price points are as follows:

Price $30 per Price $40 per

service service

Demand Sales Probability Demand Sales Probability

volume volume
Low 100 0.2 Low 50 0.2
Medium 200 0.5 Medium 150 0.5
High 300 0.3 High 250 0.3

Further information relating to the manicure services is as follows:

Variable material costs $12 per service.

Variable labour and travel costs $7 per service.
Fixed overheads per service for manicure equipment are $280, which will be
written off immediately.
Advertising manicures will cost $400 at a price point of $30 per service, and $600
at a price point of $40 per service.


Calculate the expected profit for the manicure services at a price point of:

(i) $30 per service;

(ii) $40 per service. (6 marks)

Explain briefly maximax, maximin and expected value decision rules, with
reference to risk attitudes. (4 marks)

(10 marks)

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3. Southbury Estate is a housing department within a large social services organisation
run by the government from taxpayers money. For many years the budgets have been
set by adjusting for any known changes in activity levels (mostly population
statistics) and adding an inflation adjustment to the previous years expenditure. Up
until now, only senior management have been involved in the budgeting process.

The newly appointed management accountant in Southbury is insisting on a zero-

base approach when the next budget is set, as she believes that recent fluctuations,
like immigration, opening of a number of good schools and a newly constructed hospital
nearby may affect demography of the locality and past history may not provide a
reliable estimate of what is to occur in the future.


Explain the main features of incremental budgeting and outline the

problems that can occur when using it. (5 marks)

Explain the main features of zero-based budgeting and outline the

problems that can occur when using it. (5 marks)

Explain how the use of zero-based budgeting can motivate employees.

(5 marks)

(15 marks)

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4. Manhattan Engineering (ME) is engaged in manufacturing metal parts for industrial
use. It operates a standard marginal costing system for management accounts. The
newly appointed managing director of ME having very little financial background has
received a variance report for the quarter 3, extracts of which are shown below:

Sales price $13,500 A Sales volume $28,950 F

Direct labour rate $906.25 A Direct labour $2,187.5 F
Direct materials price $1,448 F Direct materials $80 A
Variable overhead rate $453 A Variable ohead $1,093.75 F
Fixed ohead $1,000 A

Other financial details of the company are as follows:

Budgeted output and sales 750 units

Actual output 900 units

Standard cost card is provided for additional information:

Selling price $150.00

Direct materials (2kg $4) $8.00
Direct labour (2.5 hrs $5) $12.50
Variable overhead (2.5 hrs $2.50) $6.25

The company has budgeted fixed overheads of $12,500 per quarter.

The above figures do not include the effect of a shortage of required skilled workers in
the industry and general average labour rate has gone up to $6 per hour.

In the quarter just ended the company produced and sold 900 units. The direct
materials used were 3,620 kg at total cost of $13,032. The actual direct labour cost
was $9,968.75 for 1,812.5 hours.


(a) Calculate for labour costs planning and operational variances in as much
detail as information allows. (6 marks)

(b) Explain how analysing variances into planning and operational elements
can help ME. (4 marks)

(10 marks)

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5. Umbrella Company (UC) manufactures two types of umbrellas in two different
factories, the South and the North. After assembly the finished umbrellas are
transferred to the sales division at their cost plus 10% profit mark-up. UCs prices are
set on the basis of the external market in consideration, and current prices for South
umbrellas are $3.00 and of North Umbrellas $2.50. UC sets a target return of 20% on
investment in each division per annum. The heads of all divisions get paid a bonus of
$500 for every 1% return achieved in excess of target return; so if achieved return is
20% no bonus is paid, and for 21%, $500 is paid and so on.

The following are the financial details of the divisions gathered by the company

South North
Direct material cost per umbrella ($) 1.20 0.80
Direct labour ($) 1.00 1.00
Overheads ($) 0.50 0.40
Annual capacity (units) 1,500,000 1,250,000
Current capacity utilisation (units) 1,400,000 1,100,000
Investment ($) 1,500,000 1,000,000

Sales division is part of the head office of UC which is responsible for all sales. It mostly
shares the facilities of the head office; therefore the investment in sales division is only
minimal ($250,000). UC operates a just-in-time system.


Calculate annual return on investment for each division. (7 marks)

Calculate the amount of bonus each division is entitled to. (3 marks)

(10 marks)

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Formulae Sheet

Learning curve

Y axb


y = cumulative average time 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/log 2)

LR = the learning rate as a decimal

Demand curve

P a bQ

changein price
changein quantity

a price when Q 0

MR = a 2bQ

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