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Question Bank

ACCA F5
Performance Management
Exams from September 2017

JUNE 2017 RELEASE


ii I n t r o d u c t i o n ACCA F5 Question Bank

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ACCA F5 Question Bank Introduction iii

Computer or paper-based exam?

Sessional computer based exams are available for papers F5 to F9. Until December 2017 these run
alongside the traditional paper based exams and you may sit either.
At the time of printing this question bank, the ACCA had announced that they are hoping to phase out
the paper exams from March 2018. If this happens you will then have to sit the CBE. If you are taking
your exam from March 2018 onwards, please check the ACCA website for further detail
www.accaglobal.com
The timing of the paper exam and the computer based exam differ. In the paper exam you will have 3
hours and 15 minutes. However, in the computer based exam you will be given 3 hours and 20
minutes, but there will be an extra five objective test questions, known as seeded questions. The
ACCA set seeded questions for control purposes only and there is no mark allocated to them.
However, you will not know which of the questions is seeded at the point that you are answering the
questions, so you will need to take the same approach to all questions.
The technical content of paper based and computer based exams is identical, but there is a slightly
wider variety of question styles in the computer based exam.
You will find a variety of question styles in this question bank, so that you are prepared for the

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computer based exam as well as the paper one. You will find more detail about the computer based

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exams in the following places:

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http://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5/specimen-exams.html
and
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http://www.accaglobal.com/content/dam/ACCA_Global/Students/exam/Guide%20to%20CBEs_FINAL.

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PDF
The ACCA has produced a specimen exam.

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The paper version of the 2016 specimen exam is included at the back of this question bank.However,
there is a computer based version of the specimen on the ACCA website. If you are taking the
computer based exam , it is VITAL that you work through the computer based specimen, which can
be found at the following:
https://sampletds1.pearsonvue.com/Minerva/startDelivery?sessionUUID=e9d2538e-a34f-4137-9e10-
9bca83a3867a
In addition, it is VITAL that you look at the extra constructed response questions and the constructed
response workspace information provided at:
https://sampletds1.pearsonvue.com/Minerva/startDelivery?sessionUUID=c1b72428-26de-4c09-9c0f-
04c69ef893c5
iv I n t r o d u c t i o n ACCA F5 Question Bank

Contents

Page

Computer or paper-based exam? iii

Tuition Questions 3

Tuition Answers 65

Revision Questions 139

Revision Answers 229

Exam paper questions and answers 347

Formulae sheet
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379

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I n t
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F i Icons in this Question Bank

You will find a full debrief of this question on your online course
ACCA F5 Question Bank Part 1 Tuition questions 1

PART 1 TUITION QUESTIONS

Objective test and Scenario


Question Page ref
Syllabus area no Q

1: Specialist cost and management accounting techniques


Activity based costing 1-4 3 65
Scenario question: Duff Co 5-9 4 66
Target costing 10-16 5 66
Scenario question: Edward Co 17-21 7 68
Life cycle costing 22-26 8 69
Throughput accounting 27-32 9 69
Scenario question: Gopher Garage 33-37 11 70
Environmental accounting 38-40 12 72

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2: Decision-making techniques

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Relevant cost analysis 1-4 14 73
Cost volume profit analysis 5-11 15 73

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Scenario question: Cardio Co 12-16 17 75
Limiting factors 17-22 18 76
Pricing decisions
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23-28 20 77

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Make-or-buy and other short-term decisions
Scenario question: Herera Co 29-33 22 78
Dealing with risk and uncertainty in decision-making
Scenario question: Louiedewie Co 017
34-38
39-43
23
25
79
80

3: Budgeting and control


Budgetary systems and type of budget 1-10 27 81
Quantitative analysis in budgeting 11-17 29 82
Standard costing 18-19 31 84
Scenario question: Kamal Co 20-24 31 84
Material mix and yield variances 25-28 33 85
Scenario question: Product Zed 29-33 34 86
Sales mix and quantity variances 34-35 35 87
Scenario question: Memia Co 36-40 36 88
Planning and operational variances 41-45 38 89
Scenario question: Demia Co 46-50 39 90
Performance analysis 51 41 91
2 Part 1 Tuition questions ACCA F5 Question Bank

Question Page ref


Syllabus area no Q

4: Performance measurement and control


Performance management information systems 1-5 42 92
Sources of management information 6-9 43 92
Management reports 10-12 44 93
Performance analysis in private sector organisations 13-17 45 94
Scenario question: Olivers Salon 18-22 46 94
Divisional performance and transfer pricing 23-29 47 96
Scenario question: Abel Co 30-34 50 97
Performance analysis in not-for-profit organisations and the public 35-37 51 98
sector
External considerations and behavioural aspects 38-39 52 98

Long form
Based on Page ref
Question name Syllabus area Past exam Q A

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2: Decision-making techniques
1

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Cut and Stitch

201 Limiting factor analysis Q3 J10 (a)-(c) 53 99


2 WX
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Pricing Q3, J13, (b) amended 54 102
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Gym Bunnies Risk and uncertainty in decision
making
Q1, J13, (a) and (c) 55 105

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3: Budgeting and control

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1
t PC Co Budgetary systems/Types of budget Q3, D11 57 109

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2 The Safe Soap Co Materials mix and yield Q5, D14 57 112

F 3
4
Bedco
Jump
variances/Activity-based budgeting
Planning and operational variances
Performance analysis and
Q5, D13
Q5, J10
58
59
114
116
behavioural aspects

4: Performance measurement and control


1 Web Co Performance analysis in private Q3, D12 61 119
sector organisations
2 AT Co Performance analysis in private Q2, D10 62 122
sector organisations
3 Bath Co Divisional performance and transfer Q2, D11, (b) and (c) 63 126
pricing
4 Hammer Co Divisional performance and transfer Q4, J10 64 130
pricing
ACCA F5 Question Bank Tuition questions: 1: Specialist cost and management accounting techniques 3

PART 1 TUITION QUESTIONS: Objective test and Scenario

1: Specialist cost and management accounting techniques

Activity based costing


1 RDE plc uses an activity based costing system to attribute overhead costs to its three products.
The following budgeted data relates to the year to 31 December 20X8:
Product X Y Z
Production units (000) 15 25 20
Batch size (000 units) 2.5 5 4
Machine set up costs are caused by the number of batches of each product and have been
estimated to be $600,000 for the year.
Calculate the machine set up costs that would be attributed to each unit of Product Y to the
nearest $0.01.

2
Fir Co
According to ABC, which of the following is the correct statement of the hierarchy of levels of

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activity within an organisation, ranked from the bottom upwards?

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Facility
sustaining

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Product

Product
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sustaining

Batch

3 For which one of the following costs might the number of production runs be a cost driver?
Production scheduling
Product development costs
Short-run variable overhead costs
Materials handling and despatch costs
4 Tuition questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

4 KY makes several products including Product W. KY is considering adopting an activity-based


approach for setting its budget. The companys production activities, budgeted activity costs
and cost drivers for next year are given below.
Cost driver
Activity $ Cost driver quantity
Set up costs 200,000 No. of set ups 800
Inspection / quality control 120,000 No. of quality tests 400
Machines are reset after each batch. Quality tests are carried out after every second batch.
The budgeted data for Product W for next year are:
Direct materials $2.50 per unit
Direct labour 0.03 hours per unit @ $18 per hour
Batch size 150 units
Budgeted production 15,000 units
Calculate, using activity based costing, the budgeted total production cost per unit for Product W
to the nearest $0.01.

DUFF CO
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The following scenario relates to questions 5-9. Each question is worth 2 marks.

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Duff Co manufactures three products X, Y and Z. Each product uses the same materials and the same

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type of direct labour but in different quantities. For many years Duff Co has been using full absorption

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costing and absorbing overheads on the basis of direct labour hours, but is considering switching to

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activity-based costing (ABC).

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The following data relates to the three products.

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Product X Product Y Product Z

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20,000 16,000 22,000

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Direct material cost ($ per unit) 25 28 22
Direct labour (hours per unit) 2.5 3 2
Direct labour cost ($ per unit, @ $12 per hour) 30 36 24
Machine hours per unit 1.5 1.25 1.4
Batch size (units) 500 800 400
Number of purchase orders per batch 4 5 4
Duff Co also expects to incur the following indirect costs.
Cost pools
$
Machine set up costs Number of batches 280,000
Material ordering costs Number of purchase orders 316,000
Machine running costs Number of machine hours 420,000
General facility costs Number of machine hours 361,400
1,377,400

5 Calculate the budgeted full production cost per unit of product X using Duff Cos current
method of absorption costing, to the nearest $0.01.

$
ACCA F5 Question Bank Tuition questions: 1: Specialist cost and management accounting techniques 5

6 Calculate the total material ordering costs for Product Y to the nearest $.

7 Calculate the machine running and general facility costs per unit for Product Z to the nearest
$0.01.

8 Calculate the budgeted full production cost per unit of product X using ABC, to the nearest
$0.01, on the basis that total overheads allocated to Product X under activity-based costing are
$492,824.

9 Which TWO of the following statements about ABC are correct?


ABC is only useful for production overheads.
ABC is most useful when overheads are related to volume.

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ABC is an absorption costing system.

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ABC must be based on activities that are measurable in quantitative terms.

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Target costing
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10 The selling price of Product X is set at $350 for each unit and sales for the coming year are
expected to be 500 units.

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A return of 30% on the investment of $300,000 in Product X will be required in the coming year.
What is the target cost for each unit of Product X?

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11 A company has calculated that the target cost for Product Z is $40 per unit. This is based on an
expected production and sales volume of 3,000 units. The company wishes to earn a profit of
25% on sales.
What market price is the target cost for Product Z based on (to two decimal places)?
$10.00
$30.00
$50.00
$53.33
6 Tuition questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

12 T Company uses target costing. The company wishes to close the target cost gap that exists for
one of its products.
Which of the following may be used to close the target cost gap?
Replace skilled workers with less skilled workers for the more basic production tasks
Replace existing material with higher quality material
Raise the selling price of the product
Use a higher grade of labour to complete work ahead of schedule

13 The following are all steps in the implementation of the target costing process for a product.
Rank them in the correct sequence.

Calculate the
target cost

Calculate the
target cost gap

Calculate the
current cost

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Set the required

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profit

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Set the selling

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price

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Which of the following statements describes target costing?

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target selling price.


It allocates overhead costs to products by collecting the costs into pools and sharing
them out according to each products usage of the cost driving activity.
It identifies the market price of a product and then subtracts a desired profit margin to
arrive at the desired cost.
It identifies different markets for a product and then sells that same product at different
prices in each market

15 Saris Co has set a budgeted labour cost based on the assumption of a learning rate of 80%. Its
Production Director has now found that the actual learning rate is 70%.
Which of the following statements is true?
The cost gap will increase and the target cost will increase.
The cost gap will decrease and the target cost will decrease.
The cost gap will remain the same and the target cost will decrease.
The cost gap will decrease and the target cost will remain the same.
ACCA F5 Question Bank Tuition questions: 1: Specialist cost and management accounting techniques 7

16 Which TWO of the following techniques are relevant to target costing?


Value analysis
Iso-contribution analysis
Variance analysis
Functional analysis

EDWARD CO
The following scenario relates to questions 17-21. Each question is worth 2 marks.
Edward Co assembles and sells many types of radio, and also repairs radios for customers. It is
considering extending its product range to include digital radios. These radios produce a better sound
quality than traditional radios and have a large number of potential additional features not possible
with the previous technologies.
A radio is produced by assembly workers assembling a variety of components. Production overheads
are currently absorbed into product costs on an assembly labour hour basis.
Edward Co is considering a target costing approach for its new digital radio product. A selling price of
$44 has been set in order to compete with a similar radio on the market that has comparable features
to Edward Cos intended product. The board have agreed that the acceptable margin (after allowing
for all production costs) should be 20%.

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Cost information for the new radio is as follows.
Component 1 (Circuit board) these are bought in and cost $4.70 each.

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Component 2 (Wiring) in an ideal situation 25 cm of wiring is needed for each completed radio.

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However, Edward Co estimates that 4% of the purchased wire is lost in the assembly process. Wire
costs $4.80 per metre to buy.
Other materials other materials cost $8.10 per radio.
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Assembly labour these are skilled people who are difficult to recruit and retain. It takes 30 minutes
to assemble a radio and the assembly workers are paid $12.60 per hour. It is estimated that 10% of
hours paid to the assembly workers is for idle time.
Production overheads variable production overhead for each radio is $20 per hour and fixed
overhead for each radio is $12 per hour.
17 Which TWO of the following would be benefits of introducing a target costing approach?
Edward Co will have a greater internal focus on its product development.
Cost control can begin at the design stage.
Edward Co will be able to pass on cost increases to its customers.
The radio will only include features that the customer regards as valuable.

18 Calculate the reduction in cost that would be achieved by eliminating the labour idle time and
the wire lost in the assembly process, to the nearest $0.01.

$
8 Tuition questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

19 Assuming a change in supplier meant that the cost of Component 2 fell to $4.40 per metre,
there was no idle time with labour and all other costs remained the same, calculate the cost gap
to the nearest $0.01.

20 Which TWO of the following are measures that Edward Co might wish to use to reduce the cost
gap?
Only including standard components in the radio
Including additional features that the competitors radio does not have
Analysing costs into cost pools
Increasing the automation of the manufacturing process

21 Which of the following would be a problem with introducing a target cost approach to the
repair services provided by Edward Co?
The outcomes of the repair services cannot be specified properly.
The repair work carried out will vary according to the problems found.
The time of the skilled labour used in the repair process has to be costed.
The service is carried out when the customer requires it.

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Life cycle costing
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22 Which THREE of the following costs are typically costs which occur at the Research and

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Development stage of a products life cycle?

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Design costs

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Testing costs

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Production facility investment costs

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Customer support costs
Inventory costs

23 A company is about to launch a new product. Total lifetime sales are expected to be 44,000
units. $3,250,000 has been incurred on design and development. Promotional costs over the
products life are expected to be $2,000,000. De-commissioning of the machine will cost
$250,000 at the end of the products life. Production of the product is expected to cost an
average of $150 per unit.
What is the life cycle cost per unit over the products life?

24 Which of the following is NOT a benefit of life cycle costing?


Improved awareness of total costs
Assists with long-term planning
Emphasises the importance of early stage design and development costs
Results in a market driven pricing strategy
ACCA F5 Question Bank Tuition questions: 1: Specialist cost and management accounting techniques 9

25 In calculating the life cycle costs of a product, which of the following items would be included?

Included Excluded
Research and development
Planning and concept design
Testing
Production
Advertising
Distribution and customer service

26 When are the bulk of a product's life cycle costs normally determined?
At the design/development stage
When the product is introduced to the market
When the product is in its growth stage
On disposal

Throughput accounting

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27 A company manufactures two products which requires three different machine processes:

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Processing time per metre in hours

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Product A Product B
Pressing 0.50 0.50

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Stretching 0.25 0.40
Rolling 0.40 0.25

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Each product requires 1 metre of material/unit. Production for the month is expected to be

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10,000 metres for Product A and 15,000 for Product B.

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Available resources for the month are expected to be:
Available resource
Material 30,000 metres
Pressing time 13,000 hours
Stretching time 8,000 hours
Rolling time 7,750 hours
Using throughput accounting, what is the bottleneck resource?
Material
Pressing time
Stretching time
Rolling time

28 A company manufactures a product which requires two hours per unit of machine time.
Machine time is a bottleneck resource as there are only five machines which are available for
24 hours per day, five days per week. The product has a selling price of $65 per unit, direct
material costs of $25 per unit, labour costs of $20 per unit and factory overhead costs of
$10 per unit. These costs are based on weekly production and sales of 300 units.
What is the throughput accounting ratio (to 2 decimal places)?

$
10 Tuition questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

29 Z Company uses throughput accounting to help assess the efficiency of its operations.
Which of the following would improve its throughput accounting ratio?
Introduce restrictions specifying the maximum allowed hours for each shift
Replace existing material with higher quality material
Raise the selling price of the product
Use a higher grade of labour for the work

30 X Co uses a throughput accounting system. Details of product A, per unit, are as follows:
Selling price $320
Material costs $80
Conversion costs $60
Time on bottleneck resource 6 minutes
What is the return per hour for product A?

31 Which TWO of the following features distinguish throughput accounting from other costing systems?
It does not attempt to maximise profit.

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Work in progress is valued at material cost only.

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Costs are allocated to products when they are completed or sold.

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Only labour cost is treated as a variable cost.

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32 Which of the following is NOT an influence on the throughput contribution measure used in a
system of throughput accounting?

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t Direct material price

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Direct material usage

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The volume of throughput
ACCA F5 Question Bank Tuition questions: 1: Specialist cost and management accounting techniques 11

GOPHER GARAGE
The following scenario relates to questions 33-37. Each question is worth 2 marks.
Gopher Garage offers MOTs and full services to its customers. All MOTs and services have to be carried
out by one of the four mechanics at the garage. They are assisted by three trainees. The garages two
receptionists also deal with customers when they arrive and when they pay for the work that has been
done.
The average length of time that is spent by each member of staff on work for each customer is as
follows:
MOTs Service
Hours Hours
Mechanic 1.25 3.20
Trainee 0.50 1.50
Receptionist 0.25 0.30
The garage is open for 10 hours a day, 5 days a week. It is closed for public holidays that total two
weeks in any year. Annual staff salaries are $55,000 for each mechanic, $25,000 for each trainee and
$30,000 for each receptionist. The cost of oil and other materials used during MOTs is $15 per
customer, and the cost of oil and other materials used during services is $25 per customer. Other
garage costs (excluding raw materials and labour) amount to $125,000.

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Gopher Garage charges $120 for each MOT and $200 for each service.

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The garages accountant has identified mechanic time as being the bottleneck activity.

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33 What is the annual capacity of the bottleneck activity in terms of the maximum number of each
activity?

MOTs
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Services
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34 The garages accountant has calculated the cost per hour to be $48.
What is the throughput accounting ratio for both services?
MOT 1.75 Service 1.14
MOT 0.57 Service 0.88
MOT 1.16 Service 0.56
MOT 0.86 Service 1.79

35 What would be the effect on the bottleneck if the garage employed another three mechanics?
The mechanics time would be a bottleneck for MOTs only.
The mechanics time would be a bottleneck for services only.
The mechanics time will remain the bottleneck for both MOTs and services.
There will no longer be a bottleneck.
12 Tuition questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

36 Which TWO of the following measures could the garage use to improve the throughput
accounting ratio?
Decrease the time spent by the mechanics on each customer
Decrease the time spent by the trainees on each customer
Decrease the operating expenses of the garage
Decrease the price of the work done for each customer

37 Which of the following statements regarding the theory of constraints is/are true?

True False
It can be applied to the management of all external
factors affecting the organisation.
It is concerned with overcoming a bottleneck
identified in a single activity.
It aims to limit the amount of non-bottleneck
resources used.
It tries to avoid the build-up of inventories.

Environmental accounting

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38 Which of the following statements about environmental accounting is/are true?

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A significant problem for environmental accounting is

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that it is difficult to measure environmental costs.

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An aim of environmental accounting is to encourage
organisations to quantify the costs and benefits of

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improving environmental practices.

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The use of input/output analysis forces an

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organisation to monitor the cost of wasted material

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and other environmental pollution.

F i It is not possible to use activity based costing to


identify cost drivers for environmental costs.

39 Using the US Environmental Protection Agencys definition of environmental costs, how would
the cost of producing an environmental report be classified?
Conventional cost
Contingent cost
Image and relationship cost
Potentially hidden cost
ACCA F5 Question Bank Tuition questions: 1: Specialist cost and management accounting techniques 13

40 When activity-based costing is used for environmental accounting, which statement is correct
for environment-related costs and environment-driven costs?
Environment-related costs can be attributed to joint cost centres and environment-
driven costs cannot be.
Environment-driven costs can be attributed to joint cost centres and environment-
related costs cannot be.
Both environment-related costs and environment-driven costs can be attributed to joint
cost centres.
Neither environment-related costs nor environment-driven costs can be attributed to
joint cost centres.

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14 T u i t i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

2: Decision-making techniques

Relevant cost analysis


1 L is currently quoting for a job that will involve the use of three materials A, B and C. Material A
is currently in inventory with a book value of $4,000. If it was used on the job, it would need to
be replaced at a cost of $5,000. Its scrap value is $1,000. There is a surplus of Material B in
inventory. Its book value is $3,000 and it has no realisable or scrap value. There is a surplus of
Material C in inventory. Its book value is currently $6,000. It could be sold for $4,500 or used on
another job as a substitute for Material D, which L currently does not have in inventory. The
costs of obtaining D would be $4,250.
What is the relevant cost to L of using materials in inventory on this job?

2 A company is considering a one-year contract which will require three skilled workers. Skilled
workers can be hired on a temporary basis for one year at a cost of $20,000 per worker.
Alternatively, the company could retrain some existing workers who are currently paid $12,000
per worker. The training would cost $5,000 in total. If these existing workers were used, the

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company would need to replace them at a total cost of $45,000.

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What is the total relevant cost of labour for the one-year contract?

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$60,000

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$41,000
$45,000

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$50,000

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3 Studley Co purchased a machine three years ago for $15,000. It can be sold now for $9,000. The

F i current replacement cost of an equivalent machine is $14,000. If Studley Co keeps the machine
for use in the business it is expected to generate net income of $17,000.
What is the relevant cost of the machine?
$9,000
$14,000
$15,000
$17,000

4 A company has received a special order for which it is considering the use of material B which it
has held in its inventory for some time. This inventory of 945 kg was bought at $4.50 per kg. The
special order requires 1,500 kg of material B. If the inventory is not used for this order, it would
be sold for $2.75 per kg. The current price of material B is $4.25 per kg.
What is the total relevant cost of material B for the special order, to the nearest $0.01?

$
ACCA F5 Question Bank Tuition questions: 2: Decision-making techniques 15

Cost volume profit analysis


5 A business manufactures a single product which it sells for $50. The variable costs of production
are $10 a unit. Next month fixed costs will be $800,000. The Finance Director wants to realise a
profit of $120,000. How many units must be sold to generate this profit?

6 Which of the following is the correct formula to calculate the break-even sales volume (in units)
for a business?

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7 A company makes a single product which it sells for $30 per unit.

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Fixed costs are $18,000 per month. The contribution/sales ratio is 40%.
Next month the companys profit target is $36,000.

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What sales volume is required to achieve next months profit target?

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1,200 units
1,500 units
3,000 units
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4,500 units

8 ZT Ltd produces and sells three products, A,B and C in the ratio 1:2:1.
Sales price and variable cost data for the products is as follows:
A B C
Selling price ($) 8 8 10
Variable cost ($) 5 4.50 6
ZT Ltd has fixed costs of $70,000
What is ZTs break-even sales revenue?

9 A profit-volume chart can illustrate the relationship between


Sales revenue and costs
Sales volume and costs
Sales volume, revenue and costs
Sales volume and profit
16 T u i t i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

10 A company makes a single product which it sells for $2 per unit.


Fixed costs are $13,000 per month.
The contribution/sales ratio is 40%.
Sales revenue is $62,500.
What is the margin of safety in units?

11 Matt Milk Bar is planning to invest in a new blending machine, which will expand the range of
drinks it can offer. Its owner has estimated the following daily results for drinks associated with
the new machine:

$
Sales (200 units) 600
Variable costs (450)
Contribution 150
Incremental fixed costs (45)
Profit 105

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Which of the following statements that relate to the sensitivity of the investment are true?

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True False

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The investment is more sensitive to a change in sales

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price than sales volume.

C uit
If variable costs increase by 25% the investment will
make a loss.

I n t The margin of safety is 92.5%.

s t The investments sensitivity to incremental fixed costs

ir
is 70%.

F
ACCA F5 Question Bank Tuition questions: 2: Decision-making techniques 17

CARDIO CO
The following scenario relates to questions 12-16. Each question is worth 2 marks.
Cardio Co manufactures and sells three types of fitness equipment: treadmills (T), cross trainers (C)
and rowing machines (R).
The budgeted sales prices and volumes for the next year are as follows:
T C R
Selling price $1,600 $1,800 $1,400
Units 420 400 380
The budgeted revenues and costs for each product are shown below.
T C R
$ $ $
Sales revenues 672,000 720,000 532,000
Variable costs 263,760 286,400 201,780
Fixed costs 73,940 78,100 59,320
Cardio Cos Finance Director is considering various possibilities, including aiming for a
contribution/sales ratio of 65%. He is also looking at a scenario where the contribution/sales ratio was
60%, with sales revenues falling to $1,600,000 and fixed costs to $175,000.

12
Fir Co
Calculate the weighted average contribution to sales ratio for Cardio Co to the nearest 0.01%.

%
st I pyri
ntu ght
itio
13 Calculate the breakeven sales revenue at a Contribution/Sales ratio of 65%, to the nearest $000.

n2
$ 000

14
017
Calculate the margin of safety at a contribution/sales ratio of 60%, with sales revenues having
fallen to $1,600,000 and fixed overheads to $175,000, to the nearest 0.1%.

15 Cardio Cos production department currently has problems meeting demand for these products,
although this will be addressed in the medium-term by a large investment in manufacturing
facilities. For now, Cardio Cos Chief Executive has instructed the Production Department to
prioritise manufacture of products by the contribution per unit that they make.
Which of the following would NOT occur if the products making the highest contribution were
manufactured and sold first?
Cardio Co will cover its fixed costs more quickly.
Fewer unit sales will need to be made in order to break even.
The breakeven point will be lower.
The C/S ratio will rise.
18 T u i t i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

16 Once Cardio Cos new manufacturing facilities are open, the company intends to introduce a
new, mobile, cross-trainer. This will be supported by a large advertising and promotion
campaign to encourage demand. The intention is initially to charge a high price for this product,
although it may fall over time.
Which TWO of the following are reasons why Cardio Co may wish to charge a high price
initially for the mobile cross-trainer?
The sensitivity of its demand to price is uncertain.
The product is likely to have a long life cycle.
It will generate high initial cash flows to cover the marketing expenditure.
It wishes to discourage competitors from entering the market.

Limiting factors
17 TT Co operates a JIT policy with minimal inventories. It manufactures a single product with the
following cost card:
Product A
$
Materials (at $2 per kg) 8
Labour (at $5 per hour) 10

t
Other overheads 7

h 7
Total production cost 25

r i g 01
Next month demand is 4,000 units, 15,000 kg of material are available and 8,500 labour hours.

2
y
p ion
What is the limiting factor next month?

o
C uit
Sales demand
Material only

I n
Labour only

t
Material and labour

ir s
F 18 Conrad Co manufactures two products, X and Y. Details of both products are as follows:
Product X
$
Product Y
$
Selling price 105 136
Materials 18 16
Labour (at $10 per hour) 30 45
Variable overhead 12 15
Fixed overhead 20 25
Profit per unit 25 35

Maximum demand (units) 800 1,500


It has selected the optimal production plan to maximise profit for the month based on 4,650
labour hours. An extra 90 hours have become available at the standard rate of $10 per hour.
How much additional profit can be earned in the month?

$
ACCA F5 Question Bank Tuition questions: 2: Decision-making techniques 19

19 The following statements have been made about linear programming:


1 The shadow price of a scarce resource is the increase in contribution available if one
more unit of the resource is obtained
2 Non-scarce resources always have zero slack
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2

20 A company has the following production planned for the next four weeks. The figures reflect the
full capacity level of operations. Planned output is equal to the maximum demand per product.
Product A B C D
$ per unit $ per unit $ per unit $ per unit
Selling price 160 214 100 140
Raw material cost 24 56 22 40
Direct labour cost 66 88 33 22
Variable overhead cost 24 18 24 18
Fixed overhead cost 16 10 8 12
Profit

Fir Co
30 42 13 48

st I pyri
Planned output 300 125 240 400
Direct labour hours per unit 6 8 3 2

ntu ght
The direct labour force is threatening to go on strike for two weeks out of the coming four. This

itio
means that only 2,160 hours will be available for production rather than the usual 4,320 hours.

n2
If the strike goes ahead, which TWO products should be produced if profits are to be maximised?
A



B
C
D
017
21 Highfly Co manufactures two products, X and Y, and any quantities produced can be sold for
$60 per unit and $25 per unit respectively.
Variable costs per unit of the two products are as follows:
Product X Product Y
$ $
Materials (at $5 per kg) 15 5
Labour (at $6 per hour) 24 3
Other variable costs 6 5
Total 45 13

Next month, only 4,200 kg of material and 3,000 labour hours will be available. The company
aims to maximise its profits each month.
The company wants to use the linear programming model to establish an optimum production
plan. The model considers x to be number of units of Product X and y to be the number of
units of Product Y.
20 T u i t i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

Which of the following statements of objective function and constraints is/are correct?

Correct Incorrect
Objective function 60x + 25y
Material constraint 3x + y 4,200
Labour constraint 4x + 0.5y 3,000

22 C Co uses material B, which has a current market price of $080 per kg. In a linear program,
where the objective is to maximise profit, the shadow price of material B is $2 per kg.
Which TWO of the following statements are correct?
Contribution will be increased by $2 for each additional kg of material B purchased at the
current market price.
The maximum price which should be paid for an additional kg of material B is $2.
Contribution will be increased by $120 for each additional kg of material B purchased at
the current market price.
The maximum price which should be paid for an additional kg of material B is $280.

Pricing decisions

t
23 Clogs Co sells its most popular style of wooden shoes at a profit of 20% on the current selling

i g h 1 7
price of $35. Due to a material shortage, the costs of producing this style of shoe are expected

r 0
to increase by 5% next year.

y
p ion 2
What will the new selling price need to be to maintain the 20% profit margin, to the nearest

o
C uit
$0.01?

t
$

t I n
ir s 24 Longbourne Co manufactures and sells covers for phones and MP3 players. The current selling

F
price is $10 each. Weekly demand is currently 300 covers. If Longbourne increased its price by
$1, the demand would drop to 250 covers.
What is the straight line demand equation for Longbourne Co?
P = 10 0.02Q
P = 10 0.004Q
P = 16 0.02Q
P = 16 0.004Q
ACCA F5 Question Bank Tuition questions: 2: Decision-making techniques 21

25 A car rental company charges different prices to customers hiring the same make of car,
depending on the day of the week, the month of the year and the length of the rental.
The following statements have been made about its pricing strategy.
1 The company has adopted a price discrimination strategy.
2 The companys strategy is successful because all customers have the same price elasticity
of demand.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2

26 DCT Co cleans carpets. It determines its selling price by adding a mark-up of 40% to total costs.
Variable costs are $5 per carpet for cleaning and $1 for advertising. Based on an expected
volume of 2,000 carpets, fixed cleaning costs are expected to be $9,000.
What should DCT charge per carpet for cleaning?
$7.00
$8.40
$10.50

Fir Co
st I pyri
$14.70

27
ntu ght
A company sets a low initial price for its product with the aim that high volumes will be sold and
market share gained quickly.

itio
This is an example of the application of which pricing policy?
Target pricing
n2
017
Volume discounting
Penetration pricing
Price skimming

28 A company has entered two different new markets.


In market A, it is initially charging low prices so as to gain rapid market share while demand is
relatively elastic.
In market B, it is initially charging high prices so as to earn maximum profits while demand is
relatively inelastic.
Which price strategy is the company using in each market?

Price Penetration Market


discrimination pricing skimming
A
B
22 T u i t i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

Make or buy and other short-term decisions

HERERA CO
The following scenario relates to questions 29-33. Each question is worth 2 marks.
Herera Co manufactures and sells three products, details of which are as follows:
Product X Product Y Product Z
$ $ $
Selling price 80 90 100
Materials 20 30 25
Labour 30 15 40
Share of general overhead (based on maximum demand) 10 15 15
Profit per unit 20 30 20

The same employees are used to make all three products. The maximum demand for any product is
1,000 units per month. Available labour is restricted to $55,000 monthly.
An outside manufacturer has now offered to supply Herera at the following costs:
Product X Product Y Product Z

ht
Cost to buy in ($ per unit)
7
55 65 105

r i g 201
29
y
p ion
If Herera Co wishes to use the outside manufacturer wherever it is profitable, which products

o
C uit
should Herera Co buy in?

t
X only

I n
Y only

t
Both X and Y

ir s X, Y and Z

F 30 What would be the order of priority of making the products in house?

Z
ACCA F5 Question Bank Tuition questions: 2: Decision-making techniques 23

31 Herera Co has just received a special contract to make Product Y. Labour will not be a constraint
now, but it does need additional machine capacity. It purchased a machine that could be used
three years ago for $25,000. It can be sold now for $8,000. The current replacement cost of an
equivalent machine is $10,000. If Herera Co keeps the machine for use elsewhere in the
business it is expected to generate net income of $11,000.
What is the relevant cost of the machine for the special contract?
$8,000
$10,000
$11,000
$17,000

32 Which of the following represents the minimum price that Herera Co could charge for the
contract?
Marginal cost
Full cost
Marginal cost plus incremental costs
Incremental costs plus opportunity costs

Co
33 On the basis of winning the special contract to manufacture Product Y, Herera Co now believes

Fir
it has evidence that it can apply price discrimination to Product Y.

st I pyri
Which of the following conditions must hold if price discrimination is to be effective?

ntu ght
There must be little or no chance of a black market developing.
There must be little or no chance that competitors can and will undercut the firm's prices

itio
in the lower-priced market segments.

n2
Each of the sectors of the market must show similar intensities of demand.
The cost of segmentation and administration should exceed the extra revenue derived

017
from the price discrimination strategy.

Dealing with risk and uncertainty in decision-making


34 A decision maker who uses the maximax criteria to make decisions would be classified as:
Risk averse
Risk seeking
Risk neutral
Risk managing
24 T u i t i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

35 A company is not sure whether to build a small or large caf and past experience suggests there
is a 40% chance that demand will be low.
Demand
Size of restaurant Low High
$ $
Small 400,000 600,000
Large (500,000) 1,000,000
The company has determined that building the small caf will be best, based on the fact it has
the highest expected value at $520,000.
The company could commission a survey which would accurately predict the level of demand.
What is the maximum that it should pay for the survey?

Use the following information to answer the next three questions.


Sarah owns a caf on the beach at Sandsea that serves light lunches. She has analysed her results over
the last summer and has found that they have varied according to the supplies she has ordered each
day, and the daily demand levels, which have mostly been determined by the weather. Sarah has put
together a payoff table that shows the level of daily profits the caf would earn depending on the
combination of demand and supply of lunches:

ht 7
Daily supply (lunches)

r i g 201 50 75 100 125

y
50 $200 $160 $125 $95

p ion
Daily demand 75 $200 $300 $265 $235

o
(lunches)

C uit
100
125
$200
$200
$300
$300
$420
$420
$390
$540
36

n t
If Sarah uses a maximax approach in decision-making, what level of supply will she choose?

I
t
50

ir s 75

F
100
125

37 If Sarah uses a maximin approach in decision-making, what level of supply will she choose?
50
75
100
125

38 If Sarah uses a minimax regret approach in decision-making, what level of supply will she
choose?
50
75
100
125
ACCA F5 Question Bank Tuition questions: 2: Decision-making techniques 25

LOUIEDEWIE CO
The following scenario relates to questions 39-43. Each question is worth 2 marks.
Louiedewie Co has identified an investment project and estimated the following cash returns for next
year, depending on how strong competition is likely to be.
Estimated cash return ($) Probability
No competition +150,000 0.35
Average competition +75,000 0.20
Strong competition -35,000 0.45

39 What is the expected cash return on the project?

40 If the project requires an investment of $80,000, what is the probability that it will be
profitable?
Nil
0.35

Co
0.55
0.65
Fir
st I pyri
ntu ght
41 Louiedewie Co is also bidding for three other contracts, which are awarded independently of
each other. The board estimates it has a 45% chance of winning Contract A, 20% chance of

itio
winning Contract B, and 35% chance of winning Contract C. The profits from A, B and C are
estimated to be $500,000, $550,000 and $575,000 respectively.

n2
What is the expected value to the company of the profits from all three contracts?



$225,000
$500,000
$542,000
017
$536,250

42 Louiedewie Cos contract manager has now claimed that if the company wins Contract A which
is awarded first, it can use the knowledge it has gained to improve its chances of winning
Contracts B and C. He claims its chances of winning contracts B will increase to 30% and its
chances of winning Contract C will increase to 50%.
Calculate the expected value to the company of the profits from all three contracts if Contract
A is won.

$
26 T u i t i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

43 The following statements have been made about the uses of expected value:
1 Expected values are used to promote a risk-seeking attitude to decision-making.
2 Expected values are more valuable as a guide to decision-making when they refer to
outcomes that will occur many times.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2

ht 7
r i g 201
y
p ion
o
C uit
I n t
r s t
F i
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 27

3: Budgeting and control

Budgetary systems and type of budget


1 Which of the following would be considered as objectives of budgeting?

Objective Not objective


Authorisation of expenditure
Business expansion
Performance monitoring
Resource allocation

2 Which of the following statements about budgeting is/are true?

True False
A budget helps to control an organisation by forcing it
to create a plan.
A budget helps an organisation to co-ordinate the
allocation of resources.

Fir Co
A budget can help an organisation to motivate staff.

st I pyri
An organisation is legally required to prepare a master
budget annually.

3
ntu ght
A budget which is broken down into departmental or functional objectives is likely to be MOST
useful to an organisations:
itio
n2
Senior management
Middle management


Junior management
All levels of management 017
4 Using variances to comparing actual performance against standard at the end of the period is:
A strategic planning tool
A non-financial control technique
A feed-forward control technique
An example of feedback control

5 X Co uses rolling budgeting, updating its budgets on a quarterly basis. After carrying out the last
quarters update to the cash budget, it projected a forecast cash deficit of $400,000 at the end
of the year. Consequently, the planned purchase of new capital equipment has been
postponed.
Which of the following types of control is the sales managers actions an example of?
Feedforward control
Negative feedback control
Positive feedback control
Double loop feedback control
28 T u i t i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

6 The following statements have been made about the behavioural issues relating to the difficulty
of targets:
1 If a budget is too easy, most staff will be motivated to excel as they will see the budget as
realistic and attainable.
2 If a business wants to encourage staff to improve efficiency it is best to create a budget
based on ideal conditions.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2

7 Match the following descriptions to the budgeting processes that they describe.

Zero- Beyond
Rolling Incremental Flexible based budgeting
Set at the start of the
year for various
different activity levels

t
Continually extended by

h 7
adding another budget

r i g 01
period when the first

2
y
budget period expires

o p ion Prepared by building

C uit
on a previous periods
budgeted or actual

t
figures

t I n Uses adaptive

s
management processes

F ir and procedures

8 Zed Co wishes to change from a top-down system of budgeting to a bottom-up system.


Which of the following difficulties is it most likely to encounter as a result of the change?
A lack of appropriate systems and spreadsheets
A lack of comparative information
Less ownership of the budget by staff
Budgets will take longer to produce

9 Which of the following is an advantage of non-participative budgeting as compared to


participative budgeting?
It increases motivation.
It is less time consuming.
It increases acceptance.
The budgets produced are more attainable.
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 29

10 Following complaints by its managers about the current system of budgeting, P is considering
adopting principles of beyond budgeting. Which of the following is most likely to be a
disadvantage of introducing beyond budgeting?
There will be more budgetary slack.
More time will be spent on budgeting.
It may be more difficult to co-ordinate the plans of different departments.
It will lead to P becoming less focused on customer requirements.

Quantitative analysis in budgeting


Use the following information to answer the next two questions.
Zee Ltd made 500 units of product Y in April with a total cost of $10,000, and 800 units in May
with a total cost of $13,000. Using the high/low method of analysing costs:
11 What is the variable cost per unit, to the nearest $0.01?

12 What will the total cost be in June, if Zee makes 700 units?

$
Fir Co
st I pyri
ntu ght
13 TW is a company which designs and manufactures e-readers. From its past experiences, TW has
realised that whenever a new engineer is employed, there is a learning curve with a 95%

itio
learning rate which exists for the first 20 jobs.

n2
A new design engineer has just completed his first job in three hours.
Note: at the 95% learning rate the value of b is 0.074

017
How long would it take the engineer to complete the sixth job (do all workings to 3 decimal
places)?
2.45 hours
2.78 hours
3.00 hours
4.67 hours

14 The following statements have been made about budgeting techniques:


1 Learning curves are of limited relevance in a modern manufacturing business where
production is all automated.
2 Where there is uncertainty surrounding the annual sales figure for a product, the use of
expected values may help quantify the long-run average sales figure.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2
30 T u i t i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

15 Which of the following statements about using spreadsheets in budgeting is/are true?

True False
Spreadsheets can easily take account of lots of qualitative
factors.
Spreadsheets are useful when the values of the inputs to the
budget are likely to change.
Spreadsheets are only as accurate as the formulae and other
inputs that they depend on.
Spreadsheets allow for the analysis of large volumes of
quantitative data.

16 A company predicted that the learning rate for production of a new product would be 80%.
The actual learning rate was 75%. The following possible reasons were stated for this:
I Additional training was given to the workforce before they started to produce the
product.
II Unexpected problems were encountered with production.
III Unexpected changes to Health and Safety laws meant that the company had to increase
the number of breaks during production for employees.
Which of the above reasons could have caused the difference between the expected rate of

t
learning and the actual rate of learning?

g h 1 7
All of the above

y r

20 II and III only

p ion
I only

o
C uit
None of the above

17

I n t The accountant of West Co is currently preparing the companys annual flexed budget. She has

t
calculated that the maximum production capacity is 350,000 units and also come up with the

r s
following figures:

F i Production units

Material costs
250,000
$
1,500,000
300,000
$
1,800,000
325,000
$
1,950,000
Labour costs 1,250,000 1,500,000 1,625,000
Fixed costs 600,000 600,000 600,000
In addition, for each increment of 40,000 units produced, one supervisor will need to be
employed, at an annual salary of $30,000.
What will be the total production cost if production is 90% of total capacity?

$
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 31

Standard costing
18 Which of the following statements about standard costing is/are true?

True False
Standard costs should only ever be based on marginal costing
principles.
The use of basic standards is likely to give rise to meaningful
variances.
Current standards provide the best basis for motivating
employees to improve performance.
Basic standards are short-term targets and useful for day-to-day
control purposes.

19 Standard costing may be used for which FOUR of the following purposes?
Planning
Valuing inventory
Meeting the legal requirement to report standard costs to shareholders
Claiming tax back
Assessing performance

Co
Motivating staff

Fir
st I pyri
KAMAL CO
ntu ght
itio
The following scenario relates to questions 20-24. Each question is worth 2 marks.

n2
Kamal Co has produced the following performance analysis for the January to March quarter during
which no changes were made to the specification of its product.

017
Budget Actual
Number of units 6,000 7,200
$ $
Revenue 540,000 633,600
Labour (48,000) (58,716)
Materials (210,000) (205,000)
Fixed overheads (69,000) (79,500)
Profit 213,000 290,384

20 The following statements have been made:


1 The company must have dropped the selling price in the period.
2 Overheads have increased as a result of the increase in sales volume.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2
32 T u i t i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

21 What should the profit be according to the flexed budget?

22 As a result of the results in January to March, Kamal Co reconsidered its approach to budgeting
and adopted a form of rolling budgeting, starting in April for the next twelve months. The
budgeted figures for the remainder of the year before the rolling budget was introduced were
as follows:
$
April-June 550,000
July-September 560,000
October-December 575,000
Kamal Co amended the budget so that budgeted sales for April-June were 20% higher than in
the original budget, and then increased by 5% in July-September and October-December. It did
not subsequently amend the budget for July-September. Actual sales for July-September were
$610,000.
Calculate the difference in the total sales operational variance, using the original budgeted
and revised (rolling) budgeting figures.

ht 7
i g 1
23 One of the directors has proposed that Kamal Co should consider introducing a system of zero-

y r 20
based budgets for certain activities, for example marketing.

o p ion Which of the following would be considered in relation to the marketing department under

C uit
zero-based budgeting?

t
Considered Not considered

I n
Whether a marketing initiative should be undertaken

t
at all

ir s Whether the marketing department should be

F
outsourced
Whether some or all of the activities that are part of a
proposed marketing campaign are justified
Whether some or all of the activities that are part of a
proposed marketing campaign can be done more
cheaply

24 The following statements have been made about the rolling and zero-based approaches to
budgeting:
1 When pricing and resources are uncertain, rolling budgets are likely to provide better
information for control and decision-making.
2 Zero-based budgeting is likely to identify opportunities to carry out activities more
efficiently.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 33

Material mix and yield variances


25 A company has a process in which the standard mix for producing 9 litres of output is as follows:
$
4.0 litres of D at $9 per litre 36.00
3.5 litres of E at $5 per litre 17.50
2.5 litres of F at $2 per litre 5.00
58.50
A standard loss of 10% of inputs is expected to occur. The actual inputs for the latest period were:
$
4,300 litres of D at $9 per litre 38,700
3,600 litres of E at $5 per litre 19,800
2,100 litres of F at $2 per litre 4,620
63,120
Actual output for the period was 9,100 litres.
What is the materials mix variance?

Adverse Favourable
$...................

26

Fir Co
A company that manufactures luxury biscuits has decided to amend the ingredients mix to

st I pyri
include more fruit and nuts which are expensive and less oats which are cheap.
The following have arisen:
1
2
An adverse materials mix variance
A lower quality biscuit ntu ght
itio
Which of the above are most likely to be a result of the decision to change the ingredient mix?
1 only
n2
017
2 only
Neither 1 nor 2
Both 1 and 2

27 Which of the following is a NOT a method of controlling a companys production process?


Appointment of a machine supervisor
Training for customer service team
Sample testing of batches of product
Monitoring of materials and labour variances
34 T u i t i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

28 A company manufactures Product P by mixing three materials. The standard material quantity
and material cost per unit of Product P are as follows:
$
Material W 12 kg @ $5.00 60
Material X 18 kg @ $6.00 108
Material Y 20 kg @ $8.00 160
328
In February, the actual mix used was as follows:
Quantity $
Material W 970 kg 4,947
Material X 1,230 kg 7,134
Material Y 1,400 kg 11,060
The actual output was 76 units of Product P.
What was the material yield variance for February?

Adverse Favourable
$...................

PRODUCT ZED
ht 7
i g 1
The following scenario relates to questions 29-33. Each question is worth 2 marks.

y r 20
To produce 15 litres of product Zed, a standard input of 16 litres is required, made up of 9 litres of

o p ion
Chemical A and 7 litres of Chemical B. Chemical A has a standard cost of $10 per litre and Chemical B

C uit
has a standard cost of $15 per litre.

t
During September, the actual results showed that 1,650 litres of product Zed were produced, using a

I n
total input of 900 litres of Chemical A and 900 litres of Chemical B (1,800 litres in total).

r s tThe price/litre was as budgeted for both chemicals.

F i 29 The following statements have been made about the period:


1 There was no materials price variance.
2 The materials yield variance was favourable.
Which of the above statements are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2

30 What was the materials mix variance in September, to the nearest $0.01?

Adverse Favourable
$...................
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 35

31 The following statements have been made about mix variances


1 Mix variances help managers identify problems with the quality of output.
2 Adverse mix variances over a period are likely to have an adverse effect on labour
efficiency variances.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2

32 The production department now believes that the total input of 900 litres of Chemical A and 900
litres of Chemical B (1,800 litres in total) should only have produced 1,500 litres of product Zed.
Calculate the material usage operational variance to the nearest $0.01.

Adverse Favourable
$...................

33 Which of the following factors would explain an adverse material usage planning variance?

Fir Cop Explain Not explain

st I yri
Changes in the production process causing increased
loss of materials

ntu ght
A higher than expected level of waste of materials

itio
Quality control identifying a high proportion of
materials as sub-standard

n2
A new supplier supplying poorer quality materials

Sales mix and quantity variances


34
017
A company which sells a range of different breakfast cereals experiences an adverse sales mix
variance.
Which of the following is the most likely cause?
The number of people eating breakfast cereals has fallen.
The company has increased the price of its cereals.
The company has spent too much money on marketing.
Cost-conscious customers are switching to lower margin cereals in the range.
36 T u i t i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

35 The following budgeted data for a particular period was available for a company selling two
products:
Sales price per unit Variable cost per unit Sales volume in units
Product A $20 $8 15,840
Product B $24 $11 10,560
The actual results for the period were as follows:
Sales price per unit Variable cost per unit Sales volume in units
Product A $22 $8 14,200
Product B $26 $11 12,500
What is the total sales quantity contribution variance for the period?

Adverse Favourable
$...................

MEMIA CO
The following scenario relates to questions 36-40. Each question is worth 2 marks.
Memia Co makes televisions and computers. The standard costs and revenue for each television are as

t
follows:

i g h 1 7 $

r 0
Standard cost 130

y
p ion 2
Standard contribution 80

o
Standard sales price 210

C uit
The standard costs and revenue for each computer are as follows:

I n t $

t
Standard cost 210

r s
Standard contribution 100

F i Standard sales price

Budgeted production and sales were 12,000 televisions (10% of the market) and 8,000 computers.
310

As more people are watching TV on their computers, the market for televisions has shrunk to 100,000.
Memia Cos actual sales for the period were 11,000 televisions with total revenue of $2,200,000.
However, Memia Co did sell 14,000 computers.

36 The following statements have been made about the total sales variances for televisions:
1 The total sales volume variance has all arisen due to the shrinking market.
2 The only sales price variance is an operational variance of $110,000 adverse.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 37

37 Calculate the sales market size and share variances for televisions.
Market size

Adverse Favourable
$...................

Market share

Adverse Favourable
$...................

38 Calculate the sales mix variance.

Adverse Favourable
$...................

39 Calculate the sales quantity contribution variance.

Adverse Favourable
$...................

Fir Co
st I pyri
40 The directors of Memia Co have collected some non-financial data relevant to sales of
televisions over the last two years as follows:

ntu ght 20X1 20X2

itio
Sales volumes (units) 12,000 11,000
Number of returns (units) 1,080 1,000

n2
No of customer complaints regarding late delivery 360 320

017
Which of the following is true?
Performance has improved in relation to both product returns and customer complaints.
Performance has deteriorated in relation to both product returns and customer
complaints.
Performance has improved in relation to product returns but deteriorated in relation to
customer complaints.
Performance has deteriorated in relation to product returns but improved in relation to
customer complaints.
38 T u i t i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

Planning and operational variances


41 After Gen Co prepared its material budget for the first quarter, two pieces of additional
information came to light:
The Purchasing Manager managed to reduce the price of the material by placing one bulk order
at the start of the quarter.
At the end of the previous quarter, Gen Co bought a new machine as a result of its use in the
first quarter, material wastage levels fell from 3% to 2%.
Which of these factors should the budget be revised for?
The price saving only
The use of the new machine
Neither factor
Both factors

42 The learning effect entered on a budget spreadsheet was overstated due to a computer input
error.
Which of the following is this most likely to give rise to?
An adverse labour rate variance

t
A favourable labour usage variance

h 7
A favourable labour efficiency operational variance

y r i

201 An adverse labour efficiency planning variance

o
43
p ion Julienne Co has identified a labour efficiency planning variance. Which of the following is the

C uit MOST likely cause?

I n t A decision by the production manager to work overtime

t
A decision by the production manager to change the grade of labour

r s
A surplus of labour in the market

F i 44
A change in working practices to comply with new regulatory restrictions on rest periods

Caf Co budgeted to sell 10,000 units of a new product in the period at a budgeted selling price
of $5 per unit. Actual sales volumes in the period were as budgeted but the actual sales price
achieved was only $4 per unit. This was because a competitor launched a similar product at the
same time. Caf Co had been unaware that this was going to happen when it prepared its budget
and, had it known this, it would have revised its expected selling price to $380 per unit, which
was the price of the competitors product.
What is the sales price planning variance?

Adverse Favourable
$...................
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 39

45 The following details have been extracted from the accounting records of RG for August.
Output of RG 800 units 890 units
Materials 4,000kg 4,375kg
Cost per kg $20.00 $21.60
It has now been realised that the standard cost per kg of the material should have been $20.90.
What are the following variances for August to the nearest $0.01?
Materials planning price variance

Adverse Favourable
$...................

Materials operational price variance

Adverse Favourable
..................

DEMIA CO

Co
The following scenario relates to questions 46-50. Each question is worth 2 marks.

Fir
st I pyri
Demia Co makes televisions. The original standard prime costs, based on a budgeted production and
sales of 12,000 units, are as follows:

ntu ght
$
Materials 70

itio
Labour 3hrs @ $20 per hr 60
Standard prime cost 130

Actual production and sales were 11,000 televisions.


n2
017
Before the period started, Demias production equipment broke down and it was forced to buy a new
machine, which requires less labour input. As a result the new standard time for production is 2.5
hours per unit. During the period Demia spent $756,250 on 29,000 hours of labour.

46 The following statements have been made about the total labour variances:
1 The total labour rate variance is all due to planning errors.
2 The total labour efficiency variance is Nil.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2
40 T u i t i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

47 What are the correct planning and operational labour efficiency variances?
Planning labour efficiency variance

Adverse Favourable
$...................

Operational labour efficiency variance

Adverse Favourable
$...................

48 The new standard labour cost is based on 2.5 hours of semi-skilled labour at $20/hr. The labour
supervisor is thinking of arranging for the work to be done in pairs, using one semi-skilled and
one unskilled worker, each working for 1.5 hours.
Calculate the maximum hourly rate, to the nearest $0.01, that the supervisor can afford to
pay the unskilled workers without giving rise to an adverse labour rate variance.

49 The total overheads for 12,000 units were budgeted as $504,000, compared with $400,000 at

t
last years level of 9,000. The management accountant has identified that the fixed costs step

i g h 1 7
up by 20% at 10,000 units.

y r 20
Calculate the budgeted variable cost per unit for televisions.

o p ion $

C uit
50

I n t The management of Demia Limited wishes to increase the level of contribution from sales of

t
televisions and to do so by adopting a target costing approach.

ir s Which TWO of the following would be techniques that Demia Limited could use to aim

F
towards achieving a target cost?
Use of bespoke components where possible
Better training for unskilled workers
Change in the packaging of the televisions
Use of components with a longer lifespan
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 41

Performance analysis
51 Which of the following statements about variances is/are true?

True False
In a rapidly changing environment variances based on standard
costs are likely to provide a meaningful analysis of
performance.
When monitoring performance, a company only needs to focus
on adverse variances.
A desire to create a favourable material price variance may
result in the purchasing manager taking decisions which are
incompatible with TQM.
If a company operates a JIT policy, it is not likely to experience
any labour idle time variance.

Fir Co
st I pyri
ntu ght
itio
n2
017
42 T u i t i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

4: Performance measurement and control

Performance management information systems


1 An information system contains external and internal data which is both qualitative and
quantitative.
What is this system most likely to be used for?
Strategic planning
Management control
Operational control
Strategic planning, management control and operational control

2 A report which provides information about daily inventory movements would be most likely to
be used for:
Strategic planning
Management control
Operational control

t
Strategic planning, management control and operational control

i g h 1 7
3

y r 20
Which of the following is/are characteristics of a Decision support system?

o p ion Characteristic Not a characteristic

C uit Provides summary information for the Board

t
Provides information in a flexible format

t I n Facilitates what if analysis

r s
Can be used to assist resource planning

F i 4 The following statements have been made about open and closed systems:
1 Open systems refer to systems that interact with other systems or the outside environment.
2 Closed systems are preferable for performance management.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2
ACCA F5 Question Bank Tuition questions: 4: Performance measurement and control 43

5 Which of the following areas of a business would an enterprise resource planning system
generally cover?

Cover Not cover


Order processing
Manufacturing
Distribution
Customer service
Human resources
Finance

Sources of management information


6 Which of the following is/are internal sources of management accounting information and
which are external sources?

Internal External
Database of customer information
Inventory management system
Results of market research

Fir Cop
Payroll system

7
st I yri
The following statements have been made about sources of information:
1
ntu ght
Having access to external information means decisions can be made in a more informed

itio
way.

n2
2 Using internal information reduces the need to rely on third party information which may
be inaccurate.
Which of the above statements is/are true?
1 only 017
2 only
Neither 1 nor 2
Both 1 and 2

8 The following are all types of costs associated with management information:
I Use of bar coding and scanners
II Verification of payroll accuracy by Financial Controller
III Lack of resource available to spend on other value-adding activities
Which of the above are examples of process costs?
II only
I and II only
I and III only
All of the above
44 T u i t i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

9 Which of the following is/are examples of direct data capture costs and which is/are examples
of processing costs?

Direct data
capture Processing
Use of bar coding and scanners
Payroll department analysis of personnel costs
Completion of timesheets by employees
Input of timesheet information onto management
information system

Management reports
10 Which TWO of the following controls within an organisation help to ensure the accuracy of
information?
Completeness checks
Hierarchical passwords
Data encryption
Validation of input data

11

ht 7
Which of the following statements about data controls is/are true?

r i g 201 True False

y
p ion
A range check is a form of validation control.

o
Hierarchical passwords can be used to grant different

C uit
access rights to different users of a database.

t
Firewalls protect data from external access.

I n
Encryption means that data can only be understood by

t
those transmitting and receiving it, and not by anyone

r s
intercepting it.

F i 12 Which of the following controls would NOT be designed to ensure the security of confidential
information?
Storage of sensitive data in locked filing cabinets
Remote storage of back-up copies of data
Use of a data encryption software package
Requiring all staff to sign a confidentiality agreement
ACCA F5 Question Bank Tuition questions: 4: Performance measurement and control 45

Performance analysis in private sector organisations


13 Which of the following performance indicators are considered to be financial measures and
which of the following are considered to be non-financial measures?

Financial Non-financial
Product returns rate
Market share
Asset turnover
Staff turnover

14 Which of the following is NOT a perspective of the balanced scorecard?


Non-financial
Internal Business Processes
Customer
Innovation & Learning

15 Which THREE of the following are included in Fitzgerald and Moons Building blocks?
Decisions
Dimensions

Fir Co
st I pyri
Returns
Rewards

ntu ght
Standards
Targets

itio
n2
16 For which of the following would the return on capital employed be a useful performance
measure?

017
The sales team who are responsible for the revenue generated from selling product
Factory supervisors who are responsible for the costs incurred in producing product
The Operations Director who is responsible for the sales team and for factory costs
The Managing Director who has overall responsibility for the businesses costs and
revenues, including the administration and finance functions

17 The following ratios have been calculated for a company:

Gross profit margin 42%


Operating profit margin 28%
Gearing (debt/equity) 40%
Asset turnover 65%
What is the return on capital employed for the company, to the nearest 0.1%?

%
46 T u i t i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

OLIVERS SALON
The following scenario relates to questions 18-22. Each question is worth 2 marks.
Oliver is the owner and manager of Olivers Salon, which is a quality hairdresser that experiences high
levels of competition. The salon traditionally provided a range of hair services to female clients only. A
year ago, at the start of his 20X9 financial year, Oliver decided to expand his operations to include the
hairdressing needs of male clients.
The prices for the female clients were not increased during the whole of 20X8 and 20X9 and the mix of
services provided for female clients in the two years was the same.
Two new staff were recruited at the start of 20X9. The first was a junior hairdresser, to support the
specialist hairdressers for the female clients. She was appointed on a salary of $9,000 per annum. The
second new staff member was a specialist hairdresser for the male clients. There were no increases in
pay for existing staff at the start of 20X9 after a big rise at the start of 20X8, which was designed to
cover two years worth of increases.
The latest financial results are as follows.
20X8 20X9
$ $ $ $
Sales 200,000 238,500
Less cost of sales:
Hairdressing staff costs 65,000 91,000

t
Hair products female 29,000 27,000

h 7
Hair products male 8,000

r i g 201 94,000 126,000

y
Gross profit 106,000 112,500

o p ion
Less expenses: 28,000 32,500

C uit
Profit 78,000 80,000

t
Oliver thinks the salon is much busier than a year ago and was expecting more profit.

t I n
Oliver introduced some non-financial measures of success two years ago.

s
20X8 20X9

F ir Number of complaints
Number of male client visits
Number of female client visits
12
0
8,000
46
3,425
6,800
Number of specialist hairdressers for female clients 4 5
Number of specialist hairdressers for male clients 0 1

18 Calculate the average price for hair services per male client in 20X9.

19 Are the following statements about Olivers Salon true or false?

True False
Gross and net profit margins have decreased in 20X9
compared with 20X8.
Average cost per staff member has increased in 20X9
compared with 20X8.
ACCA F5 Question Bank Tuition questions: 4: Performance measurement and control 47

20 Which of the following is least likely to be an explanation for the increase in the number of
complaints in 20X9 compared with 20X8?
The change in customer base bringing in male clients who are more likely to complain
Female customers complaining about the change in atmosphere following the
introduction of male services
The mix of services offered to female clients
Poor quality work from the new trainee

21 Which of the following statements is true?


Resource utilisation of the property has increased and resource utilisation of specialist
female hairdressers has decreased.
Resource utilisation of the property has increased and resource utilisation of specialist
female hairdressers has increased.
Resource utilisation of the property has decreased and resource utilisation of specialist
female hairdressers has decreased.
Resource utilisation of the property has decreased and resource utilisation of specialist
female hairdressers has increased.

22 Oliver is thinking about introducing more non-financial measures of performance, as he believes

Fir Co
that selecting the right measures can help improve customer satisfaction and hence ultimately

st I pyri
profitability.
Which of the following will be a problem/problems for Oliver in introducing more measures?

ntu ght Problem Not a problem

itio
It may be difficult to define measures for quality of
service provided.

n2
Increasing the number of measures may increase the
chances of the measures giving a conflicting picture.

017
Increasing the number of measures will mean that the
business has more of an external focus, rather than
focusing on internal problems.
Oliver may have to spend more time himself on
measurement work and less on servicing customers.

Divisional performance and transfer pricing


23 Which of the following does the manager have control over in a cost centre?

Control No control
Revenue generation
Attributable costs
Apportioned head office costs
Investment in non-current assets
48 T u i t i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

24 Division A makes and transfers a product to Division B and receives the market price for the
transferred item, whilst Division B only gets charged with the variable cost of the item.
This transfer pricing approach is known as a:
Dual pricing system
Opportunity cost system
Two-part tariff system
Market based system

25 Tallulah Ltd uses Return on Investment (ROI) and Residual Income (RI) performance measures.
The Medchester division has net assets of $12m and in the year to 31 December 20X4 it earned
profit before interest and tax of $1.8m and paid interest of $0.3m. Tallulah Ltds cost of capital
is 12%.
What are the correct ROI, to the nearest 0.1%, and RI, to the nearest $0.01m, for the year to
31 December 20X4?
ROI

%
RI

t
$ million

i g h 1 7
26
y r 20
Dust Co has two divisions, A and B. Each division is currently considering the following separate

o p ion projects:

C uit Division A Division B

t
Capital required for the project $326 million $222 million

I n
Sales generated by project $144 million $88 million

t
Operating profit margin 30% 24%

r s
Cost of capital 10% 10%

F i Current return on investment of division 15%


If residual income is used as the basis for the investment decision, which Division(s) would
choose to invest in the project?
9%

Division A only
Division B only
Both Division A and Division B
Neither Division A nor Division B
ACCA F5 Question Bank Tuition questions: 4: Performance measurement and control 49

27 Oxco has two divisions, A and B. Division A makes a component for air conditioning units which
it can only sell to Division B. It has no other outlet for sales.
Current information relating to Division A is as follows:
Marginal cost per unit $100
Transfer price of the component $165
Total production and sales of the component each year 2,200 units
Specific fixed costs of Division A per year $10,000
Cold Co has offered to sell the component to Division B for $140 per unit. If Division B accepts
this offer, Division A will be shut.
If Division B accepts Cold Cos offer, what will be the impact on profits per year for the group
as a whole?
Increase Decrease
$...................

28 Which of the following does the manager have control over in an investment centre?

Control No control
Generation of revenues
Investment in non-current assets

Fir Cop
Investment in working capital
Apportioned head office costs

st I yri
ntu ght
29 At the start of the year, a division has non-current assets of $4 million and makes no additions
or disposals during the year. Depreciation is charged at a rate of 10% per annum on all non-

itio
current assets held at the end of the year. Working capital is $05 million at the start of the year
although this is expected to increase by 20% by the end of the year. The budgeted profit of the

n2
division after depreciation is $12m.

017
What is the expected ROI of the division for the year, to the nearest 0.01%, based on average
capital employed?

%
50 T u i t i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

ABEL CO
The following scenario relates to questions 30-34. Each question is worth 2 marks.
The production division of Abel Co has the following standard unit costs for the production of an
electronic component:
Direct material $2.00
Direct labour $2.50
Variable overheads $1.50
Fixed overheads are expected to be $300,000 and maximum capacity is 100,000 units.
The production division currently makes and transfers all 100,000 components to the retail division,
which completes the assembly and sells it to individual consumers for $15, after incurring additional
costs of $2.50 per unit. The current transfer price policy is full cost plus 30%.
The production division has been offered the chance to sell all the components it can produce to a
commercial buyer who is willing to pay $11 per unit. The retail division can source components
externally at a price of $11.50. Assume the maximum demand for the retail divisions product is
100,000 units.

30 What is the transfer price per unit under the current policy, to the nearest $0.01?

t
$

i g h 1 7
31
y r 20
Which of the following statements relating to the current system of transfer pricing are true?

o p ion 1 Full cost-based transfer prices are most appropriate where there is an intermediate

C uit market for the product.

I n t 2 When the producing division is operating at full capacity, a full cost-based approach
should be used for the transfer price.

r s t 1 only

F
2 only
Neither 1 nor 2
Both 1 and 2

32 What is the minimum transfer price that will ensure Abel Co maximises company profit, given
the offer from the commercial buyer?
$12.50
$11.00
$9.00
$8.50

33 What is the maximum contribution that Abel Co can earn if the production division decides to
supply the commercial customer?

$
ACCA F5 Question Bank Tuition questions: 4: Performance measurement and control 51

34 The Finance Director of Abel Co is considering switching away from the current policy, but is
concerned about how the Production division will cover its fixed costs.
Which of these methods will NOT help address the problem?
Giving the production and retail divisions a share of Abel Co s overall contribution
Setting the transfer price at variable cost, but reporting the value of the transfer for the
Production division at total cost
Setting the transfer price at market value if an external market exists for the product
Transferring a fixed fee to the Production division

Performance analysis in not-for-profit organisations and the public sector


35 Which of the following is/are characteristics for a public sector organisation such as a hospital?

Characteristic Not a characteristic


Some non-quantifiable objectives
Multiple stakeholders
Objectives may be subject to political pressures
Conflicting priorities for resource allocation

36
Fir Co
Which of the following is a common way of assessing Value For Money?

st I pyri
Economy, Efficiency, Effectiveness
Economy, Efficiency, Environment

ntu ght

Efficiency, Effectiveness, Environment

itio
Economy, Energy, Effectiveness

37
n2
Def Co provides accounting services to government departments. On average, each staff

017
member works six chargeable hours per day, with the rest of their working day being spent on
non-chargeable administrative work. One of the companys main objectives is to produce a high
level of quality and customer satisfaction.
Match DEF Cos targets for the next year to the aspect of economy, efficiency and
effectiveness at Def Co to which they relate.
Economy Efficiency Effectiveness
Cutting departmental expenditure by 5%
Increasing the number of chargeable
hours handled by advisers to 62 per day
Obtaining a score of 47 or above on
customer satisfaction surveys
Retaining all current contracts with
government departments
52 T u i t i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

External considerations and behavioural aspects


38 Which TWO of the following are negative behavioural aspects of a change in an organisations
performance management system?
Increased motivation to achieve rewards by achieving targets
Manipulation of targets to ensure results achieved
Dysfunctional decision making
Teamwork rather than self-interest encouraged

39 The following statements have been made about external considerations and performance
management
1 An organisation which takes account of external factors is more likely to focus on the
aspects of performance that its managers can control.
2 Planning and operational variances are a way of taking external considerations into
account when assessing performance.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2

htBoth 1 and 2

7
r i g 201
y
p ion
o
C uit
I n t
r s t
F i
ACCA F5 Question Bank Tuition questions: 2: Decision-making techniques 53

PART 1 TUITION QUESTIONS: Long form

2: Decision-making techniques

Limiting factors

1 CUT AND STITCH (Q3, JUNE 2010)


Cut and Stitch (CS) make two types of suits using skilled tailors (labour) and a delicate and unique
fabric (material).
Both the tailors and the fabric are in short supply and so the accountant at CS has correctly produced a
linear programming model to help decide the optimal production mix.
The model is as follows.
Variables:
Let W = the number of work suits produced
Let L = the number of lounge suits produced
Constraints:

Fir Co
Tailors time: 7W + 5L 3,500 (hours) this is line T on the diagram

st I pyri
Fabric: 2W + 2L 1,200 (metres) this is line F on the diagram
Production of work suits: W 400 this is line P on the diagram

ntu ght
Objective is to maximise contribution subject to:

itio
C = 48W + 40L
On the diagram provided the accountant has correctly identified OABCD as the feasible region and
point B as the optimal point.
n2
017
54 T u i t i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

Required:
(a) Find by appropriate calculation the optimal production mix and related maximum contribution
that could be earned by CS. (4 marks)
(b) Calculate the shadow prices of the fabric per metre and the tailor time per hour. (6 marks)
The tailors have offered to work an extra 500 hours provided that they are paid three times their
normal rate of $1.50 per hour at $4.50 per hour.
Required:
(c) Briefly discuss whether CS should accept the offer of overtime at three times
the normal rate. (6 marks)
(d) Calculate the new optimum production plan if maximum demand for W falls
to 200 units. (4 marks)

(20 marks)

Pricing decisions

2 WX (Q3B, JUNE 2013 AMENDED)


WX is reviewing the selling price of one of its electronic products. The current selling price of the

t
product is $25 per unit and annual demand is forecast to be 150,000 units at this price. Market

g h 1 7
research indicates that the level of demand would be affected by any change in the selling price.

i
r 0
Detailed analysis from this research shows that for every $1 increase in selling price, annual demand

y 2
would reduce by 25,000 units and that for every $1 decrease in selling price, annual demand would

p ion
o
increase by 25,000 units.

C uit
A forecast of the annual costs that would be incurred by WX in respect of this product at differing

t
activity levels is as follows.

t I n
Annual production (units) 100,000 160,000 200,000

ir s $000 $000 $000

F
Direct materials 200 320 400
Direct labour 600 960 1,200
Overhead 880 1,228 1,460
The cost behaviour patterns represented in the above forecast will apply for the whole range of output
up to 300,000 units per annum of this product.
Required:
(a)
(i) Calculate the total variable cost per unit. (2 marks)
(ii) Calculate the selling price of the product that will maximise the companys profits.
(4 marks)
(b) Explain TWO reasons why WX might decide NOT to use this optimum selling price. (4 marks)
WX has recently been suffering from liquidity problems and hopes that these will be eased by the
launch of its new webcam, which has revolutionary audio sound and visual quality. The webcam is
expected to have a product life cycle of two years.
(c) Explain the market skimming (also known as price skimming) pricing strategy and discuss, as
far as the information allows, whether this strategy may be more appropriate for WX than
charging one price throughout the webcams entire life. (10 marks)
(20 marks)
ACCA F5 Question Bank Tuition questions: 2: Decision-making techniques 55

Dealing with risk and uncertainty in decision making

3 GYM BUNNIES (Q1, JUNE 2013 AMENDED)


Gym Bunnies (GB) is a health club. It currently has 6,000 members, with each member paying a
subscription fee of $720 per annum. The club is comprised of a gym, a swimming pool and a small
exercise studio.
A competitor company is opening a new gym in GBs local area, and this is expected to cause a fall in
GBs membership numbers, unless GB can improve its own facilities. Consequently, GB is considering
whether or not to expand its exercise studio in a hope to improve its membership numbers. Any
improvements are expected to last for three years.
Option 1
No expansion. In this case, membership numbers would be expected to fall to 5,250 per annum for the
next three years. Operational costs would stay at their current level of $80 per member per annum.
Option 2
Expand the exercise studio. The capital cost of this would be $360,000. The expected effect on
membership numbers for the next three years is as follows:
Probability Effect on membership numbers

Fir Co
0.4 Remain at their current level of 6,000 members per annum
0.6 Increase to 6,500 members per annum

st I pyri
The effect on operational costs for the next three years is expected to be:

ntu ght
Probability Effect on operational costs
0.5 Increase to $120 per member per annum

itio
0.5 Increase to $180 per member per annum

n2
A decision tree has been started to illustrate these options, but requires completion:

Option 1
017
5,250 members 0.5
A
D
0.5
6,000 members
Option 2
$(360k)
0.4

0.6

6,500 members 0.5


B
0.5
56 T u i t i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

Required:
(a) Using the criterion of expected value, use the points on the decision tree to recommend the
decision that GB should make.
Note: Ignore time value of money. (8 marks)
(b) Calculate the maximum price that GB should pay for perfect information about the expansions
exact effect on MEMBERSHIP NUMBERS. (6 marks)
(c) Briefly discuss the problems of using expected values for decisions of this nature. (2 marks)
(d) Discuss the usefulness of simulation, and worst and best case figures as methods of analysing
and assess the risk that exists in a businesss decision-making. (4 marks)

(20 marks)

ht 7
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p ion
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I n t
r s t
F i
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 57

3: Budgeting and control

Budgetary systems and types of budget

1 PC CO (Q3, DECEMBER 2011)


You have recently been appointed as an assistant management accountant in a large company, PC Co.
When you meet the Production Manager, you overhear him speaking to one of his staff, saying:
Budgeting is a waste of time. I dont see the point of it. It tells us what we cant afford but it doesnt
keep us from buying it. It simply makes us invent new ways of manipulating figures. If all levels of
management arent involved in the setting of the budget, they might as well not bother preparing
one.
Required:
(a) Identify and explain SIX objectives of a budgetary control system. (9 marks)
(b) Discuss the concept of a participative style of budgeting in terms of the six objectives identified
in part (a). (11 marks)

Fir Co (20 marks)

Materials mix and yield variances st I pyri


ntu ght
2 THE SAFE SOAP CO (DECEMBER 2014 AMENDED)
itio
n2
The Safe Soap Co makes environmentally-friendly soap using three basic ingredients. The standard

017
cost card for one batch of soap for the month of September was as follows:
Material Kilograms Price per kilogram ($)
Lye 0.25 10
Coconut oil 0.6 4
Shea butter 0.5 3
The budget for production and sales in September was 120,000 batches. Actual production and sales
were 136,000 batches. The actual ingredients used were as follows:
Material Kilograms
Lye 34,080
Coconut oil 83,232
Shea butter 64,200
The Safe Soap Co has used activity-based costing to allocate its overheads for a number of years. One
of its main overheads is machine set-up costs. The following information was available in relation to
set-up costs for September.
Budget
Total number of set ups 30
Total set-up costs $40,500
Actual
Total number of set ups 36
Total set-up costs $45,400
58 T u i t i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

Required:
(a) Calculate the total material mix variance and the total material yield variance for September.
(8 marks)
(b) In October the materials mix and yield variances were as follows:
Mix: $6,000 adverse
Yield: $10,000 favourable
The production manager is pleased with the results overall, stating:
At the beginning of September I made some changes to the mix of ingredients used for the
soaps. As I expected, the mix variance is adverse in both months because we havent yet
updated our standard cost card but, in both months, the favourable yield variance more than
makes up for this. Overall, I think we can be satisfied that the changes made to the product mix
are producing good results and now we are able to produce more batches and meet the
growing demand for our product.
The sales manager, however, holds a different view and says:
Im not happy with this change in the ingredients mix. Ive had to explain to the board why the
sales volume variance for October was $22,000 adverse. Ive tried to explain that the quality of
the soap has declined slightly and some of my customers have realised this and simply arent
happy but no-one seems to be listening. Some customers are even demanding that the price of
the soap be reduced and threatening to go elsewhere if the problem isnt sorted out.

ht
Required:

7
r i g
(i)

201 Briefly explain what the adverse materials mix and favourable materials yield variances

y
p ion
indicate about production at Safe Soap Co in October. (4 marks)

o
C uit
Note: You are NOT required to discuss revision of standards or operational and planning
variances.

I n t (ii) Discuss whether the sales manager could be justified in claiming that the change in the

t
materials mix has caused an adverse sales volume variance in October. (2 marks)

ir s (c) Calculate the following activity-based variances in relation to the set-up cost of the machines:

F (i)
(ii)
The expenditure variance
The efficiency variance
(3 marks)
(3 marks)

(20 marks)

Planning and operational variances

3 BEDCO (Q5, DECEMBER 2013)


Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain. It uses a just-
in-time system and holds no inventories.
The standard cost for the cotton which is used to make the bed sheets and pillowcases is $5 per m2.
Each bed sheet uses 2 m2 of cotton and each pillowcase uses 0.5 m2. Production levels for bed sheets
and pillowcases for November were as follows.
Budgeted production Actual production
levels (units) levels (units)
Bed sheets 120,000 120,000
Pillowcases 190,000 180,000
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 59

The actual cost of the cotton in November was $5.80 per m2. 248,000 m2 of cotton was used to make
the bed sheets and 95,000 m2 was used to make the pillowcases.
The world commodity prices for cotton increased by 20% in the month of November. At the beginning
of the month, the hotel chain made an unexpected request for an immediate design change to the
pillowcases. The new design required 10% more cotton than previously. It also resulted in production
delays and therefore a shortfall in production of 10,000 pillowcases in total that month.
The Production Manager at Bedco is responsible for all buying and any production issues which occur,
although he is not responsible for the setting of standard costs.
Required:
(a) Calculate the following variances for the month of November, for both bed sheets and pillow
cases, and in total:
(i) Material price planning variance; (3 marks)
(ii) Material price operational variance; (3 marks)
(iii) Material usage planning variance; (3 marks)
(iv) Material usage operational variance. (3 marks)
(b) Assess the performance of the production manager for the month of November. (8 marks)

(20 marks)

Fir Co
st I pyri
Performance analysis and behavioural aspects

4 JUMP (Q5, JUNE 2010) ntu ght


itio
Jump has a network of sports clubs which is managed by local managers reporting to the main board.

n2
The local managers have a lot of autonomy and are able to vary employment contracts with staff and

017
offer discounts for membership fees and personal training sessions. They also control their own
maintenance budget but do not have control over large amounts of capital expenditure.
A local managers performance and bonus is assessed relative to three targets. For every one of these
three targets that is reached in an individual quarter, $400 is added to the managers bonus, which is
paid at the end of the year.
The maximum bonus per year is therefore based on 12 targets (three targets in each of the four
quarters of the year).
Accordingly, the maximum bonus that could be earned is 12 $400 = $4,800, which represents 40% of
the basic salary of a local manager. Jump has a 31 March year end.
The performance data for one of the sports clubs for the last four quarters is as follows.
Qtr to Qtr to Qtr to Qtr to
30 June 30 September 31 December 31 March
2009 2009 2009 2010
Number of members 3,000 3,200 3,300 3,400
Member visits 20,000 24,000 26,000 24,000
Personal training sessions booked 310 325 310 339
Staff days 450 480 470 480
Staff lateness days 20 28 28 20
Days in quarter 90 90 90 90
60 T u i t i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

Agreed targets are:


1. Staff must be on time over 95% of the time (no penalty is made when staff are absent from
work)
2. On average 60% of members must use the clubs facilities regularly by visiting at least 12 times
per quarter
3. On average 10% of members must book a personal training session each quarter
Required:
(a) Calculate the amount of bonus that the manager should expect to be paid for the latest
financial year. (6 marks)
(b) Discuss to what extent the targets set are controllable by the local manager (you are required to
make a case for both sides of the argument). (9 marks)
(c) Describe two methods as to how a manager with access to the accounting and other records
could unethically manipulate the situation so as to gain a greater bonus. (5 marks)

(20 marks)

ht 7
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I n t
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F i
ACCA F5 Question Bank Tuition questions: 4: Performance measurement and control 61

4: Performance measurement and control

Performance analysis in private sector organisations

1 WEB CO (Q3, DECEMBER 2012)


Web Co is an online retailer of fashion goods and uses a range of performance indicators to measure
the performance of the business. The companys management have been increasingly concerned
about the lack of sales growth over the last year and, in an attempt to resolve this, made the following
changes right at the start of Quarter 2.
(a) Advertising: Web Co placed an advert on the webpage of a well-known online fashion magazine
at a cost of $200,000. This had a direct link from the magazines website to Web Cos online
store.
(b) Search engine: Web Co also engaged the services of a website consultant to ensure that, when
certain key words are input by potential customers onto key search engines, such as Google and
Yahoo, Web Cos website is listed on the first page of results. This makes it more likely that a
customer will visit a companys website. The consultants fee was $20,000.

Fir Co
(c) Website availability: During Quarter 1, there were a few problems with Web Cos website,

st I pyri
meaning that it was not available to customers some of the time. Web Co was concerned that
this was losing them sales and the IT department therefore made some changes to the website
in an attempt to correct the problem.

ntu ght
The following incentives were also offered to customers:
(a)
itio
Incentive 1: A free Fast Track delivery service, guaranteeing delivery within two working days,

n2
for all continuing customers who subscribe to Web Cos online subscription newsletter.
Subscribers are thought by Web Co to become customers who place further orders.
(b)
017
Incentive 2: A $10 discount to all customers spending $100 or more at any one time.
The results for the last two quarters are shown below, Quarter 2 being the most recent one. The
results for Quarter 1 reflect the period before the changes and incentives detailed above took place
and are similar to the results of other quarters in the preceding year.
Quarter 1 Quarter 2
Total sales revenue $2,200,000 $2,750,000
Net profit margin 25% 16.7%
Total number of orders from customers 40,636 49,600
Total number of visits to website 101,589 141,714
Conversion rate visitor to purchaser 40% 35%
The percentage of total visitors accessing website through magazine link 0 19.9%
Website availability 95% 95%
Number of customers spending more than $100 per visit 4,650 6,390
Number of subscribers to online newsletter 4,600 11,900
Required:
Assess the performance of the business in Quarter 2 in relation to the changes and incentives that the
company introduced at the beginning of this quarter. State clearly where any further information
might be necessary, concluding as to whether the changes and incentives have been effective.

(20 marks)
62 T u i t i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

2 AT CO (Q2, DECEMBER 2010)


The Accountancy Teaching Co (AT Co) is a company specialising in the provision of accountancy tuition
courses in the private sector. It makes up its accounts to 30 November each year. In the year ending
30 November 2009, it held 60% of market share. However, over the last 12 months, the accountancy
tuition market in general has faced a 20% decline in demand for accountancy training leading to
smaller class sizes on courses. In 2009 and before, AT Co suffered from an ongoing problem with staff
retention, which had a knock-on effect on the quality of service provided to students. Following the
completion of developments that have been ongoing for some time, in 2010 the company was able to
offer a far-improved service to students. The developments included:
A new dedicated 24-hour student helpline
An interactive website providing instant support to students
A new training programme for staff
An electronic student enrolment system
An electronic marking system for the marking of students progress tests. The costs of marking
electronically were expected to be $4 million less in 2010 than marking on paper. Marking
expenditure is always included in cost of sales
Extracts from the management accounts for 2009 and 2010 are shown below:
2009 2010
$000 $000 $000 $000

t
Turnover 72,025 66,028

g
Cost of sales

i h 1 7 (52,078) (42,056)

r 0
Gross profit 19,947 23,972

y
p ion 2
Indirect expenses:

o
Marketing 3,291 4,678

C uit
Property 6,702 6,690
Staff training 1,287 3,396

I n t
Interactive website running costs
Student helpline running costs


3,270
2,872

r s tEnrolment costs 5,032 960

i
Total indirect expenses (16,312) (21,866)

F Net operating profit 3,635

On 1 December 2009, management asked all freelance lecturers to reduce their fees by at least 10%
2,106

with immediate effect (freelance lecturers are not employees of the company but are used to teach
students when there are not enough of AT Cos own lecturers to meet tuition needs). All employees
were also told that they would not receive a pay rise for at least one year. Total lecture staff costs
(including freelance lecturers) were $41663 million in 2009 and were included in cost of sales, as is
always the case. Freelance lecturer costs represented 35% of these total lecture staff costs. In 2010
freelance lecture costs were $12394 million. No reduction was made to course prices in the year and
the mix of trainees studying for the different qualifications remained the same. The same type and
number of courses were run in both 2009 and 2010 and the percentage of these courses that was run
by freelance lecturers as opposed to employed staff also remained the same.
Due to the nature of the business, non-financial performance indicators are also used to assess
performance, as detailed below.
2009 2010
Percentage of students transferring to AT Co from another training provider 8% 20%
Number of late enrolments due to staff error 297 106
Percentage of students passing exams first time 48% 66%
Labour turnover 32% 10%
Number of student complaints 315 84
Average no of employees 1,080 1,081
ACCA F5 Question Bank Tuition questions: 4: Performance measurement and control 63

Required:
Assess the performance of the business in 2010 using both financial performance indicators calculated
from the above information AND the non-financial performance indicators provided.
Note: Clearly state any assumptions and show all workings clearly. Your answer should be structured
around the following main headings: turnover; cost of sales; gross profit; indirect expenses; net
operating profit. However, in discussing each of these areas you should also refer to the non-financial
performance indicators, where relevant.

(20 marks)

Divisional performance and transfer pricing

3 BATH CO (Q2, DECEMBER 2011)


Bath Co is a company specialising in the manufacture and sale of baths. Each bath consists of a main
unit plus a set of bath fittings. The company is split into two divisions, A and B. Division A
manufactures the bath and Division B manufactures sets of bath fittings. Currently, all of Division As
sales are made externally. Division B, however, sells to Division A as well as to external customers.
Both of the divisions are profit centres.

Co
The following data is available for both divisions.

Fir
st I pyri
Division A
Current selling price for each bath $450

ntu ght
Costs per bath:
Fittings from Division B $75

itio
Other materials from external suppliers $200
Labour costs $45
Annual fixed overheads
n2 $7,440,000

017
Annual production and sales of baths (units) 80,000
Maximum annual market demand for baths (units) 80,000
Division B
Current external selling price per set of fittings $80
Current price for sales to Division A $75
Costs per set of fittings:
Materials $5
Labour costs $15
Annual fixed overheads $4,400,000
Maximum annual production and sales of sets of fittings (units)
(including internal and external sales) 200,000
Maximum annual external demand for sets of fittings (units) 180,000
Maximum annual internal demand for sets of fittings (units) 80,000
The transfer price charged by Division B to Division A was negotiated some years ago between the
previous divisional managers, who have now both been replaced by new managers. Head Office only
allows Division A to purchase its fittings from Division B, although the new manager of Division A
believes that he could obtain fittings of the same quality and appearance for $65 per set, if he was
given the autonomy to purchase from outside the company. Division B makes no cost savings from
supplying internally to Division A rather than selling externally.
64 T u i t i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

Required:
(a) Under the current transfer pricing system, prepare a profit statement showing the profit for
each of the divisions and for Bath Co as a whole. Your sales and costs figures should be split into
external sales and inter-divisional transfers, where appropriate. (6 marks)
(b) Head Office is considering changing the transfer pricing policy to ensure maximisation of
company profits without demotivating either of the divisional managers. Division A will be given
autonomy to buy from external suppliers and Division B to supply external customers in priority
to supplying to Division A.
Calculate the maximum profit that could be earned by Bath Co if transfer pricing is optimised.
(8 marks)
(c) Discuss the issues of encouraging divisional managers to take decisions in the interests of the
company as a whole, where transfer pricing is used. Provide a reasoned recommendation of a
policy Bath Co should adopt. (6 marks)

(20 marks)

4 HAMMER CO (Q4, JUNE 2010)


Hammer is a large garden equipment supplier with retail stores throughout Toolland. Many of the
products it sells are bought in from outside suppliers but some are currently manufactured by

t
Hammers own manufacturing division Nail.

g h 1 7
The prices (a transfer price) that Nail charges to the retail stores are set by head office and have been

i
r 0
the subject of some discussion. The current policy is for Nail to calculate the total variable cost of

y
p ion 2
production and delivery and add 30% for profit. Nail argues that all costs should be taken into

o
consideration, offering to reduce the mark-up on costs to 10% in this case. The retail stores are

C uit
unhappy with the current pricing policy arguing that it results in prices that are often higher than
comparable products available on the market.

I n t
Nail has provided the following information to enable a price comparison to be made of the two

t
possible pricing policies for one of its products.

ir s Garden shears

F Steel: the shears have 0.4kg of high quality steel in the final product. The manufacturing process loses
5% of all steel put in. Steel costs $4,000 per tonne (1 tonne = 1,000kg)
Other materials: Other materials are bought in and have a list price of $3 per kg although Hammer
secures a 10% volume discount on all purchases. The shears require 0.1kg of these materials.
The labour time to produce shears is 0.25 hours per unit and labour costs $10 per hour.
Variable overheads are absorbed at the rate of 150% of labour rates and fixed overheads are 80% of
the variable overheads.
Delivery is made by an outsourced distributor that charges Nail $0.50 per garden shear for delivery.
Required:
(a) Calculate the price that Nail would charge for the garden shears under the existing policy of
variable cost plus 30%. (6 marks)
(b) Calculate the increase or decrease in price if the pricing policy switched to
total cost plus 10%. (4 marks)
(c) Discuss whether or not including fixed costs in a transfer price is a sensible policy. (4 marks)
(d) Discuss whether the retail stores should be allowed to buy in from outside suppliers if the prices
are cheaper than those charged by Nail. (6 marks)
(20 marks)
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 1: Specialist cost and management accounting techniques 65

PART 1 TUITION ANSWERS: Objective test and Scenario

1: Specialist cost and management accounting techniques

Activity based costing

1 $ 7.50

Total number of batches = (15/25) + (25/5) + (20/4) = 16


Cost driver rate = $600,000 / 16 = $37,500
Cost per unit = $37,500 / 5,000 = $750
Alternatively cost per unit = $37,500 5/ 25,000 = 7.50

2
Facility 4
sustaining

Fir Co
st I pyri
Product 1

ntu ght
itio
Product 3
sustaining

Batch 2
n2
017
3 Production scheduling

4 $ 5.71

Cost driver rates


Set up costs $200,000 / 800 = $250 per set up
Inspection/quality costs $120,000 / 400 = $300 per test
Product W cost per unit
Direct materials $2.50
Direct labour $0.54
Set up costs: 15,000/150 units = 100 batches, 100 $250 / 15,000 units = $1.67
Inspection / quality cost: 100 batches/2 = 50 inspections, 50 $300 / 15,000 units = $1.00
Total production costs = $2.50 + $0.54 + $1.67 + $1.00 = $5.71
66 Tuition answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k

DUFF CO

5 $ 79.25

Total labour hours = (20,000 2.5) + (16,000 3) + (22,000 2) = 142,000


Overhead absorption rate = 1,377,400/142,000 = $9.70 per hour
Full cost per unit of X = $25 + $30 + ($9.70 2.5) = $79.25

6 $ 65833

Budgeted production and sales volumes (units) 20,000 16,000 22,000


Batch size (units) 500 800 400
Number of batches 40 20 55
Number of purchase orders per batch 4 5 4
Number of purchase orders 160 100 220
Total number of purchase orders = 160 + 100 + 220 = 480 orders
Total ordering costs for Y = $316,000 (100/480) = $65,833

t
7 $ 13.54

i g h 1 7
Total machine hours = (20,000 1.5) + (16,000 1.25) + (22,000 1.4) = 80,800 machine hours

y r 20
Machine running and facility costs = $420,000 + $361,400 = $781,400

p ion
Machine running and facility costs allocated to Z = ($781,400/80,800) (22,000 1.4) = $297,860

o
Machine running and general facility costs per unit of Z = $297,860/22,000 = $13.54

C uit
I n t
t
8 $ 79.64

ir s Overhead cost per unit of X = $492,824/20,000 = $24.64

F
Full cost per unit of X = $25 + $30 + $24.64 = $79.64

9 ABC is an absorption costing system.


ABC must be based on activities that are measurable in quantitative terms.
ABC can be used for production and non-production overheads and is only of limited use if
overheads are volume-related.

Target costing

10 $ 170

Required return = 30% $300,000 = $90,000


Target cost = (500 $350) $90,000 = $85,000
Per unit = $85,000/500 = $170
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 1: Specialist cost and management accounting techniques 67

11 $53.33
If profit = 25% sales, then target cost = 75% sales
Selling price = $40/0.75 = $53.33

12 Replace skilled workers with less skilled workers for the more basic production tasks

13
Calculate the 3
target cost

Calculate the 5
target cost gap

Calculate the 4
current cost

Set the required 2

Fir Co
profit

Set the selling 1


st I pyri
ntu ght
price

itio
n2
14 It identifies the market price of a product and then subtracts a desired profit margin to
arrive at the desired cost.

017
A target cost is arrived at by identifying the market price of a product and then subtracting a
desired profit margin from it.

15 The cost gap will decrease and the target cost will remain the same.
The lower learning rate will mean costs are lower and the cost gap will decrease. The target cost
will not be affected by the change in the learning rate as it is determined by selling price and
desired margin.

16 Value analysis
Functional analysis
Iso-contribution analysis relates to limiting factor analysis. Variance analysis is a feedback
technique whereas target costing is a feedforward technique.
68 Tuition answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k

EDWARD CO
17 Cost control can begin at the design stage.
The radio will only include features that the customer regards as valuable.
Target costing will mean that Edward Co has a greater external focus. The introduction of target
costing is likely to have been prompted by the market conditions that are forcing Edward Co to
accept a selling price and not subsequently being able to pass on cost increases to its customers.

18 $ 0.75

Cost of labour idle time = (30/60) $12.60 (10/90) = $0.70


Cost of material waste = (25/100) $4.80 (4/96) = $0.05
Total cost reduction = $0.70 + $0.05 = $0.75

19 $ 1.05

Desired cost = $44 80% = $35.20

ht 7
Revised cost of material for radio = $4.40 (25/100) (100/96) = $1.15

i g 1
Current cost = $4.70 + $1.15 + $8.10 + ((30/60) ($12.60 + $20 + $12)) = $36.25

y r 20
Cost gap = $36.25 $35.20 = $1.05

o p ion
C uit
20 Only including standard components in the radio

I n

t Increasing the automation of the manufacturing process

r s t Just using standard components is a legitimate way to reduce costs. Automation could reduce

i
costs by cutting down skilled labour time. Reducing the number of features will reduce the cost

F
gap increasing the number of features will only work if Edward Co can charge a higher price.
Analysing costs into cost pools is the starting point of activity-based costing.

21 The repair work carried out will vary according to the problems found.
The repair service will be a potentially unique job in response to the problems that the
customer has had.
The outcome of the repair service can be specified it is the problem being fixed and the radio
working properly again. Costing the time is not itself a problem as that will have to be done
whatever the costing method. Reducing labour time may however be problematic. The service
being carried out when required should not be an issue with costing this sort of service.
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 1: Specialist cost and management accounting techniques 69

Life cycle costing


22 Design costs
Testing costs
Production facility investment costs
Promotional costs are normally incurred at Introduction. Customer support costs increase from
the growth stage onwards. Inventory costs would only be relevant once production had started.

23 $ 275

3,250,000 + 2,000,000+250,000 = 5,500,000/44,000units = $125


$125 + $150 = $275 per unit

24 Results in a market driven pricing strategy


This is a benefit of target costing.

Fir Cop
25
Included Excluded

st I yri
Research and development
Planning and concept design
Testing
ntu ght

itio
Production
Advertising
Distribution and customer service
n2

26 At the design/development stage 017


Throughput accounting
27 Stretching time
Available resource Required
Material 30,000 metres 10,000 + 15,000 = 25,000 metres
Pressing time 13,000 hours 10,000 0.5 + 15,000 0.5 = 12,500 hrs
Stretching time 8,000 hours 10,000 0.25 + 15,000 0.4 = 8,500 hrs
Rolling time 7,750 hours 10,000 0.4 + 15,000 0.25 = 7,750 hrs

28 $ 1.33

Time available = 24 5 5 = 600 hrs


Production = 300 units, hence time per unit = 2 hrs (600/300)
Return per machine hour = (65 25)/2 = $20
Conversion cost per hour = (20 + 10)/2 = $15
TAR = $20/15 = 1.33
70 Tuition answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k

29 Raise the selling price of the product


This will increase the throughput contribution.

30 $ 2400

$320 $80/(6/60) = $2,400

31 It does not attempt to maximise profit.


Work in progress is valued at material cost only.
Throughput assumes that only material costs are variable, whereas labour and other costs will also
be variable beyond a certain time horizon, and this will affect the calculation of maximum profit.

32 Direct labour price

GOPHER GARAGE

t
33
MOTs

i g h 1
8000
7
y r 20
p ion
Services 3125

o
C uit
Total garage hours per year = 10 5 50 = 2,500 hours

t
There are 4 mechanics, so total hours available = 2,500 hours 4 = 10,000

t I nBased on the time taken for each activity, they can perform 10,000/1.25 = 8,000 MOTs or

s
10,000/3.2 = 3,125 services

F ir 34 MOT 1.75 Service 1.14


MOT
Return per hour = (Selling price Materials)/Time taken on the bottleneck
= ($120 $15)/1.25 = $84
Throughput accounting ratio = Return per hour/Cost per hour = $84/$48 = 1.75
Service
Return per hour = (Selling price Materials)/Time taken on the bottleneck
= ($200 $25)/3.2 = $54.69
Throughput accounting ratio = Return per hour/Cost per hour = $54.69/$48 = 1.14
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 1: Specialist cost and management accounting techniques 71

35 The mechanics time would be a bottleneck for MOTs only.


The existing capacity for each activity is:
MOTs Service
Mechanic 8,000 3,125
Trainee (2,500 3 0.5/1.5) 15,000 5,000
Receptionist (2,500 2 0.25/0.3) 20,000 16,667
Employing another three mechanics would mean that their hours available would be 17,500,
allowing them to carry out 14,000 MOTs or 5,469 services. As a result, the mechanics would still
be the bottleneck for MOTs but the trainees would be the bottleneck for services, as they can
only work on 5,000 services.

36 Decrease the time spent by the mechanics on each customer


Decrease the operating expenses of the garage
Throughput accounting is concerned with minimising the throughput activity, inventory and
operating expenses. The time taken by the trainees is not relevant, as it is not currently the
throughput activity. Decreasing the selling price will worsen the throughput ratio.

Fir Cop
37
True False

st I yri
It can be applied to the management of all external
factors affecting the organisation.

ntu ght
It is concerned with overcoming a bottleneck
identified in a single activity.

itio
It aims to limit the amount of non-bottleneck
resources used.
It tries to avoid the build-up of inventories.
n2

017
According to the theory of constraints, it is wasteful to use non-bottleneck resources above the
level required for maximum throughput, as it will lead to a build-up of excess inventory.
Using throughput accounting will not help manage external activities that the business cannot
control. Overcoming a bottleneck in one activity may result in another activity becoming a
bottleneck and throughput accounting will be applied to this as well.
72 Tuition answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k

Environmental accounting
38
True False
A significant problem for environmental accounting is
that it is difficult to measure environmental costs.
An aim of environmental accounting is to encourage
organisations to quantify the costs and benefits of
improving environmental practices.
The use of input/output analysis forces an
organisation to monitor the cost of wasted material
and other environmental pollution.
It is not possible to use activity based costing to
identify cost drivers for environmental costs.
ABC principles can be used to identify cost drivers for environmental costs.

39 Image and relationship cost

40 Environment-related costs can be attributed to joint cost centres and environment-


driven costs cannot be.

ht 7
This is the correct option as environment-driven costs are allocated to general overheads, not

r i g 0
joint centres.

2 1
y
p ion
o
C uit
I n t
r s t
F i
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision making techniques 73

2: Decision making techniques

Relevant cost analysis

1 $ 9500

Relevant cost of A is replacement cost of $5,000.


Relevant cost of B is zero as material is surplus with no realisable value.
Relevant cost of C is best alternative use. L is better off selling C for $4,500 compared with using
it and not having to purchase D for $4,250.
Relevant cost = $5,000 + $4,500 = $9,500

2 $50,000
The company can either hire new workers at a cost of $60,000 or retrain the existing ones.
The incremental cost of using the existing workers is the training cost of $5,000 plus their

Co
replacement cost of $45,000 = $50,000 in total. This is the cheaper option.

Fir
3 $14,000
st I pyri
Deprival value is the lower of
ntu ght
Replacement cost ($14,000) and
itio
n2
The higher of NRV ($9,000) and economic value ($17,000) = $17,000
Hence relevant cost = $14,000

4 $ 4957.50
017
Cost of the quantity to be bought = (1,500 945) $425 = $2,358.75
Opportunity cost of quantity in hand = 945 $275 = $2,598.75
Total relevant cost = $4,957.50

Cost volume profit analysis

5 23000
Fixed cost + Profit 920,000
Contribution per unit
= 40
= 23,000
74 T u i t i o n a n s w e r s : 2 : D e c i s i o n m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k


6

Note: is used to calculate break-even sales revenue ($)

7 4,500 units
Contribution required = $18,000 + $36,000 = $54,000
Contribution per unit = 40% $30 = $12
Hence break-even sales = $54,000/$12 = 4,500 units

8 $ 170000

One package makes (2 $3.50) + $3 + $4 = total contribution of $14


Break-even no. of packages = $70,000/$14 = 5,000
Break-even sales revenue = (10,000 $8) + (5,000 $8) + (5,000 $10) = S170,000

t
9 Sales volume and profit

i g h 1 7
A break-even chart illustrates the relationship between sales volume, revenue and costs.

y r 20
o p ion 15000

C uit
10

t
Sales = $62,500

I n
Break even sales = $13,000/0.4 = $32,500

s t
Margin of safety (sales revenue) = $30,000

ir
Margin of safety (units) $30,000/$2 =15,000 units

F 11
True False
The investment is more sensitive to a change in sales
price than sales volume.
If variable costs increase by 25% the investment will
make a loss.
The margin of safety is 92.5%.
The investments sensitivity to incremental fixed costs
is 133%.

Price will have to fall by (105/600) 100% = 17.5% for investment to breakeven. Volume will
have to fall by (105/150) 100% = 70%.
An increase in variable costs of 25% = $450 0.25 = $112.50, greater than the profit of $105
Sales at breakeven point = 45/(150/200) = 60
Margin of safety = ((200 60)/200) 100% = 70%
Sensitivity to fixed costs = (105/45) 100% = 233%
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision making techniques 75

CARDIO CO

12 60.92 %
Weighted average contribution to sales ratio (WA C/S ratio) = total contribution/total sales revenue.
T C R
$ $ $
Sales revenue 672,000 720,000 532,000
Variable costs (263,760) (286,400) (201,780)
Contribution 408,240 433,600 330,220

WA C/S ratio = ($408,240 + $433,600 + $330,220)/($672,000 + $720,000 + $532,000) =


$1,172,060/$1,924,000 = 6092%

13 $ 325 000
Fixed costs = $73,940 + $78,100 + $59,320 = $211,360
Breakeven sales revenue = fixed costs/weighted average C/S ratio
= $211,360/65% = $325,169, say $325,000

Fir Co
14 81.8 %
st I pyri
ntu ght
Breakeven sales revenue = fixed costs/weighted average C/S ratio
= $175,000/60% = $291,667

itio
Margin of safety = ((Budgeted sales Breakeven sales)/Budgeted sales sales) 100%

n2
= (($1,600,000 $291,667)/$1,600,000) 100% = 81.8%

15 The C/S ratio will rise. 017


If all the products are eventually sold, the total C/S ratio will remain the same. Even if they are
not, the products with the highest contribution per unit may not be the products with the
highest C/S ratio.

16 The sensitivity of its demand to price is uncertain.


It will generate high initial cash flows to cover the marketing expenditure.
Cardio Co is likely to play safe and start by charging a higher price to try to cover the large
marketing expenditure, if it is not sure of the responsiveness of demand to price. The product
may be a prestige product, where a higher price can be charged to gain the kudos of owning it.
A long life cycle is more likely to mean lower prices being charged initially, as the product has a
longer time to become profitable. A high price gives competitors who are prepared to undercut
similar products more opportunity to enter the market.
76 T u i t i o n a n s w e r s : 2 : D e c i s i o n m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

Limiting factors
17 Material only
4,000 units require 16,000 kg material and 8,000 labour hours. Hence material is currently the
scarce resource.

18 $ 1200

Since X makes the best contribution per labour hour (see working below), the company will
already be producing the maximum of X (800 units = 2,400 hours) and using the balance for Y.
Hence a further 90 hours would make 20 more units of Y and therefore $1,200 additional
contribution (profit).
Working Product X Product Y
Contribution per unit $45 $60
Labour hours 3 4.5
Contribution per hour $15 $13.33

Maximum demand (units) 800 1,500


Current plan: 4,650 hours available
800 units of X 2,400 hours

ht
500 units of Y 2,250 hours

r i g 01 7
19
y
p ion

2 1 only

o
Non-scarce resources are not being used to their maximum capacity so by definition will have

C uit some slack. Resources that form the critical constraints limiting the optimal production plan will

t
have zero slack.

t I n
ir s 20 A

F
Product
D

Selling price per unit


A
$160
B
$214
C
$100
D
$140
Raw material cost $24 $56 $22 $40
Direct labour cost at $11 per hour $66 $88 $33 $22
Variable overhead cost $24 $18 $24 $18
Contribution per unit $46 $52 $21 $60
Direct labour hours per unit 6 8 3 2
Contribution per labour hour $7.67 $6.50 $7 $30
Rank 2 4 3 1
Normal monthly hours
(total units hours per unit) 1,800 1,000 720 800
If the strike goes ahead, only 2,160 labour hours will be available.
Therefore make all of D, then 1,360 hours worth of A (2,160 800 hrs).
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision making techniques 77

21
Correct Incorrect
Objective function 60x + 25y
Material constraint 3x + y 4,200
Labour constraint 4x + 0.5y 3,000

Contribution for X = $15 ($60 $45)


Contribution for Y = $12 ($25 $13)
Objective function = 15x + 12y
Constraints:
Material = 3x + y 4,200 (as X uses 3 kgs of material (15/5), Y uses 1 kg (5/5))
Labour = 4x + 0.5y 3,000 (as X uses 4 labour hrs (24/6), Y uses 0.5 hrs (3/6))

22 Contribution will be increased by $2 for each additional kg of material B purchased at the


current market price.
The maximum price which should be paid for an additional kg of material B is $280.

Co
The statement that the maximum price is 2 is wrong as it reflects the common misconception

Fir
that the shadow price is the maximum price which should be paid, rather than the maximum

st I pyri
extra over the current purchase price.
The statement about contribution being $1.20 is wrong but could be thought to be correct if the

ntu ght
statement about the maximum price being $2 was wrongly assumed to be correct.

itio
n2
Pricing decisions

23 $ 36.75

Current cost = 80% $35 = $28


017
New selling price = ($28 1.05) /0.80 = $36.75

24 P = 16 0.02Q
P = a bQ and when P = 10, Q = 300, so 10 = a 300b
b = change in price/change in quantity = 1/50 = 0.02
10 = a (0.02 300)
10 = a 6, so a = 16

25 1 only
In order for the company to charge different prices, each group of customers (market segment)
must have different price elasticity of demand.
78 T u i t i o n a n s w e r s : 2 : D e c i s i o n m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

26 $14.70
Total cost per carpet = 5 + 1 + 4.5 ($9,000/2,000) = $10.50
Selling price = $10.50 1.40 = $14.70

27 Penetration pricing

28
Price Penetration Market
discrimination pricing skimming
A
B

Make-or-buy and other short-term decisions

HERERA CO

h
29 Both X and Y

r i g 01 7
Z makes a loss if it is bought in, whereas X and Y still make a contribution (see below).

y
p ion 2
o
C uit
30

t
X 3

t I n Y 2

ir s
F
Z 1

Working:
Product X Product Y Product Z
Contribution per unit if make 30 45 35
Contribution if buy in 25 25 (5)
Labour saved if buy in 30 15 n/a
Lost contribution per $ labour $0.17 $1.33 n/a
Order of making 3 2 1

31 $10,000
Deprival value is the lower of:
Replacement cost ($10,000) and
The higher of NRV ($8,000) and economic value ($11,000) = $11,000
Hence relevant cost = $10,000
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision making techniques 79

32 Incremental costs plus opportunity costs


These are the costs that are relevant to the decision.

33 There must be little or no chance of a black market developing.


The lack of a black market means that Herera Co can enforce price discrimination.

Dealing with risk and uncertainty in decision-making


34 Risk seeking

35 $ 240000

Expected value with the survey


= (0.4 $400,000) + (0.6 $1,000,000)
= $760,0000
Expected value without the survey

Fir Co
= $520,000

st I pyri
Therefore maximum value of the survey = $760,000 $520,000 = $240,000

36 125
ntu ght
itio
The choice using maximax will be the choice that gives the best possible result, which is a profit

n2
of $540 if demand and supply are 125 lunches.

37 50
Look at the worst possible outcome for each level of supply:
017
50 75 100 125
$200 $160 $125 $95
The best of these outcomes is $200 for 50 lunches supplied.

38 125
Minimax regret table is as follows:
Daily supply (units)
50 75 100 125
50 $0 $40 $75 $105
Daily demand 75 $100 $0 $35 $65
(units) 100 $220 $120 $0 $30
125 $340 $240 $120 $0
The highest regret figures are shown in bold, and 125 has the lowest of these, therefore choose
125.
80 T u i t i o n a n s w e r s : 2 : D e c i s i o n m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

LOUIEDEWIE CO

39 $ 51750

Expected return = (0.35 150,000) + (0.20 75,000) + (0.45 -35,000) = $51,750

40 0.35
The project will make a profit if returns exceed $80,000, which only applies in the no
competition situation.

41 $536,250
Expected value = (0.45 $500k) + (0.2 $550k) + (0.35 $575k) = $536,250

42 $ 952500

Expected value = $500k + (0.3 $550k) + (0.5 $575k) = $952,500

ht 7
g 1

i
43 2 only

y r 20
Expected values support a risk-neutral attitude to decision-making. They are most useful when

o p ion
they refer to events that will occur many times.

C uit
I n t
r s t
F i
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 81

3: Budgeting and control

Budgetary systems and types of budget


1
Objective Not objective
Authorisation of expenditure
Business expansion
Performance monitoring
Resource allocation

2
True False
A budget helps to control an organisation by forcing it
to create a plan.
A budget helps an organisation to co-ordinate the
allocation of resources.

Fir Cop
A budget can help an organisation to motivate staff.
An organisation is legally required to prepare a master

st I yri
budget annually.

ntu ght
There is no legal obligation to prepare a budget.

3 Junior management
itio
n2
4 An example of feedback control
017
5 Feedforward control

6 Neither 1 nor 2
If a budget is too easy, staff will not necessarily give their greatest efforts.
A budget based on ideal conditions is likely to be demotivating. Budgets need to be challenging
but achievable in order to encourage improved efficiency.
82 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

7
Zero- Beyond
Rolling Incremental Flexible based budgeting
Set at the start of the
year for various different
activity levels
Continually extended by
adding another budget
period when the first
budget period expires
Prepared by building on a
previous periods
budgeted or actual figures
Uses adaptive
management processes
and procedures

8 Budgets will take longer to produce

9 It is less time consuming.

ht 7
r i
g 201
y
10 It may be more difficult to co-ordinate the plans of different departments.

o p ion
C uit
Quantitative analysis in budgeting

I n t
t
11 $ 10.00

ir s Highest cost is $13,000 for an output of 800 units.

F Lowest cost is $10,000 for an output of 500 units.


Using the high-low method to establish values for a and b:
$(13,00010,000) $3,000
Variable cost per unit = (800500)
= 300 = $10 per unit

12 $ 12000
$(13,00010,000) $3,000
As above: Variable cost per unit = (800500)
= 300 = $10 per unit

Fixed costs can be calculated by reference to the total costs when output is 500 units
Total cost = $10,000 = Fixed cost + (500 units $10)
Fixed cost = $10,000 $5,000 = $5,000
So in June total cost = $5000 + (700 $10) = $12,000
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 83

13 2.45 hours
b
Y = ax
Average time for six jobs: 3 6 0.074 = 2.627 hours
Total time required for six jobs = 6 2.627 hours = 15.762 hours
Average time for five jobs: 3 5 0.074 = 2.663 hours
Total time required for five jobs = 5 2.663 hours = 13.315 hours
Time required to perform the 6th job = Total time required for six jobs total time required for
five jobs.
Therefore, time required to perform the 6th job = 15.762hours 13.315 hours = 2.447 hours

14 Both 1 and 2

15
True False
Spreadsheets can easily take account of lots of
qualitative factors.
Spreadsheets are useful when the values of the inputs

Fir Co
to the budget are likely to change.

st I pyri
Spreadsheets are only as accurate as the formulae and
other inputs that they depend on.
Spreadsheets allow for the analysis of large volumes

ntu ght
of quantitative data.

itio
Spreadsheets are unable to deal with qualitative factors.

n2
017
16 I only
The learning rate was actually better than expected and only I could cause it to improve.

17 $ 4305000

90% production = 350,000 0.9 = 315,000


At each level of production, material cost = $6 per unit, labour cost = $5 per unit, so both are
fully variable, total variable cost = $11 per unit
315,000/40,000 = 7.875, so 8 supervisors will be required.
Total production costs = (315,000 $11) + $600,000 + (8 $30,000) = $4,305,000
84 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Standard costing
18
True False
Standard costs should only ever be based on marginal
costing principles.
The use of basic standards is likely to give rise to
meaningful variances.
Current standards provide the best basis for
motivating employees to improve performance.
Basic standards are short-term targets and useful for
day-to-day control purposes.
Standard costs can be based on a variety of costing approaches e.g. total absorption costing,
marginal costing, ABC principles
Basic standards are often out-of-date and therefore unlikely to give rise to meaningful
variances.
Current standards reflect existing levels of efficiency and are unlikely to motivate employees to
improve performance.
Basic standards are likely to be out-of-date and may not be relevant for day-to-day control.

ht 7
i g 1
19 Planning

y r
20 Valuing inventory

o p ion Assessing performance

C uit Motivating staff

I n t
r s t
i
K C
AMAL O

F 20 1 only
The budget selling price was $90 ($540,000/6,000) and the actual price was $88
($633,600/7,200). Fixed overheads should not be affected by changes in sales volume.

21 $ 269400

Budget contribution = $282,000 (213,000 + 69,000) = $47 per unit


Flexed profit = (7,200 @ 47) 69,000 = $269,400
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 85

22 $ 133000

Variance calculated using original budget = $610,000 $560,000 = $50,000 F


Revised budget = $550,000 120% 105% = $693,000
Variance calculated using revised budget = $610,000 $693,000 = $83,000 A
Difference = $50,000 + $83,000 = $133,000
Note that this is the difference between the original and revised budget figures for the quarter.

23
Considered Not considered
Whether a marketing initiative should be undertaken
at all
Whether the marketing department should be
outsourced
Whether some or all of the activities that are part of a
proposed marketing campaign are justified
Whether some or all of the activities that are part of a
proposed marketing campaign can be done more

Co
cheaply

Fir
st I pyri
All of these would be considered as part of zero-based budgeting.

24 Both 1 and 2
ntu ght
itio
Rolling budgets are updated a short period at a time, so can more easily accommodate changes
in price and resource availability.

n2
Zero-based budgeting starts with no preconceived assumptions about how activities should be

017
carried out, so budget-setters can identify the most efficient way to operate without being
influenced by whether it will mean changing the current way things are done.

Material mix and yield variances


25
Adverse Favourable
$2400

Actual Standard
Actual quantity quantity cost
Material Standard mix Actual mix Variance per kg Variance

kgs kgs kgs $ $


A 4,000 4,300 (300) 9 (2,700)
B 3,500 3,600 (100) 5 (500)
C 2,500 2,100 400 2 800
10,000 10,000 (2,400) A
86 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

26 1 only
The change will increase the cost of the mix at standard prices and most likely increase the
quality of the biscuit.

27 Training for customer service team


This will not affect the production process.

28
Adverse Favourable
$1312

Actual
Standard quantity quantity Standard
Material Standard mix Standard mix Variance cost per kg Variance
kgs kgs kgs $ $
W 912 864 48 5 240
X 1,368 1,296 72 6 432
Y 1,520 1,440 80 8 640
3,800 3,600 1312F

ht 7
r i g 201
PRODUCT ED
Z
y
p ion
o
C uit
29 1 only

I n t Were told that the price/litre is as budgeted.

t
Standard yield is 15/16 = 0.9375 input quantity. Expected yield from actual input of 1,800

ir s litres is 1,800 x 0.9375 = 1,687.5 litres. Actual yield is only 1,650 litres, less than expected.

F 30
Adverse Favourable
$562.50

9/16 7/16
A B Total
Standard 1,012.5 787.5 1,800
Actual 900 900 1,800
112.5 112.5

$10 $15
1,125 F 1,687.5 A 562.5 A
AQSM: A = 9/16 1,800 = 1, 012.50 litres; B = 7/16 1,800 = 787.50 litres
The Mix Variance is given by: T2 T1 = $562.50 adverse
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 87

31 Neither 1 nor 2
Material mix variances are concerned with quantity, not quality. A favourable materials mix is
more likely to lead to an adverse labour efficiency variance, because the cheaper materials may
be more difficult to use or take more time to use because there is more waste.

32
Adverse Favourable
$1631.25

AM SQSM
Materials AQ SP SQ SP
A 900 9,000 1,113.75 11,137.50
B 900 13,500 866.25 12,993.75
Total T1 = 22,500 T2 = 24,131.25
SM: A = 9/16 and B = 7/16
Expected input for yield of 1,650 litres = 1,650 (1,800/1,500) = 1,980 litres
SQSM: A = 9/16 1,980 = 1,113.75 litres; B = 7/16 1,980 = 866.25 litres

Co
Operational materials usage variance = $24,131.25 $22,500 = $1,631.25 favourable

Fir
33
st I pyri
ntu ght
Explain Not explain

itio
Changes in the production process causing increased
loss of materials

n2
A higher than expected level of waste of materials
Quality control identifying a high proportion of

017
materials as sub-standard
A new supplier supplying poorer quality materials

Advanced knowledge of changes in the production process and a new supplier supplying sub-
quality materials could have influenced the planning process. Actual waste being higher is an
operational factor. Quality control rejecting a large amount of materials is generally an
operational factor, unless we know that quality control procedures were changed.

Sales mix and quantity variances


34 Cost-conscious customers are switching from premium products to lower margin cereals
in the range.
This will increase the proportion of low margin sales and have a negative impact on profitability.
88 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

35
Adverse Favourable
$3720

The sales quantity contribution variance is calculated as follows:


Actual sales Standard sales Difference Standard
in std mix in std mix in units contribution Variance
Product A 16,020 15,840 180F $12 $2,160F
Product B 10,680 10,560 120F $13 $1,560F
Total $3,720F

MEMIA CO
36 2 only
The difference between budgeted and actual sales is 1,000 televisions. The volume variance
that would be expected due to the shrinking market is 2,000 units (revised sales would be 10%
100,000 units = 10,000 units). Therefore, there must be both a planning and operational sales
volume variance (see below).

t
Sales price variance: actual revenue $2,200,000 (11,000 units @$210) = $110,000 adverse

i g h 1 7
There is no information to suggest this is anything other than an operational variance.

y r 20
o
37
p ion
C uit
Market size

I n t Adverse Favourable

t
$160000

ir s Market share

F $80000
Adverse

Favourable

Market size (Planning sales volume)


Televisions
Revised budget sales 10,000
Original budget sales 12,000
Variance 2,000 (A)
Valued at STANDARD CONTRIBUTION $80
VARIANCE IN $ 160,000 (A)
Market share (Operating sales volume)
Televisions
Actual sales 11,000
Revised sales 10,000
Variance in televisions 1,000 (F)
Valued at STANDARD CONTRIBUTION $80
VARIANCE IN $ 80,000 (F)
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 89

38
Adverse Favourable
$80000

Actual sales Actual sales Difference Standard


in std mix in actual mix in units contribution Variance
Televisions 15,000 11,000 4,000A $80 $320,000A
Computers 10,000 14,000 4,000F $100 $400,000F
Total $80,000F

39
Adverse Favourable
$440000

Weighted average budgeted contribution per unit = (12,000 $80) + (8,000 $100)
/(12,000 + 8,000) = $88
Sales quantity variance in units = (15,000 + 10,000) (12,000 + 8,000) = 5,000 favourable
Sales quantity variance in $ = 5,000 $88 = $440,000 favourable

Fir Co
st I pyri
40 Performance has deteriorated in relation to product returns but improved in relation to
customer complaints
Sales volumes (units)
ntu ght 12,000 11,000

itio
Number of returns (units) 1,080 1,000
No of customer complaints regarding late delivery 360 320

n2
Returns as % of sales 9.0% 9.1%
Customer complaints as % of sales 3.0% 2.9%

Planning and operational variances 017


41 The use of the new machine
The price saving is the result of an operational decision. The budget should however have been
prepared on the basis that the new machine would be used.

42 An adverse labour efficiency planning variance


If the learning curve was overstated in error at the planning stage the work will have taken
longer than expected.

43 A change in working practices to comply with new regulatory restrictions on rest


practices
This is likely to have a negative impact on productivity but is due to an uncontrollable external
factor.
90 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

44
Adverse Favourable
$12000

Planning variance = ($380 $5) 10,000 = $12,000 adverse

45
Materials planning price variance

Adverse Favourable
$3937.50

4,375 kg ($20 $20.90) = $3,937.50 adverse


Materials operational price variance

Adverse Favourable
$3062.50

(4,375kg ($20.90 $21.60)) = $3,062.50 adverse

ht 7
g 1
DEMIA CO

y r i 20
p ion
46 Neither 1 nor 2

o
C uit
There is no revised planning information for labour rate, any rate difference will be operational.
If Demia spent 29,000 hours making 11,000 units compared to an original flexed budget of

n t
33,000 hours, there is clearly a labour efficiency variance of some sort.

s t I Total labour efficiency variance = (29,000 hours 33,000 hours) @ $20 = $80,000 favourable

F ir 47 Planning labour efficiency variance

Adverse Favourable
$110000

Operational labour efficiency variance

Adverse Favourable
$30000

Planning labour efficiency variance


(Standard hours for actual production (11,000 $3) revised hours for actual production
(11,000 2.5)) standard rate
11,000 TVs: (33,000 27,500) $20 = $110,000 favourable
Operational labour efficiency variance
(Actual hours revised standard hours for actual production) standard rate
11,000 TVs: (29,000 27,500) $20 = $30,000 adverse
Note: this approach uses the Examiners preferred method of calculating the P&O variances.
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 91

48 $ 13.33

Original standard = 2.5 @$20 = $50


For a nil variance, cost of 1.5 hours unskilled time must be no more than $50 (1.5@$20) = $20
So max rate per hour = $20/1.5 = $13.33

49 $ 20
400,000 9,000 VC = (504,000 12,000 VC)/1.2
480,000 10,800 VC = 504,000 12,000 VC
1,200 VC = $24,000
VC = $20

50 Better training for unskilled workers


Change in the packaging of the televisions
Better training should reduce inefficiencies and waste. Changing the packaging could either
make the packaging cheaper, or more durable (with any increase in costs because the packaging

Fir Co
was more durable being outweighed by the reduced risk of breakages).

st I pyri
Use of standard components should help reduce costs. The length of life of components used
does not affect production costs.

ntu ght
Performance analysis
itio
51
n2
017
True False
In a rapidly changing environment variances based on
standard costs are likely to provide a meaningful
analysis of performance.
When monitoring performance, a company only needs
to focus on adverse variances.
A desire to create a favourable material price variance
may result in the purchasing manager taking decisions
which are incompatible with TQM.
If a company operates a JIT policy, it is not likely to
experience any labour idle time variance.
Variances will be less meaningful in a rapidly changing environment as standards are likely to be
out of date. When monitoring performance, a company should focus on significant favourable
and adverse variances. A desire to create a favourable material price variance may result in the
Purchasing Manager buying cheaper quality material which would be incompatible with TQM. If
a company operates a JIT policy, it will produce to order and not for inventory and therefore
may experience a labour idle time variance.
92 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

4: Performance measurement and control

Performance management information systems


1 Strategic planning

2 Operational control

3 Provides summary information for the Board

Characteristic Not a characteristic


Provides summary information for the Board
Provides information in a flexible format
Facilitates what if analysis
Can be used to assist resource planning

Providing summary information for the board is a characteristic of an Executive information

t
system.

i g h 1 7
y r 20
p ion
4 1 only

o
C uit
Open systems are preferable for performance management as they are able to take account of
external uncontrollable factors.

I n t
r s t5

F i
Cover Not cover
Order processing
Manufacturing
Distribution
Customer service
Human resources
Finance

Sources of management information


6
Internal External
Database of customer information
Inventory management system
Results of market research
Payroll system
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 93

7 Both 1 and 2

8 II only
Use of bar coding and scanners are costs of direct data capture.
Lack of resource available to spend on other value-adding activities is an example of an indirect
cost.

9
Direct data Processing
capture
Use of bar coding and scanners
Payroll department analysis of personnel costs
Completion of timesheets by employees
Input of timesheet information onto management
information system

Co
Management reports

Fir
st I pyri
10 Completeness checks

ntu ght
Validation of input data

11
itio
n2 True False

017
A range check is a form of validation control.
Hierarchical passwords can be used to grant different
access rights to different users of a database.
Firewalls protect data from external access.
Encryption means that data can only be understood by
those transmitting and receiving it, and not by anyone
intercepting it.

12 Remote storage of back-up copies of data


94 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Performance analysis in private sector organisations


13
Financial Non-financial
Product returns rate
Market share
Asset turnover
Staff turnover

14 Non-financial
The other perspective is Financial.

15 Dimensions
Rewards
Standards

16

ht 7
The Managing Director who has overall responsibility for the businesses costs and

i g 1
revenues, including the administration and finance functions

y r 20
o p ion 18.2

C uit
17 %

t
ROCE can be calculated by multiplying the operating profit margin and the asset turnover.

I n
28% 65% = 182%

s t
rS
i
O
F
LIVER S ALON

18 $ 20

20X8: Female clients paid $200,000 for 8,000 visits. This is an average price per visit of
$200,000/8,000 = $25
In 20X9 the female hairdressing prices did not increase and the mix of services did not change
so of the total revenue $170,000(6,800 $25) was from female clients. This means that the
balance of $68,500 ($238,500 $170,000) was from male clients at an average price of $20 per
visit ($68,500/3,425)
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 95

19
True False
Gross and net profit margins have decreased in 20X9
compared with 20X8.
Average cost per staff member has increased in 20X9
compared with 20X8.

Gross margin: 20X8 $106,000/$200,000 = 53%, 20X9 $112,500/238,500 = 47.2%


Net margin: 20X8 $78,000/200,000 = 39%, 20X9 $80,000/238,500 = 33.5%
Both margins have fallen, so the first statement is true.
Average staff cost: 20X8 $65,000/4 = $16,250, 20X9 $91,000/6 = $15,167
Average staff cost has fallen, so the second statement is false.

20 The mix of services offered to female clients


We are told that the mix hasnt changed. The others are all plausible explanations on the basis
of the information given.

Co

Fir
21 Resource utilisation of the property has increased and resource utilisation of specialist

st I pyri
female hairdressers has decreased.
Property used is the same, so resource allocation is reflected in the total number of cuts, which

ntu ght
have increased from 8,000 to 6,800 + 3,425 = 10,225
Average number of clients per specialist female hairdresser has fallen from (8,000/4) = 2,000 to
(6,800/5) = 1,360
itio
n2
017
22
Problem Not a problem
It may be difficult to define measures for quality of
service provided.
Increasing the number of measures may increase the
chances of the measures giving a conflicting picture.
Increasing the number of measures will mean that the
business has more of an external focus, rather than
focusing on internal problems.
Oliver may have to spend more time himself on
measurement work and less on servicing customers.
The business needs to solve the internal problems that it has, but having an external focus
should mean that it concentrates on the measures that are more important to customers,
where its competitors may be doing better.
Some of the new measures are likely to involve assessment and inspection, which Oliver is likely
to have to carry out himself. He will also need to spend time making an overall assessment of
what the measures tell him.
96 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Divisional performance and transfer pricing


23
Control No control
Revenue generation
Attributable costs
Apportioned head office costs
Investment in non-current assets

24 Dual pricing system

25 ROI

15.0 %
RI

$ 0.36 million

t
ROI = 1.8/12 = 15.0%

i g h 1 7
RI = 1.8 (12% 12) = 0.36

y r 20
o
26
p ion Division A only

C uit Division A: Profit = $144m 30% = $432m

t
Imputed interest charge = $326m 10% = $326m

t I n Residual income = $106m

r s
Division B: Profit = 88m 24% = $2112m

F i Imputed interest charge = $222m 10% = $222m


Residual income = $(0108)m

27
Increase Decrease
$78000

Increase in variable costs from buying in (2,200 units $40 ($140 $100)) = $88,000
Less the specific fixed costs saved if A is shut down = ($10,000)
Decrease in profit = $78,000

28
Control No control
Generation of revenues
Investment in non-current assets
Investment in working capital
Apportioned head office costs
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 97

29 27.59 %
Opening capital employed: $4m + $05m = $45m
Closing capital employed: ($4m 09) + ($05 12) = $36m + $06 = $42m
Average capital employed = $435m
Profit after depreciation = $12m
Therefore, ROI = $12m/$435m = 2759%

ABEL CO

30 $ 11.70

Marginal cost = $6 + share of overheads $3 ($300,000/100,000 units) = full cost $9


$9 1.3 = $11.70

31 Neither 1 or 2

Fir Co
A full cost-based approach should only be used if there is no intermediate market for the

st I pyri
product. An opportunity cost approach should be used if the producing division is operating at
full capacity.

ntu ght
itio
32 $11

n2
If capacity is limited, it is better for the company to sell 100,000 components to the individual
consumer: contribution = $15 $6 $2.50 = $6.50 per unit, than to the commercial buyer at a

017
contribution of $5 ($11 $6)
The production division will therefore want the TP to be at least $11.
The retail division will accept transfers provided the cost is less than its incremental net revenue
$15 $2.50 = $12.50

33 $ 600000

Now the production division can sell 100,000 components to the commercial buyer @$5
contribution = $500,000 and the retail division can buy in the components and earn
contribution from the individual consumers @ $1 per unit ($15 $11.50 $2.50) = $100,000
Total company contribution = $500,000 + $100,000 = $600,000

34 Setting the transfer price at market value if an external market exists for the product
There is no guarantee that the market value will be enough to cover fixed costs.
The other methods are all used in practice to resolve this problem.
98 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Performance analysis in not-for-profit organisations and the public sector


35
Characteristic Not a characteristic
Some non-quantifiable objectives
Multiple stakeholders
Objectives may be subject to political pressures
Conflicting priorities for resource allocation

36 Economy, Efficiency, Effectiveness

37
Economy Efficiency Effectiveness
Cutting departmental expenditure by 5%
Increasing the number of chargeable
hours handled by advisers to 62 per day
Obtaining a score of 47 or above on
customer satisfaction surveys

t
Retaining all current contracts with

h 7
government departments

r i g 201
y
p ion
o
External considerations and behavioural aspects

C uit
38 Manipulation of targets to ensure results achieved

I n t Dysfunctional decision making

r s t
F i 39 Both 1 and 2
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision-making techniques 99

PART 1 TUITION ANSWERS: Long form

2: Decision-making techniques

Limiting factors

1 CUT AND STITCH


EXAMINERS COMMENTS
This was probably the least-well answered question on the paper overall. This is not really
surprising, since I find that few students enjoy linear programming, and I think this comes
from a fear of anything too mathematical.
Part (a) was fairly straightforward. This should have been really well answered and I think
the reason why it wasnt is because candidates did not expect to be given the optimal
production point in a question. They expected to have to find it themselves. Because of this,
they didnt read the question properly and many candidates performed lots of calculations

Co
trying to find the optimal production point!

Fir
st I pyri
It is so important to read questions carefully in all exams. An expectation of what the
requirement will read, based on past questions must not be developed as, when this

ntu ght
happens, candidates inevitably dont answer the question that is currently being asked.
A good attempt at part (a) would have been to solve the two simultaneous equations for the critical

itio
constraints at point B, in order to arrive at the optimum quantity of W and L to be produced. Then,
these numbers needed to be put into the objective function in order to find contribution.

n2
It is essential to show all workings. Where workings are not shown, full marks cannot be

017
given. Also, it was not sufficient to simply try and read the optimum quantities off the graph.
The requirement said find by appropriate calculation....

(a) The optimal production mix can be found by solving the two equations given for F and T.
7W + 5L = 3,500
2W + 2L = 1,200
Multiplying the second equation by 2.5 produces:
7W + 5L = 3,500
5W + 5L = 3,000
2W = 500
W = 250
Substituting W = 250 in the fabric equation produces:
2 250 + 2L = 1,200
2L = 700
L = 350
100 T u i t i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

The optimal solution is when 250 work suits are produced and 350 lounge suits are produced.
The contribution gained is $26,000:
C = 48W + 40L
C = (48 250) + (40 350)
C = 26,000

EXAMINERS COMMENTS: PART (b)


Some candidates gave perfect answers to this but, admittedly, these candidates were in the minority.
Most answers were poor and this is clearly an area that needs to be revisited. A common
error was finding a total shadow price of $14 for fabric and tailor time jointly, rather than
calculating them separately. Such answer scored poorly.

EXAM SMART
Learning how to perform key techniques is really important in the exam. For example here
you need to know and be able to demonstrate that the shadow price is calculated by:
Adding one extra unit of resource to the constraint.
Recalculating the optimum point and the quantities of the two products at the new optimum point.
Recalculating the overall contribution at the new optimum point and

t
Identifying the increased contribution over and above the original optimum point.

i g h 1 7
r 20
(b) The shadow prices can be found by adding one unit to each constraint in turn.

y
p ion
Shadow price of T

o
7W + 5L = 3,501

C uit 2W + 2L = 1,200

t
Again multiplying the second equation by 2.5 produces:

t I n 7W + 5L = 3,501

r s
5W + 5L = 3,000

F i
2W = 501
W = 250.5
Substituting W = 250.5 in the fabric equation produces:
(2 250.5) + 2L = 1,200
2L = 1,200 501
L = 349.5
Contribution earned at this point would be = (48 250.5) + (40 349.5) = 26,004 which is an
increase of $4.
Hence the shadow price of T is $4 per hour.
Shadow price of F
7W + 5L = 3,500
2W + 2L = 1,201
Again, multiplying the second equation by 2.5 produces:
7W + 5L = 3,500.0
5W + 5L = 3,002.5
2W = 497.5
W = 248.75
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision-making techniques 101

Substituting W = 248.75 in the fabric equation produces:


(2 24875) +2L = 1,201
2L = 1,201 497.5
L = 351.75
Contribution earned at this point would be = (48 248.75) + (40 351.75) = 26,010, which is an
increase of $10.
Hence the shadow price of F is $10 per metre.

EXAMINERS COMMENTS: PART (c)


If part (b) was poorly answered, part (c) was really poorly answered!
Many candidates could perform the calculations in part (b) but did not, on the whole,
understand that the shadow price is the premium OVER AND ABOVE the normal price that
could be paid for extra tailor time. Again, this area clearly needs revisiting.

EXAM SMART
The Examiners point raises a common issue with interpreting shadow prices. You need to
realise that the shadow price (in this case $4 per hour of tailor time) represents the
maximum amount over and above the current price of the resource ($1.50 per hour) that CS

Co
might consider paying. Hence $1.50 + $5 = $5.50 per hour is the theoretical maximum per

Fir
hour that might be considered worth paying for extra tailor hours.

st I pyri
ntu ght
(c) The shadow price represents the maximum premium above the normal rate a business should
be willing to pay for more of a scarce resource. It is equal to the increased contribution that can

itio
be gained from gaining that extra resource.

n2
The shadow price of labour here is $4 per hour. The tailors have offered to work for $4.50 a
premium of $3.00 per hour. At first glance the offer seems to be acceptable. However, many

017
businesses pay overtime at the rate of time and a half and some negotiation should be possible to
create a win/win situation. Equally some consideration should be given to the quality aspect here. If
excessive extra hours are worked then tiredness can reduce the quality of the work produced.

EXAMINERS COMMENTS: PART (d)


Candidates needed to appreciate that whilst fabric remained a critical constraint, maximum
demand for W now became the other critical constraint rather than tailor time. Therefore,
the constraints for fabric and W now needed to be solved in order to find the optimum
production mix. It was surprising to see that candidates who completed part (a) correctly
could not do part (d) as essentially, the technique required was the same.

(d) If maximum demand for W falls to 200 units, the constraint for W will move left to 200 on the x
axis of the graph. The new optimum point will then be at the intersection of:
W = 200 and
2W + 2L = 1,200
Solving these equations simultaneously, if:
W = 200, then (2 200) + 2L = 1,200
Therefore L = 400.
So, the new production plan will be to make 400L and 200W.
102 T u i t i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

EXAM SMART
A quick inspection of the graph for the maximum demand of W (line P) moving to 200 units
would identify that there would now be a new optimum point (not point B anymore).

Marking guide Marks


(a) Optimal point calculation 3
Contribution 1 4
(b) For each shadow price 3 6
(c) Rate discussion 3 6
Other factors e.g. tiredness, negotiation 3
(d) Find optimum point 1
Solve 2 equations 2
Conclusion 1 4
Maximum marks available 20

Pricing decisions

ht 7
i g 1
2 WX

y r 20
p ion
EXAMINERS COMMENTS: PART (a)

o
C uit
It was surprising, even disappointing, to find that many candidates were not able to apply

t
the high low technique to calculate the total variable cost of the unit.

t I n
Part (a)(ii) was generally answered well, but a significant number of candidates made an

s
error when calculating the selling price that would maximise the companys profit, and put

F ir forward an answer that could not be possible in the context of the question.
Common errors
Unable to apply the high-low technique (part (a)(i)).
Incorrectly believing that the total variable cost was simply the sum of the direct
material and direct labour.
Unable to calculate the selling price that would maximise the companys profits (part (a)(ii)).

EXAM SMART
From the information we can tell that material and labour are purely variable costs since the
total costs change in direct proportion to annual production units. Material costs are $2 per
unit and labour is $6 per unit.
Since the overhead costs do not vary in proportion to the units produced and are not
constant in total they must represent a semi variable cost.
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision-making techniques 103

(a)
(i) The optimum selling price occurs where marginal cost = marginal revenue.
Marginal cost is assumed to be the same as variable cost. From the data it can be
determined that the costs of direct materials and direct labour are wholly variable and
total $8 per unit. [($200,000+ $600,000) / 100,000]
The overhead costs appear to be semi-variable and will be analysed using the High Low
method:
Units $000
High 200,000 1,460
Low 100,000 880
Difference 100,000 580
Thus, the variable overhead cost per unit is $580,000 / 100,000 = $5.80. The total
variable cost per unit is therefore $13.80.
EXAM SMART
An alternative working for part (ii) for the price/demand relationship would be as follows.
1
= 25,000 = 0.00004
Where P = $25, X = 150,000 and b = 0.00004

Co
Therefore 25 = a - 0.00004 150,000
25 = a - 6
Fir
st I pyri
a = 31
Therefore P = 31 - 0.00004X

ntu ght
itio
(ii) The price at which there is zero demand can be calculated to be $25 + ((150,000/25,000)

n2
$1)) = $31
There is a change in demand of 25,000 units for every $1 change in selling price so the

017
equation of the selling price is:
$31 0.00004x
And thus the equation for marginal revenue is:
$31 0.00008x
Equating marginal cost and marginal revenue gives:
13.80 = 31 0.00008x
17.20 = 0.00008x
17.2/-0.00008 = x = 215,000
If x = 215,000 then the optimum selling price is:
$31 (0.00004 215,000) = $22.40

EXAMINERS COMMENTS: PART (b)


The situation described above was compounded in part (b) when candidates attempted to
explain figures that were completely incorrect.
Example 1: explaining an optimum selling price of $5
Example 2: discussing an output figure of 3.34 million units
104 T u i t i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

Common errors
Submitting reasons in part (b) that did not relate to the figure calculated in part (a)(ii).
Unclear workings.
Submitting lengthy answers when addressing part (b) that were disproportionate to the
marks available.

(b) There are many reasons why this price may not be used (candidates are expected to explain
TWO).
There may be inaccuracies in the demand forecasts at different prices because the model
assumes that demand is driven solely by price. In fact there are many different factors
that influence demand; these include advertising, competitor actions and changing
fashions / tastes.
The model also assumes that the relationship between price and demand is static
whereas in reality it is regularly changing.
There may be inaccuracies in the determination of the marginal cost, the assumption that
marginal cost equals variable cost may itself be invalid, but even if this is acceptable then
the assumption that all variable costs vary with volume is unrealistic. Some of these costs
may be driven by factors other than volume. Again there is an assumption the unit
variable cost is unchanging once it has been determined.
(c)

ht 7
Market skimming

r i g 01
Market skimming is a strategy that attempts to exploit those areas of the market which are

2
y
relatively insensitive to price changes. Initially, high prices for the webcam would be charged in

o p ion order to take advantage of those buyers who want to buy it as soon as possible, and are

C uit
prepared to pay high prices in order to do so.

t
The existence of certain conditions is likely to make the strategy a suitable one for WX. These

I n
are as follows:

r s t Where a product is new and different, so that customers are prepared to pay high prices

i
in order to gain the perceived status of owning the product early. The webcam has

F
superior audio sound and visual quality, which does make it different from other
webcams on the market.
Where products have a short life cycle this strategy is more likely to be used, because of
the need to recover development costs and make a profit quickly. The webcam does only
have a two-year life cycle, which does make it rather short.
Where high prices in the early stages of a products life cycle are expected to generate
high initial cash inflows. If this were to be the case for the webcam, it would be
particularly useful for WX because of the current liquidity problems the company is
suffering. Similarly, skimming is useful to cover high initial development costs, which
have been incurred by WX.
Where barriers to entry exist, which deter other competitors from entering the market;
as otherwise, they will be enticed by the high prices being charged. These might include
prohibitively high investment costs, patent protection or unusually strong brand loyalty.
It is not clear from the information whether this is the case for WX.
Where demand and sensitivity of demand to price are unknown. In WXs case, market
research has been carried out to establish a price based on the customers perceived
value of the product. The suggestion therefore is that some information is available
about price and demand, although it is not clear how much information is available.
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision-making techniques 105

It is not possible to say for definite whether this pricing strategy would be suitable for
WX, because of the limited information available. However, it does seem unusual that a
high-tech, cutting edge product like this should be sold at the same price over its entire,
short life cycle. Therefore, price skimming should be investigated further, presuming that
this has not already been done by WX.
Marking guide Marks
(a)
Calculate the variable cost per unit 2
Determine the selling price equation 2
Calculate the optimum selling price per unit 2

(b)
Explain two reasons why the company might not use this optimum price two marks each) 4
(c)
Explanation 2
Discussion of each condition max two marks each 7
Conclusion 1
Maximum marks available 20

Dealing with risk and uncertainty in decision making

Fir Co
st I pyri
3 GYM BUNNIES

ntu ght
(a) Option 1

itio
Net income = $720 $80 = $640 per annum.
Total annual income = $640 5,250 = $3.36m
Option 2
n2
017
If costs $120 per annum, net income = $720 $120 = $600 per annum.
If costs $180 per annum, net income = $720 $180 = $540 per annum.
Total annual income
If membership 6,000 (A):
$600 6,000 = $3.6m
$540 6,000 = $3.24m
If membership 6,500 (B):
$600 6,500 = $3.9m
$540 6,500 = $3.51m
Expected value and decision:
EV at A = (0.5 $3.6m) + (0.5 $3.24m) = $3.42m
EV at B = (0.5 $3.9m) + (0.5 $3.51m) = $3.705m
EV at C = (0.4 $3.42m) + (0.6 $3.705m) = $3.591m per annum
At D, compare EV of:
Option 1: (3 $3.36m) = $1008m
Option 2: (3 $3.591m) $360k = $10413m
Therefore choose option 2 expand exercise studio.
106 T u i t i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

Net income $3.36 per annum

Net income $600 per annum Net income $3.6 per annum
Option 1
$3.42m
$10.413m 5,250 members: net per annum 0.5
income $640 per annum
A
D
0.5
6,000 members
Option 2 Net income $540 per annum Net income $3.24 per annum
$(360k)
0.4

$3.591m C
per annum Net income $600 per annum
0.6 Net income $3.9 per annum
$3.705
6,500 members per annum 0.5
B
0.5

ht 7
Net income $540 per annum Net income $3.51 per annum

r i g
EXAMINERS COMMENTS: PART (b)

201
y
p ion
o
Part (b) asked candidates to calculate the maximum price that the company should pay for

C uit
perfect information about the expansions exact effect on membership numbers. Very few

t
candidates answered part (b) correctly. Candidates must revise this area well.

EXAM SMART
t I n
ir s
F
Remember that the value of perfect information (VOPI) is calculated be working out the
difference between what the EV would be if you had perfect information (in this case this
would be knowledge of what the membership numbers would change to) compared to the
EV if you didnt have this knowledge. It might help to consider this in tabular format. The
values in the table represent the net income figures over the full three-year period
Expansion option
Option 1 Option 2
$ $
6,000 members under option 2 (see note 1 below) $10.08m $9.9m
6,500 members under option 2 $10.08m $10.755m
Note 1
If option 1 is undertaken you know you will get net income of $3.36m pa (5,250 {720
80}), hence over three years this is $10.08m. If we choose option 2 and it turns out member
numbers are 6,000 then the return is $9.9m. (Net income of 3 yrs $3.42m (see decision
tree) = $10.26m less the capital costs of $0.36m = $9.9m.)
If we dont have perfect information about the membership levels then the EVs are as per
the examiners workings above, namely;
Option 1 = $10.08m
Option 2 = $10.413m
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision-making techniques 107

So, without perfect information youd choose option 2 per the tree and get an EV of
$10.413m. With perfect information the following can be concluded. If you knew membership
was going to be 6,000 (prob = 0.4), you would choose option 1 and get $10.08m whereas if
you knew membership was going to be 6,500 (prob = 0.6) you would choose option 2 and get
$10.755m, giving an overall EV of $10.485m ({0.4x$10.08m} + {0.6x$10.755m})
The VOPI is therefore $10.485m - $10.413m = $0.072m

(a) With perfect information:


If membership numbers were 6,000:
EV = $3.42m 3 = $10.26m
Less costs of $360k = $9.9m
Therefore, with these membership numbers, GB would choose option 1 instead.
If membership numbers were 6,500:
EV = $3.705 3 = $11.115m
Less costs of $360k = $10.755m
In this instance, GB would choose option 2.
So, if membership numbers are 6,000, of which there is a 0.4 probability, EV will be $10.08m

Fir Co
(option 1) and if membership numbers are 6,500, of which there is a 0.6 probability, then EV will

st I pyri
be $10.755m (option 2).
Therefore EV with perfect information = (0.4 $10.08m) + (0.6 $10.755) = $10.485m.

ntu ght
Without perfect information the EV is $10413m, therefore the value of it is $72k ($10.485m

itio
$10.413m). This represents the maximum price that GB should be prepared to pay for the
information.

EXAMINERS COMMENTS: PART (c)


n2
017
Part (c) asked for a brief discussion of using expected values for a decision of this nature.
It was only worth two marks, which is why the requirement asked for only a BRIEF
discussion. Many candidates spotted the most obvious point, which is that the expected
value criterion is useful for decisions that are repeated but is less relevant to one off
decisions of this nature since it merely gives a long run average of what the outcome would
be if a decision were repeated many times. However, marks could still be earned for making
points such as the fact that probabilities are difficult to ascertain etc. Please note that the
marks available for a requirement are indicative of the length of answer expected. Writing a
whole page of answer for this requirement is simply wasting valuable time that could have
been spent elsewhere.

(b) The expansion decision is a one-off decision, rather than a decision that will be repeated many
times. Expected values, on the other hand, give us a long run average of the outcome that
would be expected if a decision was to be repeated many times. The actual outcome may not
be very close to the expected value calculated and the technique is therefore not really very
useful here.
Also, estimating accurate probabilities is difficult because this exact situation has not arisen
before.
The expected value criterion for decision-making is useful where the attitude of the investor is
risk neutral. We do not know what the management of Gym Bunnies attitude to risk is, which
108 T u i t i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

makes it difficult to say whether this criterion is a good one to use. In a decision such as this
one, it would be useful to see what the worst case scenario and best case scenario results
would be too, in order to assist decision-making.
(c) Methods of uncertainty reduction
Simulation
Computer models can be built to simulate real life scenarios. The model will predict what range
of returns the business could expect from a given decision without having risked any actual
cash. The models use random number tables to generate possible values for the uncertainty the
business is subject to. Again, computer technology is assisting in bringing down the cost of such
risk analysis.
Calculation of worst and best case figures
A business will often be interested in range. It enables a better understanding of risk. An
accountant could calculate the worst case scenario, including poor demand and high costs while
being sensible about it. He could also calculate best case scenarios including good sales and
minimum running costs. This analysis can often reassure the business. The production of a
probability distribution to show the business the range of possible results is also useful to
explain risks involved. A calculation of standard deviation is also possible.
Marking guide Marks
(a) Expected value and decision

ht
EV at A 2
EV at B

r
EV at C
i g 01 7 2
2

y
p ion 2
Compare EVs at D 1

o
Recommendation that follows 1

C uit
8
(b) Price of perfect information

t
EV with 6,000 members 2

t I n
EV with 6,500 members 2

s
Price 2

ir
6

F
(c) Discussion 2
(d) Simulation 2
Worst-best case figures 2
4
Maximum marks available 20
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 109

3: Budgeting and control

Budgetary systems and types of budget

1 PC CO
EXAMINERS COMMENTS: PART (a)
Part (a) was where the bulk of the easy marks were on this paper: a requirement to identify
and explain six objectives of a budgetary control system. A good number of answers scored
full marks. On the whole, candidates either knew the answer or didnt; there wasnt much in
between.

EXAM SMART
If you had identified that the bulk of the easy marks on this paper were in this question, it
would have been worth your while attempting this question first.

Fir Co
st I pyri
(a) Objectives of a budgetary control system

ntu ght
To compel planning
Budgeting makes sure that managers plan for the future, producing detailed plans in

itio
order to ensure the implementation of the companys long-term plan. Budgeting makes

n2
managers look at the year ahead and consider the changes in conditions that might take
place and how to respond to those changes in conditions.
To co-ordinate activities
017
Budgeting is a method of bringing together the activities of all the different departments
into a common plan. If an advertising campaign is due to take place in a company in three
months time, for example, it is important that the production department know about
the expected increase in sales so that they can scale up production accordingly. Each
different department may have its own ideas about what is good for the organisation.
For example, the purchasing department may want to order in bulk in order to obtain
bulk quantity discounts, but the accounts department may want to order in smaller
quantities so as to preserve cash flow.
To communicate activities
Through the budget, top management communicates its expectations to lower level
management. Each department has a part to play in achieving the desired results of the
company, and the annual budget is the means of formalising these expectations. The
whole process of budget setting, whereby information is shared between departments,
facilitates this communication process.
To motivate managers to perform well
The budget provides a basis for assessing how well managers and employees are
performing. In this sense, it can be motivational. However, if the budget is imposed from
the top, with little or no participation from lower level management and employees, it
can have a seriously demotivational effect. This is discussed further in part (b).
110 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

To establish a system of control


Expenditure within any organisation needs to be controlled and the budget facilitates
this. Actual results are compared to expected results, and the reasons for any significant,
unexpected differences are investigated. Sometimes the reasons are within the control of
the departmental manager and he/she must be held accountable; at other times, they
are not.
To evaluate performance
Often, managers and employees will be awarded bonuses based on achieving budgeted
results. This makes more sense than evaluating performance by simply comparing the
current year to the previous year. The future may be expected to be very different than
the past as economic conditions change. Also, events happen that may not be expected
to reoccur. For example, if weather conditions are particularly wet one year, a company
making and selling umbrellas would be expected to make higher than usual sales. It
would not be fair to assess managers against these historical sales levels in future years,
where weather conditions are more normal.
(Other possible objectives include:
To delegate authority to budget holders
A formal budget permits budget holders to make financial decisions within the specified
limits agreed, i.e. to incur expenditure on behalf of the organisation.

t
To ensure achievement of the managements objectives

h 7
Objectives are set not only for the organisation as a whole but also for individual targets.

r i g 201The budget helps to work out how these objectives can be achieved.)

y
p ion
EXAMINERS COMMENTS: PART (b)

o
C uit
Part (b) was a little more challenging: a requirement to discuss the concept of participative

t
budgeting in terms of the objectives identified in part (a). Answers to this were mixed, with

I n
some good attempts but some poor ones too. A small number of candidates didnt know

t
what participative budgeting was (the clue is in the title) so they scored nothing. Others

ir s managed to score marks by making some valid observations about it, even if they didnt

F
necessarily tackle it in the best way, which was by using the objectives in part (a) as headings
in order to give the answer some structure.

EXAM SMART
Remember that participative budgeting is sometimes referred to as bottom up budgeting,
where there is more involvement from all across the organisation.

(b) Participative budgeting


Participative budgeting refers to a budgeting process where there is some level of involvement
from subordinates within the organisation, rather than budgets just being set by the top level of
management.
There are various views about whether participative budgeting is more effective than other
styles. Each of the objectives from part (a) is dealt with below, considering the extent to which
participative budgeting helps to achieve this.
To compel planning
Participative budgeting will compel planning. Although participation can take many
forms, often it will take the form of bottom-up budgeting, whereby the participation
starts at the lowest level of management and goes all the way up to the top. If this is the
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 111

case, then planning is taking place at many levels, and should be more accurate than if it
simply takes place at a high level, by individuals who are not familiar with the day to day
needs of the business.
To co-ordinate activities
Co-ordination of activities may become more time consuming if a participative style of
budgeting is used. This is because, not only does there need to be co-ordination between
departments but there also has to be co-ordination between the different levels of
management within each department. The process should be cumbersome but also
effective, with everyone knowing exactly what the plan is.
To communicate activities
Communication will be particularly effective with participative budgeting, although how
effective depends on the extent of the participation. If all levels of management are
involved, from the bottom up, then all levels of management know what the plan is.
However, the plan may change as different departments budgets are reviewed together
and the overall budgeted profit compared to the top level managements expectations. Hence, it
may be the case that those people involved in the initial budgets, i.e. lower level
management, have to deal with their budgets being changed.
To motivate managers to perform well
If managers play a part in setting the budget, they are more likely to think that the figures

Fir Co
included in them are realistic.

st I pyri
Therefore, they are more likely to try their best to achieve them. However, it may be that
managers have built budgetary slack into their budgets, in an attempt to make

ntu ght
themselves look good. Therefore, managers could end up performing less well than they
would do had tougher targets been set by their superiors.

itio
To establish a system of control

n2
In terms of establishing a system of control, it is largely irrelevant whether the budget
setting process is a participative one or not. What is important is that actual results are

017
compared to expected, and differences are investigated. This should happen irrespective
of the budget setting process. Having said that, control is only really effective if the
budgeted figures are sound. As stated above, whilst they are more likely to be realistic if
a participative style of budgeting is used, the system is open to abuse in the form of
budgetary slack.
To evaluate performance
Managers will be appraised by comparing the results that they have achieved to the
budgeted results. A participative budget will be an effective tool for this provided that
participation is real rather than pseudo and provided that the managers have not built
slack into their figures, which has gone uncorrected.
[Examiners note: candidates would not be required to write all of this for the available marks.]
Marking guide Marks
(a) Objectives
Each objective 1
Max 9
(b) Participative style of budgeting
Explaining participative budgeting 2
Each objective discussed in relation to it 1
Max 11
Maximum marks available 20
112 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Materials mix and yield variances

2 THE SAFE SOAP CO


EXAMINERS COMMENTS: PART (a)
The final question on the paper was for 15 marks and covered material mix and yield
variances. Part (a) asked for the calculations for these and was very well answered. It was
impressive to see the number of candidates who scored full marks here.

(a) Variance calculations


Mix variance
Total kg of materials per standard batch = 025 + 06 + 05 = 135 kg
Therefore standard quantity to produce 136,000 batches = 136,000 135 kg = 183,600 kg
Actual total kg of materials used to produce 136,000 batches = 34,080 + 83,232 + 64,200
= 181,512 kg
Actual Standard
Actual quantity quantity cost

t
Material Standard mix Actual mix Variance per kg Variance

i g h 1 7
r 0
kgs kgs kgs $ $

y 2
Lye 181,512 025/135 = 33,61333 34,080 (46667) 10 (4,66670)

p ion
Coconut oil 181,512 06/135 = 80,672 83,232 (2,560) 4 (10,240)

o
Shea butter 181,512 05/135 = 67,22667 64,200 3,02667 3 9,08001

C uit
181,512 181,512 (5,82669)A

n t
Yield variance

I
Actual

s t
Standard quantity quantity Standard

ir
Material Standard mix Standard mix Variance cost per kg Variance

F
kgs kgs $ $
Lye 025 136,000 = 34,000 33,61333 38667 10 3,86670
Coconut oil 06 136,000 = 81,600 80,672 928 4 3,712
Shea butter 05 136,000 = 68,000 67,22667 77333 3 2,31999
183,600 181,512 9,89869F

EXAMINERS COMMENTS: PART (b)


Part b(i) asked for a brief explanation of what each of the variances indicates about
production at the company, Safe Soap Co. Some candidates did not read the question
properly and started discussing the managers performance. This was not what the question
asked so future candidates make sure that you always read requirements carefully. So,
for example, as regards the adverse material mix variance, answers should have stated that
it shows that the mix of materials used in October was more expensive than the standard
mix. It was surprising to see that many candidates did not know that this is what an adverse
materials mix variance shows. This was similar to some of the responses to question 2,
where the calculations were done reasonably well but understanding of what the
calculations actually meant was sometimes lacking.
Part b (ii) also proved problematic for a number of candidates. It read discuss whether the
sales manager could be justified in claiming that the change in the materials mix has caused
an adverse sales volume variance in October. The expectation was that candidates would
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 113

identify the fact that the change in mix could have led to the adverse sales volume variance
but it cannot be definitively said that it did. Many answers tried to make it a black and white
matter i.e. yes or no, when in fact the answer was grey.
Quite a few candidates said that the sales manager couldnt be justified in his claims because
a more expensive mix of materials was used and this means sales volumes should go up.
Again, its simply not as straight-forward as this. A more expensive mix might be used in
production but this doesnt mean that a product will necessarily be better. In the case of
something like soap, adhering to a certain formula is very important.

(b)
(i) A materials mix variance will occur when the actual mix of materials used in production is
different from the standard mix. So, it is inputs which are being considered. Since the
total mix variance is adverse for the Safe Soap Co, this means that the actual mix used in
September and October was more expensive than the standard mix.
A material yield variance arises because the output which was achieved is different from
the output which would have been expected from the inputs. So, whereas the mix
variance focuses on inputs, the yield variance focuses on outputs. In both September and
October, the yield variance was favourable, meaning that the inputs produced a higher
level of output than one would have expected.

Fir Co
(ii) Whilst the mix and yield variances provide Safe Soap Co with a certain level of

st I pyri
information, they cannot address any quality issues which arise because of the change in
mix. The consequences of the change may well have an impact on sales volumes. In Safe
Soap Cos case, the sales volume variance is adverse, meaning that sales volumes have

ntu ght
fallen in October. It is not known whether they also fell in September but it would be
usual for the effects on sales of the change in mix to be slightly delayed, in this case by

itio
one month, given that it is only once the customers start receiving the slightly altered

n2
soap that they may start expressing their dissatisfaction with the product.
There may also be other reasons for the adverse sales volume variance but given the

(c)
taken on board. 017
customer complaints which have been received, the sales managers views should be

(i) Expenditure variance


Cost driver rate = $40,500/30 = $1,350
Expected cost therefore = 36 $1,350 $48,600
Actual cost $45,400
Variance $3,200 F

(ii) Efficiency variance


Expected no. of batches per set up
120,000/30 = 4,000
Therefore, expected no. of set ups for 136,000 = 136,000/4,000 = 34
Actual number of set ups 36
Difference 2A

standard rate per set up $1,350


Variance $2,700 A
114 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Marking guide Marks


(a) Variance calculations
Mix variance 4
Quantity variance 4
8
(b) (i) Variances
Marks per variance explained 2 4
(ii) Discussion
Per valid point 1 2
(c) (i) Expenditure variance 3
(ii) Efficiency variance 3
Maximum marks available 20

Planning and operational variances

3 BEDCO
(a) Planning and operational variances

t
(i) Material Price Planning Variance (MPPV)

i g h 1 7 (Standard price revised price) actual quantity

y r 20 Sheets ($5 $6) 248,000 = $248,000 adverse

p ion
Pillow cases ($5 $6) 95,000 = $95,000 adverse

o
C uit (ii)
Total $343,000 adverse
Material Price Operational Variance (MPOV)

I n t (Revised price actual price) actual quantity

s t
Sheets ($6 $5.80) 248,000 = $49,600 favourable

ir
Pillow cases ($6 $5.80) 95,000 = $19,000 favourable

F
Total $68,600 favourable
(iii) Material Usage Planning Variance (MUPV)
(Standard quantity for actual production revised quantity for
actual production) standard price
RQ for each pillow case = 05 m 11 = 055 m
Sheets (240,000 240,000) $5 = 0
Pillow cases (90,000 99,000) $5 = $45,000 adverse
Total $45,000 adverse
(iv) Material Usage Operational Variance (MUOV)
(Actual quantity revised quantity for actual production)
standard price
Sheets (248,000 240,000) $5 = $40,000 adverse
Pillow cases (95,000 99,000) $5 = $20,000 favourable
Total $20,000 adverse
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 115

(b) Performance of the Production Manager


In total, there has been an overspend of $339,400, which looks poor. However, when the
reasons for this are examined, together with the variances calculated in (a), it is apparent that
the production manager cannot be held solely responsible for the overspend. In fact, he has had
little control over the situation.
Increase in cotton price
Since cotton is used to make bed sheets and the price of this rose in the world market by 20%,
the Production Managers performance has to be looked at in light of this. Because of the
increased market price, the adverse material price planning variance is very high, since the
budgeted cost of $5 per m2 was far below the actual market price of $6 per m2. The Production
Manager cannot be held responsible for this since he does not set the standard costs. He can
only be held responsible for any difference in price between the $6 market price and the $5.80
actual price paid. Since the $5.80 paid per m2 is less than the market price of $6 per m2, the
Production Manager performed well, as shown by the favourable material price operating
variance of $68,600.
Increase in amount of cotton used
Since more cotton was used for actual production than budgeted, a total adverse material
usage variance of $65,000 ($45,000 + $20,000) arose. However, of this, $45,000 (material usage
planning variance) arose because of the request for a change in the design of the pillowcases by

Co
Bedcos customer. This was not within the control of the Production Manager and his

Fir
performance should not therefore be assessed on it. However, an adverse material usage

st I pyri
operational variance of $20,000 also arose; the performance of the Production Manager is weak
here. Most of the adverse operational variance actually related to the production of bed sheets

ntu ght
rather than pillowcases. It is not clear why this arose but it is definitely poor. Bedco was also
unable to produce all the pillowcases ordered by its customer in November as the order fell

itio
short by 10,000 units. If this was genuinely because of the late design change, however, it
seems unfair to judge the Production Manager on this.
Marking guide
n2 Marks
(a) Variance calculations
MPPV
MPOV
017 3
3
MUPV 3
MUOV 3
Max 12
(b) Discussion
Each valid point 2
Max 8
Maximum marks available 20
116 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Performance analysis and behavioural aspects

4 JUMP
EXAMINERS COMMENTS: PART (a)
Part (a) examined the calculation of bonuses for a manager based on a set of given targets;
answers to this were good on the whole.

(a) Bonus calculation:


Qtr to Qtr to Qtr to Qtr to Bonus hits
30/06/09 30/09/09 31/12/09 31/03/10
Staff on time
On-time % 430/450 = 452/480 = 442/470 = 460/480 =
95.5% 94.2% 94.0% 95.8% 2
Bonus earned? Yes No No Yes

Members visits
Target visits 60% 3,000 12 60% 3,200 12 60% 3,300 12 60% 3,400 12

t
= 21,600 = 23,040 = 23,760 = 24,480

i g
Actual visits
h 1 7
20,000 24,000 26,000 24,000

r 0
Bonus earned? No Yes Yes No 2

y
p ion 2
o
Personal training

C uit
Target 10% 3,000 10% 3,200 10% 3,300 10% 3,400
= 300 = 320 = 330 = 340

t
Actual sessions 310 325 310 339

I n
Bonus earned Yes Yes No No 2

s t
Total 6

F ir The bonus earned by the manager would be 6 $400 = $2,400, which is 50% of the total bonus available.

EXAMINERS COMMENTS: PART (b)


Part (b) required a discussion of the extent to which the three targets set were controllable
by managers. For a narrative requirement, this was fairly well answered overall.
A minority of candidates did misread the requirement though and instead gave commentary
on the extent to which the targets had been met in the year.

EXAM SMART
Follow the clues given by the Examiner in the requirement. Here:
There are three targets given: a sub-heading for each one would give a clear line of
demarcation between each part of the question.
There are nine marks awarded for this requirement: three marks per target.
The requirement states that you need to make a case for both sides of the argument.
Therefore your answer needs to be balanced.
Focus on how much control you think the manager has. Form a conclusion on this for
each target if you can.
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 117

(b) An important principle of any target-based bonus system is that the targets must be based on
controllable aspects of the managers role.
Staff on time
The way in which a manager manages staff can have a big bearing on whether or not an
individual staff member is keen to work and arrive on time. We are told that the local manager
has the power to vary employment contracts so he should be able to agree acceptable shift
patterns with staff and reward them for compliance. In this respect the lateness of staff is
controllable by the manager.
On the other hand, an individual staff member may be subject to home pressures or problems
with public or other transport meaning that even they cannot control the time of arrival at work
on some days. The manager cannot control these events either. If this problem became regular
for a member of staff, then the local manager could vary the contract of employment
accordingly.
Overall, lateness to work is controllable by the local manager.
Member use of facilities
The local manager controls the staff and hence the level of customer service. Good quality
customer services would probably encourage members to use the facilities more often. Equally,
by maintaining the club to a high standard, then the local manager can remove another
potential reason for a member not to use the facilities regularly.

Fir Co
On the other hand, customers are influenced by many factors outside of the club. Their state of

st I pyri
health or their own work pressures can prevent members being able to come to the club.

ntu ght
Overall, the local manager can only partly control the number of member visits.
Personal training sessions

itio
Again, the local manager controls the level of customer service and the standard of

n2
maintenance in the personal training department. He also has control over prices so, if the
bookings fall, he is able to reduce prices or make special offers to encourage use of the facilities.

017
On the other hand, personal training sessions may be seen as a luxury by customers and in
times of financial difficulty they are expendable by them. Personal training sessions are often
available from other sources and competition can force down the sales of the club. The
manager can respond to that by improving services. He cannot, however, make significant
investment in improving the facilities without board approval.
Overall, the local manager can only partly control the number of personal training sessions
booked.

EXAMINERS COMMENTS: PART (c)


Again, there were some good answers here, with only a minority of candidates talking about
manipulating profits, which wasnt relevant to a business where profit based targets werent
being used.

EXAM SMART
In this requirement you should have focused on the instances where no bonus would be
received and think about whether it would have been possible to manipulate the figures to
hit a bonus target in any of those situations.
118 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

(c) There are a variety of methods by which the performance data can be manipulated.
Cut off
The unethical manager could record visits in a different period than was actually the case. For
example, in quarter three the target for personal training sessions was not met by 20 sessions.
This was probably obvious to the manager in the last few days of that quarter. He could have
therefore recorded some sessions as having taken place in the next quarter. Indeed, only one
session would have to be moved in this way in order for the manager to meet the target in the
final quarter and gain another $400 of bonus.
Reduce prices to below economic levels to encourage use
The targets that the manager is subject to are mainly volume driven. A reduction in prices would
harm profitability but would not damage the managers bonus potential. More sessions are
bound to follow if the price is set low enough. (Other ideas would be acceptable, including
advising staff to take the day off if they were going to be late. This would damage service levels
admittedly, but would potentially gain a bonus for lateness.)
Marking guide Marks
(a) Per target 2 Max 6
(b) For each target supporting controllability 1
For each target denying controllability 1 Max 9

t
(c) For each idea of manipulation, up to 2 Max 5

g h 1 7
Maximum marks available 20

y r i 20
o p ion
C uit
I n t
r s t
F i
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 119

4: Performance measurement and control

Performance analysis in private sector organisations

1 WEB CO
EXAMINERS COMMENTS
This was a classic performance management question and was generally well-answered by
candidates compared to other questions on the paper. The company in the question had
made certain changes and introduced some incentives in order to boost sales and the
requirement asked for a discussion of whether these changes and incentives had been
effective. As usual, it was necessary to do some preliminary calculations in order to assess
performance and candidates should be reminded that absolute figures are rarely useful and
percentage changes are far more informative.
The most common weakness in answers was the classic commentary stating that, for
example, Sales have gone up, which is good. Comments such as these simply wont score

Fir Co
marks. Candidates needed to consider the relationship between the data and calculations

st I pyri
with the information given in the question, in this case relating to the changes and incentives
introduced. If this link is not being made, rarely will comments score marks.

ntu ght
Good candidates identified that, although sales had increased by 25%, net profit had
decreased by 33%, but this was due to the mass of expenses that had been incurred in

itio
bringing about the changes. Consequently, the benefits of these changes would be expected
to continue for some time, and it would certainly be useful to see quarter 3s results when

n2
these were available.

017
Poorer candidates seemed to think that the decrease in net profit margin was a sign that
things were going wrong and cost of sales must be increasing dramatically. Again, I would
emphasise that, at this level, candidates are expected to link the information in the scenario
with the data and their calculations in order to draw valid conclusions. The candidates
producing weaker answers appeared almost not to have read the scenario and simply to
have read the data. In a question like this, it is really useful to annotate the written parts of
the scenario and where, for example, it states that $200,000 has been spent on advertising,
note down next to it the calculations that might help to analyse the effect of that (NPM,
increase in sales.) Then, when writing answers, the link has already been noted down and is
ready to be discussed.
As far as the calculations go, it is useful to produce a small schedule either at the beginning
or end of the answer with all workings on. This makes it easy to mark and see where the
calculations have come from, so that credit can still be given even where minor errors have
been made.

EXAM SMART
In exams it is important to not make silly mistakes. For example, it is very easy to misread a
calculator and see the increase in subscriptions as 259% and not 159%. You need to work
steadily and methodically, clearly showing workings as you progress.
Also do be imaginative in your calculations and make sure you talk about them too!
120 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

For example, if the profit margin had been maintained at 25% then profit would have been:
$2750k 25% = $687.5k. With the actual profit only being $459,250, this is a shortfall of
$228,250. This then gives you room to think why this has happened and what the impact
could be.
You could calculate the average spend per visit it has risen from $54.14 to $55.44, a 2%
increase and so on.
Since you have to relate the performance to changes in incentives you should start off by
identifying what the changes in incentives are. Then use clear subheadings to break your
answer down for the Examiner to make it easy for the markers to award you marks.

Web Co has made three changes and introduced two incentives in an attempt to increase sales. Using
the performance indicators given in the question, it is possible to assess whether these attempts have
been successful.
Total sales revenue
This has increased from $2.2 million to $2.75m, an increase of 25% (W1). This is a substantial increase,
especially considering the fact that a $10 discount has been given to all customers spending $100 or
more at any one time. However, because a number of changes and incentives have been introduced, it
is not possible to assess how effective each of the individual changes/incentives has been in increasing
sales revenue without considering the other performance indicators.

ht 7
Net profit margin (NPM)

r i g 01
This has decreased from 25% to 16.7%. In $ terms this means that net profit was $550,000 in Quarter 1

2
y
and $459,250 in Quarter 2 (W2). If the 25% NPM had been maintained in Quarter 2, the net profit

o p ion
would have been $687,500 for Quarter 2. It is therefore $228,250 lower than it would have been. This

C uit
is mainly because of the $200,000 paid out for advertising and the $20,000 paid to the consultant for
the search engine work. The remaining $8,250 difference could be a result of the cost of the $10

n t
discounts given to customers who spent more than $100, depending on how these are accounted for.

t I
Alternatively, it could be due to the costs of providing the Fast Track service. More information would

s
be required on how the discounts are accounted for (whether they are netted off sales revenue or

F ir instead included in cost of sales) and also on the cost of providing the Fast Track service.
While it is not clear how long the advert is going to run for in the fashion magazine, $200,000 does
seem to be a very large cost.
This expense is largely responsible for the fall in NPM. This is discussed further under number of visits
to website.
Number of visits to website
These have increased dramatically from 101,589 to 141,714, an increase of 40,125 visits (39.5% W3).
The reason for this is a combination of visitors coming through the fashion magazines website (28,201
visitors W5), with the remainder of the increase most probably being due to the search engine
consultants work. Both of these changes can therefore be said to have been effective in improving the
number of people who at least visit Web Cos online store. However, given that the search engine
consultant only charged a fee of $20,000 compared to the $200,000 paid for magazine advertising, in
relative terms, the consultants work provided value for money. Web Cos sales are not really high
enough to withstand a hit of $200,000 against profit, hence the fall in NPM.
Number of orders/customers spending more than $100
The number of orders received from customers has increased from 40,636 to 49,600, an increase of
22% (W4). This shows that, while most of the 25% sales revenue increase is due to a higher number of
orders, 3% of it is due to orders being of a higher purchase value. This is also reflected in the fact that
the number of customers spending more than $100 per visit has increased from 4,650 to 6,390, an
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 121

increase of 1,740 orders. So, for example, if each of these 1,740 customers spent exactly $100 rather
than the $50 they might normally spend, it would easily explain the 3% increase in sales that is not due
to increased order numbers. It depends partly on how the sales discounts of $10 each are accounted
for. As stated above, further information is required on these.
An increase in the number of orders would also be expected, given that the number of visitors to the
site has increased substantially.
This leads on to the next point.
Conversion rate visitor to purchaser
The conversion rate of visitors to purchasers has gone down from 40% to 35%. This is not surprising,
given the advertising on the fashion magazines website. Readers of the magazine may well have
clicked on the link out of curiosity and may come back and purchase something at a later date. It may
be useful to have a breakdown of the visitor to purchaser rate, showing one statistic for visitors who
have come from the online magazine and one for those who have not. This would help clarify the
position.
Website availability
Rather than improving after the work completed by Web Cos IT department, the websites availability
has stayed the same. This means that the IT departments changes to the website have not corrected
the problem. Lack of availability is not good for business, although its exact impact is difficult to
ascertain. It may be that visitors have been part of the way through making a purchase only to find

Fir Co
that the website then becomes unavailable. More information would need to be available about

st I pyri
aborted purchases, for example, before any further conclusions could be drawn.
Subscribers to online newsletter

ntu ght
These have increased by a massive 159%. It is not clear what impact this has had on the business as we

itio
do not know whether the level of repeat customers has increased. This information is needed.
Surprisingly, it seems that there has not been an increased cost associated with providing Fast Track

n2
delivery, as the whole fall in net profit has been accounted for, so one can only assume that Web Co
managed to offer this service without incurring any additional cost itself.
Conclusion
017
With the exception of the work carried out to make the system more available, all of the other
measures seem to have increased sales or, in the case of Incentive 1, increased subscribers. More
information is needed in relation to a couple of areas, as noted above. The business has therefore
been responsive to changes made and incentives implemented but the cost of the advertising was so
high that, overall, profits have declined substantially. This expenditure seems too high in relation to
the corresponding increase in sales volumes.
Workings
1 Increase in sales revenue ($2.75m $2.2m)/$2.2m = 25% increase.
2 NPM: 25% $2.2m = $550,000 profit in Quarter 1.
16.7% $2.75m = $459,250 profit in Quarter 2.
3 No. of visits to website: increase = (141,714 101,589)/101,589 = 39.5%
4 Increase in orders = (49,600 40,636)/40,636 = 22%
5 Customers accessing website through magazine line = 141,714 19.9% = 28,201
6 Increase in subscribers to newsletter = (11,900 4,600)/4,600 = 159%
122 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Marking guide Marks


Calculations 4
Missing info 3
Discussion and further analysis (2 to 3 marks per point) 18
Conclusion 2 Max 20
Maximum marks available 20

2 AT CO
EXAMINERS COMMENTS
This was a typical performance measurement question. There was quite a lot of information
to absorb but I strongly believe that, unless you are given plenty of information to work
with, it is only possible to make very generalised, insipid comments. This is not what F5 is all
about. I want candidates to be able to handle information and make some quality analysis
about it. It requires common sense and ability to link information. This should not be too
much to ask of a part-qualified accountant, who would have to exhibit these qualities in the
workplace.
Needless to say, answers were poor. Anyone who had read my article on this area, or indeed

ht 7
my predecessors article on this area, would know that insipid comments such as turnover

i g 1
decreased by 8.3%, which is poor will score only a calculation mark, for working out the

y r 20
8.3%. Is this decrease in turnover poor? Well, it depends on the market in which the

p ion
company is operating. You have to read the scenario. When you take into account the fact

o
that there has been a 20% decline in the demand for accountancy training, AT Cos 8.3%

C uit
looks relatively good. You must link information; this is an essential skill for any accountant.

t
Nothing is ever what it seems...ask any auditor!

t I n
Let me also take the opportunity to distinguish between an acceptable comment, which

s
might earn one mark, compared to a good point, which might earn two marks. Cost of sales

ir
fell by $10.022m in the year. Part of this reduction was down to a fall in freelance lecture

F
costs. A good candidate would have commented that, whilst the company requested that
freelance lecturers reduce their fees by 10%, the actual fee reduction gained was 15%, a
strong performance. A comment such as this would have earned two marks. A less
observant comment, earning one mark, would have been that the reduction in cost of sales
was partly due to the fact that the company requested freelance lecturers to reduce their
fees by 10%.
I hope that this question will serve as a good revision question to future examinees of F5.
The information given is there to help you make worthwhile comments. It is not there to trip
you up. When planning the question, you should annotate it carefully, cross-referencing
different parts of the question, linking financial and non-financial information etc.

EXAM SMART
Lets develop the examiners points about the good commentary about the freelance
lecturer costs. A good style is to think:
What has happened (often the number calculated)?
Why has it happened (root cause often given in the question)?
So what or what then (your judgement and/or the possible consequence)?
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 123

By thinking of this, you should be able to not only pick up the computation marks but also
the good standard narrative marks.
For example:
Cost of sales:
This fell by $10.022m (19.2%) over the year (what). This impressive cost reduction was
largely caused by (so what) AT Co requiring freelance tutors to reduce their fees by 10%
(why). Freelance fees were however cut by 15.0% (W1), creating major cost savings (why).
AT Co will need to maintain freelance tutor goodwill, so seeking future major fee reductions
may not be possible (what then).
Working 1
2009 freelance fees: 35% x $41.663m = $14.582m
2010 freelancer fees = $12.394m
12.39414.582
% fall = 14.582
100% = -15.0%

Turnover
Turnover has decreased from $72.025 million in 2009 to $66.028 million in 2010, a fall of 8.3%.
However, this must be assessed by taking into account the change in market conditions, since there

Fir Co
has been a 20% decline in demand for accountancy training. Given this 20% decline in the market

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place, AT Cos turnover would have been expected to fall to $57.62m if it had kept in line with market
conditions. Comparing AT Cos actual turnover to this, its actual turnover is 14.6% higher than

ntu ght
expected. As such, AT Co has performed fairly well, given market conditions.
It can also be seen from the non-financial performance indicators that 20% of students in 2010 are

itio
students who have transferred over from alternative training providers. It is likely that they have
transferred over because they have heard about the improved service that AT Co is providing. Hence, they

n2
are most likely the reason for the increased market share that AT Co has managed to secure in 2010.

017
Cost of sales
Cost of sales has decreased by $10.022m (19.2%) in 2010. This must be considered in relation to the
decrease in turnover as well. In 2009, cost of sales represented 723% of turnover and in 2010 this
figure was 63.7%. This is quite a substantial decrease. The reasons for it can be ascertained by, firstly,
looking at the freelance staff costs.
In 2009, the freelance costs were $14.582m. Given that a minimum 10% reduction in fees had been
requested to freelance lecturers and the number of courses run by them was the same year on year,
the expected cost for freelance lecturers in 2010 was $13.124m. The actual costs were $12.394m
($2.2m lower than 2009). These show that a fee reduction of 15% was actually achieved. This can be
seen as a successful reduction in costs.
Other cost savings must have occurred. Permanent staff numbers have remained constant as have
their salaries at about $27m. Given that of the $10.0m overall reduction in cost of sales, $2.2m savings
arose from freelancer savings, $7.8m will have come from other sources. $4m savings have been
gained by moving to electronic marking of progress tests. This appears to be a sensible move and will
lead to lower marking costs going forward. The remaining $3.8m savings may have arisen due to less
costs being incurred in other activities relating to student numbers. The fall in student numbers over
the year causing cost savings.
Gross profit
As a result of the above, the gross profit margin has increased in 2010 from 27.7% to 36.3%. This is a
big increase and reflects very well on management.
124 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Indirect expenses
Marketing costs: These have increased by 42.1% in 2010. Although this is quite significant, given
all the improvements that AT Co has made to the service it is providing, it is very important that
potential students are made aware of exactly what the company now offers. The increase in
marketing costs has been rewarded with higher student numbers relative to the competition in
2010 and these will hopefully continue increasing next year, since many of the benefits of
marketing wont be felt until the next year anyway. The increase should therefore be viewed as
essential expenditure rather than a cost that needs to be reduced.
Property costs: These have largely stayed the same in both years.
Staff training: These costs have increased dramatically by over $2 million, a 163.9% increase.
However, AT Co had identified that it had a problem with staff retention, which was leading to a
lower quality service being provided to students. Also, due to the introduction of the interactive
website, the electronic enrolment system and the online marking system, staff would have
needed training on these areas. If AT Co had not spent this money on essential training, the
quality of service would have deteriorated further and more staff would have left as they
became increasingly dissatisfied with their jobs. Again, therefore, this should be seen as
essential expenditure.
Given that the number of student complaints has fallen dramatically in 2010 to 84 from 315, the
staff training appears to have improved the quality of service being provided to students.
Interactive website and the student helpline: These costs are all new this year and result from

ht
an attempt to improve the quality of service being provided and, presumably, improve pass

r i g 1 7
rates. Therefore, given the increase in the pass rate for first time passes from 48% to 66% it can

0
be said that these developments have probably contributed to this. Also, they have probably

y
p ion 2
played a part in attracting new students, hence improving turnover.

o
C uit
Enrolment costs have fallen dramatically by 809%. This huge reduction is a result of the new
electronic system being introduced. This system can certainly be seen as a success, as not only

t
has it dramatically reduced costs but it has also reduced the number of late enrolments from

I n
297 to 106.

r s tNet operating profit

F i This has fallen from $3.635m to $2.106m. On the face of it, this looks disappointing but it has to be
remembered that AT Co has been operating in a difficult market in 20Y0. It could easily have been
looking at a large loss. Going forward, staff training costs will hopefully decrease. Also, market share
may increase further as word of mouth spreads about improved results and service at AT Co. This may,
in turn, lead to a need for less advertising and therefore lower marketing costs.
It is also apparent that AT Co has provided the student website free of charge when really it should
have been charging a fee for this. The costs of running it are too high for the service to be provided
free of charge and this has had a negative impact on net operating profit.
[Note: Students would not have been expected to write all this in the time available.]
Workings (Workings in $000)
1 Turnover
Decrease in turnover = $72,025 $66,028/$72,025 = 8.3%
Expected 2010 turnover given 20% decline in market = $72,025 80% = $57,620
Actual 2010 turnover CF expected = $66,028 $57,620/$57,620 = 14.6% higher
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 125

2 Cost of sales
Decrease in cost of sales = $42,056 $52,078/$52,078 = 192%
Cost of sales as percentage of turnover: 2009 = $52,078/$72,025 = 72.3%
2010 = $42,056/$66,028 = 63.7%
Freelance staff costs: in 2009 = $41,663 35% = $14,582
Expected cost for 2010 = $14,582 90% = $13,124
Actual 2010 cost = $12,394
$12,394 $14,582 = $2,188 decrease
$2,188/$14,582 = 15% decrease in freelancer costs
3 Gross profit margin
2009: $19,947/$72,025 = 27.7%
2010: $23,972/$66,028 = 36.3%
4 Increase in marketing costs = $4,678 $3,291/$3,291 = 42.1%
5 Increase in staff training costs = $3,396 $1,287/$1,287 = 163.9%
6 Decrease in enrolment costs = $960 5,032/5,032 = 80.9%
7 Net operating profit
Decreased from $3,635 to $2,106. This is fall of 1,529/3,635 = 42.1%
Marking guide

Fir Co Marks

st I pyri
Turnover:
8.3% decrease

ntu ght
Actual turnover 14.6% higher
Performed well CF market conditions 1

itio
Transfer of students 1
Max 3

n2
Cost of sales:
19.2% decrease

017
63.7% of turnover
15% fee reduction from freelance staff 2
Other costs of sale fell by $3.8m 2
Online marketing saving $4m 1
Max 5
Gross profit numbers and comment 1

Indirect expenses:
Marketing costs 42.1% increase
Increase necessary to reap benefits of developments 1
Benefits may take more than one year to be felt

Property costs stayed the same

Staff training:
163.9% increase
Necessary for staff retention 1
Necessary to train staff on new website etc 1
Without training staff would have left 1
Less student complaints 1
Interactive website and student helpline:
Attracted new students 1
Increase in pass rate 1
126 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Marking guide Marks


Enrolment costs:
Fall of 80.9%
Result of electronic system being introduced 1
Reduced number of late enrolments 1
Max 9
Net operating profit:
Fallen to $2.106m
Difficult market 1
Staff training costs should decrease in future 1
Future increase in market share 1
Lower advertising cost in future 1
Charge for website 1
Max 3
Maximum marks available 20

Divisional performance and transfer pricing

3 BATH CO

t
EXAMINERS COMMENTS: PART (a)

i g h 1 7
r 0
This question covered transfer pricing and really separated out the strong candidates from

y 2
the weak ones. Part (a) contained the easy marks, with a simple requirement to prepare a

o p ion
profit statement under the current transfer pricing system. There were many perfect

C uit
answers here, because the requirement was not difficult. However, weaker candidates
simply didnt know what the words profit statement meant, and just produced some

n t
workings showing total profit for the company. These candidates scored very few marks.

EXAM SMART
s t I
F ir It is really important to take your time to read the question set. A profit statement implies
that some sort of income statement is needed clearly showing the revenues and costs of
each division and also the company in total.
The best approach was to use a table, set out with columns for Division A, Division B and the
company as a whole. The rows need to show each key revenue source and cost and also the
key sub-totals. Remember, in the individual divisions profit statement, the transfer price
needs to appear. Here it is a revenue for Division B, being exactly matched by a cost in
Division A. From the companys perspective these amounts cancel (as would any inter-
company trading in a group).
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 127

(a) Profit statement


Division A Division B Division C
$000 $000 $000
Sales revenue:
External (1) 36,000 9,600 45,600
Inter-divisional transfers 0 6,000
Total 36,000 15,600 45,600
Variable costs:
External material costs (2) (16,000) (1,000) (17,000)
Inter-divisional transfers (3) (6,000) 0
Labour costs (4) (3,600) (3,000) (6,600)
Total (25,600) (4,000) (23,600)
Fixed costs (7,440) (4,400) (11,840)
Profit 2,960 7,200 10,160

Workings ($000)
1 External sales
Div A: 80,000 $450 = $36,000
Div B: 120,000 $80 = $9,600
Div B: 80,000 $75 = $6,000

Fir Co
2 External material costs

st I pyri
Div A: 80,000 $200 = $16,000
Div B: 200,000 $5 = $1,000

ntu ght
3 Inter-divisional transfers

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Div A: 80,000 $75 = $6,000

n2
4 Labour costs
Div A: 80,000 $45 = $3,600

EXAMINERS COMMENTS: PART (b)


Div B: 200,000 $15 = $3,000
017
Part (b) asked for a calculation of the maximum profit that could be earned if transfer pricing
was optimised. Optimised meant set at a level that would make the total company profit as
high as possible. In order for this to be the case, the transfer price needed to be set
somewhere between Division Bs marginal cost of $20 and the current market price of the
fittings of $65 per set. Any price between this range would make sure that Division A bought
the fittings from Division B, provided that Division A was told that it could only buy the
fittings from outside the group if the price was lower than the price being charged by
Division B. If Division B was allowed to sell to the external market too, then the profit could
be maximised at $11,060.
This logic was totally lost on the majority of candidates. However, many of them managed to
get to the maximum profit by having Division B selling 180,000 sets of fittings outside the
group and then selling the remaining 20,000 sets of fittings to B at $75. This was a half
decent attempt at the question but the reality would be, of course, that, in the real world,
Division A would not want to pay $75 for the fittings if it could buy them from an external
supplier for only $65. This is not, therefore, optimisation of transfer pricing, because this
would require the company to have a policy of making Division A buy from B, EVEN if fittings
were cheaper elsewhere and this would cause behavioural issues, with Division As manager
becoming de-motivated.
128 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

EXAM SMART
It is important to think of the behavioural aspects of the question and how that affects your
numerical calculations. Try to think of the divisions as if they were stand-alone entities.
They will want to maximise their own profits, particularly if their management receive profit-
related incentives.
The transfer price will have to be $65 or lower, if Division As manager will see it as more
profitable to buy from Division B as opposed to externally.
Similarly, Division Bs manager, knowing that the division is not at full capacity (and must
therefore be selling externally all that it can), will be willing to accept a transfer price bigger
than its variable costs per unit (here $20 variable production cost).
Therefore, any transfer price between $20 and $65 per unit should be acceptable to both
managers and would have gained full marks in the exam.

(b) Bath Cos profit if transfer pricing is optimised


Division A Division B Division C
$000 $000 $000
Sales revenue:
External (1) 36,000 14,400 50,400

t
Internal sales (2) 0 1,300 0

g h 7
Total 36,000 15,700 50,400

y r i 201
Variable costs:

p ion
External material costs (3) (19,900) (1,000) (20,900)

o
Inter-divisional transfers (2) (1,300) 0 0

C uit
Labour costs (3,600) (3,000) (6,600)

t
Total (24,800) (4,000) (27,500)

I n
Fixed costs (7,440) (4,400) (11,840)

t
Profit 3,760 7,300 11,160

ir s
F
Note: A transfer price of $65 has been used on the assumption that the company will introduce
the policy discussed in (c). Provided that the transfer price is set between the minimum of $20
(Division Bs marginal cost) and $65 (the cost to Division A of buying from outside the group), the
actual transfer price is irrelevant in this calculation. The overall profit of the company will be the
same.
Workings ($000)
1 External sales
Div A: 80,000 $450 = $36,000
Div B: 180,000 $80 = $14,400
2 Internal sales/inter-divisional transfers
20,000 $65 = $1,300
3 Material costs
Div A: 60,000 $265 + (20,000 x $200) = $19,900
Div B: 200,000 $5 = $1,000
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 129

EXAMINERS COMMENTS: PART (c)


Part (c) was a narrative requirement and was generally poorly answered. There was a certain
element of follow on from (b), although not entirely, so problems of lack of understanding in
(b) fed through to (c). It was surprising how many candidates attempted part (c) before parts
(a) and (b). While its always advisable to get the easy marks first where possible, and these
are often the discussion marks, this is not possible where the narrative fully or partly follows
on from the numbers.

EXAM SMART
Be careful to identify sub requirements where you need to have tackled the earlier parts of
the question first. This is one of them! Failure to do this will mean your answer to part (c) is
little more than a sterile textbook answer.

(c) Issues and suitable transfer price


Divisional managers performance is assessed using a metric as decided by the company. This
may simply be the profit for the period, or, depending on the type of responsibility centre being
used, a metric such as residual income or return on capital employed. Whatever the metric

Co
being used, the divisions profit figure is going to affect it and divisional managers are therefore

Fir
going to be keen to maximise their individual profits. By focusing on individual decisions,

st I pyri
divisional managers are often not aware of the impact of their decisions on the company as a
whole. This would particularly be the case where a decision which is in the best interests of the

ntu ght
company actually makes an individual divisions performance look worse.

itio
The transfer pricing system in place needs to take into account the behavioural impact of the
prices being charged. Sometimes, this can mean that a dual transfer pricing system needs to

n2
be introduced in order to ensure that divisional managers act in the interests of the company as
a whole.

017
It can be seen from part (b) that the best decision for the company is that:
Division A buys 60,000 sets of fittings from an outside supplier and buys the remaining
20,000 sets of fittings from Division B in order to ensure that Division B is working to full
capacity.
Division B sells as many sets of fittings as possible externally, at $80 per set. Since the
maximum external demand is 180,000 units, Division B sells the remaining 20,000 sets of
fittings to Division A. The minimum transfer price that would be acceptable to Division B
is its marginal cost of $20 per unit, since it has spare capacity. However, if this transfer
price is used, Division B becomes worse off than before the autonomy was given, and
Division Bs manager will not like this. As far as Division A is concerned, it will not want to
pay more than the $65 that it can buy from outside the Group.
Bath Cos policy therefore needs to ensure that, first, Division As manager is prepared to buy
20,000 sets of fittings from Division B and second, Division B is prepared to sell them at $65 per
set. Since it is in Division Bs best interest to work to full capacity and the manager of Division B
knows that Division A can obtain fittings for $65 per set, it should not be difficult for B to agree
to sell to A at this price. A policy of negotiated transfer prices would achieve this fairly quickly.
However, the company also needs to have a policy that divisions buy internally first, where this
would be in the best interests of the overall profitability of the company. This would ensure that
Division A buys the 20,000 sets of fittings from Division B. This way, the overall profit of the
company is maximised while also ensuring that divisional managers do not become
demotivated.
130 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

Marking guide Marks


(a) Profit statement
Sales revenue:
External 1
Inter-divisional transfers (revenue Div B)
External material costs 1
Inter-divisional transfers (costs Div A)
Labour costs 1
Fixed costs 1
Profit 1
6
(b) Revised profit
External sales 1
Inter-divisional transfers (revenue Div B) 1
Material costs 2
Internal transfers (materials) (costs Div A) 1
Labour costs 1
Fixed costs 1
Profit 1

8
(c) Transfer price difficulties and policies

t
Each well explained point on difficulties 1

h 7
Max 4

i g 1
Well reasoned recommendation 4

y r 20
Maximum for (c) overall 6

o p ion
Maximum marks available 20

C u i t
t
4H CAMMER O

t I n
r s
EXAMINERS COMMENTS

F i The numerical parts were quite well answered by most candidates. However, a disappointing
number of answers included the fixed costs within part (a) and part (b) which defied the
purpose of the whole question really.
That having been said, most answers were good.

EXAM SMART
Requirements (a) and (b) represent a fairly simple 10 marks which students at this level
should be expecting to get. Essentially this is just cost plus pricing workings.
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 131

(a) Price under existing policy


$
Steel (0.4/0.95 $4.00) 1.68
Other materials ($3.00 0.9 0.1) 0.27
Labour (0.25 $10) 2.50
Variable overhead (0.25 $15) 3.75
Delivery 0.50
Total variable cost 8.70
Mark-up 30% 2.61
Transfer price 11.31

(b) The only difference would be to add the fixed costs and adjust the mark-up %.
$
Existing total variable cost 8.70
Extra fixed cost (0.25 $15 0.8) 3.00
Total cost 11.70
Mark-up 10% 1.17
Transfer price 12.87

The price difference is therefore 12.87 11.31 = $1.56 per unit

EXAMINERS COMMENTS: PART (c)

Fir Co
In part (c), a discussion of whether fixed costs should be included in a transfer price was

st I pyri
required. The quality of answers was really poor.

ntu ght
The question was looking for a couple of key points, for example, that including fixed costs
guarantees a profit for the seller but invites manipulation of overheads and passes on

itio
inefficiencies from one part of the business to another.

n2
Also, that this strategy causes fixed costs of one division to be turned into a variable cost for
another division.

EXAM SMART
017
Following on from the examiners point about turning a fixed cost into a variable cost, this in
a transfer pricing scenario can always run the risk of leading to sub-optimal decision making
from the groups perspective.
The danger is that by incorporating the fixed cost into the transfer price leads to the selling
division charging a price that is above that of an external supplier.

(c) As far as the manufacturer is concerned, including fixed costs in the transfer price will have the
advantage of covering all the costs incurred. In theory this should guarantee a profit for the
division (assuming the fixed overhead absorption calculations are accurate). In essence the
manufacturer is reducing the risk in his division.
The accounting for fixed costs is notoriously difficult with many approaches possible. Including
fixed costs in the transfer price invites manipulation of overhead treatment.
One of the main problems with this strategy is that a fixed cost of the business is being turned
into a variable cost in the hands of the seller (in our case the stores). This can lead to poor
decision-making for the group since, although fixed costs would normally be ignored in a
decision (as unavoidable), they would be relevant to the seller because they are part of their
variable buy in price.
132 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

EXAMINERS COMMENTS: PART (d)


Part (d) also rarely produced answers scoring full marks.
It asked whether retail stores should be allowed to buy in from outside suppliers. Key points
in any answer should have been that the overall profitability of the company is key, as is goal
congruence; these points were rarely made.
Thankfully, many candidates did spot the more obvious points such as the fact that the
quality and reliability of any external supplier would need to be assessed.

EXAM SMART
A balanced argument here is important. There are likely to be advantages and
disadvantages of allowing the purchase of the shears or other products from outside
suppliers.
However, once again keep your ideas practical and applied to the scenario! An answer could
look like this:
Local managers may like the autonomy and freedom to purchase from outside. It may
allow Hammer to make more profit if managers can locally bargain with suppliers.
However control may be needed if local managers are buying inferior products. Poor

t
local purchasing may damage customer goodwill and ultimately Hammers brand.

h 7
Similarly careful attention to the service levels of suppliers should be paid. If suppliers

i g 1
were to dramatically raise prices then local managers may not be able to respond

y r 20
effectively. Only a centralised buying department may have the power to negotiate

p ion
more strongly on Hammers behalf.

o
C uit
t
(d) Degree of autonomy allowed to the stores in buying policy

t I n If the stores are allowed too much freedom in buying policy Hammer could lose control of its

r s
business. Brand could be damaged if each store bought a different suppliers shears (or other

F i
products). On the other hand, flexibility is increased and profits could be made for the business
by entrepreneurial store managers exploiting locally found bargains. However, the current
market price for shears may only be temporary (sale or special offer) and therefore not really
representative of their true market value. If this is the case, then any long-term decision to
allow retail stores to buy shears from external suppliers (rather than from Nail) would be wrong.
The question of comparability is also important. Products are rarely identical and
consequently, price differences are to be expected. The stores could buy a slightly inferior
product (claiming it is comparable) in the hope of a better margin. This could seriously damage
Hammers brand.
Motivation is also a factor here, however. Individual managers like a little freedom within which
to operate. If they are forced to buy what they see as an inferior product (internally) at high
prices it is likely to de-motivate. Also with greater autonomy, the performance of the stores will
be easier to assess as the store managers will have control over greater elements of their
business.
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 133

Marking guide Marks


(a) Steel 1
Other material 1
Labour 1
Variable overhead 1
Delivery 1
Mark-up 1 6
(b) Fixed cost 2
Mark-up 2 4
(c) Covers all cost 1
Risk 1
Fixed cost accounting 1
Converts a FC to VC 2 Max 4
(d) Market price may be temporary 1
Brand 1
Profitability 1
Flexibility 1
Control 1
Motivation 1
Performance assessment

Fir Co 1

st I pyri
Comparability 1 Max 6
Maximum marks available 20

ntu ght
itio
n2
017
134 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

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ACCA F5 Question Bank Part 2 Revision questions 135

PART 2 REVISION QUESTIONS

Objective test and Scenario


Question Page ref
Syllabus area no Q A

1: Specialist cost and management accounting techniques


Activity based costing 1-4 139 229
Scenario question: Wash Co 5-9 140 230
Target costing 10-16 141 232
Scenario question: Helot Co 17-21 143 233
Life cycle costing 22-25 145 234
Scenario question: Fit Co 26-30 146 235
Throughput accounting 31-35 147 236
Scenario question: Sweet Treats Bakery 36-40 149 238

Co
Environmental accounting 41-43 151 239

Fir
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2: Decision-making techniques
Relevant cost analysis 1-3 153 240
Scenario question: Losmetic Co
ntu ght 4-8 154 241

itio
Cost volume profit analysis 9-14 155 242
Scenario question: Hare Events 15-19 157 243
Limiting factors
n2
20-24 159 244

017
Scenario question: Higgins Co 25-29 161 246
Pricing decisions 30-35 162 248
Scenario question: ALG Co 36-40 164 249
Make-or-buy and other short-term decisions 41 165 250
Scenario question: Three departments 42-46 165 251
Scenario question: Chemco 47-51 167 252
Dealing with risk and uncertainty in decision-making 52-55 168 253
Scenario question: Three products 56-60 169 254
Scenario question: Sandrunner 61-65 170 255
Scenario question: Mylo 66-70 170 256
136 P a r t 2 R e v i s i o n q u e s t i o n s ACCA F5 Question Bank

Question Page ref


Syllabus area no Q A

3: Budgeting and control


Budgetary systems and type of budget 1-10 174 258
Scenario question: Kenneth Co 11-15 176 260
Quantitative analysis in budgeting 16-21 178 262
Scenario question: Comfynap Co 22-26 179 263
Standard costing 27 181 265
Scenario question: Corfe Co 28-32 181 265
Material mix and yield variances 33-36 183 266
Scenario question: Romeo Co 37-41 185 268
Sales mix and quantity variances 42-43 186 269
Scenario question: Cut Co 44-48 187 270
Planning and operational variances 49-52 188 271
Scenario question: Fedia Co 53-57 190 272
Performance analysis 58-59 191 274

4: Performance measurement and control

t
Performance management information systems 1-4 192 275

h 7
Sources of management information 5-6 193 276

r i g
Management reports

201 7-9 193 276

y
p ion
Performance analysis in private sector organisations 10-13 194 276

o
Scenario question: Bus Co 14-18 196 278

C uit
Scenario question: Jamair Co 19-23 198 279

t
Divisional performance and transfer pricing 24-29 199 280

t I n
Scenario question: Cardale Co 30-34 202 283

s
Scenario question: Andover and Winchester 35-39 203 284

F ir Performance analysis in not-for-profit organisations and the public


sector
Scenario question: Seatown Council
40-41

42-46
205

205
285

285
External considerations and behavioural aspects 47 207 286
ACCA F5 Question Bank Part 2 Revision questions 137

Long form

Based on Page ref


Question name Syllabus area Past exam Q A

2: Decision-making techniques
1 The Telephone Co Relevant costs Q1, D11, (a) 209 287
2 Hair Co CVP Q1, D12, (a) and (b) 210 292
3 CSC Co Limiting factors Q2, S16 211 295
4 Heat Co Pricing, Learning curves Q2, J11, (a) 213 298
5 Robber Co Make or Buy and other short term Q1, J12, (a) and (c) 214 302
decisions
6 Cement Co Risk and uncertainty in decision Q1, J11 215 306
making

3: Budgeting and control


1 Newtown School Budgetary systems/Types of budget Q5, J13, (c) and (d) 216 311
2 Mic Co Quantitative analysis in budgeting Q3, D13 217 314

Co
3 Noble Standard costing, including sales mix Q3, J11, (a) and (c) 218 316

Fir
and quantity variances

st I pyri
4 Block Co Sales mix and quantity variances Q4, J13 220 320
including Planning and operational
variances
ntu ght
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5 Truffle Co Planning and operational variances Q2, D12 221 323
6 Sticky Wicket Performance analysis and Q2, J10 221 326
behavioural aspects
n2
4: Performance measurement and control
1 Squarize Performance analysis in private
sector organisations
017 Q2, J13 223 330

2 Jungle Co Performance analysis in private Q1, S16 224 332


sector organisations
3 Protect against Fire Co Divisional performance and transfer Q4, D13 225 336
pricing
4 Biscuits and Cakes Divisional performance and transfer Q5, J12, (a),(b),(c) and 226 338
pricing (e)
5 Man Co Divisional performance and transfer Q4, M/J 16 amended 227 341
pricing/ Performance analysis in
private sector organisations
138 P a r t 2 R e v i s i o n q u e s t i o n s ACCA F5 Question Bank

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ACCA F5 Question Bank Revision questions: 1: Specialist cost and management accounting techniques 139

PART 2 REVISION QUESTIONS: Objective test and Scenario

1: Specialist cost and management accounting techniques

Activity based costing


1 Which of the following statements about activity-based costing is/are true?

True False
ABC can only be used within a manufacturing
environment.
ABC assumes that most overhead costs are incurred at
the product level.
A cost driver is a factor which causes a change in the
cost of an activity.
Traditional absorption costing tends to under-estimate
overhead costs for high volume products.

2 A company manufactures two products, C and D, for which the following information is available:

Co
Product C Product D Total

Fir
Budgeted production (units) 1,000 4,000 5,000

st I pyri
Labour hours per unit/in total 8 10 48,000
Number of production runs required 13 15 28

ntu ght
Number of inspections during production 5 3 8
Total production set up costs $140,000
Total inspection costs $80,000
itio
n2
Other overhead costs $96,000
Other overhead costs are absorbed on the basis of labour hours per unit.

017
Using activity-based costing, what is the budgeted overhead cost per unit of product D, to the
nearest $0.01?

3 Teddy Co makes two products using the same type of material and the same workforce. The
following information is available:
Product Product
Lou Dew
Budgeted production (units) 5,000 4,000
Material per unit ($) 20 25
Labour per unit ($) 40 60
Fixed overheads relating to materials are $150,000. The cost driver for these costs is the cost of
material purchased.
General fixed overheads are $374,000. These are absorbed on the basis of labour cost.
Using activity-based costing, what is the budgeted fixed overhead cost per unit of product
Lou, to the nearest $0.01?

$
140 Revision questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

4 A company makes two products using the same type of materials and skilled workers. The
following information is available:
Product A Product B
Budgeted volume (units) 1,000 2,000
Material per unit ($) 10 20
Labour per unit ($) 5 20
Fixed costs relating to material handling amount to $100,000. The cost driver for these costs is
the volume of material purchased.
General fixed costs, absorbed on the basis of labour hours, amount to $180,000.
Using activity-based costing, what is the total fixed overhead amount to be absorbed into
each unit of product B (to the nearest whole $)?
$113
$120
$40
$105

WASH CO

ht
The following scenario relates to questions 5-9. Each question is worth 2 marks.

7
r i g 201
Wash Co assembles and sells two types of washing machines the Spin (S) and the Rinse (R).

y
p ion
The companys policy is to transfer the machines from its assembly division to its retail division at full

o
cost plus 10%.

C uit
The overhead costs are currently allocated to the products on the basis of labour hours, but Wash Cos

t
Chief Management Accountant is contemplating using machine hours or activity-based costing (ABC)

I n
for absorption.

r s t
You have obtained the following information for the last month from the assembly division.

F i Production and sales (units)


Materials cost
Product S
3,200
$117
Product R
5,450
$95
Labour cost (at $12 per hour) $6 $9
Machine hours (per unit) 2 1
Total no. of production runs 30 12
Total no. of purchase orders 82 64
Total no. of deliveries to retail division 64 80

Overhead costs: $
Machine set-up costs 306,435
Machine maintenance costs 415,105
Ordering costs 11,680
Delivery costs 144,400
Total 877,620

5 Calculate a transfer price to the nearest $ for Product S if machine hours are used as the basis
for absorption.

$
ACCA F5 Question Bank Revision questions: 1: Specialist cost and management accounting techniques 141

6 Using ABC, calculate to the nearest $ the machine overheads (set-up and maintenance costs)
that will be absorbed by each unit of Product S.

7 Using ABC, calculate to the nearest $ the selling overheads (ordering and delivery costs) that will
be absorbed by each unit of Product R.

8 The Chief Accountant is also considering using ABC when analysing environmental costs.
Which of the following statements relating to environmental activity-based costing
(environmental ABC) is/are true?

True False
Environmental ABC will be concerned with prevention
activities as well as detection and correction activities.
Environmental ABC helps identify environment-driven
costs, which may be hidden within general overheads.
Volume of emissions may be a cost driver in

Fir Cop
environmental ABC.
Environmental ABC can measure cost savings resulting

st I yri
from measures to reduce environmental impact.

9
ntu ght
As well as environmental ABC, the Chief Accountant is looking at other techniques for

itio
accounting for environmental impacts.
Which TWO of the following statements relating to accounting for environmental costs are
true?
n2


disposal 017
Flow cost accounting involves analysing materials flows into two categories, material and

Input/output analysis aims to identify residual or waste.


Environmental life cycle costing looks at costs up until the point production ceases.
Environment-related costs are connected with activities for which costs can be directly
traced.

Target costing
10 Which of the following statements in relation to costing techniques is/are true?

True False
Target costing is a market driven approach to pricing.
Using target costing to set selling prices guarantees
that a company will make a profit on its products.
Unlike traditional costing methods, in ABC production
overheads are not absorbed across product units.
An organisation which switches to ABC may find that
some of its existing products, which require minimal
labour hours, no longer appear profitable.
142 Revision questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

11 The unit selling price of Product Z has been set at $200. The company requires a profit margin of
40%. The product specification includes material, labour and overheads at $55, $75 and $15
respectively.
What is the cost gap for each unit of Product Z?

12 Which of the following is/are characteristics of a service industry?

Characteristic Not characteristic


Homogenity
Intangibility
Perishability
Spontaneity

13 Which TWO of the following methods of reducing an organisations costs in order that its target cost
gap can be closed would be most effective in reducing the costs in a service industry context?
Use a lower grade of labour
Renegotiate terms with suppliers

t
Reduce the time spent in terms of labour hours

i g h 1 7
Attempt to increase sales volumes to achieve economies of scale

y r 20
p ion
14 S Company is a manufacturer of multiple products and uses target costing. It has been noted

o
that Product P currently has a target cost gap and the company wishes to close this gap.

C uit Which of the following may be used to close the target cost gap for product P?

I n

t Use overtime to complete work ahead of schedule

t
Substitute current raw materials with cheaper versions

ir s Raise the selling price of P

F
Negotiate cheaper rent for S Companys premises

15 The selling price of Product X is set at $550 for each unit and sales for the coming year are
expected to be 800 units.
A return of 30% on the investment of $500,000 in Product X will be required in the coming year.
What is the target cost for each unit of Product X, to the nearest $0.01?

16 Which of the following techniques is NOT relevant to target costing?


Value analysis
Variance analysis
Functional analysis
Activity analysis
ACCA F5 Question Bank Revision questions: 1: Specialist cost and management accounting techniques 143

HELOT CO (SECTION B, SEPTEMBER 2016)


The following scenario relates to Questions 1721. Each question is worth 2 marks.
Helot Co develops and sells computer games. It is well known for launching innovative and interactive
role-playing games and its new releases are always eagerly anticipated by the gaming community.
Customers value the technical excellence of the games and the durability of the product and
packaging.
Helot Co has previously used a traditional absorption costing system and full cost plus pricing to cost
and price its products. It has recently recruited a new finance director who believes the company
would benefit from using target costing. He is keen to try this method on a new game concept called
Spartan, which has been recently approved.
After discussion with the board, the finance director undertook some market research to find out
customers opinions on the new game concept and to assess potential new games offered by
competitors. The results were used to establish a target selling price of $45 for Spartan and an
estimated total sales volume of 350,000 units. Helot Co wants to achieve a target profit margin of 35%.
The finance director has also begun collecting cost data for the new game and has projected the following:
Production costs per unit $
Direct material 300
Direct labour 250

Co
Direct machining 505

Fir
Set-up 045

st I pyri
Inspection and testing 430
Total non-production costs $000
Design (salaries and technology)
Marketing consultants
ntu ght 2,500
1,700
Distribution
itio 1,400

17
n2
Which of the following statements would the finance director have used to explain to Helot Cos

cycle?
1
017
board what the benefits were of adopting a target costing approach so early in the games life-

Costs will be split into material, system, and delivery and disposal categories for
improved cost reduction analysis
2 Customer requirements for quality, cost and timescales are more likely to be included in
decisions on product development
3 Its key concept is based on how to turn material into sales as quickly as possible in order
to maximise net cash
4 The company will focus on designing out costs prior to production, rather than cost
control during live production
1, 2 and 4
2, 3 and 4
1 and 3
2 and 4
144 Revision questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

18 What is the forecast cost gap for the new game?


$205
$000
$1370
$2925

19 The board of Helot Co has asked the finance director to explain what activities can be
undertaken to close a cost gap on its computer games.
Which of the following would be appropriate ways for Helot Co to close a cost gap?
1 Buy cheaper, lower grade plastic for the game discs and cases
2 Using standard components wherever possible in production
3 Employ more trainee game designers on lower salaries
4 Use the companys own online gaming websites for marketing
1, 2 and 3
1, 3 and 4
2 and 4
2 and 3

t
20 The direct labour cost per unit has been based on an expected learning rate of 90% but now the

h 7
finance director has realised that a 95% learning rate should be applied.

r i g 01
Which of the following statements is true?

2

y
p ion
The target cost will decrease and the cost gap will increase

o
C uit


The target cost will increase and the cost gap will decrease
The target cost will remain the same and the cost gap will increase

I n

t The target cost will remain the same and the cost gap will decrease

r s t
i
21 Helot Co is thinking about expanding its business and introducing a new computer repair service

F
for customers. The board has asked if target costing could be applied to this service.
Which of the following statements regarding services and the use of target costing within the
service sector is true?
The purchase of a service transfers ownership to the customer
Labour resource usage is high in services relative to material requirements
A standard service cannot be produced and so target costing cannot be used
Service characteristics include uniformity, perishability and intangibility
ACCA F5 Question Bank Revision questions: 1: Specialist cost and management accounting techniques 145

Life cycle costing


22 Which TWO of the following statements about life cycle costing are correct?
A disadvantage of life cycle costing is that it may be difficult, at the start of a products
life, to arrive at a realistic estimate of the products costs over a number of years.
Life cycle costing is particularly suitable for innovative organisations which incur high
costs during the early stages of a product's life cycle.
Life cycle costing is particularly useful for organisations that develop products with a long
life.
The life cycle approach is designed to help organisations analyse product costs each year
easily.

23 What is the name of the costing approach which identifies a products selling price and
establishes ways of making the product that will earn an acceptable profit?
Absorption costing
Activity based costing
Life cycle costing
Target costing

Co
24 Which of the following statements that have been made about life cycle costing is/are true?

Fir
st I pyri
True False
It focuses on the short-term by identifying costs at the

ntu ght
beginning of a products life cycle.

itio
It identifies all costs which arise in relation to the
product each year and then calculates the products

n2
profitability on an annual basis.
It accumulates a products costs over its whole life time

017
and works out the overall profitability of a product.
It allocates costs to each stage of a products life cycle
and writes them off at the end of each stage.

25 A manufacturing company which produces a range of products has developed a budget for the
life-cycle of a new product, P. The information in the following table relates exclusively to
product P:
Lifetime total Per unit
Design costs $800,000
Direct manufacturing costs $20
Depreciation costs $500,000
Decommissioning costs $20,000
Machine hours 4
Production and sales units 300,000
The companys total fixed production overheads are budgeted to be $72 million each year and
total machine hours are budgeted to be 96 million hours. The company absorbs overheads on a
machine hour basis.
146 Revision questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

What is the budgeted life-cycle cost per unit for product P?


$2440
$2573
$2740
$2273

FIT CO
The following scenario relates to questions 26-30. Each question is worth 2 marks.
Fit Co specialises in the manufacture of a small range of high-tech products for the fitness market. It is
currently considering the development of a new type of fitness monitor, which would be the first of its
kind in the market. It would take one year to develop, with sales then commencing at the beginning of
the second year. The product is expected to have a life cycle of two years, before it is replaced with a
technologically superior product. The following cost estimates have been made.
Year 1 Year 2 Year 3
Units manufactured and sold 100,000 200,000
Research and development costs $160,000
Product design costs $800,000
Marketing costs $1,200,000 $1,000,000 $1,750,000
Manufacturing costs:

ht 7
g 1
Variable cost per unit $40 $42

y r i 20
Fixed production costs $650,000 $1,290,000

p ion
Distribution costs:

o
Variable cost per unit $4 $4.50

C uit
Fixed distribution costs $120,000 $120,000
Selling costs:

t
Variable cost per unit $3 $3.20

t I n
Fixed selling costs $180,000 $180,000

s
Administration costs $200,000 $900,000 $1,500,000

F ir 26 Which of the following costs would be included as part of the calculation of life cycle costs?

Included Not included


Research and development costs
Product design costs
Marketing costs
Distribution costs
Selling costs
Administration costs

27 Which TWO of the following are benefits of using life cycle costing?
It attempts to distinguish clearly between the costs of different periods.
It gives a good indication of the success of research and development and design activities.
It ensures that products do not enter a decline stage of their life cycle.
It matches initial costs to the revenues that the product finally earns.
ACCA F5 Question Bank Revision questions: 1: Specialist cost and management accounting techniques 147

28 In which TWO of the following circumstances is life cycle costing particularly useful?
Products with a short life
Products with an even spread of costs and revenues over their lives
Very simple products
Products being launched in a competitive environment where time to market is very
important

29 After preparing the cost estimates above, Fit Co realises that it has not taken into account the
effect of the learning curve on the production process. The variable manufacturing cost per unit
above, of $40 in Year 2 and $42 in Year 3, includes a cost for 0.5 hours of labour. The Year 2 cost
per hour for labour is $24 and the Year 3 cost is $26 per hour. Subsequently, it has been
estimated that, although the first unit is expected to take 0.5 hours, a learning curve of 95% is
expected to occur until the 100th unit has been completed. The result will be that it takes a
total labour time of 35.56 hours for the first 100 units.
Calculate to the nearest $10,000, the labour cost that will be included for Year 2 in the
calculation of the life cycle cost.

$ 000

Fir Co
30 Further analysis has been undertaken of the costs of the new product. Now the total

st I pyri
manufacturing life cycle costs of the monitor are estimated to be $12,600,000 and total life
cycle costs overall of $23,000,000. The sales director believes that the maximum price of the
new monitor would be $85 and the board wishes to make a 20% profit margin on it. The

ntu ght
research and development and product design teams have estimated that they could undertake
extra work, with the aim of finding ways to reduce total manufacturing costs by 25%.

itio
Calculate the maximum level of costs that could be incurred by the research and development

n2
and product design teams if a 20% profit margin is to be achieved, assuming that the changes
they suggest successfully reduce manufacturing costs by 25%.

$ 000 017
Throughput accounting
31 Which of the following statements about throughput accounting is/are true?

True False
Throughput accounting is based on the concept that
there is a finite capacity at certain critical points in an
organisations production schedule.
Throughput accounting treats labour as a fixed cost in
the short-term.
Throughput accounting focusses on improving
efficiency by using all production facilities to their
maximum capacity.
The aim of throughput accounting is to increase the
speed with which products move through an
organisation in order to maximise profit.
148 Revision questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

32 S Ltd manufactures three products, A, B and C. The products use a series of different machines
but there is a common machine, P, that is a bottleneck.
The selling price and standard cost for each product for the forthcoming year is as follows:
A B C
$ $ $
Selling price 200 150 150
Direct materials 41 20 30
Conversion costs 55 40 66
Machine P - minutes 12 10 7
Using a throughput accounting approach, what would be the ranking of the products for best
use of the bottleneck?

33 A company manufactures a product which requires four hours per unit of machine time.
Machine time is a bottleneck resource as there are only ten machines which are available for

ht
12 hours per day, five days per week. The product has a selling price of $130 per unit, direct

7
g 1
material costs of $50 per unit, labour costs of $40 per unit and factory overhead costs of

r i 0
$20 per unit. These costs are based on weekly production and sales of 150 units.

y 2
p ion
What is the throughput accounting ratio (to 2 decimal places)?

o
C uit
1.33

t
2.00

I n
0.75

t
0.31

ir s
F 34 Which of the following statements about the concepts underlying throughput accounting
is/are correct?

True False
Inventory levels should be kept to a minimum.
All machines within a factory should be 100% efficient,
with no idle time.
The distinction between direct and indirect costs is not
useful.
Labour should be treated as a fixed cost that is part of
total factory cost.
ACCA F5 Question Bank Revision questions: 1: Specialist cost and management accounting techniques 149

35 A manufacturing company uses three processes to make its two products, X and Y. The time
available on the three processes is reduced because of the need for preventative maintenance
and rest breaks.
The table below details the process times per product and daily time available:
Hours Hours required Hours required
available to make one unit to make one unit
Process per day of product X of product Y
1 22 100 075
2 22 075 100
3 18 100 050
Daily demand for product X and product Y is 10 units and 16 units respectively.
Which of the following will improve throughput?
Increasing the efficiency of the maintenance routine for Process 2
Increasing the demand for both products
Reducing the time taken for rest breaks on Process 3
Reducing the time product X requires for Process 1

SWEET TREATS BAKERY (SECTION B, DECEMBER 2016)


Fir Co
st I pyri
The following scenario relates to questions 36-40. Each question is worth 2 marks.
Sweet Treats Bakery makes three types of cake: brownies, muffins and cupcakes. The costs, revenues

ntu ght
and demand for each of the three cakes are as follows:

itio
Brownies Muffins Cupcakes
Batch size (units) 40 30 20

n2
Selling price ($ per unit) 1.50 1.40 2.00
Material cost ($ per unit) 0.25 0.15 0.25

017
Labour cost ($ per unit) 0.40 0.45 0.50
Overhead ($ per unit) 0.15 0.20 0.30
Minimum daily demand (units) 30 20 10
Maximum daily demand (units) 140 90 100
The minimum daily demand is required for a long-term contract with a local cafe and must be met.
The cakes are made in batches using three sequential processes; weighing, mixing and baking. The
products must be produced in their batch sizes but are sold as individual units. Each batch of cakes
requires the following amount of time for each process:
Brownies Muffins Cupcakes
Weighing (minutes) 15 15 20
Mixing (minutes) 20 16 12
Baking (minutes) 120 110 120

The baking stage of the process is done in three ovens which can each be used for eight hours a day, a
total of 1,440 available minutes. Ovens have a capacity of one batch per bake, regardless of product
type.
Sweet Treats Bakery uses throughput accounting and considers all costs, other than material, to be
'factory costs' which do not vary with production.
150 Revision questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

36 On Monday, in addition to the baking ovens, Sweet Treat Bakeries has the following process
resources available:
Process Minutes available
Weighing 240
Mixing 180
Which of the three processes, if any, is a bottleneck activity?
Weighing
Mixing
Baking
There is no bottleneck

37 On Wednesday, the mixing process is identified as the bottleneck process. On this day, only 120
minutes in the mixing process are available.
Assuming that Sweet Treats Bakery wants to maximise profit, what is the optimal production
plan for Wednesday?
80 brownies, 30 muffins and 100 cupcakes
0 brownies, 90 muffins and 100 cupcakes
120 brownies, 0 muffins and 100 cupcakes

t
40 brownies, 60 muffins and 100 cupcakes

i g h 1 7
r 0
38 Sweet Treats Bakery has done a detailed review of its products, costs and processes.

y
p ion 2
Which TWO of the following statements will improve the throughput accounting ratio?

o
C uit


The caf customer wants to negotiate a loyalty discount.
A bulk discount on flour and sugar is available from suppliers.

I n

t There is additional demand for the cupcakes in the market.

t
The rent of the premises has been reduced for next year.

ir s
F 39 On Friday, due to a local food festival at the weekend, Sweet Treats Bakery is considering
increasing its production of cupcakes. These cupcakes can be sold at the festival at the existing
selling price.
The company has unlimited capacity for weighing and mixing on Friday but its existing three
ovens are already fully utilised, therefore in order to supply cupcakes to the festival, Sweet
Treats Bakery will need to hire another identical oven at a cost of $45 for the day.
How much will profit increase by if the company hires the new oven and produces as many
cupcakes as possible?
$31.00
$55.00
$95.00
$140.00
ACCA F5 Question Bank Revision questions: 1: Specialist cost and management accounting techniques 151

40 In a previous week, the weighing process was the bottleneck and the resulting throughput ratio
(TPAR) for the bakery was 1.45.
State which of the following statements about the TPAR for the previous week are true and
which are false.

True False
The bakerys operating costs exceeded the total throughput
contribution generated from the three products.
Less idle time in the mixing department would have
improved the TPAR
Improved efficiency during the weighing process would have
improved the TPAR.

Environmental accounting
41 Which of the following statements about environmental cost accounting is/are true?

True False
The majority of environmental costs are already
captured within a typical organisations accounting

Co
system. The difficulty lies in identifying them.

Fir
st I pyri
Input/output analysis divides material flows within an
organisation into three categories: material flows,
system flows, and delivery and disposal flows.

ntu ght
Input/output analysis enables classification of output

itio
as finished production, scrap and waste.
Environmental life cycle costing enables analysis of

n2
clean-up and disposal activities relating to a product.

42
017
The following are types of management accounting techniques:
I Flow cost accounting
II Input/output analysis
III Life-cycle costing
IV Absorption costing
Which of the above techniques could be used by a company to account for its environmental
costs?
I only
II and III only
I, II and III only
All of the above
152 Revision questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank

43 Different management accounting techniques can be used to account for environmental costs.
One of these techniques involves analysing costs under three distinct categories: material,
system, and delivery and disposal.
What is this technique known as?
Activity-based costing
Life-cycle costing
Input-output analysis
Flow cost accounting

ht 7
r i g 201
y
p ion
o
C uit
I n t
r s t
F i
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 153

2: Decision-making techniques

Relevant cost analysis


1 Which of the following statements about relevant costing is/are true?

True False
Decisions should always be based on future
incremental accounting profits.
When a required resource is in scarce supply, the
opportunity cost of the next best alternative use
needs to be considered.
Sunk costs are irrelevant to decision making as the
expenditure has already been incurred.
Depreciation may be a relevant cost if it is incremental
to the project being considered.

2 A company has received a special order which needs 1,000 metres of material Z. It has
800 metres of material Z in inventory, which it purchased for $5 per metre. If the inventory is
not used for this order, it would be sold for $3.75 per metre. The current price of material Z is
$4.50 per metre.

Fir Co
st I pyri
What is the total relevant cost of material B for the special order?

ntu ght
$

3
itio
The Fruit Company (F Co) currently grows fruit which customers pick themselves from the fields

n2
before paying. F Co is concerned that a large number of customers are eating some of the fruit

017
whilst picking it and are therefore not paying for all of it. As a result, it has to decide whether to
hire staff to pick and package the fruit instead.
Which of the following values and costs are relevant to the decision?

Relevant Not relevant


The total sales value of the fruit currently picked and
paid for by customers
The cost of growing the fruit
The cost of hiring staff to pick and package the fruit
The total sales value of the fruit if it is picked and
packaged by staff instead
154 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

LOSMETIC CO
The following scenario relates to questions 4-8. Each question is worth 2 marks.
Losmetic Co is a company producing a variety of cosmetic creams and lotions. The company has just
been asked by one of its biggest customers, a chain of stores, to produce a one-off order of creams for
a special promotion that the stores are running. The order needs to be completed within three weeks.
The following cost estimate has been prepared:
Materials $
Silk powder 15,000 grams at $2.20 per gram 33,000
Silk amino acids 5,000 grams at $0.80 per gram 4,000
Aloe vera 20,000 grams at $1.40 per gram 28,000
Labour
Skilled 500 hours at $12 per hour 6,000
Unskilled 250 hours at $8 per hour 2,000
Factory overheads 750 hours at $4 per hour 3,000
Total production cost 76,000
General fixed overheads 15% of total production cost 11,400
Total cost 87,400

As the order is a one-off order, Losmetic Co will be quoting on a relevant cost basis, so that it can offer
as competitive a price as possible.

ht 7
i g 1
4 Losmetic Co has sufficient inventory of all materials currently to fulfil the order. The current

y r 20
replacement costs from the companys normal supplier are silk powder $2.50 per gram, silk

p ion
amino acids $1 per gram, aloe vera $1.70 per gram.

o
C uit
The silk amino acids are not needed currently for any other purposes. Both the silk powder and
aloe vera are in regular use. However, owing to temporary problems with the normal supplier,

t
15,000 grams of aloe vera will have to be purchased from another supplier at $2 per gram, in

t I n order to fulfil other orders if the one-off order is accepted.

r s
Calculate the cost of materials that should be included in the quotation.

F i $

5 The skilled labour force is paid a guaranteed annual salary based on a 40-hour week at a rate of
$12 per hour. There is no spare capacity for the next three weeks. Overtime is paid at time and
a half. Skilled labour could be brought in from outside at a rate of $16 per hour.
There are two spare members of staff who are unskilled labour. They must be paid a minimum
of $8 per hour for a 30-hour week. Additional hours are paid at the hourly rate, but they will be
paid time and a half for the next three weeks for every hour that exceeds what they would have
worked if they worked an average 40-hour week each week.
Calculate the cost of labour that should be included in the quotation.

$
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 155

6 Of the factory overheads, $1.60 relates to the electricity costs connected with running the
machinery. The other $2.40 is the cost of the supervisors salary. The supervisor is paid an
annual salary that is the equivalent of $40 per hour. He receives a premium of 25% on this rate
for overtime, which he is paid on an hourly basis. He is expected to work 15 hours overtime if
Losmetic Co accepts this order.
Calculate the cost that should be included in the quotation for factory overheads.

7 How should the general fixed overheads be treated when preparing the quotation?
The overheads should be included because they are production costs.
The overheads should be excluded because they are not opportunity costs.
The overheads should be excluded because they are not incremental costs.
The overheads should be included to ensure Losmetic Co makes a profit from the order.

8 Which of the following statements about relevant costing is/are true?

True False
All cash expenses are relevant costs, all non-cash

Co
expenses are non-relevant costs.

Fir
st I pyri
Notional costs are never relevant costs.
Fixed costs are never relevant costs.

ntu ght
Not all future costs are relevant costs.

Cost volume profit analysis itio


n2
017
9 The following statements have been made about CVP analysis:
Which of the following statements about CVP analysis is/are true?

True False
CVP can help a company assess how sensitive its profits
might be to below budget performance.
CVP analysis uses a total absorption costing approach.
CVP analysis is flexible enough to deal with changes in
both variable and fixed costs at different levels of activity.
Break-even analysis can only be used for a single product
or for multiple products which are sold in a constant mix.

10 A company makes a single product which it sells for $3 per unit.


Fixed costs are $18,000 per month.
The contribution/sales ratio is 60%.
Sales revenue is $43,500.
What is the margin of safety in units?
156 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

11 P Co makes two products P1 and P2 budgeted details of which are as follows:


P1 P2
$ $
Selling price 1000 800
Cost per unit:
Direct materials 350 400
Direct labour 150 100
Variable overhead 060 040
Fixed overhead 120 100
Profit per unit 320 160
Budgeted production and sales for the year ended 30 November 2015 are:
Product P1 10,000 units
Product P2 12,500 units
The fixed overhead costs included in P1 relate to apportionment of general overhead costs only.
However, P2 also includes specific fixed overheads totalling $2,500.
If only product P1 were to be made, how many units (to the nearest unit) would need to be
sold in order to achieve a profit of $60,000 each year?
25,625 units
19,205 units
18,636 units

ht 7
26,406 units

r i g 201
y
12 Which of the following are required in order to calculate the break-even sales revenue for a

o p ion manufacturing company which produces multiple products?

C uit Required Not required

t
Product mix ratio

t I n Contribution to sales ratio for each product

s
General fixed costs

F i Method of apportioning general fixed costs

13 Christine Co makes two products, the sara and the cristina. Production and sales of the sara are
three times that of the cristina. Each unit of the sara makes a contribution of $12, each unit of
the cristina makes a contribution of $7. Fixed costs are $269,000.
How many units of both products taken together must be made and sold to achieve a profit of
$75,000?

14 A company makes and sells product X and product Y. Twice as many units of product Y are made
and sold as that of product X. Each unit of product X makes a contribution of $10 and each unit
of product Y makes a contribution of $4. Fixed costs are $90,000.
What is the total number of units which must be made and sold to make a profit of $45,000?
7,500
22,500
15,000
16,875
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 157

HARE EVENTS (SECTION B, DECEMBER 2016)


The following scenario relates to questions 15-19. Each question is worth 2 marks.
Hare Events is a company which specialises in organising sporting events in major cities across
Teeland. It has approached the local council of Edglas, a large city in the north of Teeland, to request
permission to host a running festival which will include both a full marathon and a half marathon race.
Based on the prices it charges for entry to similar events in other locations, Hare Events has decided
on an entry fee of $55 for the full marathon and $30 for the half marathon. It expects that the
maximum entries will be 20,000 for the full marathon and 14,000 for the half marathon.
Hare Events has done a full assessment of the likely costs involved. Each runner will receive a race pack
on completion of the race which will include a medal, t-shirt, water and chocolate. Water stations will
need to be available at every five kilometre (km) point along the race route, stocked with sufficient
supplies of water, sports drinks and gels. These costs are considered to be variable as they depend on
the number of race entries.
Hare Events will also incur the following fixed costs. It will need to pay a fixed fee to the Edglas council
for permits, road closures and support from the local police and medical services. A full risk
assessment needs to be undertaken for insurance purposes. A marketing campaign is planned via
advertising on running websites, in fitness magazines and at other events Hare Events is organising in
Teeland, and the company which Hare Events usually employs to do the race photography has been
approached.

Fir
The details of these costs are shown below:
Co
st I pyri
Full marathon Half marathon

ntu ght
$ $
Race packs 15.80 10.80

itio
Water stations 2.40 1.20

n2
$
Council fees 300,000

017
Risk assessment and insurance 50,000
Marketing 30,000
Photography 5,000

15 If Hare Events decides to host only the full marathon race, what is the margin of safety?
35.0%
47.7%
52.3%
65.0%

16 Assuming that the race entries are sold in a constant sales mix, based on the expected race
entry numbers, what is the sales revenue that Hare Events needs to achieve in order to break
even (to the nearest $000)
$385,000
$575,000
$592,000
$597,000
158 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

17 Hare Events wishes to achieve a minimum total profit of $500,000 from the running festival.
What are the number of entries Hare Events will have to sell for each race in order to achieve
this level of profit, assuming a constant sales mix based on the expected race entry numbers
applies? Work to the nearest whole number.
Full marathon: 17,915 entries Half marathon: 12,540 entries
Full marathon: 14,562 entries Half marathon: 18,688 entries
Full marathon: 20,000 entries Half marathon: 8,278 entries
Full marathon: 9,500 entries Half marathon: 6,650 entries

18 Hare Events is also considering including a 10 km race during the running festival. It expects the
race will have an entry fee of $20 per competitor and variable costs of $8 per competitor. Fixed
costs associated with this race will be $48,000.
If the selling price per competitor, the variable cost per competitor and total fixed costs for
this 10 km race all increase by 10%, which of the following statements will be true?
Break-even volume will increase by 10% and break-even revenue will increase by 10%.
Break-even volume will remain unchanged but break-even revenue will increase by 10%.
Break-even volume will decrease by 10% but break-even revenue will remain unchanged.
Break-even volume and break-even revenue will both remain the same.

19
ht 7
Which of the following statements relating to cost volume profit analysis are true?

r i g
(i)

201 Production levels and sales levels are assumed to be the same so there is no inventory

y
p ion
movement.

o
C uit
(ii) The contribution to sales (C/S ratio) can be used to indicate the relative profitability of
different products.

I n t (iii) CVP analysis assumes that fixed costs will change if output either falls or increases

t
significantly.

ir s (iv) Sales prices are recognised to vary at different levels of activity especially if higher

F
volume of sales is needed
(i), (ii) and (iii)
(ii), (iii) and (iv)
(i) and (ii)
(iii) and (iv)
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 159

Limiting factors
20 A company uses the linear programming model to find the optimal production plan for its two
products X and Y. The model considers x to be number of units of product X and y to be the
number of units of product Y.
It has identified the following equations:
Objective function = Maximise 8x + 12y
Subject to the following constraints:
Material 2x + y 2,000
Unskilled labour: x + y 1,500
and x 400
What is the optimal solution for the output of X and Y?

Co
21 Taylor Co manufactures two products, A and B, and any quantities produced can be sold for

Fir
$30 per unit and $25 per unit respectively.

st I pyri
Variable costs per unit of the two products are as follows:

ntu ght
Product A Product B
$ $

itio
Materials (at $2 per kg) 8 6
Labour (at $5 per hour) 10 5

n2
Other variable costs 7 3
Total 25 14

017
Next month, only 3,200 kg of material and 2,000 labour hours will be available. The company
aims to maximise its profits each month and wants to use the linear programming model to
establish an optimum production plan.
The model considers x to be number of units of Product A and y to be the number of units of
Product B.
Which of the following statements of objective function and constraints is correct?
Objective function Material constraint Labour constraint
30x + 25y 4x +3y 3,200 2x + y 2,000
5x + 11y 4x + 3y 3,200 2x + y 2,000
5x + 11y 4x + 3y 3,200 2x + y 2,000
30x + 25y 4x + 3y 3,200 2x + y 2,000
160 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

22 A linear programming model has been formulated for two products, X and Y. The objective
function is depicted by the formula C = 5X + 6Y, where C = contribution, X = the number of
product X to be produced and Y = the number of product Y to be produced.
Each unit of X uses 2 kg of material Z and each unit of Y uses 3 kg of material Z. The standard
cost of material Z is $2 per kg.
The shadow price for material Z has been worked out and found to be $280 per kg.
If an extra 20 kg of material Z becomes available at $2 per kg, what will the maximum
increase in contribution be?
Increase of $96
Increase of $56
Increase of $16
No change

23 A company manufactures three products using different amounts of the same grade of labour,
which is in short supply.
The following budgeted data relates to the products:
Per unit: P1 P2 P3
$ $ $

t
Selling price 120 140 95

h 7
Materials ($2 per kg) (40) (32) (22)

i g 1
Labour ($10 per hour (10) (20) (11)

y r 20
Variable overheads (20) (28) (24)

p ion
Fixed overheads (6) (9) (12)

o
Profit per unit 44 51 26

C uit
t
Rank the products 1,2,3 in the order they should be manufactured, assuming that the

n
company wants to maximise profits.

s t I Ranking

F ir P1

P2

P3
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 161

24 A jewellery company makes rings (R) and necklaces (N).


The resources available to the company have been analysed and two constraints have been
identified:
Labour time 3R + 2N 2,400 hours
Machine time 05R + 04N 410 hours
The management accountant has used linear programming to determine that R = 500 and N =
400.
Which of the following is/are slack resources?
1 Labour time available
2 Machine time available
1 only
2 only
Both 1 and 2
Neither 1 nor 2

HIGGINS CO

Fir Co
The following scenario relates to questions 25-29. Each question is worth 2 marks.

st I pyri
Higgins Co (HC) manufactures and sells pool cues and snooker cues. The cues both use the same type
of good quality wood (ash), which can be difficult to source in sufficient quantity. The supply of ash is

ntu ght
restricted to 5,400 kg per period. Ash costs $43.20 per kg.

itio
The cues are made by skilled craftsmen who are well known for their workmanship. HCs craftsmen
are generally only able to work for 12,000 hours in a period. The craftsmen are paid $18 per hour.

n2
HC sells the cues to a large market. Demand for the cues is strong and the company has estimated that

017
up to 15,000 pool cues and 12,000 snooker cues can be sold in any period. The selling price for pool
cues is $41 and the selling price for snooker cues is $69.
Manufacturing details for the two products are as follows.
Pool cues Snooker cues
Craftsmen time per cue 0.5 hours 0.75 hours
Ash per cue 250 g 250 g
Other variable costs per cue $1.20 $4.70
HC does not keep inventory.

25 Calculate the maximum contribution that HC could earn if ash and labour were not constraints.

26 Calculate the number of pool and snooker cues HC would manufacture if demand for both types
of cue was not a constraint and assuming HC continues to manufacture both types of cue.
162 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

27 If the amount of ash available was increased to 7,000 kg and the amount of skilled labour
available was increased to 16,000 hours, which of the following statements would be true,
assuming maximum demand for pool cues was 15,000 and maximum demand for snooker cues
was 12,000?
Labour would remain a constraint but ash would no longer be a constraint.
Ash would remain a constraint but labour would no longer be a constraint.
Both labour and ash would still be constraints.
Neither labour nor ash would be constraints.

28 Assume that the constraints that limit HC are the constraints on labour available and the
demand for snooker cues. Under these constraints 6,000 pool cues are made. The contribution
for snooker cues has recently increased to $45 per cue and for pool cues to $25 per cue.
Some of the craftsmen have offered to work overtime, provided that they are paid double time
for the extra hours over the contracted 12,000 hours. HC has estimated that up to 1,200 hours
per period could be gained in this way.
Calculate the shadow price of labour.

29
t
Which of the following statements relating to limited factor analysis or linear programming

h 7
g 1
is/are true?

y r i 20 True False

o p ion The objective function is the function relating to the

C uit
limitation of the scarce resource.

t
The constraints in graphical linear programming analysis

n
are drawn as straight lines.

s t I The shadow price is only significant for constraints that

r
are binding.

F i There will be slack if less than the maximum amount


available of a limited resource is needed.

Pricing decisions
30 Which of the following statements about price elasticity of demand is/are true?

True False
If PED < 1, total revenue will rise if the selling price of
the product is increased.
If PED >1, the demand is said to be inelastic.
PED may be at different levels at different points on the
demand curve.
If a downward demand curve changes to become
steeper, demand is becoming more elastic.
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 163

31 A companys demand curve is P = 34 0.05Q. It experiences some cost discounts if it produces


200 units or more, so its cost function is as follows:
TC = 1,500 + 3Q (up to Q = 199)
TC = 1,900 + 2.8Q (if Q = 200 or more)
What is the optimum selling quantity and price, to the nearest $0.01?

Quantity

Price $

32 A company wishes to enter two different new markets.


In market A, it has estimated that demand will be relatively elastic.
In market B, demand is likely to be relatively inelastic initially.
Which price strategy is most appropriate for the company to use in each market?

Price Penetration Market


discrimination pricing skimming
A
B

Fir Co
st I pyri
33 Which of the following statements about pricing is/are true?

ntu ght
True False
Target costing results in a market driven selling price.

itio
Cost-plus pricing only works if the % mark-up is applied
to total absorption costing.

n2
A cost-plus pricing policy will always result in a profit for

017
the company.
Penetration pricing aims to recover the high initial costs
of product development.

34 Which TWO of the following circumstances that may arise in relation to the launch of a new
product favour a penetration pricing policy?
Demand is relatively inelastic.
There are significant economies of scale.
The firm wishes to discourage new entrants to the market.
The product life cycle is particularly short.

35 Which of the following statements regarding market penetration as a pricing strategy is/are
correct?
1 It is useful if significant economies of scale can be achieved
2 It is useful if demand for a product is highly elastic
1 only
2 only
Neither 1 nor 2
Both 1 and 2
164 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

ALG CO
The following scenario relates to questions 36-40. Each question is worth 2 marks.
ALG Co is launching two new, innovative, products onto the market and is trying to decide on the right
launch price for them.
The first products expected life is three years. Given the high level of costs which have been incurred
in developing the product, ALG Co wants to ensure that it sets its price at the right level and has
therefore consulted a market research company to help it do this. The research, which relates to
similar but not identical products launched by other companies, has revealed that at a price of $60,
annual demand would be expected to be 250,000 units.
However, for every $2 increase in selling price, demand would be expected to fall by 2,000 units and
for every $2 decrease in selling price, demand would be expected to increase by 2,000 units.
A forecast of the annual production costs which would be incurred by ALG Co in relation to the new
product are as follows:
Annual production (units) 200,000 250,000 300,000 350,000
$ $ $ $
Direct material 2,400,000 3,000,000 3,600,000 4,200,000
Direct labour 1,200,000 1,500,000 1,800,000 2,100,000
Overheads 1,400,000 1,550,000 1,700,000 1,850,000

ht 7
g 1
36 Calculate the total fixed overheads for this product, using the high-low method.

y r i $
20
o p ion
C uit
37 Given the data above, which of the following is the correct formulation of the demand function?

I n t P = 190 0001x

t
P = 250 0001x

ir s P = 250 00005x

F
P = 310 0001x

38 The second products variable costs have been identified as $20 per unit and its demand
function has been formulated as 240 0.001x.
Calculate the expected revenue for the product.

39 ALG Co plans to adopt a policy of market skimming for the two new products.
In which TWO of the following situations is market skimming an appropriate policy?
Customers are prepared to pay high prices to obtain a new product.
Products have a long life cycle.
Barriers to entry deter competitors.
There are significant economies of scale connected with output.
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 165

40 One of the directors has read about the market penetration pricing policy and wishes to have an
idea of what the differences are between market penetration and market skimming policies.
In which of the following situations would a market skimming policy be more likely to be
used, and in which situations would a market penetration policy be more likely to be used?

Skimming Penetration
The level of demand is unknown.
Demand is expected to be elastic.
ALG Co can discourage competitors from entering the
market.
ALG has excess production capacity.

Make-or-buy and other short-term decisions


41 A business makes two components which it uses to produce one of its products. Details are:
Component A Component B
Per unit information: $ $
Buy in price 14 17
Material 2 5
Labour

Fir Co 4 6

st I pyri
Variable overheads 6 7
General fixed overheads 4 3

ntu ght
Total absorption cost 16 21

The business wishes to maximise contribution and is considering whether to continue making

itio
the components internally or buy in from outside.

n2
Which components should the company buy in from outside in order to maximise its
contribution?


A only
B only 017
Both A and B
Neither A nor B

THREE DEPARTMENTS
The following scenario relates to questions 42-46. Each question is worth 2 marks.
The following are performance figures for three retail departments operated by a shop.
Caf Bedding Furniture Total
$ $ $ $
Sales 10,000 25,000 50,000 85,000
Variable costs 7,000 13,000 29,000 49,000
Share of fixed shop overheads 5,000 6,000 8,000 19,000
Profit/loss (2,000) 6,000 13,000 17,000
The furniture department is located on the ground floor of the shop, and the bedding department and
caf are located on the fifth floor.
166 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

42 The following statements have been made about the caf:


1 The caf should be closed down as it is loss making.
2 Without the caf, the shops total profit would be higher.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2

43 You have been informed that if the caf is shut down, fixed shop overheads of $3,500 would be
saved, but the bedding department is likely to lose 10% of its revenues.
If the caf is closed, what will the new profit figure be?

44 Which of the following is the most likely explanation of why the bedding department will lose
10% of its revenues?

t
Customers often visit the caf after they have been in the bedding department.

h 7
Customers have to go through the bedding department to get to the caf.

r i g

201 Customers often visit the furniture department and the caf department together.

y
The bedding department and caf are complementary.

p ion

o
C uit
45 If the caf is shut, what measure can the shop take that is most likely to prevent the bedding

t
department losing 10% of its revenues?

t I n Let the bedding department also occupy the area formerly occupied by the caf

s
Relocate the bedding department next to the furniture department on the ground floor

F i

Adopt a policy of product line pricing on beds
Adopt a policy of relevant cost pricing on beds

46 One of the directors has argued that one argument for keeping the caf is that it increases the
overall level of customer satisfaction with the store. Which of the following is the most helpful
measure of the customer satisfaction generated by the caf?
New items added to the cafs menu
Length of queues in the caf
% occupancy of the tables in the caf
Profits made by the caf
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 167

CHEMCO
The following scenario relates to questions 47-51. Each question is worth 2 marks.
Chemco imports different grades of fertiliser which it sells in bulk to farmers. All products currently
make a profit. Chemco has now decided to consider refining the fertilisers by further processing, in
order to sell it to individuals for domestic use.
The quantities and associated costs are as follows:
Medium
Fertiliser Basic grade Premium
Current monthly sales quantity 100 kg 40 kg 60 kg
Current sales price per kg (farmers) $5 $7 $10
After further processing:
Sales price per kg (individual customers) $5.5 $8 $13
Further processing cost per kg $0.60 $0.80 $2

47 The following statements have been made about the fertilisers:


1 The basic fertiliser should only ever be sold in bulk to farmers.
2 If Chemco can obtain additional supplies, medium grade fertiliser should be sold to both
farmers and to individuals for domestic use.

Fir
Which of the above statements is/are true?
Co
st I pyri
1 only

ntu ght
2 only
Neither 1 nor 2

itio
Both 1 and 2

48
n2
Assume the available quantity of fertiliser that Chemco can obtain is limited each month by

017
import quotas, but that there are no restrictions on sales demand.
To which type or types of customer should each fertiliser be sold, in order to maximise
profits?

Basic Medium grade Premium


Farmers
Individual customers

49 Chemco has just gained a new contract. The fertiliser it has agreed to supply needs a chemical
added as part of the refining process. The chemical is in stock but is in short supply and is also
needed by the company on an existing contract. Since the chemical is relatively unstable, any
excess inventory has to be disposed of after six months.
What is the total relevant cost of the chemical required for the new contract?
The replacement cost of the chemical
The price at which the chemical could be sold in the outside market
The contribution (excluding chemical cost) foregone from using the chemical in the
existing contract
The disposal cost of the chemical
168 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

50 Another fertiliser that Chemco sells requires two chemicals as part of the refining process. To
produce 100 kg of the fertiliser, a standard input mix of 6 litres of Chemical A and 14 litres of
Chemical B is required.
Chemical A has a standard cost of $30 per litre and Chemical B has a standard cost of $40 per litre.
During last month, the actual results showed that 5,000 kg of the fertiliser X were produced,
using a total input of 31,000 litres of Chemical A and 72,500 litres of Chemical B (103,500 litres
in total).
The actual costs of Chemicals A and B were at the standard cost of $20 and $25 per litre respectively.
Calculate the materials mix variance.

Adverse Favourable
$...................

51 In which of the following circumstances would it NOT be reasonable to calculate a materials mix
variance?
Proportions in the mix are changeable.
Proportions in the mix can be controlled.
The chemicals used in the mix are discrete.
The usage variance of individual chemicals is of limited value.

ht 7
r i g 01
Dealing with risk and uncertainty in decision-making

2
52
y
p ion
Which of the following statements about uncertainty in decision-making is/are true?

o
C uit
True False

t
Mystery shopping may be used to reduce the

I n
uncertainty associated with making changes to an

t
existing product or launching a new one.

ir s Sensitivity involves identifying a number of possible

F
outcomes that may arise if the project goes ahead.
Focus groups are used to provide qualitative data
about new products.
Pay-off tables record all possible outcomes.

53 Tree Co is considering employing a sales manager. Market research has shown that a good sales
manager can increase profit by 30%, an average one by 20% and a poor one by 10%. Experience
has shown that the company has attracted a good sales manager 35% of the time, an average
one 45% of the time and a poor one 20% of the time.
The companys normal profits are $180,000 per annum and the sales managers salary would be
$40,000 per annum.
Based on the expected value criterion, which of the following represents the correct advice
which Tree Co should be given?
Do not employ a sales manager as profits would be expected to fall by $1,300
Employ a sales manager as profits will increase by $38,700
Employ a sales manager as profits are expected to increase by $100
Do not employ a sales manager as profits are expected to fall by $39,900
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 169

54 The Mobile Sandwich Co prepares sandwiches which it delivers and sells to employees at local
businesses each day. Demand varies between 325 and 400 sandwiches each day. As the day
progresses, the price of the sandwiches is reduced and, at the end of the day, any sandwiches
not sold are thrown away. The company has prepared a regret table to show the amount of
profit which would be foregone each day at each supply level, given the varying daily levels of
demand.
Regret table
Daily supply of sandwiches (units)
325 350 375 400
325 $0 $21 $82 $120
Daily demand 350 $36 $0 $44 $78
for sandwiches (units) 375 $82 $40 $0 $34
400 $142 $90 $52 $0
Applying the decision criterion of minimax regret, how many sandwiches should the company
decide to supply each day?
325
350
375
400

55

Fir Co
Which THREE of the following statements about the use of Expected values (EV) are correct?

st I pyri
They are useful because they take account of the spread of possible returns
They can be used for one-off investment decisions

ntu ght
The average value generated may not actually represent a possible outcome

itio
They allow different possible outcomes to be built into a decision
They represent a long-run average if an event is repeated many times

n2
The probabilities of different possible outcomes are usually easy to estimate

THREE PRODUCTS 017


The following scenario relates to questions 56-60. Each question is worth 2 marks.
The matrix below shows the various contribution outcomes for three products, X, Y, and Z, depending
on whether the product price is $10 or the product price is $15.
Profit
Product P = $10 P = $15
X 60 80
Y -28 160
Z 50 90

56 Using expected values, which product should be chosen?


Project X
Project Y
Project Z
It is impossible to say
170 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

57 If the two product prices are equally likely to occur, which product or products should be chosen?
Product X
Product Y
Product Z
Either Project X or Project Z

58 If the variable cost of Product X is $7, calculate the fall in the number of units sold if the Product
price is $15 compared with if it is $10.

units

59 If the quantity sold of Product Z was 10 when the price was $10 and 9 when the price was $15,
what would be the demand function for Product Z?
5 0.2Q
50 0.2Q
50 5Q
60 5Q

t
60 Which of the following is/are disadvantages of using marginal cost plus pricing?

i g h 1 7 Disadvantage Not disadvantage

y r 20
It ignores fixed costs.

o p ion The mark-up % cannot be varied.

C uit
Budgeted output volume needs to be established.

t
The basis it uses for absorption of fixed overheads is

I n
arbitrary.

r s t
F i
SANDRUNNER
The following scenario relates to questions 61-65. Each question is worth 2 marks.
Sandrunner golf club is setting its annual membership fee, which will affect the number of members.
The forecast annual cash inflows from membership fees are shown below.
Membership fees
Membership fee Low Average High
$000 $000 $000
$300 180 210 270
$400 200 220 240
$450 180 205 245
$500 160 190 210

61 If the maximax decision-making technique is applied the fee set would be:
$300
$400
$450
$500
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 171

62 Which TWO of the following are criticisms of using the maximax technique?
It presupposes an attitude of risk aversion.
It ignores the probabilities of different outcomes.
It ignores outcomes that are less than the best possible.
It assumes there are opportunity losses.

63 If the minimax regret decision making technique is applied the fee set would be:
$300
$400
$450
$500

64 The committee has now decided to set the fee at $300 or $400 for the next year. For both
outcomes the probabilities are Low 0.5 Average 0.3 High 0.2. A golf club member who is a
marketing consultant has offered to carry out a survey of possible members to determine with
certainty what the outcome will be.
Calculate the maximum amount that the marketing consultant should be paid for his work.

Co
$

Fir
65
st I pyri
Over the longer-term, the committee are concerned with the increased costs of running the golf

ntu ght
club. It believes that it may be able to maximise cash flow from members by introducing
differential membership fees, so that the fees members pay will depend to some extent on how

itio
frequently they use facilities offered by the club.

n2
Which TWO of the following is the committee MOST likely to take into account when
considering whether to introduce differential membership fees?



The profits made by the club shop 017
The subscriptions charged by other golf clubs in the area

The amount of usage of the course at weekends (the busiest time of the week)
The number of members using the clubs restaurant facilities
172 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

MYLO (SECTION B, SEPTEMBER 2016)


The following scenario relates to Questions 66 70. Each question is worth 2 marks.
Mylo runs a cafeteria situated on the ground floor of a large corporate office block. Each of the five
floors of the building are occupied and there are in total 1,240 employees.
Mylo sells lunches and snacks in the cafeteria. The lunch menu is freshly prepared each morning and
Mylo has to decide how many meals to make each day. As the office block is located in the city centre,
there are several other places situated around the building where staff can buy their lunch, so the level
of demand for lunches in the cafeteria is uncertain.
Mylo has analysed daily sales over the previous six months and established four possible demand
levels and their associated probabilities. He has produced the following payoff table to show the daily
profits which could be earned from the lunch sales in the cafeteria:
Demand level Probability Supply level
450 620 775 960
$ $ $ $
450 015 1,170 980 810 740
620 030 1,170 1,612 1,395 1,290
775 040 1,170 1,612 2,015 1,785
960 015 1,170 1,612 2,015 2,496

66

ht
If Mylo adopts a maximin approach to decision-making, which daily supply level will he choose?

7
i g 1
450 lunches

y r

20 620 lunches

o p ion 775 lunches

C uit
960 lunches

I
67
n t If Mylo adopts a minimax regret approach to decision-making, which daily supply level will he

t
choose?

ir s 450 lunches

F


620 lunches
775 lunches
960 lunches

68 Which of the following statements is/are true if Mylo chooses to use expected values to assist in
his decision-making regarding the number of lunches to be provided?
1 Mylo would be considered to be taking a defensive and conservative approach to his
decision
2 Expected values will ignore any variability which could occur across the range of possible
outcomes
3 Expected values will not take into account the likelihood of the different outcomes
occurring
4 Expected values can be applied by Mylo as he is evaluating a decision which occurs many
times over
1, 2 and 3
2 and 4
1 and 3
4 only
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 173

69 The human resources department has offered to undertake some research to help Mylo to
predict the number of employees who will require lunch in the cafeteria each day. This
information will allow Mylo to prepare an accurate number of lunches each day.
What is the maximum amount which Mylo would be willing to pay for this information (to the
nearest whole $)?
$191
$359
$478
$175

70 Mylo is now considering investing in a speciality coffee machine. He has estimated the following
daily results for the new machine:
$
Sales (650 units) 1,300
Variable costs (845)
Contribution 455
Incremental fixed costs (70)
Profit 385

Which of the following statements are true regarding the sensitivity of this investment?
1
Fir Co
The investment is more sensitive to a change in sales volume than sales price
2
st I pyri
If variable costs increase by 44% the investment will make a loss

ntu ght
3 The investments sensitivity to incremental fixed costs is 550%

itio
4 The margin of safety is 846%
1, 2 and 3
2 and 4
n2
017
1, 3 and 4
3 and 4
174 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

3: Budgeting and control

Budgetary systems and type of budget


1 Which of the following statements about budgeting is/are true?

True False
A rolling budget is a budget that starts at nil every
period and requires managers to justify every item of
expenditure.
A cash flow budget is a good example of feed-forward
control.
An incremental budget is a budget which, having been
established at the beginning of a period is then
constantly amended and extended on account of
developing circumstances.
An advantage of activity-based budgets is that they
enable more efficient improvement programmes to be
implemented.

2
ht 7
Match the following examples of information to the category of information to which they relate.

r i g 201
y
Internal External Internal External

p ion
historic historic anticipated anticipated

o Government inflation

C uit statistics

t
Purchases made by

t I n customers

s
Cash flow forecast for

F ir the next five years


Inventory movement
records

3 Match the following descriptions of standards to the standards which they describe

Attainable Basic Ideal Current


Kept unchanged over a
period of time
Makes no allowance for
normal losses, waste and
machine downtime
Assumes an efficient level of
operation, but includes
allowances for normal loss,
waste and machine
downtime
Based on working conditions
and prices that apply now
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 175

4 Which of the following statements about changing budgetary systems is/are true?

True False
The costs of implementation may outweigh the benefits.
Employees will always welcome any new system which
improves planning and control within the organisation.
The time and cost involved in the system transition may initially
lead to control being worse not better.
Employees will adapt easily to the new system and this will
increase their motivation.

5 Which of the following statements about the master budget is/are true?

True False
It sets out the timetable for budget preparation.
It is usually prepared before the functional budgets.
It includes a budgeted statement of profit or loss,
statement of financial position and cash budget.
It is always prepared on a top-down basis.

6
Fir Co
Which of the following statements about zero based budgeting is/are true?

st I pyri True False

ntu ght
It makes it easier for employees to artificially inflate
budgets.
It facilitates improvements in processes.
itio

n2
Employees will focus on eliminating wasteful
expenditure.
Short-term benefits could be emphasised over long-
term benefits. 017

7 Which FOUR of the following are purposes of budgeting?


Co-ordination
Communication
Quantification
Motivation
Quality control
Authorisation

8 Jen Co operates in a dynamic environment.


Which budgeting approach is most likely to be suitable for Jen Co?
Fixed budgets
Incremental budgeting
Bottom-up budgeting
Zero-based budgeting
176 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

9 RS has recently introduced an activity based budgeting system. RS manufactures two products,
details of which are given below:
Product R Product S
Budgeted production per annum (units) 80,000 60,000
Batch size (units) 100 50
Machine set-ups per batch 3 3
Processing time per unit (minutes) 3 5
The budgeted annual costs for two activities are as follows:
Machine set-up $180,000 Processing $108,000
What is the budgeted processing cost per unit of Product R, to the nearest $0.01?

10 Which TWO of the following are advantages of flexible budgeting?


It is useful for decision-making purposes.
It is quicker to carry out than fixed budgeting.
It provides appropriate benchmarks for cost control.
It encourages the organisation to review the value of all its activities.

ht 7
KENNETH CO
r i g 201
y
p ion
o
The following scenario relates to questions 11-15. Each question is worth 2 marks.

C uit
Kenneth Co makes many products, one of which is Product Z. Kenneth Co is considering making

t
various changes to the way it approaches the budgeting process, including adopting an activity-based

I n
costing approach in place of the current practice of absorbing overheads using direct labour hours.

t
The main budget categories and cost driver details for October are set out below, excluding direct

ir s material costs:

F Budget category
Direct labour
Set-up costs
$
128,000
22,000
Cost driver details
8,000 direct labour hours
88 set-ups each month
Quality testing costs* 34,000 40 tests each month
Other overhead costs 32,000 absorbed by direct labour hours
* A quality test is performed after every 75 units produced
The following data for Product Z is also provided:
Direct materials: budgeted cost of $2150 per unit
Direct labour: budgeted at 03 hours per unit
Batch size: 30 units
Set-ups: 2 set-ups per batch
Budgeted volume for October: 150 units

11 Calculate, to the nearest $0.01, the budgeted unit cost of Product Z for October using a direct
labour-based absorption method for all overheads.

$
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 177

12 Calculate, to the nearest $0.01, the budgeted unit cost of Product Z for October using an
activity-based costing approach for all overheads.

13 Kenneth Co is currently using an incremental approach to budgeting, but its Finance Director
wishes to switch to a zero-based approach.
Which of the following are advantages of the incremental approach to budgeting?

Advantage Not advantage


It encourages managers to spend up to the maximum
allowed in the budget.
It is a straightforward approach for inexperienced
managers to apply.
It is suitable for organisations where historic costs are
a good guide to future costs.
It forces employees to avoid wasteful expenditure.

14 Which of the following describes a zero-based budgeting approach?


Fir Co
Updating the budget regularly and controlling performance with the use of variance

st I pyri
analysis that analyses variances into planning and operational variances
Using the current years results as a starting point and updating the budget for changes in

ntu ght
activity or inflation
Analysing the cost of each activity, identifying alternative ways of performing the activity

itio
and assessing the consequences of performing the activity at different levels or not at all
Using an adaptive management process to prepare budgets that are focused on cash

n2

flows rather than cost control

15 017
Which TWO of the following are disadvantages of the zero-based approach to budgeting?
Zero-based budgeting does not respond to changes in the economic environment.
It is difficult to rank activities that have qualitative rather than quantitative benefits.
It restricts management from changing plans once the budget has been approved.
Operational managers will become less motivated if zero-based budgeting is introduced,
as they will not be involved in the budgeting process.
178 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

Quantitative analysis in budgeting


16 The total costs for a factorys first four months production are as follows:
Month Output Total cost
(units) ($)
January 11,000 12,000
February 15,000 17,500
March 10,000 12,500
April 13,000 16,000
If a = total fixed costs and b = variable cost per unit, the values of a and b determined by the
high-low method are as follows:

a$
b$

17 A worker takes 2 hours to produce the first unit of a product, but gets faster so that after a total
of 11.664 hours, 8 units have been completed in total.
What is the learning rate, to the nearest 0.1%?

ht 7
g 1
18 A companys production process involves a learning effect but the Production Manager has

y r i 0
indicated this will cease after 200 units have been made for the following reasons:

2
p ion
I Restrictions on availability of other resources e.g. machine time

o
C uit
II
III
Staff working at maximum physical capacity
Lack of incentives to encourage further improvement

I n t Which of the above are valid reasons for reaching a steady state or production?

t
I only

ir s I and II only

F
II and III only
All of the above

19 A learning curve would be expected to apply in the production of items which exhibit which of
the following features?

Apply Not apply


Simple to make
Made largely by labour efforts
Mass-produced
New product
Continuous production
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 179

20 The following table shows the number of clients who attended a particular accountancy practice
over the last four weeks and the total costs incurred during each of the weeks:
Week Number of clients Total cost
$
1 400 36,880
2 440 39,840
3 420 36,800
4 460 40,000
Applying the high low method to the above information, which of the following could be used
to forecast total cost ($) from the number of clients expected to attend (where x = the
expected number of clients)?
7,280 + 74x
16,080 + 52x
3,200 + 80x
40,000/x

21 Tech World is a company which manufactures mobile phone handsets. From its past
experiences, Tech World has realised that whenever a new design engineer is employed, there
is a learning curve with a 75% learning rate which exists for the first 15 jobs.

Co
A new design engineer has just completed his first job in five hours.

Fir
Note: At the learning rate of 75%, the learning factor (b) is equal to 0415.

st I pyri
How long would it take the design engineer to complete the sixth job?

ntu ght
2377 hours
1442 hours
2564 hours
itio
n2
5 hours

COMFYNAP CO 017
The following scenario relates to questions 22-26. Each question is worth 2 marks.
Comfynap Co manufactures beds and other types of recliners.
The company has been developing a new bed, designed to give extra comfort. The estimated time for
the first bed is 15 hours but the Production Director expected a learning curve of 80% to apply to the
first 32 units produced, meaning that the cumulative total time for 32 units is expected to be 157.25
hours.
The cost of labour is $60 per hour.

22 Calculate the expected labour cost of the 32nd unit to the nearest $.

$
180 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

23 32 units of the bed have now been produced. The first bed actually took 25 hours to make and the
total time for the first 32 beds was 110 hours, at which point the learning effect came to an end.
Calculate the actual rate of learning that occurred, to the nearest 0.1%.

24 Comfynap Co has also been developing a lounge recliner. The Production Director had assumed
that a learning rate of 75% would apply to the manufacture of the recliner. However, after
initial production had been completed, it was found that a learning rate of 83% had applied.
Which TWO of the following statements could explain the difference between the expected
learning rate and the actual learning rate?
Assembly of the recliner was labour-intensive and repetitive.
There was high staff turnover during the initial phase of production.
There were a number of delays in the production process.
The design of the recliner was changed once the initial phase of production was over.

25 Comfynap Co is also developing a garden recliner. The Production and Sales Directors are trying
to formulate a budget for this product. The Production Director has guaranteed that production
will be matched to demand, but demand is uncertain.

ht 7
The directors have identified the following as possible outcomes.

r i g 201 Demand Probability

y
(units)

o p ion Worst possible outcome 15,000 0.2

C uit
Most likely outcome 28,000 0.7
Best possible outcome 50,000 0.1

I n t The selling price will be $100. The variable cost is $40 for any production level up to 20,000

t
units. If production is higher than 20,000 units, then the variable cost per unit will fall to $35.

r s
The $35 variable cost will be expected to apply to all units at that level.

F i Expected fixed costs are $200,000.


Using probabilistic budgeting, calculate the expected budgeted contribution of the product.

26 The Head Office of Comfynap Co is concerned about the number of problems that have
occurred with the budgets that managers have prepared using spreadsheets.
Which of the following is/are significant disadvantages with using spreadsheets for budgeting?

Disadvantage Not disadvantage


It can be difficult to manipulate information on
spreadsheets.
It can be difficult to identify errors in formulae used in
spreadsheets.
Spreadsheets only take account of qualitative
information.
It is very difficult to set common standards for the use
of spreadsheets for budgeting by managers.
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 181

Standard costing
27 Which of the following statements about different types of standards in standard costing
systems is/are true?

True False
Basic standards provide the best basis for budgeting because
they represent an achievable level of productivity.
Ideal standards are short-term targets and useful for day-to-day
control purposes.
An attainable standard is always based on current efficiency
levels and costs.
Current standards are particularly useful when inflation is high.

CORFE CO (SECTION B, SEPTEMBER 2016)


The following scenario relates to Questions 28 32. Each question is worth 2 marks.
Corfe Co is a business which manufactures computer laptop batteries and it has developed a new
battery which has a longer usage time than batteries currently available in laptops. The selling price of
the battery is forecast to be $45.

Fir Co
The maximum production capacity of Corfe Co is 262,500 units. The companys management

st I pyri
accountant is currently preparing an annual flexible budget and has collected the following
information so far:

ntu ght
Production (units) 185,000 200,000 225,000
$ $ $

itio
Material costs 740,000 800,000 900,000
Labour costs 1,017,500 1,100,000 1,237,500

n2
Fixed costs 750,000 750,000 750,000

017
In addition to the above costs, the management accountant estimates that for each increment of
50,000 units produced, one supervisor will need to be employed. A supervisors annual salary is
$35,000.
The production manager does not understand why the flexible budgets have been produced as he has
always used a fixed budget previously.

28 Assuming the budgeted figures are correct, what would the flexed total production cost be if
production is 80% of maximum capacity?
$2,735,000
$2,770,000
$2,885,000
$2,920,000
182 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

29 The management accountant has said that a machine maintenance cost was not included in the
flexible budget but needs to be taken into account.
The new battery will be manufactured on a machine currently owned by Corfe Co which was
previously used for a product which has now been discontinued. The management accountant
estimates that every 1,000 units will take 14 hours to produce. The annual machine hours and
maintenance costs for the machine for the last four years have been as follows:
Machine Maintenance
time costs
(hours) ($000)
Year 1 5,000 850
Year 2 4,400 735
Year 3 4,850 815
Year 4 1,800 450
What is the estimated maintenance cost if production of the battery is 80% of maximum
capacity (to the nearest $000)?
$575,000
$593,000
$500,000
$735,000

30

ht 7
In the first month of production of the new battery, actual sales were 18,000 units and the sales

i g 1
revenue achieved was $702,000. The budgeted sales units were 17,300.

y r 20
Based on this information, which of the following statements is true?

o p ion When the budget is flexed, the sales variance will include both the sales volume and sales

C uit
price variances

t
When the budget is flexed, the sales variance will only include the sales volume variance

I n
When the budget is flexed, the sales variance will only include the sales price variance

r s t When the budget is flexed, the sales variance will include the sales mix and quantity

i
variances and the sales price variance

F 31 Which of the following statements relating to the preparation of a flexible budget for the new
battery are true?
1 The budget could be time-consuming to produce as splitting out semi-variable costs may
not be straightforward
2 The range of output over which assumptions about how costs will behave could be
difficult to determine
3 The flexible budget will give managers more opportunity to include budgetary slack than
a fixed budget
4 The budget will encourage all activities and their value to the organisation to be reviewed
and assessed
1 and 2
1, 2 and 3
1 and 4
2, 3 and 4
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 183

32 The management accountant intends to use a spreadsheet for the flexible budget in order to
analyse performance of the new battery.
Which of the following statements are benefits regarding the use of spreadsheets for
budgeting?
1 The user can change input variables and a new version of the budget can be quickly
produced
2 Errors in a formula can be easily traced and data can be difficult to corrupt in a
spreadsheet
3 A spreadsheet can take account of qualitative factors to allow decisions to be fully
evaluated
4 Managers can carry out sensitivity analysis more easily on a budget model which is held
in a spreadsheet
1, 3 and 4
1, 2 and 4
1 and 4
2 and 3

Co
Material mix and yield variances

Fir
st I pyri
33 Which of the following statements about materials variances is/are true?

True False

ntu ght
Mix and yield variances are most appropriate where a product

itio
requires a set amount of different types of material.
The materials yield variance assesses whether the finished

n2
output was greater or less than expected, given the amount of
material that was input.

017
Mix and yield variances are most appropriate where the input
proportions of the materials used in a product can be varied
without substantially changing the nature of the output.

The materials mix variance assesses the impact of varying the


proportions of the different materials used in a product.

34 To produce 19 litres of product X, a standard input mix of 8 litres of chemical A and 12 litres of
chemical B is required.
Chemical A has a standard cost of $20 per litre and chemical B has a standard cost of $25 per
litre.
During September, the actual results showed that 1,850 litres of product X were produced,
using a total input of 900 litres of chemical A and 1,100 litres of chemical B (2,000 litres in total).
The actual costs of chemicals A and B were at the standard cost of $20 and $25 per litre
respectively.
It was expected that an actual input of 2,000 litres would yield an output of 1,900 litres (95%).
The actual yield for September was only 1,850 litres, which was 50 litres less than expected.
184 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

For the total materials mix variance and total materials yield variance, was there a favourable
or adverse result in September?
The total mix variance was adverse and the total yield variance was favourable.
The total mix variance was favourable and the total yield variance was adverse.
Both variances were adverse.
Both variances were favourable.

35 Isaacs Co has a process in which the standard mix for producing 1 unit of output is as follows:
$
5 litres of R at $8 per litre 40.00
3 litres of S at $10 per litre 30.00
4 litres of T at $2 per litre 8.00
During November 2,000 units were produced and usage was:
9,700 litres of R
6,300 litres of S
7,400 litres of T
What was the materials yield variance for November?

Adverse Favourable

t
$...................

i g h 1 7
36

y r 20
Product GX consists of a mix of three materials, J, K and L. The standard material cost of a unit

p ion
of GX is as follows:

o
C uit Material J 5 kg at $4 per kg
$
20

I n t Material K
Material L
2 kg at $12 per kg
3 kg at $8 per kg
24
24

r s t
i
During March, 3,000 units of GX were produced, and actual usage was:

F Material J
Material K
Material L
13,200 kg
6,500 kg
9,300 kg
What was the materials yield variance for March?
$6,800 favourable
$6,800 adverse
$1,000 favourable
$1,000 adverse
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 185

ROMEO CO (SECTION B, DECEMBER 2016)


The following scenario relates to questions 37 41. Each question is worth 2 marks.
Romeo Co is a business which makes and sells fresh pizza from a number of mobile food vans based at
several key locations in the city centre. It offers a variety of toppings and dough bases for the pizzas
and has a good reputation for providing a speedy service combined with hot, fresh and tasty food to
customers.
Each van employs a chef who is responsible for making the pizzas to Romeo Co's recipes and two sales
staff who serve the customers. All purchasing is done centrally to enable Romeo Co to negotiate bulk
discounts and build relationships with suppliers.
Romeo Co operates a standard costing and variances system and the standard cost card for Romeo
Co's basic tomato pizza is as follows:
Ingredient Weight Price
kg $ per kg
Dough 0.20 7.60
Tomato sauce 0.08 2.50
Cheese 0.12 20.00
Herbs 0.02 8.40
0.42

Fir Cop
In Month 3, Romeo Co produced and sold 90 basic tomato pizzas and actual results were as follows:
Kgs brought Actual cost

st I yri
Ingredient and used per kg
Dough 18.9 6.50

ntu ght
Tomato sauce 6.6 2.45
Cheese 14.5 21.00

itio
Herbs 2.0 8.10
42

n2
37
017
What was the total favourable material price variance for Month 3 (to 2 decimal places)?

38 What was the total adverse materials mix variance for Month 3?
$38.14
$41.92
$42.88
$81.02

39 In Month 4, Romeo Co produced and sold 110 basic tomato pizzas. Actual results were as
follows:
Kgs brought Actual cost
Ingredient and used per kg
Dough 21.3 6.60
Tomato sauce 7.5 2.45
Cheese 14.2 20.00
Herbs 2.0 8.50
45
186 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

What was the total materials yield variance for Month 4? (Calculate all workings to 2 decimal
places).
$11.63 favourable
$12.21 favourable
$9.75 adverse
$21.95 adverse

40 In Month 5, Romeo Co reported a favourable materials mix variance for the basic tomato pizza.
Which of the following statements would explain why this variance has occurred?
The proportion of the relatively expensive ingredients used in production was less than
the standard.
The prices paid for the ingredients used in the mix were lower than the standard prices.
Each pizza used less of all the ingredients in actual production than expected.
More pizzas were produced than expected given the level of ingredients input.

41 In Month 6, 100 basic tomato pizzas were made using a total of 42 kg of ingredients. A new chef
at Romeo Co used the expected amount of dough and herbs but used less cheese and more
tomato sauce per pizza than the standard. It was noticed that the sales of the basic tomato
pizza had declined in the second half of the month.

ht 7
Based on the above information, which TWO of the following statements are correct?

r i
g 201 The actual cost per pizza in Month 6 was lower than the standard cost per pizza.

y
p ion
The sales staff should lose their Month 6 bonus because of the reduced sales.

o
C uit


The value of the ingredients usage variance and the mix variance are the same.
The new chef will be responsible for the material price, mix and yield variances.

I n t
r s t
Sales mix and quantity variances

F i 42 Which of the following statements about materials and sales mix variances is/are true?

True False
Sales mix and quantity variances are only meaningful when the
companys products are independent of each other.
The sales mix variance considers how the profit has been affected
by selling products in a different ratio than initially expected.
The materials mix variance can be calculated by taking the
difference between the actual quantity in the standard mix and
the actual quantity in the actual mix, then multiplying it by the
actual cost per kg.
The materials mix variance arises because there is a difference
between what the input should have been for the output
achieved and the actual output.
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 187

43 If a budget for a single product is flexed, which of the following variances will be the sales
variance?
Price variance
Quantity variance
Mix variance
Yield variance

CUT CO
The following scenario relates to questions 44-48. Each question is worth 2 marks.
Cut Co produces and sells disposable razors and non-disposable razors with replaceable blades.
Its monthly budget is as follows:
Non-disposable Pack of Disposable
razors blades razors
Sales volume (units) 1,000 2,000 500
Selling price/unit ($) 15 8 5
Variable cost/unit ($) 8 3 2

Fir Cop
Actual results for July are:
Non-disposable Pack of Disposable
razors blades razors
Sales volume (units)
st I yri
900 2,600 700

ntu ght
Selling price/unit ($) 16 8 4.50
Variable cost/unit ($) 8 3 2

itio
n2
44 The following statements have been made about July:
1 As Cut Co sold 100 more non-disposable razors at $1 more per item and 200 more

2 017
disposable razors at $0.50 less per item, there is no overall price variance.
The total sales volume variance was favourable.
Which of the above statements are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2

45 What was the total sales mix variance in July?

Adverse Favourable
$...................

46 What was the total sales quantity variance in July?

Adverse Favourable
$...................
188 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

47 Which of the following is/are possible causes of the sales mix variance?

Possible cause Not possible cause


The size of the market for non-disposable razors
increased.
The production costs were as budgeted.
Price-conscious customers switched to cheaper
disposable razors.
A close competitor withdrew its non-disposable razor
after safety concerns.

48 Which of the following statements about pricing strategies is/are true:

True False
If product prices are set based on standard costs, then a
business will be unable to pass the cost of production
inefficiencies on to the customer.
The prices of complementary products cannot be set
independently.
If a company is using target costing, the price set will be

t
determined by the target cost.

h 7
Price discrimination can be achieved by setting different

r i g 01
prices for different versions of the same product.

2
y
p ion
o
C uit
Planning and operational variances

t
49 Conrad Co budgeted that it would sell 10,000 units based on an expected total market of

t I n
200,000 units. However, after producing the budget there was a 10% increase in industry
demand due to better economic forecasts.

ir s Which of the following is this most likely to give rise to?

F

A favourable sales price variance
A favourable sales mix variance
A favourable market share variance
A favourable market size variance
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 189

50 Which of the following statements about variances is/are true?

True False
The use of planning and operational variances splits
responsibility for performance between managers in charge of
day-to-day activities and decisions and those in charge of
budgeting.
The revision of budgets for operational difficulties that have
been experienced is likely to lead to more meaningful variance
analysis.
Splitting variances into planning and operational variances will
always make operational managers more receptive to variance
analysis.
Those in charge of budgeting are not always responsible for
planning variances.

51 The following data relate to Product Z and its raw material content for September.
Budget
Output 11,000 units of Z

Co
Standard materials content 3 kg per unit at $4.00 per kg

Fir
st I pyri
Actual output 10,000 units of Z
Materials purchased and used 32,000 kg at $4.80 per kg

ntu ght
It has now been agreed that the standard price for the raw material purchased in September

itio
should have been $5 per kg.
What were the following variances for September?
Materials planning price variance
n2
...................
Adverse

Favourable
017
Materials operational usage variance

Adverse Favourable
...................

52 PlasBas Co uses recycled plastic to manufacture shopping baskets for local retailers. The
standard price of the recycled plastic is $050 per kg and standard usage of recycled plastic is 02
kg for each basket. The budgeted production was 80,000 baskets.
Due to recent government incentives to encourage recycling, the standard price of recycled
plastic was expected to reduce to $040 per kg. The actual price paid by the company was $042
per kg and 100,000 baskets were manufactured using 20,000 kg of recycled plastic.
What is the materials operational price variance?
$2,000 favourable
$1,600 favourable
$400 adverse
$320 adverse
190 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

FEDIA CO
The following scenario relates to questions 53-57. Each question is worth 2 marks.
Fedia Co makes a specialist chemical product. The original prime costs for each canister, based on
budgeted production of 12,000 canisters, are as follows:
$
Materials 2.5kg @ $30 per kg 75
Labour 3hrs @ $20 per hour 60
Prime cost 135

Before the period started, Fedias supplier announced that it was closing down. Fedia Co was forced to
find a new supplier and purchased better quality replacement material at a price of $80 for each
canister. Fedia produced 11,000 canisters of the product and spent $809,600 on 25,300 kg of material.

53 The following statements have been made about the total material variances:
1 The total material price variance is $50,600 adverse.
2 The total material usage variance is $70,400 favourable.
Which of the above statements is/are true?
1 only

ht 7
2 only

i g 1
Neither 1 nor 2

y r

20 Both 1 and 2

o p ion
C uit
54 Calculate the material price planning variance. You should calculate this using the actual
quantity purchased.

I n t Adverse Favourable

r s t $...................

F i 55 Calculate the material usage variance. You should calculate this using the original standard cost
per kg.

Adverse Favourable
$...................

56 Assuming there are no changes to budgeted costs and revenues other than material costs,
which of the following variances is likely to be favourably affected by use of better quality
materials?
Labour rate
Sales yield
Variable overhead expenditure
Fixed overhead volume
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 191

57 Which of the following is/are advantages of having a system of planning and operational
variances in place?

Advantage Not an advantage


The system will highlight non-controllable operational
variances.
Managers can justify variances as being due to bad
planning.
Planning variances can highlight out-of-date
standards.
The system will be based on realistic standards that
are easy to establish.

Performance analysis
58 Which of the following statements about both standard costing and total quality management
is/are true?

True False
They focus on assigning responsibility solely to senior
managers.

Fir Cop
They work well in rapidly changing environments.
The philosophy of continuous improvement behind TQM is

st I yri
incompatible with predetermined standards.

ntu ght
Standard costs may allow for a predetermined level of scrap,
whereas TQM aims for no scrap.

59 itio
A profit centre manager claims that the poor performance of her division is entirely due to

n2
factors outside her control. She has submitted the following table along with notes from a

017
market expert, which she believes explains the cause of the poor performance:
Budget Actual Actual
Category this year this year last year Market expert notes
Sales volume (units) 500 300 400 The entire market has
decreased by 25% compared
to last year. The product will
be obsolete in four years
Sales revenue $50,000 $28,500 $40,000 Rivalry in the market saw
selling prices fall by 10%
Total material cost $10,000 $6,500 $8,000 As demand for the raw
materials is decreasing,
suppliers lowered their
prices by 5%
After adjusting for the external factors outside the managers control, in which
category/categories is there evidence of poor performance?
Material cost only
Sales volume and sales price
Sales price and material cost
Sales price only
192 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

4: Performance measurement and control

Performance management information systems


1 Match the descriptions of how the system is used to the system being described.
Transaction Executive Enterprise
processing information resource planning
system system system
Captures all the day-to-day routine
transactions within a business
Integrated system overseen centrally
Provides summary information for
strategic decisions
Includes data analysis and modelling
tools

2 Which of the following statements about Management information systems is/are true?

True False

t
They are designed to provide information for internal and

h 7
external use.

r i g 01
They provide information for planning, control and decision

y
making.

o p ion They are designed to report on existing operations.

C uit They are designed to integrate an organisations processes to

t
provide a single system for the whole organisation.

t I n
s
3 The following statements have been made about planning and control as described in the three

F ir tiers of Robert Anthonys decision-making hierarchy:


1 Strategic planning is concerned with making decisions about the efficient and effective
use of existing resources.
2 Operational control is about ensuring that specific tasks are carried out efficiently and
effectively.
Which of the above statements is/are true?
1 only
2 only
Neither 1 nor 2
Both 1 and 2

4 A manufacturer and retailer of kitchens introduces an enterprise resource planning system.


Which of the following is NOT likely to be a potential benefit of introducing this system?
Schedules of labour are prepared for manufacturing
Inventory records are updated automatically
Sales are recorded into the financial ledgers
Critical strategic information can be summarised
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 193

Sources of management information


5 Scowen Co decided to employ a researcher on a part-time contract to undertake a telephone
survey into the preferences of consumers for a variety of different packaging.
Which TWO of the following costs that Scowen Co has incurred are costs of data collection?
Cost of telephone calls
Cost of researcher
Cost of time spent analysing results of survey
Costs of disseminating results to managers and staff

6 Which of the following is/are internal sources of management accounting information and
which are external sources?

Internal External
Value of sales, analysed for each customer
Value of purchases, analysed for each supplier
Prices of similar products, analysed for each
competitor company
Hours worked, analysed for each employee

Fir Co
st I pyri
Management reports

ntu ght
7 Which of the following control(s) help to ensure the security of highly confidential information?

itio
Dont ensure
Ensure security security

n2
Logical access controls

017
Database controls
Hierarchical passwords
Range checks

8 XYZ Co creates archive copies of its database regularly.


What is the purpose of this type of control?
Ensure the accuracy of the data
Preserve data confidentiality
Prevent unauthorised access to the data
Minimise the risk of data loss
194 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

9 A government department generates information which should not be disclosed to anyone who
works outside of the department. There are many other government departments working
within the same building.
Which of the following would NOT be an effective control procedure for the generation and
distribution of the information within the government department?
If working from home, departmental employees must use a memory stick to transfer
data, as laptop computers are not allowed to leave the department
All departmental employees must enter non-disclosed and regularly updated passwords
to access their computers
All authorised employees must swipe an officially issued, personal identity card at the
entrance to the department before they can gain access
All hard copies of confidential information must be shredded at the end of each day or
locked overnight in a safe if needed again

Performance analysis in private sector organisations


10 The following statements have been made about short-termism:
1 A focus solely on non-financial performance measures is likely to encourage short-
termism

t
2 Investing in R&D is an example of a decision which is intended to improve long-term

i g h 1 7
profitability

y r 20
Which of the above statements is/are true?

o p ion 1 only

C uit
2 only

t
Neither 1 nor 2

I n
Both 1 and 2

r s t
i
11 Which of the following statements about performance frameworks is/are true?

F In the balanced scorecard the set of indicators which measure


True

False

whether value is being added to the shareholders is known as
the innovation and learning perspective.
The balanced scorecard looks at both internal and external
matters concerning the organisation.
The Building Blocks model focuses solely on non-financial
measures.
The Building Blocks model considers competitiveness, resource
utilisation and flexibility as dimensions of performance.
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 195

12 A company has had some problems with staff motivation and retention and has decided to
introduce some targets.
Which target is it likely to face the biggest potential difficulty setting?
Staff turnover rate
Level of absenteeism
Number of working hours
Level of staff satisfaction

13 A companys sales and cost of sales figures have remained unchanged for the last two years.
The following information has been noted:
Year ended 31 May 2015 31 May 2014
Inventory turnover period 45 days 38 days
Payables payment period 40 days 35 days
Receivables payment period 60 days 68 days
Current ratio 11 13
Quick ratio 13 14
The following statements have been made about the companys performance for the most
recent year:
1 Customers are taking longer to pay and this may have contributed to the decline in the
companys current ratio.

Fir Co
st I pyri
2 Inventory levels have increased and this may have contributed to the decline in the
companys quick ratio.
Which of the above statements is/are true?
ntu ght
itio
1 only
2 only

n2

Both 1 and 2

017
Neither 1 nor 2
196 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

BUS CO
The following scenario relates to questions 14-18. Each question is worth 2 marks.
Bus Co is a large bus operator, operating long-distance bus services across the country. There are three
other national operators in the country. Last month, an independent survey of 40,000 passengers was
carried out, the results of which are shown in the table below:
Table: Bus passenger satisfaction % by national operator
Value for
Operator money Punctuality Journey time
Bus 68 80 82
Prime 58 80 83
Express 67 76 85
Transit 62 78 86
Based on feedback that it has had from a recent survey it has undertaken of its own customers, Bus Co
has calculated a rating for overall customer satisfaction, based on a weighted average which, it asserts,
reflects the importance customers surveyed placed on each of the three criteria above. The weightings
used were as follows:
Value for money 40%
Punctuality 32%
Journey time 28%

ht 7
The managing director (MD) of Bus Co made a public statement saying that: Independent research

i g 1
has shown that our customers are the most satisfied of any national bus operator. Independent

y r 20
research confirms that we lead our competitors on what matters most to customers. We are ahead of

p ion
them on value for money and punctuality. We are also striving to lower our environmental footprint.

o
C uit
In order to improve customer satisfaction, the MD has proposed that Bus Co should introduce an
greater variety of tickets. Currently all four operators offer standard daily single or return, or weekly

n t
tickets, on particular routes. The MD has proposed that Bus Co should introduce Rover tickets,

I
allowing unlimited daily or weekly travel on all routes in certain areas, and off-peak fares, which would

r s tapply to certain routes outside the rush hours. He has also proposed the introduction of Smartcard

i
tickets on the busiest routes, allowing customers to swipe their tickets on electronic readers as they

F enter and leave the bus.

14 Using the customer satisfaction criteria calculated by Bus Co, rank the four bus operators, with
the operator with the highest customer satisfaction ranked first.

Bus

Prime

Express

Transit
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 197

15 State which of the following assertions made by the managing director are true and which are
false.

True False
Independent research has shown that Bus Cos passengers
are the most satisfied of any national bus operators.
Independent research confirms that Bus Co leads its
competitors on what matters most to customers.
Independent research confirms that Bus Co is ahead of its
competitors on value for money.
Independent research confirms that Bus Co is ahead of its
competitors on punctuality.

16 Match the following measures to the value for money criteria of Economy, Efficiency and
Effectiveness.

Economy Efficiency Effectiveness


Occupancy rate of buses
Utilisation rate for drivers
Percentage of customers satisfied with cleanliness of

Co
buses

Fir
st I pyri
Percentage of carbon emissions relative to target set

ntu ght
17 Which of the following is least likely to improve punctuality on Bus Cos routes?

itio
No longer accepting cash on buses and only accepting prepaid tickets
Amending the timetable to allow for longer journey times on certain routes during busy

n2
periods

017
Introducing a greater range of tickets on some routes
Allowing customers to use Smartcard tickets on busiest routes

18 Which of the following Building Block dimensions proposed by Fitzgerald and Moon is the
introduction of off-peak fares least likely to address?
Competitiveness
Quality
Resource utilisation
Flexibility
198 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

JAMAIR CO
The following scenario relates to questions 19-23. Each question is worth 2 marks.
Jamair was founded in September 20X1 and is one of a growing number of airlines in the country of
Shania. Jamairs strategy is to operate as a low-cost, high efficiency airline.
The airline was given an on time arrival ranking of seventh best by Shanias aviation authority, who
rank all 50 of the countrys airlines based on the number of flights which arrive on time at their
destinations. 48 Jamair flights were cancelled in 20X7 compared to 35 in 20X6. This increase was due
to an increase in the staff absentee rate at Jamair from 3 days per staff member per year to 45 days.
The average ground turnaround time for airlines in Shania is 50 minutes, meaning that, on average,
planes are on the ground for cleaning, refuelling, etc for 50 minutes before departing again. Jamair has
increased the number of cleaners and also the number of spot checks of cleaners work
The number of passengers carried by the airline has grown from 300,000 passengers on a total of
3,428 flights in 20X1 to 920,000 passengers on 7,650 flights in 20X7.
Media reports suggest that other aircraft companies may be interested in bidding for Jamair Co.

19 Which TWO of the following strategies are likely to aid Jamair Cos objective of operating as a
low-cost, high efficiency airline?

t
Operating mostly in capital cities to reduce landing costs

g h 1 7
Using only one type of aircraft

r 0
Having Premium, Business and Economy seat classes

y
p ion

2 Focusing on e-commerce with customers booking tickets and checking in for flights online

o
C uit
20 Match the following objectives of Jamair Co to the perspective of the balanced scorecard to

t
which they relate.

t I n Financial Customer Internal Learning

ir s Ensuring flights are on time

F Using fewer planes to transport


customers
Improving turnaround times


Improving cleanliness of planes by
spot checks

21 Match the following performance measures used by Jamair Co to the perspective of the
balanced scorecard to which they relate.

Financial Customer Internal Learning


Absentee rates of employees
Planes lease costs per customer
Revenue per passenger mile
Number of flights cancelled
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 199

22 Which FOUR of the following are disadvantages with using the balanced scorecard?
It steers Jamair away from solely focusing on financial measures.
It cannot resolve conflicts between short-term and long-term objectives.
An improvement in one perspective of the balanced scorecard can be made without
affecting the other three perspectives.
It can be difficult to gain an overall impression of the results provided.
There is no direct link between the overall results of the scorecard and the creation of
shareholder value.
The balanced scorecard will be of limited effectiveness if Jamairs strategy is unclear.

23 The following statistics are available about Jamair and two of its principal competitors.

Jamair Competitor Competitor


1 2
Profit attributable to shareholders ($ million) 371 546 286
Share price at year-end ($) 9.0 6.0 4.5
Shares in issue at year-end (million) 520 1,100 600
Fleet size (number of aircraft) 17 29 25
Kilometres flown (million) 56 92 65

Fir Co
Are the following statement relating to the data above true or false?

st I pyri True False

ntu ght
Jamair Co has a higher P/E ratio than its competitors, which
may reflect the rumours about a takeover

itio
Competitor 2 appears to do a greater proportion of long-haul
flights than Jamair or Competitor 1.

n2
Divisional performance and transfer pricing
24
017
Which of the following statements about transfer pricing is/are true?

True False
Cost-based transfer prices are most appropriate where there is
an intermediate market for the product.
When the producing division is operating at full capacity, an
opportunity cost based approach should be used for the transfer
price.
The maximum transfer price is the sum of the supplying
divisions marginal cost and opportunity cost of the item
transferred.
200 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

25 Which of the following statements about divisional performance measures is/are true?

True False
Residual income is better for comparing divisions of different
sizes.
Return on investment may cause a manager to reject a project
that exceeds the head office target, if the project will earn less
than the divisions existing Return on investment.
A disadvantage of Residual income is that it requires an estimate
of cost of capital.
A disadvantage of both Return on investment and Residual
income is that they may appear to improve as a divisions assets
get older.

26 On the last day of the financial year a division has net assets with a total carrying amount of
$720,000. The return on investment for the division is 15%. The division manager is considering
selling a non-current asset immediately prior to the year end. The non-current asset has a
carrying amount of $36,000 and will sell for a profit of $14,000.
What would be the divisions return on investment (ROI) immediately after the sale of the asset
at the end of the year, to the nearest 0.1%?

ht 7
%

r i g 201
27
y
p ion
A division is considering investing in capital equipment costing $27m. The useful economic life

o
of the equipment is expected to be 50 years, with no resale value at the end of the period. The

C uit
forecast return on the initial investment is 15% per annum before depreciation. The divisions
cost of capital is 7%.

I n t What is the expected annual residual income of the initial investment?

r s t $

F i 28 Tom has been questioned about the performance of his division, which has been worse than his
Chief Executive expected. Tom has submitted the following comments on the performance of
his division:
Category Budget Actual last Actual this
this year year year
Sales volume (units) 6,000 5,000 4,200 There has been a 20%
decrease in the market
compared with last year.
Sales revenue $600,000 $450,000 $317,000 Market selling prices have
fallen by 15% compared
with last year.
Material cost $113,400 $105,000 $81,600 Suppliers have increased
their prices by 5%
compared with last year.
Material usage (kgs) 16,200 15,000 11,500 Changes in production have
meant that each unit
produced used 10% less
material than last year.
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 201

After taking account of the factors that are not under Toms control, in which categories did
his division perform poorly (defined as performing below budget AND performing below what
would have been expected, based on Toms comments)?

Poor Not poor


performance performance
Sales volume
Sales price
Material cost
Material usage

29 At the end of 20X1, an investment centre has net assets of $1m and annual operating profits of
$190,000. However, the bookkeeper forgot to account for the following:
A machine with a net book value of $40,000 was sold at the start of the year for $50,000 and
replaced with a machine costing $250,000. Both the purchase and sale are cash transactions. No
depreciation is charged in the year of purchase or disposal. The investment centre calculates
return on investment (ROI) based on closing net assets.
Assuming no other changes to profit or net assets, what is the return on investment (ROI) for
the year?

Fir Co
188%

st I pyri
198%
151%

ntu ght
159%

itio
n2
017
202 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

CARDALE CO
The following scenario relates to questions 30-34. Each question is worth 2 marks.
Cardale Industrial Metal Co (CIM Co) is a large supplier of industrial metals, that is split into a number
of divisions. Each division operates separately as an investment centre, with each one having full
control over its non-current and current assets. Head Office imposes common accounting policies
including monthy rates of depreciation.
Each divisional manager is paid a salary of $120,000 per annum plus an annual performance-related
bonus, based on the return on investment (ROI) achieved by their division for the year. Each divisional
manager is expected to achieve a minimum ROI for their division of 10% per annum. If a manager only
meets the 10% target, they are not awarded a bonus. However, for each whole percentage point
above 10% which the division achieves for the year, a bonus equivalent to 2% of annual salary is paid,
subject to a maximum bonus equivalent to 40% of annual salary.
The following figures relate to Division N for the year ended 31 August 20X5:
Division N
$000
Sales 8,700
Net profit 1,286
Non-current assets 14,980
Inventory, cash and trade receivables 3,260
Trade payables 1,400

ht 7
Net profit is stated after deducting $684,000 apportioned Head Office costs.

r i g 01
Division Ns manager is concerned that his bonus may be lower in comparison with the manager of

2
y
p ion
Division F, a smaller division than Division N. He has found out that the manager of Division F has

o
achieved a return on investment of 28.5% for the year ended 31 August 20X5, which Division Ns

C uit
manager regards as very high.

t
Division Fs manager has stated that his figures are good because he runs his department very

I n
efficiently and is always looking to improve the decision-making process. To that end he invested in a

t
strategic executive information system just before 31 August 20X5.

ir s Division Ns manager believes that it would be better if Cardale Co switched to basing its bonus system

F on the size of residual income generated by each Division, based on a cost of capital of 10%.

30 Calculate, to the nearest 0.1%, the return on investment for Division N for the year ended 31
August 20X5.

31 Calculate the bonus that the manager of Division F will be paid for the year ended 31 August
20X5.

$
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 203

32 Which of the following is/are possible reasons why the manager of Division F has achieved a
high ROI for the year ended 31 August 20X5?

Possible Not possible


reason reason
Division Fs manager has kept cash balances high.
The accumulated depreciation on Division Fs non-current
assets is low.
Division Fs manager invested in the strategic management
information system just before the year-end.

33 For which TWO of the following reasons might Division Fs manager be concerned about the
fairness of basing bonus on RI in the way proposed by Division Ns manager?
Division F is smaller than Division N.
It reduces the incentive for Division F to undertake investments where the benefits may
be marginal.
Division F has a lower risk profile than Division N.
Division Fs manager is more likely to be penalised for taking decisions that are in the
best interests of Cardale Co.

Fir Co
34 For which of the following reasons is the manager of Division F most likely to have invested in a

st I pyri
strategic executive information system?
The system lists in detail all the accounting information relating to his department.

ntu ght
The system allows easier access to external sources of information.
The system will help integrate information needs across Cardale Co.

itio
The system provides expert knowledge and assistance in decision-making in areas where

n2
the manager lacks expertise.

ANDOVER AND WINCHESTER 017


The following scenario relates to questions 35-39. Each question is worth 2 marks.
Andover and Winchester are divisions within Petersfield Co, a large diversified business. The Andover
division was only created last year. The following performance statements are available for the year:
Andover Winchester
$000 $000
Revenue 200 450
Variable costs (60) (200)
Contribution 140 250
Fixed costs (25) (70)
Divisional profit before central costs 115 180
Apportioned central costs (60) (120)
Divisional net profit 55 60
Divisional net assets (@NBV) 375 200
The overall cost of financing for the company is 10%. The managers have full discretion over incurring
fixed costs.
204 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

35 What is the correct RI (in $000) for appraising the managers of the two divisions?
Andover

$ 000
Winchester

$ 000
Andover Winchester
$77.5 $160
$102.5 $230
$17.5 $40
$23 $46

36 The following statements have been made:


1 Andover divisions ROI is less than half that of Winchester division
2 One reason Winchester division appears to be performing better could be due to the fact
that it is significantly older than Andover division
Which of the above statements is/are true?

ht 7
1 only

i g 1
2 only

y r

20 Both 1 and 2

o p ion Neither 1 nor 2

C uit
t
37 Which of the following options shows the words that correctly fill in the gaps in the sentence?

t I n The managers of Andover and Winchester divisions should be assessed on costs, revenue and

s
investments that are ............... their division. To promote goal-congruent behaviour by the two

ir
divisions, .............. should be used to compare them. Efficiency variances ............... be used to

F
assess the managers of the two centres.
controllable by/RI/can
incurred by/RI/cannot
controllable by/ROI/can
incurred by/ROI/cannot

38 One of the non-executive directors at Petersfield Co has queried the means for rewarding the
managers of its divisions. He wonders whether managers can increase their rewards by trying to
manipulate the short-term results of their divisions.
Which of the following measures would be MOST effective in addressing the possible
problems of short-term manipulation of results?
Rewarding managers for the performance of their division only
Linking manager rewards to the overall performance of the company and not divisional
results
Rewarding managers if they fulfil a number of financial and non-financial targets
Only rewarding managers by means of a basic salary and not providing any rewards for
short-term performance
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 205

39 The board has agreed that the performance of each division should be partly judged by
customer satisfaction.
Which of the following measures is MOST likely to be an indication of how satisfied customers
are?
The number of items rejected by internal quality control processes
The level of staff turnover
The number of new products launched by the division
The % of on-time deliveries

Performance analysis in not-for-profit organisations and the public sector


40 Which of the following is LEAST suitable as a method of evaluating the performance of a public
sector organisation?
Assessing Value-for-money
Measuring actual performance in relation to financial targets
Appointment of a regulator to undertake monitoring
Conducting a survey of the users of the service

Co
41 A government is trying to assess schools by using a range of financial and non-financial factors.

Fir
One of the chosen methods is the percentage of students passing five exams or more.

st I pyri
Which of the three Es in the value for money framework is being measured here?

ntu ght
Economy
Efficiency

itio

Effectiveness

n2
Expertise

SEATOWN COUNCIL
017
The following scenario relates to questions 42-46. Each question is worth 2 marks.
Seatown is located on the coast. The towns main industry is tourism, with an emphasis on family
holidays. Consequently, the cleanliness of the towns beaches is a major factor in the towns success.
The town council has a cleaning department that is responsible for keeping the beaches clean and tidy.
Early every morning the beaches are swept using equipment that is towed behind tractors. Most litter
takes the form of paper and plastic packaging, but it can include glass bottles and aluminium cans.
To try to prevent litter being left on the beach the town council also places bins on the beaches above
the high water mark. Litter bins need to be emptied regularly, otherwise holidaymakers pile their
rubbish beside the bins. This leads to litter being spread by the wind or by seabirds scavenging for food
scraps.
The cost of cleaning the beaches is a major expense for the town council. The management team of
the town council has asked the internal audit department to investigate whether the town is getting
good value for money from this expenditure.
206 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

42 Which TWO of the following could be used as performance measures of the efficiency of the
beach cleaning operations?
Tractor running costs
How much time is spent sweeping the sands
Amount of litter collected
How frequently bins are being emptied

43 Which THREE of the following could be used as performance measures of the effectiveness of
the beach cleaning operations?
Spot checks on litter bins by council officers
The number of litter bins used
Time spent by employees on each area of the beaches
Ratings of beaches by external agencies
Complaints by visitors
Amount of vehicle miles covered by tractors

44 To help with its analysis, the council wishes to estimate the number of visitors to Seatown annually.
Which of the following is likely to be the least reliable indicator of the number of visitors to

t
Seatown during the year?

g h 1 7
Number of people on beaches ascertained by regular spot counts

r 0
Number of hotel rooms in Seatown

y
p ion
Number of users of car parks

o
C uit
Number of visitors to tourist information centres

45

I n t Which of the following would be a difficulty/difficulties in analysing the effectiveness of beach

t
and litter bin cleaning activities compared with each other and over the year?

ir s Difficulty Not a difficulty

F Some refreshment kiosks will only be open at certain


times of the year.
The number of visitors will be less in winter.


Certain areas of Seatowns beaches are more difficult
to sweep.
Sweeping should pick up litter that poses a threat to
beach user safety.

46 Seatown Council is considering using Fitzgerald and Moons Building Block model as well as
Value for Money analysis.
Which of the following completes this paragraph?
The variation in frequency of sweeping beaches during the year is a measure of _____, whereas
the number of visitors compared with other resorts is a measure of ______.
resource usage/service quality
flexibility/service quality
resource usage/competitiveness
flexibility/competitiveness
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 207

External considerations and behavioural aspects


47 The performance of an organisation can be influenced by internal and external factors. Which of
the following are internal factors and which are external factors?

Internal External
Growth in the economy
Director leaves to join a competitor
Market shortage of labour
New health and safety regulations

Fir Co
st I pyri
ntu ght
itio
n2
017
208 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

ht 7
r i g 201
y
p ion
o
C uit
I n t
r s t
F i
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 209

PART 2 REVISION QUESTIONS: Long form

2: Decision-making techniques

Relevant cost analysis

1 THE TELEPHONE CO (Q1, DECEMBER 2011)


The Telephone Co (T Co) is a company specialising in the provision of telephone systems for
commercial clients. There are two parts to the business:
Installing telephone systems in businesses, either first time installations or replacement
installations;
Supporting the telephone systems with annually renewable maintenance contracts.
T Co has been approached by a potential customer, Push Co, who wants to install a telephone system
in new offices it is opening. While the job is not a particularly large one, T Co is hopeful of future
business in the form of replacement systems and support contracts for Push Co. T Co is therefore keen
to quote a competitive price for the job. The following information should be considered:
(1)

Fir Co
One of the companys salesmen has already been to visit Push Co, to give them a demonstration

st I pyri
of the new system, together with a complimentary lunch, the costs of which totalled $400.
(2) The installation is expected to take one week to complete and would require three engineers,

ntu ght
each of whom is paid a monthly salary of $4,000. The engineers have just had their annually
renewable contract renewed with T Co. One of the three engineers has spare capacity to

itio
complete the work, but the other two would have to be moved from contract X in order to
complete this one. Contract X generates a contribution of $5 per engineer hour. There are no

n2
other engineers available to continue with Contract X if these two engineers are taken off the

017
job. It would mean that T Co would miss its contractual completion deadline on Contract X by
one week. As a result, T Co would have to pay a one-off penalty of $500. Since there is no other
work scheduled for their engineers in one weeks time, it will not be a problem for them to
complete Contract X at this point.
(3) T Cos technical advisor would also need to dedicate eight hours of his time to the job. He is
working at full capacity, so he would have to work overtime in order to do this. He is paid an
hourly rate of $40 and is paid for all overtime at a premium of 50% above his usual hourly rate.
(4) Two visits would need to be made by the site inspector to approve the completed work. He is
an independent contractor who is not employed by T Co, and charges Push Co directly for the
work. His cost is $200 for each visit made.
(5) T Cos system trainer would need to spend one day at Push Co delivering training. He is paid a
monthly salary of $1,500 but also receives commission of $125 for each day spent delivering
training at a clients site.
(6) 120 telephone handsets would need to be supplied to Push Co. The current cost of these is
$18.20 each, although T Co already has 80 handsets in inventory. These were bought at a price
of $16.80 each. The handsets are the most popular model on the market and frequently
requested by T Cos customers.
(7) Push Co would also need a computerised control system called Swipe 2. The current market
price of Swipe 2 is $10,800, although T Co has an older version of the system, Swipe 1, in
inventory, which could be modified at a cost of $4,600. T Co paid $5,400 for Swipe 1 when it
ordered it in error two months ago and has no other use for it. The current market price of
210 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

Swipe 1 is $5,450, although if T Co tried to sell the one they have, it would be deemed to be
used and therefore only worth $3,000.
(8) 1,000 metres of cable would be required to wire up the system. The cable is used frequently by
T Co and it has 200 metres in inventory, which cost $1.20 per metre. The current market price
for the cable is $130 per metre.
(9) You should assume that there are four weeks in each month and that the standard working
week is 40 hours long.
Required:
(a) Prepare a cost statement, using relevant costing principles, showing the minimum cost that T Co
should charge for the contract. Make DETAILED notes showing how each cost has been arrived
at and EXPLAINING why each of the costs above has been included or excluded from your cost
statement. (14 marks)
(b) Explain the relevant costing principles used in part (a) and explain the implications of the
minimum price that has been calculated in relation to the final price agreed with Push Co.
(6 marks)

(20 marks)

Cost volume analysis

ht 7
i g 1
2 HAIR CO (Q1, DECEMBER 2012 AMENDED)
r 20
y
p ion
Hair Co manufactures three types of electrical goods for hair: curlers (C), straightening irons (S) and

o
dryers (D.) The budgeted sales prices and volumes for the next year are as follows.

C uit C S D

t
Selling price $110 $160 $120

t I n
Units 20,000 22,000 26,000

r s
Each product is made using a different mix of the same materials and labour. Product S also uses new

F i revolutionary technology for which the company obtained a ten-year patent two years ago. The
budgeted sales volumes for all the products have been calculated by adding 10% to last years sales.
The standard cost card for each product is shown below.
C S D
$ $ $
Material 1 12 28 16
Material 2 8 22 26
Skilled labour 16 34 22
Unskilled labour 14 20 28
Both skilled and unskilled labour costs are variable.
The general fixed overheads are expected to be $640,000 for the next year.
Required:
(a) Calculate the weighted average contribution to sales ratio for Hair Co.
Note: round all workings to TWO decimal places. (6 marks)
(b) Calculate the total break-even sales revenue for the next year for Hair Co.
Note: round all workings to TWO decimal places. (2 marks)
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 211

(c) Rank the products according to their C/S ratios. Calculate the revenue and profit for each
product, and the cumulative revenues and profits on the basis that the product with the highest
C/S ratio is sold first. (5 marks)
(d) Briefly comment on your findings in (c). (4 marks)
(e) Explain how a multi-product profit-volume (PV) chart may assist a business in its decision-
making. (3 marks)

(20 marks)

Limiting factors

3 CSC CO (Q32, SEPTEMBER 2016)


CSC Co is a health food company producing and selling three types of high-energy products: cakes,
shakes and cookies, to gyms and health food shops. Shakes are the newest of the three products and
were first launched three months ago. Each of the three products has two special ingredients, sourced
from a remote part the world. The first of these, Singa, is a super-energising rare type of caffeine. The
second, Betta, is derived from an unusual plant believed to have miraculous health benefits.
CSC Cos projected manufacture costs and selling prices for the three products are as follows:

Fir Cop
Cakes Cookies Shakes
Per unit $ $ $
Selling price
st I yri
540 490 600

ntu ght
Costs:
Ingredients: Singa ($120 per gram) 030 060 120

itio
Ingredients: Betta ($150 per gram) 075 030 150
Other ingredients 025 045 090

n2
Labour ($10 per hour) 100 120 080
Variable overheads 050 060 040

017
Contribution 260 175 120

For each of the three products, the expected demand for the next month is 11,200 cakes, 9,800
cookies and 2,500 shakes.
The total fixed costs for the next month are $3,000.
CSC Co has just found out that the supply of Betta is going to be limited to 12,000 grams next month.
Prior to this, CSC Co had signed a contract with a leading chain of gyms, Encompass Health, to supply it
with 5,000 shakes each month, at a discounted price of $580 per shake, starting immediately. The
order for the 5,000 shakes is not included in the expected demand levels above.
Required:
(a) Assuming that CSC Co keeps to its agreement with Encompass Health, calculate the shortage of
Betta, the resulting optimum production plan and the total profit for next month. (6 marks)
One month later, the supply of Betta is still limited and CSC Co is considering whether it should breach
its contract with Encompass Health so that it can optimise its profits.
Required:
(b) Discuss whether CSC Co should breach the agreement with Encompass Health.
Note: No further calculations are required. (4 marks)
Several months later, the demand for both cakes and cookies has increased significantly to 20,000 and
15,000 units per month respectively. However, CSC Co has lost the contract with Encompass Health
212 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

and, after suffering from further shortages of supply of Betta, Singa and of its labour force, CSC Co has
decided to stop making shakes at all. CSC Co now needs to use linear programming to work out the
optimum production plan for cakes and cookies for the coming month. The variable x is being used to
represent cakes and the variable y to represent cookies.
The following constraints have been formulated and a graph representing the new production
problem has been drawn:
Singa: 025x + 05y 12,000
Betta: 05x + 02y 12,500
Labour: 01x + 012y 3,000
x 20,000
y 15,000
x, y 0

ht 7
r i g 201
y
p ion
o
C uit
I n t
r s t Required:

F i (c)
(i) Explain what the line labelled C = 26x + 175y on the graph is and what the area
represented by the points 0ABCD means. (4 marks)
(ii) Explain how the optimum production plan will be found using the line labelled C = 26x +
175y and identify Explain what the line labelled C = 26x + 175y on the graph is and
what the area represented by the points 0ABCD means.the optimum point from the
graph. (2 marks)
(iii) Explain what a slack value is and identify, from the graph, where slack will occur as a
result of the optimum production plan. (4 marks)
Note: No calculations are needed for part (c).

(20 marks)
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 213

Pricing decisions

4 HEAT CO (Q2, JUNE 2011)


Heat Co specialises in the production of a range of air conditioning appliances for industrial premises.
It is about to launch a new product, the Energy Buster, a unique air conditioning unit which is capable
of providing unprecedented levels of air conditioning using a minimal amount of electricity. The
technology used in the Energy Buster is unique so Heat Co has patented it so that no competitors can
enter the market for two years. The companys development costs have been high and it is expected
that the product will only have a five-year life cycle.
Heat Co is now trying to ascertain the best pricing policy that they should adopt for the Energy Busters
launch onto the market. Demand is very responsive to price changes and research has established
that, for every $15 increase in price, demand would be expected to fall by 1,000 units. If the company
set the price at $735, only 1,000 units would be demanded.
The costs of producing each air conditioning unit are as follows.
$
Direct materials 42
Labour 12 (1.5 hours at $8 per hour. See note below)
Fixed overheads 6 (Based on producing 50,000 units per annum)

Co
Total cost 60

Fir
st I pyri
Note
The first air conditioning unit took 1.5 hours to make and labour cost $8 per hour. A 95% learning

ntu ght
curve exists, in relation to production of the unit, although the learning curve is expected to finish
after making 100 units. Heat Cos management have said that any pricing decisions about the Energy

itio
Buster should be based on the time it takes to make the 100th unit of the product. You have been told
that the learning co-efficient, b = -0.0740005.

n2
All other costs are expected to remain the same up to the maximum demand levels.
Required:
(a)
017
(i) Establish the demand function (equation) for air conditioning units; (3 marks)
(ii) Calculate the marginal cost for each air conditioning unit after adjusting the
labour cost as required by the note above; (6 marks)
(iii) Equate marginal cost and marginal revenue in order to calculate the optimum price and
quantity, (3 marks)
(b) Explain what is meant by a penetration pricing strategy and a market skimming strategy and
discuss whether either strategy might be suitable for Heat Co when launching the Energy
Buster. (8 marks)

(20 marks)
214 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank

Make or buy and other short-term decisions

5 ROBBER CO (Q1, JUNE 2012)


Robber Co manufactures control panels for burglar alarms, a very profitable product. Every product
comes with a one-year warranty offering free repairs if any faults arise in this period.
It currently produces and sells 80,000 units per annum, with production of them being restricted by
the short supply of labour. Each control panel includes two main components one keypad and one
display screen. At present, Robber Co manufactures both of these components in-house. However, the
company is currently considering outsourcing the production of keypads and/or display screens.
A newly established company based in Burgistan is keen to secure a place in the market, and has
offered to supply the keypads for the equivalent of $4.10 per unit and the display screens for the
equivalent of $4.30 per unit. This price has been guaranteed for two years.
The current total annual costs of producing the keypads and the display screens are as follows.
Display
Keypads screens
Production 80,000 units 80,000 units
$000 $000
Direct materials 160 116
Direct labour 40 60

t
Heat and power costs 64 88

i g h
Machine costs

1 7
26 30

r 0
Depreciation and insurance costs 84 96

y 2
Total annual production costs 374 390

o p ion
Notes:

C uit
(1) Materials costs for keypads are expected to increase by 5% in six months time; materials costs

t
for display screens are only expected to increase by 2%, but with immediate effect.

t I n
(2) Direct labour costs are purely variable and not expected to change over the next year.

ir s (3) Heat and power costs include an apportionment of the general factory overhead for heat and

F
power as well as the costs of heat and power directly used for the production of keypads and
display screens. The general apportionment included is calculated using 50% of the direct labour
cost for each component and would be incurred irrespective of whether the components are
manufactured in-house or not.
(4) Machine costs are semi-variable; the variable element relates to set up costs, which are based
upon the number of batches made. The keypads machine has fixed costs of $4,000 per annum
and the display screens machine has fixed costs of $6,000 per annum. Whilst both components
are currently made in batches of 500, this would need to change, with immediate effect, to
batches of 400.
(5) 60% of depreciation and insurance costs relate to an apportionment of the general factory
depreciation and insurance costs; the remaining 40% is specific to the manufacture of keypads
and display screens.
Required:
(a) Advise Robber Co whether it should continue to manufacture the keypads and display screens
in-house or whether it should outsource their manufacture to the supplier in Burgistan,
assuming it continues to adopt a policy to limit manufacture and sales to 80,000 control panels
in the coming year. (8 marks)
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 215

(b) Robber Co takes 0.5 labour hours to produce a keypad and 0.75 labour hours to produce a
display screen. Labour hours are restricted to 100,000 hours and labour is paid at $1 per hour.
Robber Co wishes to increase its supply to 100,000 control panels (i.e. 100,000 each of keypads
and display screens).
Advise Robber Co as to how many units of keypads and display panels they should either
manufacture and/or outsource in order to minimise their costs. (7 marks)
(c) Discuss the non-financial factors that Robber Co should consider when making a decision about
outsourcing the manufacture of keypads and display screens. (5 marks)

(20 marks)

Risk and uncertainty in decision making

6 CEMENT CO (Q1, JUNE 2011)


Cement Co is a company specialising in the manufacture of cement, a product used in the building
industry. The company has found that when weather conditions are good, the demand for cement
increases since more building work is able to take place. Last year, the weather was so good, and the
demand for cement was so great, that Cement Co was unable to meet demand. Cement Co is now
trying to work out the level of cement production for the coming year in order to maximise profits.

Co
The company doesnt want to miss out on the opportunity to earn large profits by running out of

Fir
cement again. However, it doesnt want to be left with large quantities of the product unsold at the

st I pyri
end of the year, since it deteriorates quickly and then has to be disposed of. The company has received
the following estimates about the probable weather conditions and corresponding demand levels for
the coming year:
ntu ght
itio
Weather Probability Demand
Good 25% 350,000 bags

n2
Average 45% 280,000 bags
Poor 30% 200,000 bags

017
Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has
to be disposed of at a cost of $0.50 per bag.
Cement Co has decided to produce at one of the three levels of production to match forecast demand.
It now has to decide which level of cement production to select.
Required:
(a) Construct a pay-off table to show all the possible profit outcomes. (8 marks)
(b) Decide the level of cement production the company should choose, based on the following
decision rules:
(i) Maximin (1 mark)
(ii) Maximax (1 mark)
(iii) Expected value (4 marks)
You must justify your decision under each rule, showing all necessary calculations.
(c) Describe the maximin and expected value decision rules, explaining when they might be used
and the attitudes of the decision makers who might use them. (6 marks)

(20 marks)
216 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

3: Budgeting and control

Budgetary systems and types of budget

1 NEWTOWN SCHOOL (Q5, JUNE 2013)


Newtown Schools head teacher has prepared the budget for the year ending 31 May 2014. The
government pays the school $1,050 for each child registered at the beginning of the school year, which
is June 1, and $900 for any child joining the school part-way through the year. The school does not
have to refund the money to the government if a child leaves the school part-way through the year.
The number of pupils registered at the school on 1 June 2013 is 690, which is 10% lower than the
previous year. Based on past experience, the probabilities for the number of pupils starting the school
part-way through the year are as follows.
Probability No. of pupils joining late
0.2 50
0.3 20
0.5 26
The head teacher admits to being poor with numbers and does not understand probabilities so, when

t
calculating budgeted revenue, he just calculates a simple average for the number of pupils expected to

g h 1 7
join late. His budgeted revenue for the year ending 31 May 2014 is therefore as follows:

i
y r 20 Rate per Total

p ion
Pupils pupil income

o
$ $

C uit
Pupils registered at beginning of school year 690 1,050 724,500

t
Average expected number of new joiners 32 900 28,800

I n
753,300

r s tThe head teacher uses incremental budgeting to budget for his expenditure, taking actual expenditure

i
for the previous year as a starting point and simply adjusting it for inflation, as shown below.

F Note
Actual cost for
y/e 31 May 2013
$
Inflationary
adjustment
Budgeted cost for
y/e 31 May 2014
$
Repairs and maintenance 1 44,000 +3% 45,320
Salaries 2 620,000 +2% 632,400
Capital expenditure 3 65,000 +6% 68,900
Total budgeted expenditure 746,620

Budget surplus 6,680

Notes
(1) $30,000 of the costs for the year ended 31 May 2013 related to standard maintenance checks
and repairs that have to be carried out by the school every year in order to comply with
government health and safety standards. These are expected to increase by 3% in the coming
year. In the year ended 31 May 2013, $14,000 was also spent on redecorating some of the
classrooms. No redecorating is planned for the coming year.
(2) One teacher earning a salary of $26,000 left the school on 31 May 2013 and there are no plans
to replace her. However, a 2% pay rise will be given to all staff with effect from 1 December
2013.
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 217

(3) The full $65,000 actual costs for the year ended 31 May 2013 related to improvements made to
the school gym. This year, the canteen is going to be substantially improved, although the
extent of the improvements and level of service to be offered to pupils is still under discussion.
There is a 07 probability that the cost will be $145,000 and a 03 probability that it will be
$80,000. These costs must be paid in full before the end of the year ending 31 May 2014.
The schools board of governors, who review the budget, are concerned that the budget surplus has
been calculated incorrectly. They believe that it should have been calculated using expected income,
based on the probabilities provided, and using expected expenditure, based on the information
provided in notes 1 to 3. They believe that incremental budgeting is not proving a reliable tool for
budget setting in the school since, for the last three years, there have been shortfalls of cash despite a
budget surplus being predicted. Since the school has no other source of funding available to it, these
shortfalls have had serious consequences, such as the closure of the school kitchen for a considerable
period in the last school year, meaning that no hot meals were available to pupils. This is thought to
have been the cause of the 10% fall in the number of pupils registered at the school on 1 June 2013.
Required:
(a) Considering the views of the board of governors, recalculate the budget surplus/deficit for the
year ending 31 May 2014. (6 marks)
(b) Discuss the advantages and disadvantages of using incremental budgeting. (4 marks)
(c) Briefly outline the three main steps involved in preparing a zero-based budget. (6 marks)

Fir Co
(d) Discuss the extent to which zero-based budgeting could be used by Newtown School to improve

st I pyri
the budgeting process. (4 marks)

(20 marks)

ntu ght
itio
Quantitative analysis

2 MIC CO (Q3, DECEMBER 2013) n2


017
Mic Co produces microphones for mobile phones and operates a standard costing system. Before
production commenced, the standard labour time per batch for its latest microphone was estimated
to be 200 hours. The standard labour cost per hour is $12 and resource allocation and cost data were
therefore initially prepared on this basis.
Production of the microphone started in July and the number of batches assembled and sold each
month was as follows:
Month No of batches assembled and sold
July 1
August 1
September 2
October 4
November 8
The first batch took 200 hours to make, as anticipated, but, during the first four months of production,
a learning effect of 88% was observed, although this finished at the end of October. The learning
formula is shown on the formula sheet and at the 88% learning rate the value of b is 01844245.
Mic Co uses cost plus pricing to establish selling prices for all its products. Sales of its new
microphone in the first five months have been disappointing. The sales manager has blamed the
production department for getting the labour cost so wrong, as this, in turn, caused the price to be too
high. The production manager has disclaimed all responsibility, saying that, as usual, the managing
218 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

director prepared the budgets alone and didnt consult me and, had he bothered to do so, I would
have told him that a learning curve was expected.
Required:
(a) Calculate the actual total monthly labour costs for producing the microphones for each of the
five months from July to November. (9 marks)
(b) Discuss the implications of the learning effect coming to an end for Mic Co, with regard to
costing, budgeting and production. (4 marks)
(c) Discuss the potential advantages and disadvantages of involving senior staff at Mic Co in the
budget setting process, rather than the managing director simply imposing the budgets on
them. (7 marks)

(20 marks)

Standard costing

3 NOBLE (Q3, JUNE 2011)


Noble is a restaurant that is only open in the evenings, on SIX days of the week. It has eight restaurant
and kitchen staff, each paid a wage of $8 per hour on the basis of hours actually worked. It also has a

t
restaurant manager and a head chef, each of whom is paid a monthly salary of $4,300. Nobles budget

g h 1 7
and actual figures for the month of May was as follows.

i
y r 20 Budget Actual

p ion
Number of meals 1,200 1,560

o
C uit $ $ $ $

t
Revenue: Food 48,000 60,840

n
Drinks 12,000 11,700

s t I 60,000 72,540

r
Variable costs:

F i Staff wages
Food costs
Drink costs
(9,216)
(6,000)
(2,400)
(13,248)
(7,180)
(5,280)
Energy costs (3,387) (3,500)
(21,003) (29,208)
Contribution 38,997 43,332
Fixed costs:
Managers and chefs pay (8,600) (8,600)
Rent, rates and depreciation (4,500) (13,100) (4,500) (13,100)
Operating profit 25,897 30,232

The budget above is based on the following assumptions.


(1) The restaurant is only open six days a week and there are four weeks in a month. The average
number of orders each day is 50 and demand is evenly spread across all the days in the month.
(2) The restaurant offers two meals: Meal A, which costs $35 per meal and Meal B, which costs
$45 per meal. In addition to this, irrespective of which meal the customer orders, the average
customer consumes four drinks each at $2.50 per drink. Therefore, the average spend per
customer is either $45 or $55 including drinks, depending on the type of meal selected. The
May budget is based on 50% of customers ordering Meal A and 50% of customers ordering
Meal B.
(3) Food costs represent 12.5% of revenue from food sales.
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 219

(4) Drink costs represent 20% of revenue from drinks sales.


(5) When the number of orders per day does not exceed 50, each member of hourly paid staff is
required to work exactly six hours per day. For every incremental increase of five in the average
number of orders per day, each member of staff has to work 0.5 hours of overtime for which
they are paid at the increased rate of $12 per hour.
You should assume that all costs for hourly paid staff are treated wholly as variable costs.
(6) Energy costs are deemed to be related to the total number of hours worked by each of the
hourly paid staff, and are absorbed at the rate of $2.94 per hour worked by each of the eight
staff.
Required:
(a) Prepare a flexed budget for the month of May, assuming that the standard mix of customers
remains the same as budgeted. (12 marks)
(b) After preparation of the flexed budget, you are informed that the following variances have
arisen in relation to total food and drink sales:
Sales mix contribution variance $1,014 Adverse
Sales quantity contribution variance $11,700 Favourable
Required:

Co
BRIEFLY describe the sales mix contribution variance and the sales quantity contribution

Fir
variance. Identify why each of them has arisen in Nobles case. (4 marks)
(c)
st I pyri
Nobles owner told the restaurant manager to run a half-price drinks promotion at Noble for the

ntu ght
month of May on all drinks. Actual results showed that customers ordered an average of six
drinks each instead of the usual four but, because of the promotion, they only paid half of the

itio
usual cost for each drink. You have calculated the sales margin price variance for drink sales
alone and found it to be a worrying $11,700 adverse. The restaurant manager is worried and

n2
concerned that this makes his performance for drink sales look very bad.

017
Required:
BRIEFLY discuss TWO other variances that could be calculated for drinks sales or food sales in
order to ensure that the assessment of the restaurant managers performance is fair. These
should be variances that COULD be calculated from the information provided above although
no further calculations are required here. (4 marks)

(20 marks)
220 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

Sales mix and quantity variances

4 BLOCK CO (Q4, JUNE 2013)


Block Co operates an absorption costing system and sells three types of product Commodity 1,
Commodity 2 and Commodity 3. Like other competitors operating in the same market, Block Co is
struggling to maintain revenues and profits in face of the economic recession which has engulfed the
country over the last two years. Sales prices fluctuate in the market in which Block Co operates.
Consequently, at the beginning of each quarter, a market specialist, who works on a consultancy basis
for Block Co, sets a budgeted sales price for each product for the quarter, based on his expectations of
the market. This then becomes the standard selling price for the quarter. The sales department itself
is run by the companys sales manager, who negotiates the actual sales prices with customers. The
following budgeted figures are available for the quarter ended 31 May 2013.
Budgeted production Standard selling price Standard variable
Product and sales units per unit production costs per unit
Commodity 1 30,000 $30 $18
Commodity 2 28,000 $35 $28.40
Commodity 3 26,000 $41.60 $26.40
Block Co uses absorption costing. Fixed production overheads are absorbed on the basis of direct
machine hours and the budgeted cost of these for the quarter ended 31 May 2013 was $174,400.

t
Commodity 1, 2 and 3 use 0.2 hours, 0.6 hours and 0.8 hours of machine time respectively.

g h 1 7
The following data shows the actual sales prices and volumes achieved for each product by Block Co

i
r 0
for the quarter ended 31 May 2013 and the average market prices per unit.

y
p ion 2 Actual production and Actual selling price Average market price

o
Product sales units per unit per unit

C uit
Commodity 1 29,800 $31 $3220

t
Commodity 2 30,400 $34 $3315

I n
Commodity 3 25,600 $4040 $3910

r s tThe following variances have already been correctly calculated for Commodities 1 and 2:

F i Sales price operational variances


Commodity 1: $35,760 Adverse
Commodity 2: $25,840 Favourable
Sales price planning variances
Commodity 1: $65,560 Favourable
Commodity 2: $56,240 Adverse
Required:
(a) Calculate, for Commodity 3 only, the sales price operational variance and the sales price
planning variance. (4 marks)
(b) Using the data provided for Commodities 1, 2 and 3, calculate the total sales mix variance and
the total sales quantity variance. (11 marks)
(c) Briefly discuss the performance of the business and, in particular, that of the sales manager for
the quarter ended 31 May 2013. (5 marks)

(20 marks)
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 221

Planning and operational variances

5 TRUFFLE CO (Q2, DECEMBER 2012)


Truffle Co makes high quality, handmade chocolate truffles which it sells to a local retailer. All
chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer. The standard
cost of labour for each batch is $6.00 and the standard labour time for each batch is half an hour. In
November, Truffle Co had budgeted production of 24,000 batches; actual production was only 20,500
batches. 12,000 labour hours were used to complete the work and there was no idle time. All workers
were paid for their actual hours worked. The actual total labour cost for November was $136,800.
The Production Manager at Truffle Co has no input into the budgeting process.
At the end of October, the Managing Director decided to hold a meeting and offer staff the choice of
either accepting a 5% pay cut or facing a certain number of redundancies. All staff subsequently
agreed to accept the 5% pay cut with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change was
implemented immediately and made the chocolates more difficult to shape. When recipe changes
such as these are made, it takes time before the workers become used to working with the new
ingredient mix, making the process 20% slower for at least the first month of the new operation.
The standard costing system is only updated once a year in June and no changes are ever made to the

Co
system outside of this.

Fir
st I pyri
Required:
(a) Calculate the total labour rate and total labour efficiency variances for November, based on the

ntu ght
standard cost provided above. (4 marks)
(b) Analyse the total labour rate and total labour efficiency variances into component parts for

itio
planning and operational variances in as much detail as the information allows. (8 marks)

n2
(c) Assess the performance of the production manager for the month of November. (8 marks)

017
(20 marks)

Performance analysis and behavioural aspects

6 STICKY WICKET (Q2, JUNE 2010)


Sticky Wicket (SW) manufactures cricket bats using high quality wood and skilled labour using mainly
traditional manual techniques. The manufacturing department is a cost centre within the business and
operates a standard costing system based on marginal costs.
At the beginning of April 2010 the production director attempted to reduce the cost of the bats by
sourcing wood from a new supplier and de-skilling the process a little by using lower grade staff on
parts of the production process. The standards were not adjusted to reflect these changes.
The variance report for April 2010 is shown below (extract).
Variances Adverse Favourable
$ $
Material price 5,100
Material usage 7,500
Labour rate 43,600
Labour efficiency 48,800
Labour idle time 5,400
222 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

The Production Director pointed out in his April 2010 board report that the new grade of labour
required significant training in April and this meant that productive time was lower than usual. He
accepted that the workers were a little slow at the moment but expected that an improvement would
be seen in May 2010. He also mentioned that the new wood being used was proving difficult to cut
cleanly, resulting in increased waste levels.
Sales for April 2010 were down 10% on budget and returns of faulty bats were up 20% on the previous
month. The sales director resigned after the board meeting stating that SW had always produced
quality products but the new strategy was bound to upset customers and damage the brand of the
business.
Required:
(a) Assess the performance of the Production Director using all the information above, taking into
account both the decision to use a new supplier and the decision to de-skill the process.
(7 marks)
In May 2010 the budgeted sales were 19,000 bats and the standard cost card is as follows.
Std cost Std cost
$ $
Materials (2kg at $5/kg) 10
Labour (3hrs at $12/hr) 36
Marginal cost 46
Selling price 68

t
Contribution 22

i g h 1 7
In May 2010 the following results were achieved.

y r 20
40,000kg of wood were bought at a cost of $196,000, this produced 19,200 cricket bats. No inventory

o p ion
of raw materials is held. The labour was paid for 62,000 hours and the total cost was $694,000. Labour

C uit
worked for 61,500 hours.

t
The sales price was reduced to protect the sales levels. However, only 18,000 cricket bats were sold at

I n
an average price of $65.

r s tRequired:

F i (b) Calculate the materials, labour and sales variances for May 2010 in as much detail as the
information allows. You are not required to comment on the performance of the business.
(13 marks)

(20 marks)
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 223

4: Performance measurement and control

Performance analysis in private sector organisations

1 SQUARIZE (Q2, JUNE 2013)


Squarize is a large company which, for many years, operated solely as a pay-tv broadcaster. However,
five years ago, it started product bundling, offering broadband and telephone services to its pay-tv
customers. Customers taking up the offer were then known in the business as bundle customers and
they had to take up both the broadband and telephone services together with the pay-tv service.
Other customers were still able to subscribe to pay-tv alone but not to broadband and telephone
services without the pay-tv service.
All contracts to customers of Squarize are for a minimum three-month period. The pay-tv box is sold to
the customer at the beginning of the contract; however, the broadband and telephone equipment is
only rented to them.
In the first few years after product bundling was introduced, the company saw a steady increase in
profits. Then, Squarize saw its revenues and operating profits fall. Consequently, staff bonuses were
not paid, and staff became dissatisfied. Several reasons were identified for the deterioration of results:
(1)
Fir Co
In the economy as a whole, discretionary spending had been severely hit by rising

st I pyri
unemployment and inflation. In a bid to save cash, many pay-tv customers were cancelling their
contracts after the minimum three-month period as they were then able to still keep the pay-tv

ntu ght
box. The box comes with a number of free channels, which the customer can still continue to
receive free of charge, even after the cancellation of their contract.
(2)
itio
The companys customer service call centre, which is situated in another country, had been the

n2
cause of lots of complaints from customers about poor service, and, in particular, the number of
calls it sometimes took to resolve an issue.
(3)
017
Some bundle customers found that the broadband service that they had subscribed to did not
work. As a result, they were immediately cancelling their contracts for all services within the 14-
day cancellation period permitted under the contracts.
In a response to the above problems and in an attempt to increase revenues and profits, Squarize
made the following changes to the business:
(1) It made a strategic decision to withdraw the pay-tvbroadbandtelephone package from the
market and, instead, offer each service as a standalone product.
(2) It guaranteed not to increase prices for a 12-month period for each of its three services.
(3) It transferred its call centre back to its home country and increased the level of staff training
given for call centre workers.
(4) It investigated and resolved the problem with customers broadband service.
It is now one year since the changes were made and the Finance Director wants to use a balanced
scorecard to assess the extent to which the changes have been successful in improving the
performance of the business.
224 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

Required:
(a) For each perspective of the balanced scorecard, identify two goals (objectives) together with a
corresponding performance measure for each goal which could be used by the company to
assess whether the changes have been successful. Justify the use of each of the performance
measures that you choose. (16 marks)
(b) Discuss how the company could reduce the problem of customers terminating their pay-tv
service after only three months. (4 marks)

(20 marks)

2 JUNGLE CO (Q31, SEPTEMBER 2016)


Jungle Co is a very successful multinational retail company. It has been selling a large range of
household and electronic goods for some years. One year ago, it began using new suppliers from the
country of Slabak, where labour is very cheap, for many of its household goods. In 20X4, Jungle Co also
became a major provider of cloud computing services, investing heavily in cloud technology. These
services provide customers with a way of storing and accessing data and programs over the internet
rather than on their computers hard drives.
All Jungle Co customers have the option to sign up for the companys Gold membership service,
which provides next day delivery on all orders, in return for an annual service fee of $40. In September

t
20X5, Jungle Co formed its own logistics company and took over the delivery of all of its parcels,

h 7
instead of using the services of international delivery companies.

r i g 201
Over the last year, there has been worldwide growth in the electronic goods market of 20%. Average

y
p ion
growth rates and gross profit margins for cloud computing service providers have been 50% and 80%

o
respectively in the last year. Jungle Cos prices have remained stable year on year for all sectors of its

C uit
business, with price competitiveness being crucial to its continuing success as the leading global

t
electronic retailer.

t I n
The following information is available for Jungle Co for the last two financial years:

r s
Notes 31 August 20X6 31 August 20X5

F i Revenue
Cost of sales
1
2
$000
94,660
(54,531)
$000
82,320
(51,708)
Gross profit 40,129 30,612
Administration expenses 3 (2,760) (1,720)
Distribution expenses (13,420) (13,180)
Other operating expenses (140) (110)
Net profit 23,809 15,602

Notes
(1) Breakdown of revenue
31 August 20X6 31 August 20X5
$000 $000
Household goods 38,990 41,160
Electronic goods 41,870 32,640
Cloud computing services 12,400 6,520
Gold membership fees 1,400 2,000
94,660 82,320
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 225

(2) Breakdown of cost of sales


31 August 20X6 31 August 20X5
$000 $000
Household goods 23,394 28,812
Electronic goods 26,797 21,216
Cloud computing services 4,240 1,580
Gold membership fees 100 100
54,531 51,708
(3) Administration expenses
Included in these costs are the costs of running the customer service department ($860,000 in
20X5; $1,900,000 in 20X6.) This department deals with customer complaints.
(4) Non-financial data
31 August 20X6 31 August 20X5
Percentage of orders delivered on time 74% 92%
No. of customer complaints 1,400,000 320,000
No. of customers 7,100,000 6,500,000
Percentage of late Gold member deliveries 1400% 200%
Required:
Discuss the financial and non-financial performance of Jungle Co for the year ending 31 August 20X6.

Co
Note: There are 7 marks available for calculations and 13 marks available for discussion.

Fir
st I pyri
(20 marks)

Divisional performance and transfer pricing


ntu ght
itio
n2
3 PROTECT AGAINST FIRE CO (Q4, DECEMBER 2013)

017
Protect Against Fire Co (PAF Co) manufactures and sells fire safety equipment and also provides fire
risk assessments and fire safety courses to businesses. It has been trading for many years in the
country of Calana, where it is the market leader.
Five years ago, the directors of PAF Co established a similar operation in its neighbouring country,
Sista, renting business premises at various locations across the country. The fire safety market in Sista
has always been dominated by two other companies, and when PAF Co opened the Sista division, its
plan was to become market leader there within five years. Both the Calana division (Division C) and the
Sista division (Division S) usually restrict themselves to a marketing budget of $0.5 million per annum
but in 2013, Division S launched a $2m advertising campaign in a final push to increase market share.
It also left its prices for products and services unchanged in 2013 rather than increasing them in line
with its competitors.
Although the populations of both countries are similar, geographically, the country of Sista is twice as
large as Calana and its customers are equally spread across the country. The products and services
offered by the two divisions to their customers require skilled staff, demand for which is particularly
high in Sista. Following the appointment of a new government in Sista at the end of 2012, stricter fire
safety regulations were immediately introduced for all companies. At the same time, the government
introduced a substantial tax on business property rents which landlords passed on to their tenants.
International shortages of fuel have led to a 20% increase in fuel prices in both countries in the last
year.
Summary statements of profit or loss for the two divisions for the two years ended 30 November 2012
and 30 November 2013 are shown below.
226 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

Division S Division S Division C Division C


2013 2012 2013 2012
$000 $000 $000 $000
Revenue 38,845 26,937 44,065 40,359
Material costs (3,509) (2,580) (4,221) (3,385)
Payroll costs (10,260) (6,030) (8,820) (7,700)
Property costs (3,200) (1,800) (2,450) (2,320)
Gross profit 21,876 16,527 28,574 26,954
Distribution and marketing costs (10,522) (7,602) (7,098) (5,998)
Administrative overheads (7,024) (6,598) (12,012) (11,974)
Operating profit 4,330 2,327 9,464 8,982
Employee numbers 380 241 420 385
Market share 30% 25% 55% 52%
Required:
Using all the information above, assess the financial performance of Division S in the year ended
30 November 2013. State clearly where further information might be required in order to make more
reasoned conclusions about the divisions performance.
Note: Up to 7 marks are available for calculations.

(20 marks)

ht 7
4 BISCUITS AND CAKES (Q5, JUNE 2012)

r i g 201
y
The Biscuits division (Division B) and the Cakes division (Division C) are two divisions of a large,

p ion
manufacturing company. While both divisions operate in almost identical markets, each division

o
operates separately as an investment centre. Each month, operating statements must be prepared by

C uit
each division and these are used as a basis for performance measurement for the divisions.

I n t
Last month, senior management decided to recharge head office costs to the divisions. Consequently,
each division is now going to be required to deduct a share of head office costs in its operating

r s tstatement before arriving at net profit, which is then used to calculate return on investment (ROI).

i
Prior to this, ROI has been calculated using controllable profit only. The companys target ROI,

F however, remains unchanged at 20% per annum. For each of the last three months, Divisions B and C
have maintained ROIs of 22% per annum and 23% per annum respectively, resulting in healthy
bonuses being awarded to staff. The company has a cost of capital of 10%.
The budgeted operating statement for the month of July is shown below.
B C
$000 $000
Sales revenue 1,300 1,500
Less variable costs (700) (800)
Contribution 600 700
Less controllable fixed costs (134) (228)
Controllable profit 466 472
Less apportionment of head office costs (155) (180)
Net profit 311 292

Divisional net assets $23.2m $22.6m


ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 227

Required:
(a) Calculate the expected annualised Return on Investment (ROI) using the new method as
preferred by senior management, based on the above budgeted operating statements, for each
of the divisions. (2 marks)
(b) The divisional Managing Directors are unhappy about the results produced by your calculations
in (a) and have heard that a performance measure called residual income may provide more
information.
Calculate the annualised residual income (RI) for each of the divisions, based on the net profit
figures for the month of July. (3 marks)
(c) Discuss the expected performance of each of the two divisions, using both ROI and RI, and
making any additional calculations deemed necessary. Conclude as to whether, in your opinion,
the two divisions have performed well. (6 marks)
(d) Division B has now been offered an immediate opportunity to invest in new machinery at a cost
of $2.12 million.
The machinery is expected to have a useful economic life of four years, after which it could be
sold for $200,000. Division Bs policy is to depreciate all of its machinery on a straight-line basis
over the life of the asset. The machinery would be expected to expand Division Bs production
capacity, resulting in a 10% increase in contribution per month.

Co
Recalculate Division Bs expected annualised ROI and annualised RI, based on Julys budgeted

Fir
operating statement after adjusting for the investment. State whether the Managing Director

st I pyri
will be making a decision that is in the best interests of the company as a whole if ROI is used as
the basis of the decision. (5 marks)
(e)
ntu ght
Explain any behavioural problems that will result if the companys senior management insist on
using solely ROI, based on net profit rather than controllable profit, to assess divisional
performance and reward staff.
itio (4 marks)

n2 (20 marks)

5 MAN CO (Q4 MARCH/JUNE 2016 AMENDED) 017


A manufacturing company, Man Co, has two divisions: Division L and Division M. Both divisions make a
single standardised product. Division L makes component L, which is supplied to both Division M and
external customers. Division M makes product M using one unit of component L and other materials. It
then sells the completed product M to external customers. To date, Division M has always bought
component L from Division L.
The following information is available:
Component L Product M
$ $
Selling price 40 96
Direct materials:
Component L (40)
Other (12) (17)
Direct labour (6) (9)
Variable overheads (2) (3)
Selling and distribution costs (4) (1)
Contribution per unit before fixed costs 16 26

Annual fixed costs $500,000 $200,000


Annual external demand (units) 160,000 120,000
Capacity of plant 300,000 130,000
228 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

Division L charges the same price for component L to both Division M and external customers.
However, it does not incur the selling and distribution costs when transferring internally.
Division M has just been approached by a new supplier who has offered to supply it with component L
for $37 per unit. Prior to this offer, the cheapest price which Division M could have bought component
L for from outside the group was $42 per unit.
It is head office policy to let the divisions operate autonomously without interference at all.
Required:
(a) Calculate the incremental profit/(loss) per component for the group if Division M accepts the
new suppliers offer and recommend how many components Division L should sell to Division M
if group profits are to be maximised. (3 marks)
(b) Using the quantities calculated in (a) and the current transfer price, calculate the total annual
profits of each division and the group as a whole. (6 marks)
(c) Discuss the problems which will arise if the transfer price remains unchanged and advise the
divisions on a suitable alternative transfer price for component L. (6 marks)
The Finance Director of Man Co is about to introduce balanced scorecard reporting to Division L and
Division M. As there have been queries from the divisions about how the balanced scorecard will work,
in particular the three non-financial perspectives, he will need to provide more guidance before the
approach can be implemented.

t
Required:
(d)

i g h 1 7
Explain the significance of the three non-financial perspectives in the balanced scorecard

r 0
approach to performance measurement. (5 marks)

y
p ion 2 (20 marks)

o
C uit
I n t
r s t
F i
AC C A F 5 Q u e s t i o n B a n k Revision answers: 1: Specialist cost and management accounting techniques 229

PART 2 REVISION ANSWERS: Objective test and Scenario

1: Specialist cost and management accounting techniques

Activity based costing


1
True False
ABC can only be used within a manufacturing
environment.
ABC assumes that most overhead costs are incurred at
the product level.
A cost driver is a factor which causes a change in the
cost of an activity.
Traditional absorption costing tends to under-estimate
overhead costs for high volume products.

ABC can be used for manufacturing and service businesses. Traditional absorption costing assumes

Co
that most overhead costs are incurred at the product level and overestimates costs for high value

Fir
items. ABC considers more of the overheads relate to batch and product sustaining activities.

st I pyri
2 $ 46.25
ntu ght
itio
Set-up costs per production run = $140,000/28 = $5,000

n2
Cost per inspection = $80,000/8 = $10,000
Other overhead costs per labour hour = $96,000/48,000 = $2

017
Overheads costs of product D:
$
Set-up costs (15 $5,000) 75,000
Inspection costs (3 $10,000) 30,000
Other overheads (40,000 $2) 80,000
185,000
Overhead cost per unit = 185,000/4,000 = $4625

3 $ 49.00

Total material budget = (5,000 $20) + (4,000 $25) = $200,000


Fixed overheads related to materials = $150,000
OAR = $150,000/$200,000 = $0.75 per $ of material
Lou material fixed overhead = $0.75 $20 = $15
Total labour budget = (5,000 $40) + (4,000 $60) = $440,000
General fixed overheads = $374,000
OAR = $374,000/$440,000 = $0.85 per $ of labour
Lou general fixed overhead = $0.85 $40 = $34
Total fixed overhead cost per unit of Lou = $15 + $34 = $49
230 Revision answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k

4 $120
Total material budget ((1,000 units $10) + (2,000 units $20)) = $50,000
Fixed costs related to material handling = $100,000
OAR = $2/$ of material
Product B = $2 x $20 = $40
Total labour budget ((1,000 units $5) + (2,000 units x $20) = $45,000
General fixed costs = $180,000
OAR = $4/$ of labour
Product B = $4 $20 = $80
Total fixed overhead cost per unit of Product B ($40 + $80) = $120

WASH CO

5 $ 298

Total overhead costs = $877,620


Total machine hours = (3,200 2) + (5,450 1) = 11,850

t
Overhead absorption rate = $877,620/11,850 = $74.06

i g h 1 7
Overhead cost for S = 2 $74.06 = $148.12

y r 20 Product S

p ion
$

o
C uit
Materials cost
Labour cost (at $12 per hour)
117.00
6.00

t
Overhead costs 148.12

I n
Total cost 271.12

t
10% mark-up 27.11

ir s Transfer price using machine hours 298.23

F 6 $ 138

Machine set up costs: driver = number of production runs


30 + 12 = 42
Therefore, cost per set up = $306,435/42 = $7,296.07
Machine maintenance costs: driver = machine hours: 11,850 as above
$415,105/11,850 = $35.03
Product S Per unit
$
Machine set-up costs ($7,296.07 30/3,200) 218,882 68.40
Machine maintenance costs ($35.03 3,200 2/3,200) 224,192 70.06
Total overheads absorbed 443,074 138.46
AC C A F 5 Q u e s t i o n B a n k Revision answers: 1: Specialist cost and management accounting techniques 231

7 $ 16

Ordering costs: driver = number of purchase orders


82 + 64 = 146
Therefore, cost per order = $11,680/146 = $80
Delivery costs: driver = number of deliveries.
64 + 80 = 144
Therefore, cost per delivery = $144,400/144 = $1,002.78
Product R Per unit
$
Ordering costs ($80 64/5,450) 5,120 0.94
Delivery costs ($1,002.78 80/5,450) 80,222 14.72
Total overheads absorbed 85,342 15.66

8
True False
Environmental ABC will be concerned with prevention

Fir Cop
activities as well as detection and correction activities.
Environmental ABC helps identify environment-driven

st I yri
costs, which may be hidden within general overheads.
Volume of emissions may be a cost driver in

ntu ght
environmental ABC.

itio
Environmental ABC can measure cost savings resulting
from measures to reduce environmental impact.

All the statements are true.


n2
9
017
Input/output analysis aims to identify residual or waste.
Environment-related costs are connected with activities for which costs can be directly
traced.
Flow cost accounting has a third category System that relates to in-house handling of materials.
Environmental life cycle costing also considers costs of clean-up and decommissioning after
production has ceased.
232 Revision answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k

Target costing
10
True False
Target costing is a market driven approach to pricing.
Using target costing to set selling prices guarantees
that a company will make a profit on its products.
Unlike traditional costing methods, in ABC production
overheads are not absorbed across product units.
An organisation which switches to ABC may find that
some of its existing products, which require minimal
labour hours, no longer appear profitable.

Using target costing to set selling prices will only result in a profit if the company ensures that it
can actually produce the product for less than the selling price.
ABC, like traditional costing methods, attempts to absorb production overheads across product
units. However, this is done in a different way, using cost drivers, rather than labour or machine
hours, to establish an overhead absorption rate. This can result in quite different product costs.

t
25

h
11 $

r i g 01 7
Profit required = 40% $200 = $80. Hence target cost = $120

y
p ion 2
Product cost = $55 + $75 + $15 = $145

o
C uit
So cost gap = $25

I n t
t
12

r s
Characteristic Not characteristic

F i Homogenity
Intangibility
Perishability






Spontaneity

Typically, the services provided will differ according to the customer so heterogeneity/variability
rather than homogeneity is normally a characteristic of a service industry.

13 Use a lower grade of labour


Reduce the time spent in terms of labour hours
In most service industries the majority of the cost is likely to be related to labour.

14 Substitute current raw materials with cheaper versions


AC C A F 5 Q u e s t i o n B a n k Revision answers: 1: Specialist cost and management accounting techniques 233

15 $ 362.50

Return: $500,000 30% = $150,000


Total sales revenue: $550 800 = $440,000
Therefore, total cost = $440,000 $150,000 = $290,000
Unit cost = $290,000/800 = $362.50

16 Variance analysis
Variance analysis is not relevant to target costing as it is a technique used for cost control at the
production phase of the product life cycle. It is a feedback control tool by nature and target
costing is feedforward.
Value analysis can be used to identify where small cost reductions can be applied to close a cost
gap once production commences.
Functional analysis can be used at the product design stage. It ensures that a cost gap is reached
or to ensure that the product design is one which includes only features which customers want.
Activity analysis identifies and describes activities in an organisation and evaluates their impact
on operations to assess where improvements can be made.

Fir Co
st I pyri
HELOT CO

ntu ght
17 2 and 4
Target costing does encourage looking at customer requirements early on so that features

itio
valued by customers are included, so Statement 2 is correct. It will also force the company to

n2
closely assess the design and is likely to be successful if costs are designed out at this stage
rather than later once production has started, so Statement 4 is correct.

017
Statement 1 explains a benefit of flow cost accounting. Statement 3 explains the concept of
throughput accounting.

18 $2.05
Target price is $45 and the profit margin is 35% which results in a target cost of $2925. The
current estimated cost is $3120 which results in a cost gap of $205.

19 2 and 4

EXAM SMART
The word appropriate in the requirement is important here the methods chosen should
not impact on the target selling price.

Using more standardised components and using its own websites for marketing will reduce
processing and marketing costs.
Using cheaper materials and trainee designers will reduce costs but could impact the quality
and customer perception of the product which would impact the target price.
234 Revision answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k

20 The target cost will remain the same and the cost gap will increase.
The change in the learning rate will increase the current estimated cost which will increase the
cost gap.
The target cost will be unaffected as this is based on the target selling price and profit margin;
neither of which are changing.

21 Labour resource usage is high in services relative to material requirements.


Services do use more labour relative to materials.
The other three statements are incorrect as uniformity is not a characteristic of services, there is
no transfer of ownership and although it is difficult to standardise a service due to the human
influence, target costing can still be used.

Life cycle costing


22 A disadvantage of life cycle costing is that it may be difficult, at the start of a products
life, to arrive at a realistic estimate of the products costs over a number of years.
Life cycle costing is particularly suitable for innovative organisations which incur high

ht
costs during the early stages of a product's life cycle.

7
r i g 01
Life cycle costing is better for organisations that develop products with short lives. Life cycle

2
y
costing is concerned with product costs over a number of periods, and is not concerned with

p ion
the split of costs between each year.

o
C uit
t

n
23 Target costing

s t I
F ir 24
True

False

It focuses on the short-term by identifying costs at the
beginning of a products life cycle.
It identifies all costs which arise in relation to the
product each year and then calculates the products
profitability on an annual basis.
It accumulates a products costs over its whole life time
and works out the overall profitability of a product.
It allocates costs to each stage of a products life cycle
and writes them off at the end of each stage.

Life cycle costing goes beyond the short-term by looking at a products whole life cycle and
looks at costs for the entire period, not on an annual basis and not writing costs off at the end
of each stage.
AC C A F 5 Q u e s t i o n B a n k Revision answers: 1: Specialist cost and management accounting techniques 235

25 $27.40
OAR for fixed production overheads ($72 million/96 million hours) = $075 per hour
Total manufacturing costs (300,000 units $20) = $6,000,000
Total design, depreciation and decommissioning costs = $1,320,000
Total fixed production overheads (300,000 units 4 hours $075) = $900,000 Total life-cycle
costs = $8,220,000
Life-cycle cost per unit ($8,220,000/300,000 units) = $2740

FIT CO
26
Included Not included
Research and development costs
Product design costs
Marketing costs

Fir Cop
Distribution costs
Selling costs

st I yri
Administration costs

ntu ght
All the costs listed are part of the life cycle cost calculation.

itio
n2
27 It gives a good indication of the success of research and development and design
activities.

017
It matches initial costs to the revenues that the product finally earns.
Life cycle costing is not primarily concerned with splitting costs into periods, but a single set of
costs over a products whole lifetime.
It cannot normally prevent a product entering a decline stage as most products will reach that
point at some stage.

28 Products with a short life


Products being launched in a competitive environment where time to market is very
important
Life cycle costing is particularly useful where products have a short life, since costs and revenues
can be estimated fairly accurately upfront. Life cycle costing also means that launch costs
incurred to speed up the launch are accounted for fairly.
Life cycle costing is less useful where the spread of costs is even, because it addresses the
problems of the mismatching of costs and revenues over time. It is also of limited use if
products are simple, since upfront costs are unlikely to be significant.
236 Revision answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k

29 $ 790 000
Total labour time for first 100 units = 35.56 hours
Time for 99th unit
y = 0.5 990074
= 0.3559 hours per unit.
Therefore total hours for 99 units = 35.23 hours.
Therefore, time for 100th unit = 35.56 hours 35.23 hours = 0.33 hours
Total labour cost over life of product
Year 2
100 units 36 hours
99,900 at 0.33 hours per unit 32,967 hours
Total hours 33,003 hours

at $24 per hour $792,072

30 $ 550 000
Total revenue = 300,000 $85 = $25,500,000

t
Total desired costs = $25,500,000 80% = $20,400,000

i g h 1 7
Reduction in manufacturing costs = $12,600,000 25% = $3,150,000

y r 20
Total costs before extra R and D/design costs = $23,000,000 $3,150,000 = $19,850,000

o p ion
Maximum R and D/design costs = $20,400,000 $19,850,000 = $550,000

C uit
I n t
Throughput accounting

r s t
i
31

F Throughput accounting is based on the concept that


there is a finite capacity at certain critical points in an
True

False

organisations production schedule.


Throughput accounting treats labour as a fixed cost in the
short-term.
Throughput accounting focusses on improving efficiency
by using all production facilities to their maximum
capacity.
The aim of throughput accounting is to increase the
speed with which products move through an organisation
in order to maximise profit.

Only the bottleneck resources will be used to maximum capacity.


AC C A F 5 Q u e s t i o n B a n k Revision answers: 1: Specialist cost and management accounting techniques 237

32
A 2

B 3

C 1
A B C
$ $ $
Selling price 200 150 150
Direct materials 41 20 30
Throughput contribution 159 130 120
Throughput/Limiting factor 159/12 130/10 120/7
13.25 13 17.14
nd rd
Ranking 2 3 1st

33 1.33
Return per factory hour = ($130 $50)/4 hours = $20
Factory costs per hour = $20 + $40/4 = $15

Co
TAR = $20/$15 = 133

Fir
34
st I pyri
ntu ght
True False

itio
Inventory levels should be kept to a minimum.
All machines within a factory should be 100% efficient,

n2
with no idle time.

017
The distinction between direct and indirect costs is not
useful.
Labour should be treated as a fixed cost that is part of
total factory cost.

Throughput accounting discourages production for inventory purposes and is often used in a
just in time environment.
In throughput accounting it is the bottleneck resource which should be 100% efficient which
actually may mean unused capacity and idle time elsewhere.

35 Increasing the efficiency of the maintenance routine for Process 2


Throughput is determined by the bottleneck resource. Process 2 is the bottleneck as it has
insufficient time to meet demand.
The only option to improve Process 2 is to improve the efficiency of the maintenance routine.
All the other three options either increase the time available on non-bottleneck resources or
increase demand for an increase in supply which cannot be achieved.
238 Revision answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k

SWEET TREATS BAKERY


36 Mixing
Available Total minutes
Process Brownies Muffins Cupcakes
minutes required
Weighing 240 60 45 100 205
Mixing 180 80 48 60 188
Baking 1,440 480 330 600 1,410
The bottleneck is the mixing process as 188 minutes are required to meet maximum demand
but there are only 180 minutes available.
Note: Four batches of brownies need to be made in order to have sufficient cakes to meet
maximum demand as the cakes must be made in their batch sizes.

37 80 brownies, 30 muffins, 100 cupcakes


Brownies Muffins Cupcakes
Throughput contribution ($) 50 37.5 35
Mixing minutes 20 16 12

t
Throughput per mixing minute ($) 2.50 2.34 2.91
Ranking

i g h 1 7
2 3 1

y r 20
Optimal production plan

o p ion Number of Mixing

C uit
Fulfil customer order
cakes minutes

t
1 batch of cupcakes 20 12

I n
1 batch of brownies 40 20

r s t
1 batch of muffins 30 16

F i
General production (based on ranking)
4 batches of cupcakes 80 48
1 batch of brownies 40 20

Therefore the bakery should produce 80 brownies, 30 muffins and 100 cupcakes.

38 A bulk discount on flour and sugar is available from suppliers.


The rent of the premises has been reduced for the next year.
Reduction in rent and discounts on materials will reduce costs and will improve the TPAR.
Giving a customer a loyalty discount will reduce sales revenue and as a result the TPAR. Demand
for cupcakes can increase but it will not impact the TPAR as demand is not the restriction.
AC C A F 5 Q u e s t i o n B a n k Revision answers: 1: Specialist cost and management accounting techniques 239

39 $95.00
Each oven has a capacity of eight hours and each cupcake batch takes two hours so four extra
batches can be made.
Extra throughput = four batches x $35 = $140
Less the hire costs will result in an additional profit of $95.

40
True False
The bakerys operating costs exceeded the total throughput
contribution generated from the three products.
Less idle time in the mixing department would have
improved the TPAR
Improved efficiency during the weighing process would have
improved the TPAR.

As the TPAR exceeds 1 then the throughput contribution exceeds operating costs so Statement
1 is false.
Less idle time on a non-bottleneck process would not improve the TPAR, so Statement 2 is false.
Improving efficiency during the weighing process would improve the TPAR, as any actions to

Fir Co
improve throughput on a bottleneck will improve the TPAR so Statement 3 is true.

st I pyri
ntu ght
Environmental accounting

itio
41

n2
True False
The majority of environmental costs are already

017
captured within a typical organisations accounting
system. The difficulty lies in identifying them.
Input/output analysis divides material flows within an
organisation into three categories: material flows,
system flows. and delivery and disposal flows.
Input/output analysis enables classification of output
as finished production, scrap and waste.
Environmental life cycle costing enables analysis of
clean-up and disposal activities relating to a product.

Flow cost accounting enables analysis into material flows, system flows and delivery and
disposal flows.

42 I, II, and III only


As specified by the United Nations Division for Sustainable Development (2003).

43 Flow cost accounting


Under a system of flow cost accounting material flows are divided into three categories
material, system, and delivery and disposal.
240 R e v i s i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

2: Decision-making techniques

Relevant cost analysis


1
True False
Decisions should always be based on future
incremental accounting profits.
When a required resource is in scarce supply, the
opportunity cost of the next best alternative use
needs to be considered.
Sunk costs are irrelevant to decision making as the
expenditure has already been incurred.
Depreciation may be a relevant cost if it is incremental
to the project being considered.

Decisions should always be based on future incremental cash flows which are more objective
than accounting profits.

t
Depreciation is never relevant as it is not a cash flow.

i g h 1 7
y r 20
p ion
2 $ 3900

o
C uit
Cost of the quantity to be bought = 200 $4.50 = $900

t
Opportunity cost of quantity in hand = 800 $3.75 = $3,000

t I n Total relevant cost = $3,900

ir s
F 3
Relevant

Not relevant

The total sales value of the fruit currently picked and
paid for by customers
The cost of growing the fruit
The cost of hiring staff to pick and package the fruit
The total sales value of the fruit if it is picked and
packaged by staff instead

The cost of growing the fruit is not relevant since it is a common cost.
AC C A F 5 Q u e s t i o n B a n k Revision answers: 2: Decision-making techniques 241

LOSMETIC CO

4 $ 76000

Silk powder: (15,000 $2.50) + Aloe vera: (15,000 $2) + (5,000 $1.70) = $76,000

5 $ 8600

Skilled labour overtime will required for employees at $12 150% = $18, therefore better to
bring in workers from outside, 500 hours $16 = $8,000
Unskilled labour 250 hours required. If they worked a 40 hour week for the next three weeks,
total hours would be 40 3 2 = 240 hours. They are guaranteed payment for 30 3 2 = 180
hours. Therefore cost = (8 1.5 (250 240)) + (8 (240 180)) = $600
Total labour cost = $8,000 + $600 = $8,600

6 $ 1950

Co
(750 $1.60) + (15 $40 125%) = $1,950

Fir
st I pyri
The salary element is excluded but the full overtime payment is included.

7
ntu ght
The overheads should be excluded because they are not incremental costs.

itio
The overheads are excluded as they do not arise specifically as a result of the order. Not all

n2
relevant costs are opportunity costs. The fact that the costs are production costs is not a factor,
and were told that the pricing is based on relevant costs, not all costs.

8 017
True False
All cash expenses are relevant costs, all non-cash
expenses are non-relevant costs.
Notional costs are never relevant costs.
Fixed costs are never relevant costs.
Not all future costs are relevant costs.

Non-cash expenses are non-relevant costs, but some cash expenses (for example past expenses)
are not relevant. Notional costs are not cash flows, so are not relevant. Fixed costs may relate
specifically to the decision, so may be relevant. Some future costs may be incurred whatever
decision is taken, so are not relevant.
242 R e v i s i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

Cost volume profit analysis


9
True False
CVP can help a company assess how sensitive its profits
might be to below budget performance.
CVP analysis uses a total absorption costing approach.
CVP analysis is flexible enough to deal with changes in
both variable and fixed costs at different levels of activity.
Break-even analysis can only be used for a single product
or for multiple products which are sold in a constant mix.

CVP focuses on contribution which is a marginal costing approach.


A limitation of CVP analysis is that it assumes constant variable costs per unit and a constant
fixed cost.

10 4500

Current sales volume = $43,500/$3 = 14,500 units

ht 7
Contribution per unit = 60% $3 = $1.80

r i g 01
Break-even = $18,000/$1.80 = 10,000 units

2
y
p ion
Hence margin of safety = 14,5000 10,000 = 4,500 units

o
C uit
t
11 18,636 units

t I n Number of units required to make target profit = fixed costs + target profit/contribution per unit

s
of P1.

F ir Fixed costs = ($12 10,000) + ($1 12,500) $2,500 = $22,000


Contribution per unit of P = $320 + $120 = $440
($22,000 + $60,000)/$440 = 18,636 units

12
Required Not required
Product mix ratio
Contribution to sales ratio for each product
General fixed costs
Method of apportioning general fixed costs

The method of apportioning general fixed costs is not required to calculate the break-even sales
revenue.
AC C A F 5 Q u e s t i o n B a n k Revision answers: 2: Decision-making techniques 243

13 32000

Contribution per each package of 4 units (3 sara 1 cristina) = (3 $12) + $7 = $43


Contribution required for $75,000 profit = $269,000 + $75,000 = $344,000
Number of packages required = $344,000/$43 = 8,000
Number of units required = 8,000 4 = 32,000

14 22,500
Two units of Y and one unit of X would give total contribution of $18.
Weighted average contribution per unit = $18/3 units = $6
Sales units to achieve target profit = ($90,000 + $45,000)/$6 = 22,500

HARE EVENTS
15 47.7%
Total fixed costs = $385,000

Fir Co
st I pyri
Contribution per marathon entry ($55 $18.20) = $36.80

ntu ght
BEP = 10,462
Margin of safety (20,000 - 10,462)/20,000 = 47.7%

itio
16 $592,000
n2
$98.80/$152 = 65%
BER = $385,000/65% = $592,308
017
Weighted average C/S ratio = ((2 x $36.80) + (1.4 x $18.00))/((2 x $55) + (1.4 x $30)) =

17 Full marathon: 17,915 entries Half marathon: 12,540 entries


Weighted average C/S ratio = 65%
Revenue to achieve target profit = $885,000/65% = $1,361,538
Marathon revenue = ($110/$152) x $1,361,538 = $985,324
Number of entries = $985,324/$55 = 17,915 entries
Half marathon revenue ($42/$152) x $1,361,538 = $376,214
Number of entries = $376,214/$30 = 12,540 entries
244 R e v i s i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

18 Break-even volume will remain unchanged but break-even revenue will increase by 10%.
Current contribution = $12
Current BEV = $48,000/$12 = 4,000 entries
Current BER = $48,000/($12/$20) = $80,000
Revised contribution = (($20 x1.1) + ($8 x 1.1)) = $13.20
Revised fixed costs = $48,000 x 1.1 = $52,800
Revised BEV = $52,800/$13.20 = 4,000 entries
Revised BER = $52,800/($13.20/$22) = $88,000
The BEV hasn't changed but the BER has increased by 10%.

19 Statements (i) and (ii)


CVP analysis assumes no movement in inventory and the C/S ratio can be used to indicate the
relative profitability of different products so Statements (i) and (ii) are correct.

Limiting factors

ht 7
i g 1
EXAM SMART

y r 20
p ion
Although you wont have to draw a graph for linear programming questions in the exam,

o
sketching a graph in questions like this can help you see whats happening.

C uit
I n t
t
20

r s
X 400

F i Y 1100

Constraints are:
Material 2x + y 2,000
Unskilled labour: x + y 1,500
and x 400
For material:
Point where x is maximum possible, y is minimum is x = 1,000 y = 0
Point where x is minimum possible (ie 400), y is maximum possible is x = 400 y = 1,200
For unskilled labour:
Point where x is maximum possible, y is minimum is x = 1,500 y = 0
Point where x is minimum possible, y is maximum possible is x = 400 y = 1,100
Feasible points per these constraints are: x = 1,000 y = 0, x = 400 y = 1,100
AC C A F 5 Q u e s t i o n B a n k Revision answers: 2: Decision-making techniques 245

Other boundaries of feasible region are:


x = 400, y = 0, which can be ignored as lower than x = 1,000 y = 0
x = 500, y = 1,000, point that solves material and labour simultaneous equations
Applying objective function 8x + 12y
x = 1,000 y = 0: (8 1,000) = 8,000
x = 400 y = 1,100: (8 400) + (12 1,100) = 16,400
x = 500 y = 1,000: (8 500) + (12 1,000) = 16,000

2,000

1,500

Co
1,000

Fir
st I pyri
ntu ght
500

itio
n2
017
Objective function 500 1,000 1,500 x

21
Objective function Material constraint Labour constraint
5x + 11y 4x + 3y 3,200 2x + y 2,000
Contribution per unit: A = $30-$25 = $5 and B = $25-$14 = $11
As resources are limited, the constraints are of the less than or equal variety.

22 Increase of $56
By definition, a shadow price is the amount by which contribution will increase if an extra kg of
material becomes available. 20 $280 = $56.
246 R e v i s i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

23
P1 1

P2 3

P3 2

P1 P2 P3
Labour hours per unit 1 2 1.1
$ $ $
Profit per unit 44 51 26
Add back fixed costs 6 9 12
Contribution per unit 50 60 38
Contribution per labour hour 50 30 34.55
st rd nd
Ranking 1 3 2

24 1 only
If the values for R and N are substituted into the constraints:
Labour required = (3 500) + (2 400) = 2,300 hours which is less than what is available so

t
there is slack.

i g h 1 7
Machine time required = (05 500) + (04 400) = 410 hours which is exactly what is available

r 0
and so there is no slack.

p y n 2
C C o i t i o
u
H
t
IGGINS O

t I n
s
25 $ 780000

F ir Contribution per cue

Pool cue
Snooker
cue
$ $
Selling price 41.00 69.00
Material cost at $43.20/kg (10.80) (10.80)
Craftsmen cost at $18/hr (9.00) (13.50)
Other variable cost (1.20) (4.70)
Contribution per cue 20.00 40.00

Total contribution = (15,000 20) + (12,000 40) = $780,000

26 21600

0.5P + 0.75S =12,000 (1)


0.25P + 0.25S = 5,400 (2)
0.5P + 0.5S = 10,800 (2) 2 = (3)
0.25S = 1,200 (1) (3)
S = 4,800
AC C A F 5 Q u e s t i o n B a n k Revision answers: 2: Decision-making techniques 247

Substituting in (2)
0.25P + (0.25 4,800) = 5,400
0.25P = 4,200
P = 16,800
Total number of cues = 4,800 + 16,800 = 21,600

27 Labour would remain a constraint but ash would no longer be a constraint.


Ash required = (0.25 15,000) + (0.25 12,000) = 6,750, less than the 7,000 kg available, so ash
is no longer a constraint.
Labour required = (0.5 15,000) + (0.75 12,000) = 16,500, more than the 16,000 hours
available so labour remains a constraint.

28 $ 50

Maximum demand S = 12,000 (1)


Labour 0.5P + 0.75S = 12,001 (2)

Fir Co
Substituting S = 12,000 in equation (2)

st I pyri
0.5P + (0.75 12,000) = 12,001
0.5P + 9,000 = 12,001
0.5P = 3,001
ntu ght
P = 6,002
itio
n2
Number of extra cues = 6,002 6,000 = 2

017
Increase in contribution = 2 $25 = $50

29
True False
The objective function is the function relating to the
limitation of the scarce resource.
The constraints in graphical linear programming
analysis are drawn as straight lines.
The shadow price is only significant for constraints
that are binding.
There will be slack if less than the maximum amount
available of a limited resource is needed.

The objective function relates to the solution to the problem, it is formulated in terms of
maximising or minimising.
248 R e v i s i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

Pricing decisions
30
True False
If PED < 1, total revenue will rise if the selling price of
the product is increased.
If PED >1, the demand is said to be inelastic.
PED may be at different levels at different points on
the demand curve.
If a downward demand curve changes to become
steeper, demand is becoming more elastic.

If PED >1, the demand is said to be elastic. If the curve becomes steeper, demand is becoming
more inelastic.

31
Quantity 312

Price $ 18.40

ht 7
P = 34 0.05Q so MR = 34 0.1Q

r i g 01
Up to Q = 199, MC = 3

2
y
p ion
Let MR = MC: 34 0.1Q = 3

o
31 = 0.1Q, so Q = 310

C uit At this volume, cost discounts apply so MC becomes 2.8

I n t 34-0.1Q = 2.8

t
31.2 = 0.1Q

ir s Q = 312 and P = 34 0.05(312) = $18.40

F 32
Price Penetration Market
discrimination pricing skimming
A
B

Demand will be much more price sensitive in market A than market B.


AC C A F 5 Q u e s t i o n B a n k Revision answers: 2: Decision-making techniques 249

33
True False
Target costing results in a market driven selling price.
Cost-plus pricing only works if the % mark-up is
applied to total absorption costing.
A cost-plus pricing policy will always result in a profit
for the company.
Penetration pricing aims to recover the high initial
costs of product development.

In cost-plus pricing the % mark-up can be applied to a number of different costs.


A cost-plus pricing policy will only result in a profit for the company if demand at the chosen
price is enough to cover total costs.
Price skimming aims to recover the high initial costs of product development.

34 There are significant economies of scale.


The firm wishes to discourage new entrants to the market.
Penetration pricing will be the preferred policy if demand is elastic and the product life cycle is long.

Co
35 Both 1 and 2

Fir
st I pyri
Penetration pricing involves setting a low price when a product is first launched in order to
obtain strong demand.

ntu ght
It is particularly useful if significant economies of scale can be achieved from a high volume of
output and if demand is highly elastic and so would respond well to low prices.

itio
ALG CO
n2
36 $ 800000
017
Variable overhead cost using high-low method: ($1,850,000 $1,400,000)/(350,000 200,000)
= $3 per unit.
Fixed costs = $1,400,000 (200,000 $3) = $800,000

37 P = 310 0001x
Demand function is P = a bx, where P = price and x = quantity, therefore find a value for a and
b firstly.
B = P/Q = 2/2,000 = 0001 (ignore the minus sign as it is already reflected in the formula
P = a bx)
Therefore P = a 0001x
Find value for a by substituting in the known price and demand relationship from the question,
matching p and x accordingly.
60 = a (0001 250,000)
60 = a 250
310 = a
P = 310 0001x
250 R e v i s i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

38 $ 14300000

Identify MC
MC = $20
State MR
MR = 240 0002x
Equate MC and MR to find Q
20 = 240 0002x
0002x = 220
x = 110,000
Substitute x into demand function to find P
P = 240 (0001 110,000)
P = $130
Sales revenue = 110,000 $130 = $14,300,000

39 Customers are prepared to pay high prices to obtain a new product.


Barriers to entry deter competitors.

ht 7
Market skimming is charging a high price initially, which a company is more likely to do if there

r i g 01
is high initial demand and lack of competitive pressure. It is more likely to be associated with

y 2
products with a short life cycle, in order to maximise returns quickly. Economies of scale will

p ion
drive down costs, which may drive down price as well.

o
C uit
t
40

I n
Skimming Penetration

r s t The level of demand is unknown.

F
Demand is expected to be elastic.
ALG Co can discourage competitors from entering
the market.
ALG has excess production capacity.

High prices (skimming) are more likely to be charged if there is uncertainty about the demand.
Low Prices (penetration) are more likely to be charged if demand is elastic and sensitive to
prices levels. Low prices and hence low profits may deter competitors. Low prices can ensure
that a substantial market share is gained quickly, using spare production capacity to cope with
the demand.

Make-or-buy and other short-term decisions


41 B only
The marginal cost of making A is $12 per unit and of making B is $18 per unit. It is the marginal
cost which is the relevant cost for the make or buy decision since the fixed costs will be incurred
anyway. Therefore, it is cheaper to make A ($12 marginal cost CF $14 buy in cost) but it is
cheaper to buy in B ($17 buy in cost CF $18 make cost).
AC C A F 5 Q u e s t i o n B a n k Revision answers: 2: Decision-making techniques 251

THREE DEPARTMENTS
42 Neither 1 nor 2
Assuming the fixed overheads will be incurred anyway, the caf makes a $3,000 contribution to
fixed costs and therefore profit without the caf would be lower, not higher.

43 $ 16300

Without the caf: Bedding Furniture Total


$ $ $
Sales (10% of bedding lost) 22,500 50,000 72,500
Variable costs 11,700 29,000 40,700
Contribution 10,800 21,000 31,800
Fixed shop overheads 15,500
($3,500 saved)
Profit 16,300

44 Customers have to go through the bedding department to get to the caf.


Shutting the caf would reduce the footfall through the bedding department. The bedding and

Fir Co
caf products are not linked strongly, so cannot be said to be complementary.


st I pyri
ntu ght
45 Relocate the bedding department next to the furniture department
Customers looking for new furniture may also be considering buying a new bed and this will

itio
make it easier for them to view both together. A product line pricing policy relates to offering
for sale several related products, which would probably not apply to the bedding department. A

n2
relevant cost pricing strategy is a minimum pricing strategy that is unlikely to help here.

46 % occupancy of the tables in the cafe


017
% occupancy should be a reliable measure if taken over time. New items added to the menu
wont show customer satisfaction unless customers actually buy them. Length of queues in the
caf may show how popular the caf is, but may ultimately be self-defeating as customers get
fed up with waiting in queues. Profits made by the caf will depend on the pricing policy as well
as the number of customers.
252 R e v i s i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

CHEMCO
47 Both 1 and 2
Basic fertiliser is not worth processing further, as the additional costs exceed the additional income.
Medium grade fertiliser is worth processing further. If there are limited quantities it should be
sold in the individual market as the contribution is increased, but if there are unlimited supplies,
both markets are profitable.
Fertiliser Basic Medium grade Premium
Current Sales price per kg (farmers) $5 $7 $10
After further processing:
Additional sales price per kg $0.50 $1.00 $3
Further processing cost per kg $0.60 $0.80 $2
Net additional contribution $(0.10) $0.20 $1

48
Basic Medium grade Premium
Farmers
Individual customers

ht 7
g 1

i
49 The contribution foregone from using the chemical in the existing contract

y r 20
When a required resource is in scarce supply, the opportunity cost of the next best alternative

p ion
use needs to be considered.

o
C uit
t
50

I n
Adverse Favourable

r s t $500

F i 6/20
A
14/20
B Total
Should 31,050 72,450 103,500
Did 31,000 72,500 103,500
50 F 50 A

$30 $40
$1,500 F $2,000 A $500 A
SM: A = 0.3 and B = 0.7
AQ = 31,000 + 72,500 = 103,500
AQSM: A = 0.3 103,500 = 31,050 litres; B = 0.7 103,500 = 72,450 litres
The Mix Variance is given by: T2 T1 = $500 Adverse

51 The chemicals used in the mix are discrete.


This means the amounts used of each chemical are independent of each other and it is not
relevant to think in terms of controlling the proportion of each.
AC C A F 5 Q u e s t i o n B a n k Revision answers: 2: Decision-making techniques 253

Dealing with risk and uncertainty in decision-making


52
True False
Mystery shopping may be used to reduce the uncertainty
associated with making changes to an existing product or
launching a new one.
Sensitivity involves identifying a number of possible
outcomes that may arise if the project goes ahead.
Focus groups are used to provide qualitative data about
new products.
Pay-off tables record all possible outcomes.

Simulation involves identifying a number of possible outcomes that may arise if the project goes
ahead.
Sensitivity involves seeing how much the estimates used to make the original decision can
change before the decision becomes incorrect.

53 Do not employ a sales manager as profits would be expected to fall by $1,300

Fir Co
New profit figures before salary paid:

st I pyri
Good manager: $180,000 13 = $234,000
Average manager: $180,000 12 = $216,000
Poor: $180,000 11 = $198,000
ntu ght
itio
EV of profits = (035 $234,000) + (045 $216,000) + (02 $198,000) = $81,900 + $97,200 +
$39,600 = $218,700
Deduct salary cost and EV with manager = $178,700
n2
017
Therefore do not employ manager as profits will fall by $1,300.

54 375

EXAMINERS COMMENT
Candidates often struggle with minimax regret questions as the concept can be a little difficult to
understand. Taking each corresponding level of supply and demand, it is necessary to work out
the regret from choosing one supply level rather than another, taking into account the actual
demand level. This is why, when the supply and demand levels are the same, there is always a
value of $0 as there is no regret because exactly the correct level of supply was anticipated. In
order to decide on the optimum supply level using minimax regret as the decision criterion, the
business should firstly identify what the highest regret is for each level of supply. Then, it should
choose the minimum of those maximum regrets in order to decide the appropriate level of supply.
So, in this question, the maximum regret at each supply level is as follows:
At 325: $142
At 350: $90
At 375: $82
At 400: $120
The minimum of these is $82 at 375, therefore the answer is C.
254 R e v i s i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

The maximum regret at each supply level is as follows:


At 325: $142
At 350: $90
At 375: $82
At 400: $120
The minimum of these is $82 at 375.

55 The average value generated may not actually represent a possible outcome
They allow different outcomes to be built into a decision
They represent a long-run average if an event is repeated many times

Risk and uncertainty

THREE PRODUCTS
56 It is impossible to say

ht 7
Without the probabilities to assign, it is impossible to calculate the expected value of each

i g 1
project.

y r 20
o
57
p ion Either Product X or Product Z

C uit If the prices are equally likely then EV of Product X = $70 ,Y = $66 and Z = $70

I n t
r s t 10

i
58 units

F Q1 is quantity sold at $60 profit


60 = Q1 (10 7)
Q1 = 20
Q2 is quantity sold at $60 profit
80 = Q2 (15 7)
Q2 = 10
Q1 Q2 = 10 units

59 60 5Q
P = a bQ and when P = 10, Q = 10, so 10 = a 10b
b = change in price/change in quantity = 5/1 = 5
10 = a (5 10)
10 = a 50, so a = 60
AC C A F 5 Q u e s t i o n B a n k Revision answers: 2: Decision-making techniques 255

60
Disadvantage Not disadvantage
It ignores fixed costs.
The mark-up % cannot be varied.
Budgeted output volume needs to be established.
The basis it uses for absorption of fixed overheads is
arbitrary.

The mark-up % can be varied with marginal costing. Marginal cost plus pricing does not need to
budgeted volume of output to be established. Absorption does not take place when marginal
costing is used.

SANDRUNNER
61 $300
The best possible outcome is a cash inflow of $270,000 when a fee of $300 is set.

Co

Fir
62 It ignores the probabilities of different outcomes.