PROY, ° & oO Mock One V3. POV, RceS Ch Ve Ree Advanced Performance Management P5APM-MK1-217-Q Time allowed: 3 hours 15 minutes This paper is divided into two sections: Section A THIS ONE question is compulsory and MUST be attempted Section B_TWO questions ONLY to be attempted Present value and annuity tables are on pages 10 and 11 Do NOT open this paper until instructed by the supervisor. ©2017 Becker Educational Development Corp.Section A — This ONE question is compulsory and MUST be attempted 1 (©2017 seca carl Development Corp ilps eserves The Better Educational Development Co (BEDC) provides a wide range of professional training courses including training for accountants, bankers and lawyers. The company is based in Homeland, where the majority of its courses take place. The company has an excellent reputation in Homeland built up over many years. The company is listed on the stock exchange of Homeland. BEDC developed the following mission statement: “We exist to provide a high quality level of tuition and related materials in order to give our students all the help they need in passing their professional exams; to provide an environment in which all of our staff are able to achieve their full career potential: and to ensure that we provide a satisfactory return to our shareholders”. Two years ago, as part of its plan to expand the business internationally, the Better Educational Development Corporation acquired the business of The Small Training Co (STC), which is based in Awayland, STC provides accountancy training courses for students attempting intemationally recognised professional exams. STC was a small, privately-owned company with very informal control and management systems in place, The management of BEDC agreed that since STC was already’a successful organisation, they wanted to allow the directors of STC to continue 19 manage.the company with limited interference from BEDC. Rather than setting detailed budgets for STC the management of BEDC agreed to set targets for a small number of high-level key performance indicators (KPIs), “If those guys at STC can show us that they cam perform well on these KPIs, I am happy! I don’t care how they do it!” declared John Ewing, the CEO of BEDC A scorecard containing five KPIs has been designed for the purpose of monitoring the performance of STC. It containis targets for each of the five KPIs, which are agreed in advance by the managers of STC and BEDC. Once set, the targets remain fixed for the relevant period. The scorécard is completed annually. The first annual scorecard has just been completed: Actual Budget Variance Sales reventie (S000) 800 950 (150) Net profit(loss) 100 150 (50) ‘Number of students 900 1,000 (400) Exam pass raies 70% 70% Rejumn on capital employed 10% 15% (5%) The directors of STC receive a bonus if actual performance exceeds budget or target on four of the five key performance indicators, Recently, the previously happy atmosphere at STC has changed. The directors have become increasingly keen on meeting the targets set in the scorecard. Staff salaries have been frozen in an attempt to achieve the profit targets. Some key staff and tutors have been upset by this policy and have left the company to join a competitor. The directors are also considering cancelling a project, on which staff have been working for two Years, to save costs. The project involves the design of on line computer-based tests as part of the leaming process. Initial pilots have shown that students are very keen on online tests. If the project were not cancelled it would cost an additional $50,000 in the following year, but would be completed by the middle of that year.The directors are disappointed that they have failed to meet four of the targets, so will not achieve a bonus this year. ‘The sales director of STC said, “Given the economic climate, we did not have a bad year, The budget and targets were based on the actual performance of the previous year, when the economy was still performing well. We believe that the market fell by 20% this year, so a drop of only 10% in student numbers was a pretty good performance in my opinion”. The directors of BEDC are aware of the problems of motivation at STC and believe that the scorecard might lie at the root of tite problem. The board therefore wants your evaluation of the scorecard and advice on improvements that could be made to it. Jack Dosh, the Chief Financial Officer of BEDC has recently attended a presentation about Economic Value Added (EVA™) and is very enthusiastic about it. “I believe that the useof EVA™ could be the solution to our problems at STC.” he said. “It will focus the attention of the directors on maximising the wealth of the owners, and that is ultimately what we are about” he said. He wants you to comment on whether it would be advantageous to introduce EVA™ at BEDC. He has prepared some more detailed analysis of the net profit for the latest year, as follows: $000 Sales 300 Operating expenses (590) EBIT 210 Interest (60) Profit before tax 150 Tax at 30% (50) Net Profit 100 Capital (equity plus debt) at the Start of the year, per published financial statements was $1 million. Included in operating expenses is $50,000 relating to the project to develop the online tests Cummlative costs incurred on the project in previous periods amounted to a total of $300,000. All of these costs were treated as expenses in the statement of profit or loss of STC when they were incurred, since the auditors advised that they did not meet the criteria for capitalisation, Jack Dosh has asked you to calculate EVA based on the information above. The weighted average cost of capital of STC is estimated to be 12%. ‘The management of BEDC are also concerned about the loss of tutors so are considering changing their reward scheme, Currently the tutors are paid a fixed salary and a discretionary bonus at the end of the year if the company has “had a good year”. No bonuses have been paid for the last five years. All tutors have professional qualifications from well-respected international accounting bodies. Management wants you to evaluate this reward system and make recommendations for how it could be improved. (©2017 seca carl Development Corp ilps eserves 3Required: Write a report to the directors of BEDC which: @ Evaluates the existing scorecard and recommends improvements. (18 marks) (ii) Discusses the comments of Mr Dosh about the use of EVA™, (10 marks) (iii) Calculates the value of EVA™ for the most recent year and comments on the meaning of it. (6 marks) (ixy)——_Evaluates the current reward scheme for tutors, and recommends ways in which management could aim to Improve the motivation of tutors, including, Dut not limited to, changing the reward schemes. (12 marks) Professional marks will be awarded in question one for format, style, structure and clarity of the discussion. (4 marks) (50 marks) (©2017 seer aucaoelDevopment Corp. Al igs saves. 4Section B - TWO que: 2 ns ONLY to be attempted Kickstart is a subsidiary of a major vendor of software. The company provides the following three services: Project management Implementation support Product education and training. The budgets the three service lines for the next financial year are as follows Budgeted statement of profit or lass for the next financial year Project Implementation Product Total ‘management — support education & training s s s s Fees receivable 8,500,000 3,240,000 2.016.000 13,756,000 Less Salaries 2,500,000 960,000 1,200,000 Variable costs 1,200,000 600,000 270,000 Fixed costs 235,625 1.178.125 1,413,750 Net profit/(loss) 4.564375 SOL,S7S (867.750) 4.198.500 Fixed costs have been apportioned amofig the three service areas based on the budgeted number of consultations provided during the year. This is as follows: Service: Number of consultations Project management 300 Implementation support 1,500 Product education and training 1,800 ‘An activity-based costing study recently undertaken on behalf of the management of Kickstart concluded that $0% of fixed costs are determined by time spent on activities as per the following table: Activity Cost driver Project Implememation Product Total management support education fixed & raining ‘costs $000 1 966 Pre-contract meetings Number of 4 meetings (per consultation) Assessment of client needs Time taken (days per consultation) Post-implementation Time taken 3 os 025° 651 ‘monitoring and support (days per consultation) 645 (©2017 seca carl Development Corp ilps eserves 3The remaining 20% of other fixed costs are attributable to the three types of service as follows: Project management Implementation support s Product education and training 95,000 The management of Kickstart has asked you to calculate the budgeted profit or loss of each service line using an activity based costing approach using the cost drivers above Management would also like you to explain the impact of using activity based costing on performance management at Kickstart. Your answer should refer to your calculations a5 well as consider other relevant factors, Finally, the managers have heard the term “operational activity based management” but are not sure exactly what this means. You have been asked you to explain it to them and to consider if it could be useful to Ki Require (a) Recalculate the budgeted profit for each service line using activity based costing. (7 marks) (>) Evaluate the Impact of moving to actiyity based costing information on performance management at Kickstart. (9 marks) (© Explain the meaning of the term “operational activity based management” and demonstrate how it might be used at Kickstart. (9 marks) (25 marks) (©2017 seca carl Development Corp ilps eserves 63 Gee Electronics (Gee) exports electronic components for the automobile industry from the home country in which it is currently based. The company has recently set up a research facility in the home country to develop hydrogen fuel cells. The concept of hydrogen fuel cells has attracted a great deal of interest from the environmental lobby since it offers the prospect of very environmentally friendly vehicles. The market for these vehicles is in the development stage and there have been relatively few sales so far for this new technology Gee hopes that the current pressure from environmental groups and governments will lead to large volume sales. Increasingly, electronic component manufacturers are under pressure to manufacture close to the locations of their customers, the automobile manufacturers. The research and development (R&D) director has decided that there is a need to open a research facility abroad, which would work in parinership with the facility in the home country while capitalising on the benefits that a foreign base could offer. If this venture were successful, Gee would open a manufacturing facility next to the proposed overseas R&D base. The Board of Directors recognises that different countries will offer different potential advantages and disadvantages. Tt has been decided that the ideal characteristics and factors for the chosen country should be determined, so that potential choices can be screened effectively before a final decision is made, The board has asked you fo consider these factors and explain what they are. The directors want to be able to measure how well potential countries perform in respect of each factor, and would like you to propose a key performance indicator in respect of each one. Gee currently operates a standard costing system, with variances calculated on a monthly basis. A purchasing department continually monitors prices charged by alternative suppliers and orders are placed with suppliers offering the lowest prices, subject to minimum quality requirements. The manager of the purchasing department has recently boasted that “our suppliers are kept on their toes — they kniow that if they do not give us a good price, they will lose the order”. The market for hydrogen fuel cells is likely to be a more competitive market than for the company’s other products. The CEO is interested in introducing Total Quality Management (TQM) as he feels that quality is likely to be a large factor in winning customers. He is aware that introducing such techniques may require changes to the existing accounting systems and culture at Gee, and wants your advice on what changes would be required. The directors are aware that the existing accounting systems may not provide all the information necessary to support TQM and want you to advise them on what information would be required. “They are also aware that TQM includes a collaborative approach to management of both employees and other stakeholders — in particular suppliers. ‘They have asked you to outline what changes would be required to their management style if they move (TQM. Require (a) Discuss four factors that should be present in the chosen country, and for each suggest with justification one key performance indicator that could be used to measure it. (12 marks) (b) Discuss the impact of introducing total quality management on the accounting systems at Gee. (8 marks) (©) Briefly describe the changes that would be required to the management style at Gee as a result of introducing total quality management. (5 marks) (25 marks) (©2017 seca carl Development Corp ilps eserves 74 DEF is a trading company that is divided into three divisions: D, E and F. Each division maintains its own accounting records and prepares an annual summary of its results. ‘These performance summaries are shown below for the most recent financial year. Division D E F 000 000 sooo Sales (net of retums) 150 200 400 Variable production costs 30. 70 230 Fixed production costs 60 30 80 Administration costs 30 28 40 Profit 10 55 50 Capital employed 400 550 415 The following additional information is available: 1 Divisions are free to trade with each other without any interference from Head Office. The managers of the respective divisions negotiate transfer prices between themselves. During the year and included in the above costs and revenues are the following transactions: a Division D sold goods for $20,000 to Division E. The price negotiated was agreed on a unit basis between the managers of the two divisions. ‘The variable production cost of these items in Division D was $18,000. Division D was operating under capacity and agreed to a transfer price that was little more than its own Variable cost. a Division F sold goods for $15,000 to Division E. The price negotiated ‘was agreed on a unit basis between the managers of the two divisions The variable production cost of these items in Division F was $9,000. Division F was operating under capacity and negotiated a transfer price based on its total production cost. 2 Included in the Administration costs for each division are the following ‘matiagement charges from Head Office D:$10,000 $8,000 F: $15,000 3 At the start of each year Head Office sets each division a target Retum on Capital Employed. The target depends on their nature of the work and their industry sector. For the most recent financial year these targets were: D: 6% E:3% F: 15% ‘The managers of DEF are concerned that the divisional performance reports above may not show a fair view of the performance of each division and would like you to explain any weaknesses in the reports. They are also concerned that the existing transfer prices negotiated between the divisions may have contributed to a distorted view of the performance of the divisions which may have resulted in decisions that are not in the best interests of DEF as whole. They want you to prepare an alternative statement showing the performance of the three divisions, including a more appropriate transfer price. Finally, the managers have heard about dual pricing and want you to explain what it is, and how it could be used at DEF. (©2017 seca carl Development Corp ilps eserves 8Required: (a) Discuss the shortcomings of the above performance summaries when measuring the performance of each division. Note: You should ignore the impact of the transfer prices in this part of the question. (8 marks) (6) Discuss the potential problems of negotiated transfer pricing, and how these ave impacted on the performance of each of Divisions D, E, and F for the most recent financial year. (6 marks) (©) Prepare an alternative statement that is more useful for measuring and reporting the performance of Divisions D, E, and F. (7 marks) (@ __ Discuss how the use of “Dual” transfer prices could affect the measurement of divisional performance within DEF. Illustrate your answer with suggested dual prices. (4 marks) (25 marks) (©2017 seer aucaoelDevopment Corp. Al igs saves. 9Present Value Table Present value of Lie. (I+ 0)* where r= discount rate n= number of periods until payment Discount rate (r) 1 0990 0.980 0971 0.962 2 0980 0961 0.933 0.925 3 0971 0942 0.915 0.889 4 0.961 0.924 0.888 0.855 5 0.951 0.906 0.863 0.822 6 0.888 0.837 0.790 7 0871 0.813 0.760 8 0.853 0.789 0.731 9 0.837 0.766 0.703 10 0.820 0.744 0.676 1L 0.896 0.804 0.722 12 0.887 0.788 0.701 13 0.879 0.773 0.681 14 0.870 0.758 0.661 15 0.861 0.743 0.642 (n) 11% 12% 13% 14% 1 O.88s 0.877 2 0.783, 0.769 3 0.693 0.675 4 0.613» 0.592 3 0.519 6 0480 0.456 7 0.425 0.400 8 0.376 0.351 9 0.308 10 0.270 wW 0.261 0.237 12 0.231 0.208 13 0.204 0.182 14 0.181 0.160 15 0.160 0.140 (©2017 seca carl Development Corp ilps eserves 0.952 0.907 0.864 0.823 0.784 0.746 ori 0.677 0.645 0.614 0.585 0.537 0.530 0.505 asl 9.870 0.756 0.658 0.372 0.497 0.432 0.376 0.327 0.284 0.247 0215 0.187 0.163 141 0.943 0.890 0.840 0.792 0.747 0,708 0.665 0.627 0.592 0.558 0.527 0.497 0,469 0.442 0.417 16% 0.862 0.743 0.641 0.352 0.476 0.410 0.354 0.308 0.263 0.227 0.195 0.168 0.143 0.108 10 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.382 0.544 0.508 0.475 Oads 0.415 0.388 0.362 17% 0.855 731 0.624 0.534 0.456 0.390 0.333 0.285 0.243 0.208 0.178 0.152 0.130 OL 0.095 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.340 0.500 0.463 0.429 0.397 0.368 0.340 31s 18% 0.847 71s 0.609 0.516 0.437 0.370 31s 0.266 0.228 O.191 0.162 0.137 0.116 0.099 0.084 0.917 0.842 0.972 0.708 0.650 01596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 19% 0.840 0.706 0.593 0.499 0.419 0.296 0.249 0.209 0.176 0.148 0.124 0.108 0.088 0.074 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.135 ola 0.093 0.078 0.065Present value of an annuity of | ie. where discount rate yumber of periods Annuity Table Discount rate (r) Periods (n) 1% 2% 3% 4% 5% 6% M_—8M%_—9%_—*10% 1 0990 0.980 0.971 0.962 0.952 0.935 0.926 0917 0909 1 2 1970 1942 1.913 1.886 1.859 L808 1.783 1.759 1.736 2 3 2941 2884 2829 2775 2.723 2.624 2577 2.531 2487 3 4 R717 3.630 3.546 3387 3312 3240 3170 4 3 4580 4.452 4.329 4.100 3,993 3,890 3.791 5 6 5.795 5.601 S417 5.076 4.767 4.623 4,486 4.355 6 7 6728 6472 6.230 6.002 5.786 389 5.206 5.033 4.868 7 8 7.652 7.325 7.020 6.733 6.463 SOT 5.747 5.535 8 9 8566 8.162 7.786 7435 7.108 6515 6.247 5.995 9 10 9471 8.983 8.530 8111 7.722 7.024 6.710 6418 6.145 10 11 1037 9.787 9.253 8.760 8.306 7.499 7.139 6805 6495 11 12 1126 10.58 9.954 9.385 8.863 7.943 7536 7.161 6814 12 13 12.13 1135 1063 9.986 9.394 8.358 7.904 7487 7.103 13 14 13.00 1211 11.30 10.56 9.899 8.745 8.244 7.786 7.367 14 15 1387 1285 1194 1142 10.38 9.108 8.559 8.061 7.606 15 (n) 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.847 0.840 2 L713. 1.690 1.668 1366 1.547 3 2444 2.402, 2361 2.174 2.140 4 3.102 3.037 2.974 2.690 2.639 5 3.696 3,605 3.517 3127 3.058 6 3.998 3.498 3.410 7 4.423 3.812 3.706 8 4,799 4.078 3.954 9 5.132 4.303 4.163, 10 5.426 4.494 4.339 u 5.687 $453 4.656 4.586 2 5918 5.660 4.793 4.611 13 6.750 6424 6.122 5.842 4910 4.715 14 6.982 6.628 6.302 6.002 $.008 4.802 15 7.191 6811 6462 6.142 3.092 4.876 End of Question Paper (©2017 seca carl Development Corp ilps eserves u