F5 – Performance Management
June 2009
Exercise Pack
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EC1Y 4UP
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Contents Question Answer
Exercise 1 5 36
Exercise 2 6 37
Exercise 3 7 39
Exercise 4 8 42
Exercise 5 9 43
Exercise 6 10 45
Exercise 7 11 46
Exercise 8 12 48
Exercise 9 13 50
Exercise 10 14 51
Exercise 11 15 52
Exercise 12 16 53
Exercise 13 17 55
Exercise 14 18 56
Exercise 15 19 58
Exercise 16 20 60
Exercise 17 22 62
Exercise 18 23 65
Exercise 19 24 68
Exercise 20 25 70
Exercise 21 26 72
Exercise 22 27 79
Exercise 23 28 81
Exercise 24 29 82
Exercise 25 31 86
Exercise 26 32 87
Exercise 27 33 89
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Exercise 1
Budgeted overheads are $200,000 per month, and direct labour hours for each month
have been estimated at 50,000 hours. Overheads are absorbed on the basis of
direct labour hours.
Required:
Calculate the over or underabsorption of overheads for the first three months of
the year:
i) January
Actual overheads were $190,000. 50,000 hours were worked.
ii) February
Actual overheads were $200,000. 48,000 hours were worked.
iii) March
Actual overheads were $190,000. 48,000 hours were worked.
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Exercise 2
Required:
i) marginal costing?
ii) absorption costing?
Reconcile the two profit figures you have calculated
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Exercise 3
Anichebe Co makes three products, X, Y and Z. Currently overheads are absorbed on the
basis of direct labour hours, though Anichebe is considering implementing an ABC system
for the year. Anichebe uses a costplus pricing system for its products.
X Y Z
Production quantity (units) 2800 2000 400
Batches of material 14 10 16
Per unit:
Direct material (kg) 5 8 4
Direct material ($) 5 4 8
Direct labour (hrs) 3 1 1
Direct labour ($) 27 9 9
Power drill operations 6 3 2
Anichebe has carried out an ABC investigation into its production process,
and this has revealed the following cost drivers:
a) Produce a summary showing the budgeted cost per unit for each of products X, Y and Z,
i) using the existing method for the absorption of product
costs (4 marks)
ii) using an ABC method. (10 marks)
b) Compare the figures you have calculated, and comment on their implications.
(6 marks)
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Exercise 4
Process X Y Z
Capacity per day 22 16 10
The longrun benefit to Castillo for each extra air conditioning unit sold would be $10,000.
Castillo's production manager has been investigating ways to elevate the capacity of
each of X, Y and Z.
Various projects have been identified:
i) The staff on production process Y could take an intensive training course. This will cost
$20,000 but will increase capacity of process Y to 21 units per day.
ii) An additional machine could be purchased for production process Z. This would cost
$32,000 but will increase capacity of process Z to 23 units per day.
Required:
Identify which, if any, of the projects should be carried out, and evaluate the increase in
relevant benefit that would result.
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Exercise 5
The following budgeted data relates to three products made by Cahill Ltd:
Total factory costs have been budgeted at $240,000 for the period, and Cahill Ltd
has 160,000 budgeted hours available on the bottleneck machine.
Required
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Exercise 6
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Exercise 7
Harvey produces a single product, the standard cost card of one unit of one unit
of which is given below:
$ per $ per
unit unit
Direct material 18
Direct labour 22
Production overheads:
variable 12
fixed 10
22
Total production cost 62
Nonproduction overheads:
variable 4
fixed 2
6
68
Calculate (to the nearest whole cent) the selling price under
each of the following sets of circumstances:
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Exercise 8
The owner of Parkinson, an economist by trade, has suggested that a profit margin
of 20% on full cost should be set for each Joe sold.
There is no opening inventory. The marketing director of Parkinson has challenged this
Suggestion and has estimated the following levels of sales demand for the Joe:
Assuming the budgeted number of Joes are produced, regardless of sales volume:
i) Calculate, and comment upon, the profit for the year if a fullcost price is
charged,
using both absorption and marginal costing principles.
ii) Calculate the longrun profitmaximising price.
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Exercise 9
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Exercise 10
Baines's skilled workers are currently working their full contracted hours, and
a dispute between Baines and the trade union has resulted in an overtime ban
being enforced around the factory.
During this industrial unrest, the production manager of Baines will not consider hiring
more skilled workers under any circumstances.
If the contract is accepted, skilled workers will need to be transferred from Baines's
existing production of their other product, the Q. No such problems exist for
Baines's nonunionised unskilled workers  enough idle time exists to allow them
to carry out the contract within their contracted hours. 50 hours of each grade of
labour would be required by the contract.
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Exercise 11
Cahill Group manufactures cuddly toys for children, namely Roos, Galahs and
Dingos, all in the same factory. The managing director of Cahill might delist
the Dingos product line due to nonprofitability. Here is the budget for
the forthcoming year:
Further information:
i) Material costs and variable production overhead costs are wholly variable.
ii) 5% of labour cost represents the fixed cost of the factory supervisors and line
leaders.
iii) Only twothirds of the fixed production overhead is directly attributable to individual
products; the remainder is an allocation of general fixed production overheads.
iv) Marketing costs include $4,000 per product used for general advertising, and $6,000
used for specific product advertising. The remainder is marketing staff costs.
v) Selling and distribution costs include a 1% commission on sales revenue for sales staff.
The remainder is for Cahill's lorry used to distribute all three products to customers.
Required:
Assess the managing director's suggestion from a financial point of view.
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Exercise 12
Product
H J K L
per litre per litre per litre per litre
Selling price ($) 7.40 13.10 10.20 12.00
Required:
Show which, if any, of MoyesCorp's joint chemical products should
undergo further processing.
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Exercise 13
Ferguson Inc launches the theme park stall and begins selling its snacks at a price
of $3.50 per unit. The finance director asks you to prepare a report analysing the
results of the stall over the 100day long 2008 summer season.
It is now October 2008. You are carrying out the analysis of the actual snack
sales for the summer. Actual sales volumes (to the nearest 50 snacks) were:
Number of
Daily demand days
(snacks sold per day)
50 14
100 35
150 38
200 11
250 2
Assumptions for 2009:
i) Variable and total fixed costs will remain constant at $1.50 per unit and
$15,000
ii) An inflationary increase of price to $3.70 per unit will not alter the expected
number of units sold for next summer.
iii) Profit will be earned at an even rate throughout the summer.
Required
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Exercise 14
Rodwell PLC is replacing a factory machine. It has the choice of two machines.
For the purpose of this exercise, there are two possible demand levels, low and high.
The estimated annual profit for each demand level is as follows:
Demand level
Low High
Machine $ $
X 120,000 150,000
Y 20,000 200,000
Using each of the following decisionmaking criteria, which machine should Rodwell
choose to purchase?
i) Maximin
ii) Maximax
iii) Minimax regret
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Exercise 15
The probability of demand being high has now been estimated as 0.7, and
that of demand being low as 0.3.
Using the information from the previous example, which machine would be
purchased by Rodwell, assuming the decisionmaker is
i) risk seeking
ii) risk averse
iii) risk neutral?
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Exercise 16
Alex Young Salads is a producer of ownbrand bagged salads and coleslaw
products for several large UK supermarkets. They buy in salad goods from
farmers and convert these into products sold by supermarkets to consumers,
often for barbecues.
The management of Alex Young has asked you, the management accountant
at Alex Young, for help in analysing the relationship between the
average weekly midday temperature and the sales of salad products
to supermarket chains.
You have been provided with the following data from weeks 26 to 31 last year:
Required:
Continuing with the figures from the Alex Young Salads example…
b) Using regression analysis, establish the formula of the line representing the relationship
between average temperature and weekly sales revenue. Explain what the line is telling
the management of Alex Young Salads.
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d) Explain the uses the information you have derived in parts a) to c) might be put to by
the management of Alex Young Salads.
e) Explain any issues you would bring to the attention of the management of Alex Young
Salads
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Exercise 17
Temple is creating its monthly sales budgets for next year for two products, the Tem
and the Pul.
Deseasonalised sales in units (y) of each product have been found to be reliably estimated
using the following equations:
Quarter Q1 Q2 Q3 Q4
Required
Prepare forecast sales units estimates for both products for 20X7.
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Exercise 18
Vaughanee Ltd has commissioned some production efficiency research into three
proposed new products, the Cookee, the Kaypee, and the Montee.
The results of this research will be used to calculate standard labour costs per unit.
The first unit of the Cookee is expected to take 100 hours to produce.
A 70% learning curve is expected to apply to the Cookee.
The first unit of the Montee was found to take 200 hours to produce.
The average time per unit for the first 80 Montees was 32 hours.
Required
i) calculate the average time per unit for the first 16 units
ii) calculate the average time per unit for the first 17 units
iii) calculate the time taken to make the 17th unit
i) find the average time per unit if 200 units are produced
ii) find the average time per unit for the next 50 units
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Exercise 19
Cunningham manufactures items of prefabricated steel and concrete to order for customers
engaged in the construction and steel erecting industry.
There are a number of different departments within Cunningham, and budgeted and actual
information for the steel girder fabrication department is given below:
The variable element of all steel girder fabrication costs vary proportionally with
machine hours.
All costs are variable except direct labour, which includes $8750 fixed supervisor salaries,
and also production overheads, fixed up to 18,000 hours, but then have a stepped
fixed element of $8000.
The manager of the steel girder fabrication department has received a rather terse
email from the factory manager of Cunningham plc, requiring her to explain the
'serious overspending' of $31515 within her department.
She has asked you to help with preparing her response.
Required
Prepare a revised budgetary control statement. Advise the manager of the steel
girder fabrication department of possible points she might like to make in response
to the factory manager.
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Exercise 20
Chedgzoy Ltd makes a single product, the standard cost details of which
are given below:
$
Direct materials 5 kg @ $4 /kg 20
Direct labour 4 hours @ $6 /hour 24
Actual results are that 1000 units were produced and sold. The actual hours paid for during
The period were 4100, and the hours worked were 3900. Actual labour costs came to $27060.
Material purchased during the month was 5200kg at a cost of $21320. However, only 4900kg
of this material was used.
Chedgzoy calculates material price variances at the time of purchase.
The product manufactured by Chedgzoy has recently been updated. The production manager
has recently been to a CPD seminar at which the 'learning curve effect' was discussed.
She is concerned as to whether this might be relevant to Chedgzoy's product and labour
variances.
ii) Explain what is meant by the 'learning curve effect'. Explain the effect this might have on
Chedgzoy's labour variances.
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Exercise 21
Harvey Ltd manufactures a variety of products, including Product Colin. Harvey uses an
absorption costing system.
The standard cost card for a Colin (set during the previous year) is given below:
$ $
Selling price 130
Direct material X 6 kg x $4.50 per kg 27
Direct material Y 2 kg x $5.50 per kg 11
Assembly labour 6 hrs x $7.50 per hour 45
Variable overheads 6 hrs x $2.50 per hour 15
Fixed overheads 6 hrs x $0.50 per hour 3
101
Profit per unit 29
Additional information:
Purchases during November were 18700kg of material X at $4.30 per kg, and 6350kg of
material Y at $5.30 per kg.
3100 Colins were sold during November, at an average selling price of $127 per unit.
There was no change in inventory of either raw material, or of finished goods,
during the month. It is not possible to substitute any of material X with any of material Y.
12500 assembly hours were worked and paid at a rate of $7.75 per hour, and 6000 hours
were worked at $8 per hour.
However, 6200 hours were paid at $8 per hour due to a lastminute packaging
change.
Harvey budgets to produce 2800 units every month. To build up stocks of Colin for
Christmas, this is 250 units higher than budgeted sales.
Budgeted fixed overheads for the month were $8400.
Actual variable and fixed overheads were $43000 and $10500 respectively.
Required
Calculate appropriate Product Colin variances for November and present an operating
statement reconciling budgeted with actual profit.
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Exercise 22
Required
Calculate the material mix and yield variance for Bullens plc
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Exercise 23
Gladwys plc makes a single product, of which the standard material input
for 2500 units is:
$
kg at
Material P 1600 $ 3.20 per kg 5120
kg at
Material Q 600 $ 0.50 per kg 300
kg at
Material R 800 $ 3.60 per kg 2880
3000 kg 8300
During period 7:
Required
Calculate the material mix and yield variance for Gladwys plc
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Exercise 24
The summarised income statements and balance sheets for the past two years for
Carsley plc are as follows:
20X8 20X7
Summarised income statements: $000 $000 $000 $000
Turnover:
Cash sales 135 131
Credit sales 3776 3684
3911 3815
Cost of sales:
Opening inventory 407 331
Cash purchases 439 298
Credit purchases 2207 2029
Closing inventory 562 457
2491 2201
Gross profit 1420 1614
Expenses 777 856
Profit before interest and tax 643 758
Interest 164 132
Profit before
tax 479 626
Tax 134 175
Profit after tax 345 451
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Summarised balance sheets: 20X8 20X7
$000 $000 $000 $000 $000 $000
Noncurrent assets (NBV) 3106 2664
Current assets:
Inventories 562 457
Receivables Trade receivables 479 366
Other 207 306
686 672
Cash 202 195
1450 1324
Total assets 4556 3988
Equity:
Share capital 1578 1578
Retained
profits 777 767
2355 2345
Payables: amounts falling due after more than 1 yr
Longterm loans 1338 842
Required
Calculate the following ratios for both years:
i) ROCE
ii) Gross profit margin
iii) Net profit margin (based on PBIT)
iv) Asset turnover
v) Financial gearing
vi) Current ratio
vii) Quick ratio (acid test)
viii) Accounts receivable days
ix) Accounts payable days
x) Inventory days
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Exercise 25
The two divisions are considering whether to invest in two different projects.
Division X can invest in project X1. This will cost $125,000, and yield a profit
of $21,000.
Division Y can invest in project Y1. This will also cost $125,000, but yield a profit
of only $14,500.
McFadden has a cost of capital of 12%.
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Exercise 26
Stubbs Group has two divisions, Division Cue and Division Tee. The divisional managers of
Stubbs have their performance appraised based on the internal profit each division makes.
Annual performance related bonuses are sufficiently high to motivate divisional managers.
Cue manufactures two products, Pee and Gee. Pee is sold on the open market for $80 per
unit.
No external market exists for Gee. Each unit of Pee and Gee uses the same production
resources as each other.
Tee supplies an external market and can obtain its components (product Gee) from
either Cue, or from an external supplier, that supplies Gee to Tee for $43 per unit.
Required
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Exercise 27
Trebilcock company makes and sells a single product, the standard cost card is as follows:
$
Direct materials 1.5kg x $3 / kg 4.50
Direct labour 0.5hrs x $7.50 / hour 3.75
Standard prime cost per unit 8.25
Other costs 4.75
Standard cost per unit 13.00
Selling price 25.00
Standard profit per unit 12.00
Budgeted sales for November 20X8 were 7500 units, and budgeted production was 7250
units.
i) Trebilcock sold 7300 units. This was a particularly impressive performance, given that a
recession
had caused the entire market to shrink by 5%. This was done by setting an average selling
price of $24.00 per unit. The open market selling price for Trebilcock's product was
$23.50 per unit.
ii) Production for the month was 7000 units. Total usage of materials came to 11000kg, and
total labour hours worked amounted to 3700 hours.
iii) The open market price of direct material during the month was $3.50, and total material
cost came to $36000.
A total quality management programme at Trebilcock's major material supplier has
dramatically improved the quality of raw material entering Trebilcock's production process.
As a result, the standard raw material usage per unit should reduce to 1.4kg per unit.
iv) The total labour cost for the month came to $29000, which was not
surprising given that the actual labour rate per hour for November X8 was $7.75 per hour.
The budget was set using standards devised during May 20X8. You
are concerned at the effect that the changes highlighted above might have
on the evaluation of the performance of Trebilcock's managers, and so have
decided to calculate planning and operational variances as a result.
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Required
Calculate:
i) traditional material price and usage variances
ii) material planning price and material planning usage variances, and
material operational price and operational usage variances
iii) traditional labour rate and efficiency variances
iv) labour planning cost variance, and labour operational rate and operational
efficiency variances
v) traditional sales price and volume variances
vi) sales planning price and sales planning volume variance,
and sales operational price and sales operational volume variances
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Answers
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Exercise 1
Budgeted overhead
Overhead absorption rate = Budgeted activity level
$200,000
= 50,000 hours
=$ 4 per hour.
i) January
ii) February
iii) March
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Exercise 2
i) Marginal costing
$ $
W1  Closing inventory
calculation
units
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ii) Absorption costing
$ $
Reconciliation:
$
Marginal costing profit 820,000
Change in inventory x fixed OAR per
unit 1,500 x $40 60,000
Absorption costing profit 880,000
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Exercise 3
1. Calculate OAR:
Using ABC:
Power: 23600
(6 x 2800) + (3 x 2000) + (2 x
400)
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$0.8 per kg of material handled
Supervision: 11880
(3 x 2800) + (1 x 2000) + (1 x
400)
Rate X Y Z
$ act's $ act's $ act's $
Material receipt (W1): 1181.00 0.005 5.905 0.005 5.905 0.04 47.24
Power: 1.00 6 6 3 3 2 2
Material handling: 0.80 5 4 8 6.4 4 3.2
Supervision: 1.10 3 3.3 1 1.1 1 1.1
19.205 16.405 53.54
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Comparison of cost per unit figures:
Comment:
Using traditional overhead absorption assumes all overheads vary with labour hours.
This has resulted in an inaccurate allocation of overheads, since only 11% of
total overheads truly vary in this way.
Using ABC has allocated overheads on the basis of the activity that has caused those
overheads. This has resulted in a far more accurate allocation of overheads to the
three products.
It can now be seen that product X has been allocated too much cost in the past, and
has been subsidising product Z and (to a lesser extent) product Y.
From a performance measurement point of view, there is a real risk that product Z might
be unfairly perceived as being much more profitable to produce and to sell than is
actually the case.
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Exercise 4
Current 22 16
Invest in ii) 22 16
Invest in i) + ii) 22 21
Invest in ii)
Invest in i) + ii)
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Exercise 5
$240,000
Cost per factory hour 160,000
= = hours = $1.50 per hour
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Now calculate the optimal production plan:
160,000
PROFIT $207,000
Cahill should manufacture 11,000 units of P, and 35,000 units of Q. This will yield
a profit of $207,000 for the period. No other production mix will produce a higher
profit than this.
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Exercise 6
Product
J K L
$ per unit $ per unit $ per unit
Selling price 60 85 100
Marginal cost per unit 30 43 52
Contribution per unit 30 42 48
Labour hours per unit 1 1.5 1.2
Contribution per labour hour 30 28 40
Ranking 2 3 1
Hours Contribution
Product Units taken Balance ($)
2000
L 300 360 360 @ $40 /hr 14400
1640
J 500 500 500 @ $30 /hr 15000
1140
K 760 1140 1140 @ $28 /hr 31920
0
Total contribution 61320
Total budgeted fixed costs (W1) 35000
Total profit 26320
W1  Fixed Costs
Budgeted units Fixed OAR / unit $
J 500 x 10 = 5000
K 1500 x 16 = 24000
L 300 x 20 = 6000
35000
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Exercise 7
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vi) Using a 30% margin on marginal cost:
$
Production cost 56.00
30% margin 24.00
Selling price 56 / (100%30%) 80.00
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Exercise 8
Selling price per Joe: $10.00 per unit x 120% 12.00 $ per unit
Therefore demand would be 38000 units at this selling price.
Producing more units than sales is likely to be unsustainable in the long run.
Therefore, marginal costing is likely to better indicate the longterm profitability
of Joes.
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Price Unit contribution Demand Total contribution
$ $ (units) $
11.00 4.00 40000 160000
12.00 5.00 38000 190000
13.00 6.00 35000 210000
14.00 7.00 31000 217000
15.00 8.00 25000 200000
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Exercise 9
The model instructs us to use the higher of scrap value, or the opportunity cost
of the next best alternative use foregone.
Opportunity cost: The alternative use for X is as a substitute for H. The relevant
cost of H is the current replacement cost of H, so by accepting the contract, this
involves sacrificing the opportunity to use 300kg of X as a substitute for 300kg of
H.
The higher of these two values is $1200, so this is the relevant material cost for
the special contract.
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Exercise 10
To attempt this question, treat the two grades of labourer separately in the decision
model. The model tells
us:
$ per hour
Relevant cost of skilled labour:
Opportunity cost of contribution foregone from Q (W1) 40
Existing hourly rate for skilled workers 12
52
Relevant cost of unskilled labour 0
52
Product Q contribution per unit is $60 profit + $20 fixed indirect cost = $80 per unit
Therefore, the contribution foregone from Q = $80 per unit = $40 per hour
2 hours per
unit
In other words, each hour diverted from making product Q means that $40
contribution is lost by Baines  this has to be built into the labour rate used to
assess the special contract.
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Exercise 11
Show the relevant costs and revenues for the Dingos toy, and use this to
establish the net relevant benefit of selling the toy: Dingos
$000
Relevant cost:
Materials (i) Wholly incremental 70.0
Labour (ii) Remove 5% 104.5
Variable production overhead (i) Wholly incremental 50.0
Fixed production overhead (iii) 2/3 avoidable 20.0
Marketing (iv) Specific advertising 6.0
Selling and distribution (v) 1% avoidable 3.1
Head office recharge Not relevant 0.0
Cahill Group's profit will fall to $6600 if they discontinue the Dingo.
N.B. This can be proven as follows:
If we discontinue the Dingos toy, the following costs will need to be borne by
the other toys in Cahill's range:
$000
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Exercise 12
Product
H J K L
J 1 x $3 x 7500 22,500
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Exercise 13
50 14 0.14 7
100 35 0.35 35
150 38 0.38 57
200 11 0.11 22
250 2 0.02 5
100 1 126
E(x) = Σpx
This means that the expected number of snack sales per day is 126 units.
Or: Selling price per unit next year $3.70 per unit.
($3.70 
C/S ratio of dessert = $1.50) = 59%
$3.70
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Expected contribution for next summer = $277.20 x 100 = $27,720
($150
(daily fixed cost + +
iii) Required units = required profit) = $240) = 177 units
cont'n per unit ($3.70

$1.50)
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Exercise 14
i) Maximin
Maximin criterion assumes that the worst possible outcome will always occur. The
decisionmaker should therefore choose the highest payoff given this scenario.
The worst possible outcome is that demand might be low. Given low demand:
X 120,000
Y 20,000
ii) Maximax
Maximax criterion assumes that the best possible outcome will always occur. The
decisionmaker should therefore choose the highest payoff given this scenario.
The best possible outcome is that demand might be high. Given high demand:
X 150,000
Y 200,000
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Regret = Profit from optimal decision possible  profit from actual decision made
Low High
Machine $ $
X  50,000
Y 100,000 
The aim of this criterion is to minimise the maximum possible regret. The maximum
regret for machine X is $50,000, whilst that of machine Y is $100,000. Therefore
machine X should be chosen.
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Exercise 15
i) risk seeking
This person is an optimist  apply the maximax decisionmaking criterion
X 150,000
Y 200,000
X 120,000
Y 20,000
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Expected value of x, EV(x) = Σpx
Expected value
Machine ($)
Machine Y has the higher expected value, and should therefore be chosen.
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Exercise 16
1. Select the data points with the highest and lowest activity levels. If relevant,
inflate the figures given to current prices.
In the Alex Young Salads example, we will treat average weekly temperature
as the activity (x) level.
The highest temperature given is 26°C, and the lowest is 16°C.
High 26 °C sales $334,000
Low 16 °C sales $228,000
$334  $228
= 26  16
In other words, a $10600 sales increase occurs for each rise of 1°C
In other words, the model is predicting that even if the weekly temperature
was 0°C, there would still be sales of $58400 for Alex Young Salads
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4. Use the figures you have calculated to predict the total cost at the activity
level you have been given.
aii)
For 21 °C, (week 32)
Total cost = Fixed cost + variable cost
= $58,400 + (10600 x 21)
= $281,000 predicted sales
Sales
Temp (°C) ($000)
(x) (y) xy x2 y2
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Then apply the formulae:
If y = a +
bx,
nΣxy  ΣxΣy
b = nΣx2  (Σx)2
214176  209875
= 16038  15625
= 10.414
Σy bΣx
a = n  n
= 279.83  216.96
= 62.874
y = 62.874 + 10.414 x
= 62.874 + (10.414 x 19 )
= $260,741 predicted sales
ii) week 32
y = 62.874 + 10.414 x
= 62.874 + (10.414 x 21 )
= $281,569 predicted sales
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d) Explain the uses the information you have derived in parts a) to c) might be put to by
the management of Alex Young Salads.
e) Explain any issues you would bring to the attention of the management of Alex Young
Salads
1. The forecasts that have been raised depend on the accuracy of the weather forecast from
the Met Office. It is notoriously difficult to predict the weather for a period as long as a week.
This problem will be even more relevant in week 32 (which is two weeks away).
2. The forecasts raised assume that the relationship between salad sales and temperature is
linear. This is not necessarily the case.
3. The sample of values from which the forecasts have been drawn is too small to be
statistically significant, in that it only covers a sixweek period of a single year.
4. Both forecasting methods assume that the only factor influencing salad sales is the
weather. Other things can affect sales of particular foodstuffs, for instance
 consumer taste
 celebrity chef endorsements
 unusual oneoff events, such as sporting events (e.g. sales of convenience food
usually increase dramatically during the World Cup football tournament and
Olympic Games, etc.)
5. Forecasting in this way assumes that the past is a reliable indicator to future events.
There is no necessary causal link between the future and the past.
63 © 7city Learning
Exercise 17
Tem Q1 Q2 Q3 Q4
Quarter number 9 10 11 12
Trend 510 520 530 540
Seasonal variation (%) 10% 25% 20% 15%
Seasonal variation (units) 51 130 106 81
Forecast sales 561 650 424 459
Pul Q1 Q2 Q3 Q4
Quarter number 9 10 11 12
Trend 422 430 438 446
Seasonal variation (units) 30 25 55 50
Forecast sales 392 455 493 396
64 © 7city Learning
Exercise 18
y= axb
a= 100
log rate log 0.7
b= log 2 = log 2

0.154902 0.51457
= 0.30103 =
x= 16
0.51457
y= 100 x 16
y= 24.01 hours per Cookee
y= axb
a= 100
b= 0.5145732
x= 17
y= axb
0.51457
y= 100 x 17
y= 23.27 hours per Cookee
The time taken to make the 17th Cookee is the difference between the total
time for 17 Cookees and the total time for 16 Cookees.
65 © 7city Learning
b) i) average time per unit if 200 Kaypees are produced
y= axb
log rate log 0.8
b= log 2 = log 2
0.09691 
= 0.30103 = 0.32193
x= 40
y= 5
y= axb
y 5
b 0.3219
a= x = 40
5
= 0.30497 = 16.395 hours
If x = 200 units,
0.32193
y= 16.395 x 200
y= 2.98 hours per unit
If x = 250 units,
0.32193
y= 16.395 x 250
y= 2.77 hours per unit
hours
Total for 250 units = 2.77 x 250 = 692.94
Total for 200 units = 2.98 x 200 = 595.64
st th
Total time for the 201 to the 250 unit = 97.30
y= axb
y= 32
a= 200
66 © 7city Learning
x= 80
b
32 = 200 x 80
b
0.16 = 80
b
log 0.16 = log 80
log 0.16 = b log 80
log 0.16
log 80 = b
0.79588
1.90308999 = b
b = 0.4182
log rate
log 2 = 0.4182
67 © 7city Learning
Exercise 19
Rivets:
Variable cost 1700
of rivets / hr = 17000 = $0.10
Steel:
Variable cost 76500
of steel / hr = 17000 = $4.50
Direct labour: $
Production overheads
By working 20340 hours, the step has been crossed, and so a further $8000 must be added
to find the flexed budget allowance.
% of flexed
Original Flexed Total budget variance
Budget Budget Actual Variance
68 © 7city Learning
Rivets 1,700 2,034 2,065 31 A 1.52% A
Production volumes were higher than originally budgeted, meaning that the original
budget cannot fairly be compared to actual cost.
The budget must first be flexed. One cannot sensibly compare the budgeted
cost of producing 10000 girders with the actual cost of producing 12500 girders.
Overall the total variance was very small indeed  only $469A, which is 0.25% of total
flexed budget cost for the period.
The variances for the two biggest areas of expenditure, steel and direct labour,
are both favourable, and less than 2% of flexed budget cost.
Other direct material cost had an actual value over 13% higher than flexed budget.
However, given that the absolute value of the variance was merely $133A,
it is debatable as to how much time and effort should be spent in trying to understand
this particular overspend.
The most worrying variance in this particular cost centre is that of production overheads,
which were $2050 overspent (nearly 5% of flexed budget),
after allowing for the step. Getting to grips with this is probably where the majority
of investigation time and effort should be spent.
69 © 7city Learning
Exercise 20
i) Labour variances
Labour efficiency variance = (Std hours for actual production  actual hours worked) x std
rate per hour
Labour rate variance = (Std cost of hours paid  Actual cost of hours paid)
Idle time variance = (Actual hours paid  actual hours worked) x std rate per
hour
Hours
paid 4100
Hours worked 3900
Idle
hours 200
x 6 / hr = $ 1200 A
Material variances
Material usage = (Std material for actual production  actual material used) x std cost per kg
Material price = (Std cost of material purchased  Actual cost of material purchased)
Usage: kg Price: $
1000 units should use 5200 kg should cost
( 1000 x 5 kg/unit) 5000 ( 5200 x 4 $/kg) 20800
But did
use 4900 But did cost 21320
100 F 520 A
x 4 / kg = $ 400 F
(N.B. If the company in the question values material price variance at the time of usage,
use the amount of material actually used to calculate the price variance)
70 © 7city Learning
ii) The learning curve effect
The learning curve effect describes the 'speeding up' effect experienced by staff as
they perform a repetitive activity many times. Since Chedgzoy's product has recently
been updated, this might well have resulted in a new production procedure being designed
for the product, and it is therefore possible that a new learning effect might be present.
Labour rate and idle time variances should not be affected by the learning curve effect.
It is still possible for labour efficiency variances to be calculated; however, a large caveat
should be placed upon any interpretation carried out on these variances
until the
steady state has been reached and a standard time per unit can be reliably calculated.
71 © 7city Learning
Exercise 21
To answer this question, first set out the proforma, then calculate as many variances as
you can from the information given.
Work your way down the standard cost card, calculating variances from the costs given
as you go.
Note that there is no change in any inventory during the month. Therefore actual production
of Colins must equal actual sales of Colins, and also actual usage of both materials
X and Y must equal actual purchases.
Material variances
Material usage = (Std material for actual production  actual material used) x std rate
per hour
Material price = (Std cost of material purchased  Actual cost of material purchased)
Material X
Usage: kg Price: $
100 A 3,740 F
x$ 4.50 / kg = $ 450 A
Material Y
Usage: kg Price: $
150 A 1,270 F
x$ 5.50 / kg = $ 825 A
72 © 7city Learning
Labour variances
Labour efficiency variance = (Std hours for actual production  actual hours worked) x std
rate per hour
Labour rate variance = (Std cost of hours paid  Actual cost of hours paid)
Assembly labour
100 F 6,125 A
x$ 7.50 / hr = $ 750 F
Idle time variance = (Actual hours paid  actual hours worked) x std rate per hour
V. ohd efficiency variance = (Std hours for actual production  actual hours worked)
x std VO rate per hour
V. ohd expenditure variance = (Std cost of var ohds  Actual cost of var ohds)
Efficiency: hrs
73 © 7city Learning
Expenditure: $
3,250 F
Fixed overhead variances
2,100 A
F. ohd efficiency variance = (Standard hours for actual production  actual hours) x Std
F.ohd per hour
F. ohd capacity variance = (Budgeted hours  actual hours) x Std F.ohd per hour
x$ 0.50 / hr = $
74 © 7city Learning
F. ohd capacity variance: hrs
actual units did
3,100 take 18,500
2,800 budgeted units should take
1,700 F
x$ 0.50 / hr = $ 850 F
Note: Although this is not required by the question, notice how the fixed overhead efficiency
and capacity
variances add to give the fixed overhead volume variance:
Sales variances
Sales volume profit variance = (Actual units sold  budgeted units sold) x std profit per
unit
Sales price variance = (Actual selling price per unit  Std selling price per unit) x Actual
units sold
550 F
75 © 7city Learning
Sales price variance: $
Act SP per unit 127
Std SP per unit 130
3 A
x 3100 units 9300 A
Once you have completed all of the variances, plug the numbers you have calculated into
the operating statement proforma.
Budgeted gross profit 2550 budgeted units x $29 budgeted profit per unit 73,950
80,600
Cost variances $F $A
Material X:
usage 450
price 3,740
Material Y:
usage 825
price 1,270
Assembly labour:
efficiency 750
rate 6,125
76 © 7city Learning
250
expenditure 3,250
Fixed overhead:
expenditure 2,100
efficiency 50
capacity 850
Author's Note 1
Although this is not required by the question asked, it is possible to calculate actual
profit directly for this question in the following way:
$ $
units x per
Sales 3,100 $ 127.00 unit 393,700
77 © 7city Learning
Author's Note 2
Again, not required by the question, but notice how the fixed overhead cost variance is
caused by underabsorbing fixed overheads:
$
Fixed overhead absorbed:
Underabsorption 1,200
Expenditure 2,100 A
Efficiency 50 F
Capacity 850 F
1,200 A
78 © 7city Learning
Exercise 22
79 © 7city Learning
Author's Note
It is possible to prove these figures by calculating the usage variances for Bullens:
Usage for A: kg
70 F
x$ 18.00 / kg = $ 1,260 F
Usage for B: kg
130 A
x$ 14.00 / kg = $ 1,820 A
+ 1,820 A
560 A
80 © 7city Learning
Exercise 23
$8,300
2,500 = $3.32 per unit of output
81 © 7city Learning
Exercise 24
i) ROCE
PBIT PBIT
Capital
ROCE = employed = (Equity + long term liabilities)
643 = 17.4%
20X8 = 2355 + 1338
758
20X7 = 2345 + 842 = 23.8%
Gross profit
Profit margin = Sales turnover
1420
20X8 = 3911 = 36.3%
1614
20X7 = 3815 = 42.3%
643
20X8 = 3911 = 16.4%
758
20X7 = 3815 = 19.9%
82 © 7city Learning
iv) Asset turnover
3815
20X7 = 2345 + 842 = 1.20 times
v) Financial gearing
1338
20X8 = 1338 + 2355 = 36.2%
842
20X7 = 842 + 2345 = 26.4%
Current assets
Current ratio = Current liabilities
1450
20X8 = 863 = 1.68 times
1324
20X7 = 801 = 1.65 times
83 © 7city Learning
vii) Quick ratio (acid test)
1450  562
20X8 = 863 = 1.03 times
1324  457
20X7 = 801 = 1.08 times
Trade
Accounts receivable receivables
days = Credit sales x 365
479
20X8 = 3776 x 365 = 46.3 days
366
20X7 = 3684 x 365 = 36.3 days
Trade payables
Accounts payable Credit
days = purchases x 365
256
20X8 = 2207 x 365 = 42.3 days
158
20X7 = 2029 x 365 = 28.4 days
84 © 7city Learning
x) Inventory days
Inventory
Inventory days = Cost of sales x 365
457
20X7 = 2201 x 365 = 75.8 days
85 © 7city Learning
Exercise 25
i) Using ROI
Division Division
X Y
Exising ROI:
Profit 120000 16000
Capital 375000 145000
32.0% 11.0%
New ROI if project accepted:
New profit 141000 30500
New capital 500000 270000
28.2% 11.3%
Accept? No Yes
Now the decisions taken are in the interest both of the divisions,
and of McFadden as a whole.
86 © 7city Learning
Exercise 26
b) i) when Cue has spare capacity and limited demand for Pee
In this circumstance, the minimum transfer price for Gee is $33, since this is
the incremental cost to Stubbs Group of producing Gee. However, this
would provide no incentive to Cue to supply Tee, since no contribution is
made.
The transfer price set therefore needs to be in the range of $33 to $43.
Each extra dollar above $33 is an extra dollar profit for division Cue at the
expense of a dollar of Tee's profit from each Gee transferred  therefore
there will be a negotiation whereby Cue's manager will try to set the transfer
price as close to $43 as possible, and Tee's manager will try to set the
transfer price as close to $33 as possible. It is in the interest of Stubbs
group
to enable this negotiation to take place for motivational reasons  both
managers participate in the negotiation, and (assuming the negotiation
is fair) both will see the transfer price set as fair.
b) ii) when Cue has no spare capacity and unlimited demand for
Pee
If Division Cue is to supply division Tee, this means that some capacity for
producing product Pee has to be sacrificed. Therefore, producing Gee
has an opportunity cost  this is the lost contribution from selling Pee
externally. For each Gee produced, one less Pee is produced and sold.
For every unit of Gee supplied internally, Cue loses $16 contribution from
Pee. The relevant cost from supplying product Gee internally is therefore
87 © 7city Learning
$49 (that is, $16 + $33). It is in the interest of Stubbs Group for Tee to buy
in Gee from the external supplier at the cheaper relevant cost of
$43.
If a transfer price of $49 is set, and the buyin price rises above $49, then it becomes
right for the group for the internal transfer to take place since the total relevant cost
to Stubbs of producing and selling Tee's products (i.e. $49 per unit) would be lower
than the market price per Gee.
88 © 7city Learning
Exercise 27
Traditional
price: $
3,000 A
Traditional usage: kg
500 A
x$ 3.00 / kg = $ 1,500 A
89 © 7city Learning
i) Traditional material price variance = $ 3,000 A
2,500 F
x$ 3.50 / kg = $ 4,200 A
5,250 A
90 © 7city Learning
Planning material usage: kg
7,000 units should use (orig. std usage)
1,250 A
200 A
x
$ 7.50 / hr = $ 1,500 A
91 © 7city Learning
iii) Traditional labour rate variance = $ 1,250 A
325 A
200 A
x$ 7.75 / hr = $ 1,550 A
875 A
92 © 7city Learning
N.B. There is no planning labour efficiency variance, since the standard labour time
per unit has not been amended.
200 A
$/
x 12.00 unit 2,400 A
93 © 7city Learning
v) Traditional sales price variance = $ 7,300 A
94 © 7city Learning
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