erry aes SE) 2013acca.taobaoGera LEARNINGMEDIA ACCA - F5 Performance Management ‘Suggested Mock Exam Answers 2013 Answer 4 (a) Decision Tree 3. 5 marks Maximum marks 5 (b) Expected value of total profit ‘Annual Machine: Size 1 Machine: Size 2 ‘Machine: Size 3 output (m’) Profit | Prob | EV | Profit | Prob | EV | Profit | Prob | EV T milion 35[ 056] 19.60 5| 016[ 080 - ~ ~ 1 milion 25] 024| 6.00 (©)| 0.24} (1.20) e i ze 5 million 175| 008! 1400) 125] 0.12] 1500] 50) 0.18] 900 S million 75| 0.06) 450 75| 009) 675} 25} 030] 750 5 milion 25] 006] 1.50 25] 009) 225] (25)| 0.12] (3.00) 8 milion - - -| 200] 015} 30.00 0.24| 48.00 8 million - - - 40) 0.15| 6.00 0.16| 640 50 58.60 67.90 Note: the profits shown in the above table are before charging lease payments. ae Probability of breaking even Machine: Size 1 Probability of breaking even =100% EV of profit = $45.60 - $20 = $25.60 milion All for you to... aass/§G38708370 LEARNINGMEDIA Machine: Size 2 Probability of breaking even = 51% EV of profit = $59.60 - $30 Machine: Size 3 Probability of breaking even E = 58% EV of profit = $67.90 - $40 = $27.90 million 3 marks Maximum marks 8 {c) Report From: ‘The Management Accountant Date: XXIKXIXX To: ‘The Management of Strong Foundation ‘Subject: Recommendation of action Based on the decision tree, size 2 machine is the preferred option. However, there are certain issues to be considered: > The expected values of the profits from all three machines are close to the current profit of $24 milion. ‘Strong Foundation is a well-known establishment and produces traditional materials (and thus, takes very litle risk). Thus, the following question would arise: “Do the extra profits offer sufficient reward for the risks involved in undertaking the new venture?” > Machine size 2 has the highest expected value, but the lowest probability of breaking even. In order to decide whether accepting machine size 2 is viable or not, the management needs to revisit the risk appetite of the company. » Machine size 1 has the smallest expected value. But based on the outcomes presented, it will always retum a profit. » Machine size 3 has an expected value close to that of machine size 1, but offers the potential for the largest ‘output (that is 5 million or 8 million). However, machine size 3 also presents the possibility of the largest loss, > The choice between the machines is very sensitive to the forecasts of outputs and costs and their associated probabilities. For example if for Machine size 3, the profit per metre square for the production of 8 millon square metres was certain to be $25, then the expected value would rise to $53.50 milion. This is far higher than the other machines and much higher than the profit currently being eamed ($24 milion). > Expected value is an averaging technique based on probability estimates and therefore its use for a “one- off decision is questionable. Moreover, the use of a small number of point probabilities also weakens the technique. » Expected value does not provide a measure for the spread of results that could occur. A simulation (modelling) technique may be a better methodology to appraise such projects. Signed: Management accountant ‘1 mark for report structure ‘1 mark for each valid point Maximum marks 7 MD) >. 572013acca.taobaoGora LEARNINGMEDIA Answer 2 (a) Variances should be analysed between planning and operating causes, so that management can focus on controllable costs and revenues ‘A planning variance represents the difference between an original standard - which is no longer considered to bbe a relevant or achievable target - and a revised standard. Such variances, therefore, represent uncontrollable differences between the actual and target performance. ‘Operating variances arise by comparing actual performance against achievable targets. Such variances are thus considered to be controllable through management decisions and actions. 2marks Maximum marks 2 Planning price variance (ingredient A) Revised standard cost (1,650 x 0.5 kg x $0.55) $453.75 Original standard cost (1,650 x 0.5 kg x $0.50) $412.50 $41.25 (A) 3 marks Operating price variance (ingredient A) 1,072 kg cost $510.0 1,072 kg should have cost (1,072 x $0.50) $589.60 $79.60 _(F) 3 marks Maximum marks 5 (b) Material mix and yield variances Material mix variance Revised average standard price per kg of input $ 0.5 kg of A @ $0.55 per kg | 0.275 0.5kg of B @ $1.20 per kg | 0.360 0.5kg of C @ $0.80 per kg | 0.200 0.835 ‘$0.835/1.05 kg = $0.795 per kg of input For the month of October: Ingredients | Actual quantity in ] Actual quantity in | Difference actual mix (kg) | standard mix (kg) | (kg) A 4,072 895, 7 8 412 537 (125) c 396, 448 (62) 7,880 7,880 Nil Material mix variances: A= 177 x ($0.55- 0.795) = 43 (F) B = (125) x ($1.20 - 0.795) = 51 (F) C= (62) x (0.80 ~ 0.795) = Nil Total material mix variance = 43 (F) + 51 (F) + Nil $94 (F) Note: the weighted average method of valuation has been used. 3 marks All for you to... azss/§G38708370 mon LEARNINGMEDIA Material yield variance Kg 1,880 kg input should yield (1,880/ 1.05) | 1,790.48 ‘Actual yield (1,650.00) Difference (shortfall) 140.48 ‘Thus, material yield variance = 140.48 kg x $0.835 = $117 (A) 3marks ‘Maximum marks 6 {c) For the month of October: Variance % Adverse / Favourable Ingredient A (1777 895) 19.8% (A) Ingredient B (125 / 537) 23.3% (F) Ingredient C (52/448) 11.6% (F) Yield (140.48 / 1,790.48) 7.8% (A) 3marks This form of analysis is useful because it shows the trend of product mix without distortion from the effect of the standard price being very similar to the weighted average standard price. 1 mark This information is very important, and the use of percentages relative to the standard values for the actual inputs and output avoids the distortions caused to the variance values by fluctuating actual activity levels. Some ‘managers may also find it easier to understand non-financial measures. It should be remembered that mixing is done by weight, not based on financial values. 1 mark In this question, it can be seen that there is a continuing, increasing trend of using more of ingredient A and less of ingredient B. The use of ingredient C is fluctuating around the standard and is of less significance. However, the monetary mix variance for ingredient C, which is nil, could be misleading. 1 mark ‘There is a mix variance, but the nil valuation is a function of its small size in kg, and the similarity between the ‘standard input value of material C and the weighted average standard input cost per kg, 1 mark ‘Maximum marks 7 Answer 3 {a) Total savings achieved by implementing JIT Current situation ‘$000 [$000 Direct costs Mi 273,000 m2 316,200 M3 445,500 Total direct cost 1,034,700 Overheads Set-ups 45,500 Materials handling | 58,400 Inspection 63,000 Machining 182,400 Warehousing 43,800 | 303,100 Fixed overheads 342,870 Total cost 4,770,670 3marks MEO 6-257Implementing the JIT system ‘$000 [$000 Direct costs M1 289,800 m2 335,580 M3 475,200 Total direct cost 1,100,580 Overheads Setups 31,850 Materials handling | 40,880 Inspection 44,100 Machining 155,040 | 271,870 Fixed overheads Setups 29,862 Materials handling | 37,023, Inspection 41,916 Machining 122,859 |_231,660 Total cost 1,604,110 ‘$000 Current cost 1,770,670 Cost under JIT system | 1,604,110 Cost savings 166,560 (b) Variable cost per machine under JIT ‘Comparison of current system and the proposed system of JIT mi (8) [M2(8) [M3 (8) Total direct cost 3,864.00 | 4,474.40 | 6,336.00 Variable overheads (W1) | _ 928.26 | 1,292.00 | 1,404.67 Total variable cost 4,792.26 | 5,766.40 | 7,740.67 Determination of optimum selling price and output level 2013acca.taobaoGora LEARNINGMEDIA 3 marks ‘Therefore, Haydon Pic should implement the JIT system, as there are substantial savings in costs. 2 marks ‘Maximum marks 8 2 marks Machine M1 Demand (units) | Selling Price (8) | Variable cost (S) Contribution ($) Total contribution ($000) 75,000 65,000 50,000 35,000 5,000 4,792.26 5,750 4,792.26 6,000 4,792.26 6,500 4,192.26 207.74 987.74 1,207.74 4,707.74 15,581 62,253 60,387 59,771 Therefore, the optimum level of sales and the corresponding selling price is: 65,000 machines @ $5,750 ‘3 marks All fon you te, aass/§G38708370 mon LEARNINGMEDIA Machine M2 Demand (units) | Selling Price (S) | Variable cost (S) | Contribution (8) | Total contribution (S000) 75,000 5,750 5,766.40 (16.40) (1,230) 60,000 6,250 5,766.40 483.60 29,016 50,000 6,500 5,766.40 733.60 33,012 45,000 7,500 5,766.40 1,733.60 60,676 Therefore, the optimum level of sales and the corresponding selling price is: 35,000 machines @ $7,500 3 marks Machine M3 Demand (units) | Selling Price ($) | Variable cost ($) | Contribution ($) | Total contribution ($000) 75,000 6,500 7,740.87 (1,240.67) (63,050) 60,000 6,750 7,740.67 (990.67) (69,440) 45,000 7,750 7,740.87 9:33 420 30,000 8,000 7,740.87 259.33, 7,780 Therefore, the optimum level of sales and the corresponding selling price is: 30,000 machines @ $8,000, 3 marks Working Wt: Variable overheads Set-up costs: $13,000 x 70% = $9,100 per production run M1: $9,100 x (1,000/75,000) M2: $9,100 x (1,000/75,000) M3: $9,100 x (1,500/75,000) Material handling costs: $4,000 x 70% = $2,800 per order executed M1: $2,800 x (4,000/75,000) M2: $2,800 x (5,000/75,000) (M3: $2800 x (5,600/75,000) = $209.07 Inspection costs: $18,000 x 70% = $12,600 per production run M1 = $12,600 x (1,000/75,000) M2 = $12,600 x (1,000/75,000) M3 = $12,600 x (1,500/75,000) Machining costs: $40 x 85% = 434 per machine hour M1: $34 x (1,080,000/75,000) = $489.60 M2: $34 x (1,800,000/75,000) = $816 M3: $34 x (1,680,000/75,000) = $761.60 Variable overheads per machine M1: $121.33 + $149.33 + $168 + $489.60 = $928.26 M2: $121.33 + $186.67 + $168 + $816 = $1,292 M3: 4182 + $209.07 + $252 + $761.60 = $1,404.67 2marks Maximum marks 12 BEd e2572013acca.taobaoGora LEARNINGMEDIA Answer 4 (a) Throughput accounting ratio = Retum per factory hour/Cost per factory hour Return per factory hour Retumn per factory hour = hroughput per uni/Usage of bottleneck resource Rotary Tillers | Pruners | Marks Selling price per unit sioo[ $160 Material cost per unit $40 $50 Throughput per unit seo[si0| 1 Bottleneck resource (hours required) | __0.25 hours | 0.4 hours | 1 Return per factory hour ‘s240 [$275 Cost per factory hour Cost per factory hour = Total factory costs/Bottleneck hours available Fixed production overheads ‘$2,025,000 | Marks Labour and other variable production overheads | _ $2,400,000 Total factory costs $4,426,000 | 1 Bottleneck resource hours available 30,000 hours. Cost per factory hour $147.50 | 1 ‘Throughput accounting ratio Rotary Tillers | Pruners | Marks Retum per factory hour ‘s240 | $275 Cost per factory hour 147.50 | $147.50 ‘Throughput accounting ratio 163[ 1.86] 2 In situations where throughput accounting principles are applied, a product will be worth producing provided that the throughput per factory hour is greater than the cost per factory hour. This may be measured by the throughput accounting ratio. If throughput return outweighs the cost per factory hour, the ratio will be greater than 1.00. ‘Management attention should focus upon increasing the throughput ratio. if they can do this then higher levels Of profit will be achieved 1 mark ‘Maximum marks 8 {b) Since the pruner has a higher return per bottleneck hour than the rotary tiller, Garden Companion should ‘manufacture the pruner until it has satisfied the total demand of 48,000 units. ‘The production mix of the equipment will therefore be as follows: Equipment Units Units perhour of | Totalhours of | Marks manufactured bottleneck bottleneck resource resource required Pruners, 48,000 a 12,000 | 1.5 Rotary Tillers 48,000 2.50 18,000 | 1.5 "30,000 All for you to... aass/§G38708370 LEARNINGMEDIA Projected profit of Garden Companion for the coming period: $ 3 | Marks ‘Throughput return Pruners (48,000 units x $110) 5,280,000 Rotary Tillers (45,000 units x $60) 2,700,000 | 7,980,000 | 1 Less: Costs Fixed production overheads $2,025,000 Labour and other variable production overheads | $2,400,000 | (4,425,000) | 1 Net profit 3,556,000 ‘Maximum marks 6 {) Environmental accounting is the identification, priorisation, quantification or qualification and incorporation Of environmental costs into business decisions. it would be beneficial for Garden Companion to implement environmental accounting as part of its accounting system as it would help the organisation in the folowing assessment of annual environmental costs product pricing budgeting investment appraisal, calculating investment options designing, calculating costs, savings and benefits of environmental projects {design and implementation of environmental management systems ‘environmental performance evaluation, indicators and benchmarking ‘external reporting / disclosure of environmental expenditures, investments and liabilities reporting of environmental data to statistical agencies and local authorities vvvvvvyyy 3 marks Environmental costs of Garden Companion Environmental costs are a general classification for several types of costs relating to use, release and regulation of materials in facility operations, Environmental costs include disposal costs, investment costs and extemal costs incurred because poor environmental quality exists or may exist. ‘The following costs can be identified with respect to Garden Companion: > Environmental preventive costs: these costs are basically incurred to prevent the production of contaminants or wastes that could cause damage to the environment. Garden Companion’s efforts to minimise the effects of its activities on the environment, conducting environment oriented research and development activities and planting trees in the neighbourhood can be classified as the organisation's environmental preventive costs. The costs that may be incurred by Garden Companion in complying with the various environmental regulations and obtaining environmental certificates would also fall under the category of preventive cost. mark > Environmental detection costs: these costs relate to the activities undertaken to determine if products, processes and other activities within the firm are in compliance with environmental standards. Costs that ‘may be incurred by Garden Companion in testing the “environmental compatibility’ of its products (garden equipment), machining and other processes, and the processes involved in the treatment of residues can be Classified as environmental detection costs. 1 mark > Environmental failure costs: these costs relate to the activities performed in order to deal with the pollutants that result from the activities of the organisation. Such costs of Garden Companion would include costs related to the treatment of various gaseous and solid wastes, noise levels, etc. that are generated by the firm's processes. 1 mark ‘Maximum marks 6 BED 6-2572013acca.taobaoGora Answer 5 (a) Financial performance of Smart Shoes (i) Sales Growth It can be observed that Smart Shoes has had an excellent start to its business. It has made $550,000 of sales in the first quarter and then increased that figure by nearly 41% to $775,000 (working notes) in the next quarter. This is impressive, particularly given that the footwear industry is very competitive. Although it is often that new businesses make slow starts, this does not look to be the case here. 2marks (ii) Gross Profit ‘The gross profit of Smart Shoes is 55% for the first quarter and 52% (working notes) for the second quarter. We have no comparable industry data provided so no absolute comment can be made. However, we can see the {gross profit has reduced by three points in one quarter. This can be taken to be potentially serious and should not continue in future. However, the cause of this fall is not clear. Price pressure from competitors is possible, who may be responding to the good start made by the business. If Smart Shoes is reducing its prices, this would reflect on the gross profit margin produced, It could also be that the costs of sales figures are rising disproportionately. As the business has grown so quickly, Smart Shoes may have had to resort to sourcing extra new supplies at short notice incurring higher Purchase or shipping costs. These could all reduce the gross profits achieved, 2marks (iii) Website design and operation cost ‘Website design and operation costs are being written off as incurred to the management accounting profit and loss account. They should be seen as an investment for the future and not likely to be incurred in the long term. ‘Website development has been made with the future in mind as research done by Smart Shoes revealed that ‘such footwear can be best sold through intemet marketing, Itcan be assumed that future website costs will be lower than at present. Taking this into consideration the loss made by the business does not look as serious as it initially appears. 2marks (iv) Initial Promotional Expenses The initial promotional expenses would not continue at this level in the future. Once the market share is established, this cost will be replaced by more general marketing of the website. Initial promotion proves to be ‘more expensive than general marketing and so the profits of the business will improve over time. This is another ‘good sign that the results of the first two quarters are not as bad as they seem. 1 mark (v) Selling and Distribution Expenses This is a relatively minor cost and appears under control. The proportion of this cost to sales is 6% in quarter 1 ‘and 5.8% in quarter 2. mark (vl) Admin Expenses The admin expenses are 25% of sales in quarter 1 and reduce to 23% of sales in quarter 2. This indicates good cost control by Smart Shoes. This is an example of a business gaining critical mass. The bigger it gets the more itis able to absorb costs. Smart Shoes may have some way to go in this regard, gaining a much greater size than at present mark (vil)Other Variable Operating Expenses ‘These costs of Smart Shoes also appear under control in that it seems to have just varied with volume. Ye marks All for you to... aass/ LEARNINGMEDIA§G38708370 LEARNINGMEDIA Comment on Loss ‘Smart Shoes has lost $181,500 in the first quarter and $83,700 in the second quarter. But the situation is not as bad as it appears to be due to the following reasons: > New businesses take a while to break even after their launch, > The loss figures have been computed after considering website design and development costs which may not be incurred in the future. > Also responsible for the losses are the initial promotion expenses which would subsequently reduce in the future. The major concem of Smart Shoes would be the increase in the cost of sales as a percentage of sales. Steps should be taken to correct this. 2'/s marks: ‘Maximum Marks 12 (b) Non - financial performance of Smart Shoes (i) Number of footwear sold The number of footwear sold by Smart Shoes increased by nearly 41% in the second quarter, which suggests an impressive start. The data can also be used to calculate the selling price per footwear. Quarter 1: $550,000 / 11,000 = $50 Quarter 2: $775,000 / 15,500 = $50 The above suggests that the fall in gross profit has litle to do with the sales price for the shoes. The problem of the falling gross profit must lie elsewhere. 2marks (il) Number of website visitors This is a very impressive start. A new business can often find it dificult to make an impression in the market. Growth in website hits is 24% in the two quarters. If this continued over a year, Smart Shoes’ footwear would become very well known. The internet enables new businesses to impact the market quickly. 2 marks (iii) Unproductive system time Unproductive system time is to be avoided by internet based sellers as much as possible. If the system is down, then customers (and potential customers) cannot access the site. This could easily lead to lost sales at that time and even discourage customers from trying again at later dates, ‘The unproductive time percentage has risen alarmingly and this is a matter of concem. Ideally, we would need figures for the average percentage of unproductive time achieved by comparable systems to be able to ‘comment further. The owners are likely to be disappointed given the level of initial investment they have already made. A discussion with the website developers may well be warranted 2marks (iv) Delivery Efficiency The efficiency of delivery has reduced between the first and the second quarters. This could affect the future sales of Smart Shoes and thus has to be taken care of. 2marks ‘Maximum marks 8 EO 6-2572013acca.taobaoGora LEARNINGMEDIA Workings Profit and Loss Statement of Smart Shoes for the two Quarters. First Quarter ($)__| Second Quarter ($) Sales 550,000 775,000 Less: Cost of Sales (247,500) (372,000) Gross Profit (a) 302,500 “403,000 Less: Operating Expenses: ‘Admin Expenses 137,500 178,250 Selling and Distribution Cost 33,000 44,950 ‘Website Design and Operation 165,000 116,250 Initial Promotion Expenses. 82,500 54,250 ther Operating Expenses 66,000 93,000 Total Operating Expenses (b) 484,000 486,700 Profit (a) ~ (b) (181,500) (83,700) Gross Profit Percentage ‘Quarter 1: $302,500 / $550,000 = 55% ‘Quarter 2: $403,000 / $775,000 = 52% End of Answers All for you to... axss/