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F5 PERFORMANCE MANAGEMENT

All figures are in $ unless otherwise stated

1
ML is an engineering company that specializes in providing engineering facilities to businesses that
cannot justify operating their own facilities in-house. ML employs a number of engineers who are skilled
in different engineering techniques that enable ML to provide a full range of engineering facilities to its
customers.

Most of the work undertaken by ML is unique to each of its customers, often requiring the manufacture
of spare parts for its customers’ equipment, or the building of new equipment from customer drawings.
As a result most of ML’s work is short-term, with some jobs being completed within hours while others
may take a few days.

To date, ML has adopted a cost plus approach to setting its prices. This is based upon an absorption
costing system that uses machine hours as the basis of absorbing overhead costs into individual job
costs. The MD is concerned that, over recent months, ML has been unsuccessful when quoting for work
with the consequence that there has been an increase in the level of unused capacity. It has been
suggested that ML should adopt an alternative approach to its pricing based on marginal costing since
“any price that exceeds variable costs is better than no work”.

With reference to the above scenario:

a. Briefly explain absorption and marginal cost approaches to pricing

b. Discuss the validity of the comment “any price that exceeds variable costs is better than no
work”.

TIME ALLOWED: 20 minutes

2
Fixed overhead absorption rates are often calculated using a single measure of activity. It is suggested
that fixed overhead costs should be attributed to cost units using multiple measure of activity (ABC).

Explain ABC and how it may provide useful information to managers.

(Your answer should refer to both the setting of cost driver rates and subsequent overhead cost contro)

TIME ALLOWED: 10 minutes

3
Explain the benefits of using multiple activity bases for variable overhead absorption.

TIME ALLOWED: 10 minutes

4
Explain the factors that should be considered when selecting cost drivers for an ABC system.

TIME ALLOWED: 10 minutes

5
Explain why throughput accounting has been described as a form of “super variable costing” and how
the concept of contribution in throughput accounting differs from that in marginal costing.

TIME ALLOWED: 10 minutes

6
A supermarket chain is considering building a new shop. There are two possible locations. Explain the
environmental factors that the management accountant should consider when providing information to
support the decision making.

TIME ALLOWED: 10 minutes

7
A table manufacturing company is considering introducing a new environmental policy and specialist
control team as a reaction to some concerns that buyers are having over the company’s potential
adverse impact on natural resources. The company is concerned about how following an environmental
policy might impact on its costs.

State what types of environmental costs the company might incur and explain how these might change
in the future with the introduction of an environmental policy.

TIME ALLOWED: 10 minutes

8
A company has carried out extensive product research and, as a result, has just launched a new
innovative product unlike anything else that is currently available in the market. The company has
launched this product using a market skimming pricing policy, i.e. charging very high prices initially.

The market in which it operates is highly competitive and historically success has been achieved by
being the first to market with new products. Only a small number of companies have survived in the
market, and those that remain are constantly aiming to develop new products either by improving those
already in the market, or by extensive product research.

Select ALL that apply:

a. In the introduction state, the product is unique and therefore the company can charge a high
price
b. In the introduction stage, competitors will buy the product to carry out reverse engineering and
see how the product works, so that they can develop their own similar, but different product
c. In the introduction phase, the company will seek to avoid this competition by maintaining its
selling price at the end of the introduction stage
d. In the growth stage, the company will adopt a lower selling price to continue to attract new
purchasers of the product
e. In the growth stage, if the product cannot be differentiated in other ways, the company may
need further reductions in selling price to maintain growth
f. The growth stage is the ideal time to offer short term one-off offers or discounts for multiple
purchases
g. In the maturity phase, the selling price of the product becomes unstable and the product is not
financially viable anymore
h. In the decline stage, the product may continue to be sold, provided its margin is positive
i. If the product’s margin is not positive in the decline phase, the product may be bundled with
other products or sold for less than its unit cost in order to clear the company’s inventory of
what has become an obsolete product