Performance Management

Tuition Mock

June and December 2009

Question Paper
Reading and Planning 15 minutes
Writing 3 hours
ALL FIVE questions are compulsory and MUST be attempted
During reading and planning time only the question paper may be annotated DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS

Get into good exam habits now!

Take a moment to focus on the right approach for this exam.

Effective time management

• Watch the clock, allocate time to each mark and move on if you get behind.

• Take a few moments to think what the requirements are aski ng for and how you are going to answer them.

• Remember one mark is usually allocated for each point you give in a discursive question.

Effective planning

• This paper is in exactly the same format as the real exam. You should read through the paper and plan the order in which you will tackle the questions. Always start with the one you feel most confident about.

• Read the requirements carefully: focus on mark allocation, question words (see below) and potential overlap between requi rements

• Identify and make sure you pick up the easy marks avai lable in each question.

Effective layout

• Present your numerical solutions using the standard layouts you have seen. Show and reference your workings clearly.

• With written elements try and make a number of distinct points using headings and short paragraphs. You should aim to make a separate point for each mark.

• Ensure that you explain the points you are making ie why is the point a strength, criticism or opportunity?

• Give yourself plenty of space to add extra lines as necessary, it will also make it easier for the examiner to mark.

Common terminology



Describe Distinguish Explain


Illustrate Calculate/compute Demonstrate Prepare


Compare and contrast Discuss





Express, fully or clearly, the details of/facts of Give the exact meaning of

Communicate the key features of

Highlight the differences between

Make clear or intelligi ble/state the meaning of Recognise, establish or select after consideration Use an example to describe or explain something To ascertain or reckon mathematically

To prove with certainty or to exhibit by practical means To make or get ready for use

Examine in detail the structure of

Show the similarities and/or differences To examine in detail by argument

To create or bring into existence

To counsel, inform or notify

To appraise or assess the value of To advise on a course of action


All FIVE questions are compulsory and MUST be attempted

1 Fourstones

Fourstones currently produces two products, the Stone and the Haugh. It currently uses a standard absorption costing system to calculate inventory values and cost of sales. It has, up to now, used a labour hour basis to absorb fixed producti on overheads into the cost of production.

Material cost per unit Direct Labour cost per unit Labour rate per hour

Fixed production overheads per hour

Selling price

Production and sales volumes

Budget data relating to the company's two products are as follows.

Stone Haugh

$450 $550

$1,250 $625

$25 $25

$50 $50

$9,000 14,000

$4,525 12,500

Fourstones is considering moving towards an Activity Based Costing (ABC) system. It has identified the following activities undertaken within the factory and has allocated its overheads to each activity.

Activity Overheads
Production set ups 20,125,000
Delivery to customers 3,900,000
Component receipts/storage 13,992,500
Other activities 12,607,500
Total overheads 50,625,000
Other relevant data
Stone Haugh
Production runs 1,025 3,000
Deliveries to customers 14,000 25,000
Different components per unit 620 425 At a recent meeting of the Board the change in costing system was considered and the followi ng comments were made:

Chief Executive

The change in costing system is pointless unless it improves the profitability of the company. I would like to see how this change to ABC improves company performance.

Marketing Director

ABC sounds like the way forward. I do not understand why it is not used by all companies. Required

(a) Calculate the full production cost per unit and net profit for each product using:

(i) Absorpti on costing

(ii) Activity Based costing

(13 marks)

(b) Draft a memorandum as Financial Controller to the rest of the Board addressing the concerns of the two Directors. You should explain the advantages of activity based costing over the

current absorption costing system. (7 marks)

(Total: 20 marks)


2 Ride Co

Ride Co is engaged in the manufacturing and marketing of bicycles. Two bicycles are produced. These are the 'Roadster' which is designed for use on roads and the 'Everest' which is a bicycle designed for use in mountainous areas. The following information relates to the year ending 31 December 20X5.

(1) Unit selli ng price and cost data is as follows.

Selling price Material cost

Variable production conversion costs

Roadster $ 200



Everest $ 280 100 60

(2) Fixed production overheads attributable to the manufacture of the bicycles will amount to $4,050,000.

(3) Expected demand is as follows.

Roadster Everest

150,000 units 70,000 units

(4) Each bicycle is completed in the finishing department. The number of each type of bicycle that can be completed in one hour in the finishing department is as follows.

Roadster 6.25

Everest 5.00

There are a total of 30,000 hours available within the finishing department.

(5) Ride Co operates a just in time (JIT) manufacturing system with regard to the manufacture of bicycles and aims to hold very little work-in-progress and no finished goods inventories whatsoever.


(a) Using marginal costing principles, calculate the mix (units) of each type of bicycle which will

maximise net profit and state the value of that profit. (4 marks)

(b) (i)

Calculate the throughput accounting ratio for each type of bicycle

(ii) Briefly discuss when it is worth produci ng a product where throughput accounting principles are in operation. Your answer should assume that the variable overhead cost amounting to $4,800,000 incurred as a result of the chosen product mix in part (a) is

fixed in the short term. (8 marks)

(c) Using throughput accounting principles, advise management of the quantities of each type of bicycle that should be manufactured which will maxi mise net profit and prepare a projection of the net profit that would be earned by Ride Co in the year ending 31 December 20X5.

(4 marks)

(d) Explain two aspects in which the concept of 'contribution' in throughput accounting differs

from its use in marginal costing. (4 marks)

(Total: 20 marks)


3 Textile Co

Textile Co has recently shut down a factory which used to make cushions, although all the inventories of raw materials and machinery are still there awaiting disposal. A former customer has just asked whether he could be supplied with one last delivery of 500 cushions. You ascertain the following facts.

(1) There is sufficient covering material in inventory. Thi s originally cost $400 but has a disposal value of $190.

(2) There is sufficient stuffing in inventory. This originally cost $350. It was to have been shipped to another factory at a cost of $80. The other factory would pay $500 for this quantity.

(3) Labour costs would be $450.

(4) A supervisor could be spared from the other factory for the week needed to produce the cushions. His normal wage is $160 and his rail fare and hotel bill would amount to $135.

(5) Before the factory was closed, fixed overheads were absorbed at 200% of direct labour cost.


(a) Calculate the minimum price that could be quoted.

(5 marks)

Textile Co also manufactures and sells fabric, but the purchasing manager has been asked to investigate the prices of an overseas producer. She provides the following cost and price information.

Fabric Damask Silk Linen
Production (rolls) 20000 40000 80000
$ $ $
Direct material cost, per roll 0.80 1.00 0.40
Direct labour cost, per roll 1.60 1.80 0.80
Direct expense cost, per roll 0.40 0.60 0.20
Fixed cost per roll 0.80 1.00 0.40
Selling price each 4.00 5.00 2.00
Imported pri ce 2.75 4.20 2.00 (b) Calculate whether any of the fabrics should be purchased on the basis of cost only. (5 marks)

(c) Calculate the new profit and the amount of the change in profits if Textile Co purchase Damask.

(5 marks)

(d) Identify matters that should be considered before making a decision to purchase fabric.

(5 marks)

(Total: 20 marks)


4 Hillstar

Hillstar has received a request from a new customer for the manufacture of a specialised piece of equipment. Thi s is a one-off order and the company has calculated that the lowest cost estimate, prepared on a relevant cost basis, is $1,050.60.

Now that the cost esti mates have been prepared it is considered that there is some doubt about the unskilled labour rates per hour and the machine maintenance costs per hour. The company has analysed the risks and the estimated probabilities for each value are:

Unskilled labour

$ per hour Probability

15 0.20

11 0.55

9 0.25

Maintenance costs

$ per hour Probability

2.80 0.30

2.00 0.50

1.50 0.20

The followi ng two-way data table shows the effects of these possible changes on the lowest cost estimate.

15 11 9

Maintenance costs per hour

Unskilled labour rate

per hour




+ 140.40 + 13.80 - 49.50

+ 126.60 0.0

- 63.30

+ 117.975 - 8.625

- 71.925


(a) (i)

Explain the meaning of the two-way table given and show how thi s can be used to

assess the risk of the quotation price. (5 marks)

(ii) What are the limitations of using expected values as a guide to decision making?

(3 marks)

Analysis has been undertaken for a new product that Hillstar is considering launching.

The variable cost per unit could be $70, $65 or $60 and it is estimated that a flexible pricing policy will result in the following outcomes.

Price ($) 110 100 90

Demand 45,000 58,000 80,000


(b) (i)

Prepare a summary which shows the budgeted contributi on for each of the nine

possible outcomes. (5 marks)

(ii) State the pricing strategy which will result from each of the following decision rules:

maximax, maximin and minimax regret

Explain the basis of operati on of each decision rule. Use your answer to (i) where

relevant. (7 marks)

(Total: 20 marks)


5 First Edition

First Edition Limited is a company that prides itself on being the first to deliver advanced technology products to the market.

The management of First Edition are considering whether to introduce a system of target costing in the future as it has been suggested to them that this would be a more beneficial way of prici ng and achievi ng the desired returns for their products.


(a) (b)

Briefly describe the stages in the target costing process.

(5 marks)

Explain to the management of First Edition why this process might be a better way of achieving their desired returns. (5 marks)

Analysis has been performed as to the expected costs of a new product 'Edition X'

The main component cost is expected to be $43.00 per unit.

The delivery cost of this component is $250 and the components are delivered in batches of 100 at a time.

Other materials (cabling) required will cost $45 per 100m. Each unit needs O.4m of cable.

The final material, type Z will be purchased in batches of 250 with 5 being needed for each unit. The cost per batch is $1 ,250.

The materials for packaging are $0.75 per unit but it is envisaged that a wastage rate of 5% of packaging material will be experienced due to the unusual dimensions of the Edition X.

Labour costs are expected to be $45,000 if 1 0,000 units are produced and $97,500 if 25,000 units are produced.

Variable overheads are $3.50 per unit.

Currently factory fixed overheads are 150,000 per annum. Specific fixed overheads are anticipated being $30,000.

First Edition is planning to produce 50,000 units with a selling price of $95. They demand a profit margin of 25%.


(c) Calculate the expected cost for Edition X and identify any cost gap.

(10 marks) (Total: 20 marks)


Student self-assessment

Having completed this paper take a few minutes to consider what you did well and what you found difficult. Use this as a basis to focus your future study on effectively improving your performance.

Common problems Future emphasis if you answer Yes

Timing and planning Did you finish too early?

Did you overrun?

YIN Focus your planning time on generating more ideas.

Use models to help develop width to your thinking.

YIN Focus on allocating your time better.

Practise questions under strict timed conditions. If you get behind leave space and move on.

YIN Focus your planning time on developing a logical structure to your answer.

Did you waffle?


Was your answer difficult to follow?

YIN Use headings and subheadings.

Use numbering sequences when identifying points.

Leave space between each point.

Did you fail to explain each point clearly? YIN Show why the point identified answers the question set.

Did you fail to show any workings or were

your worki ngs unclear? YIN Give yourself time and space to make the markers job easy.


Did you struggle with:

Interpreting the questions?

Rememberi ng the notes/text?

YIN Learn the meaning of question words (inside front cover).

Learn subject jargon (study text glossary). Read questions carefully noting all the parts. Practise as many questions as possible.

YIN Review your notesltext.

Work through easier examples first. Contact ACCA queries for help.

YIN Quiz yourself constantly as you study. You need to develop your memory as well as your understanding of a subject.

Understanding the subject?


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