ACCA

F5 (PM)

Performance Management

ANSWERS

MOCK B

We're not sure whether it is Becker's mock exam or

Kaplan's, or someone else's. Whomever it is, we are
grateful to them.
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SECTION A

1 Both A and D are true. In B, margins may vary but target costing can cope with varying
margins for different services. In C, the incorrect statement is that all services are fixed cost
dominated.

2 Both C and D are true. Removing trade discounts effectively increase selling prices and
working longer will reduce the cost per factory hour as any fixed cost will be spread over
greater hours. In A, a settlement discount is a finance charge and should not affect the
factory performance. In B, it is implied that there will still be a pay rise and so the TPAR
will reduce although not by as much as was expected.

3 D
Production and distribution of the newsletter is done to affect subjective (though measurable)
perceptions of management, customers, employees. Production incurs “corporate image” and
“relationship” costs, which, typically, include the costs of annual environmental reports.

4 B
Existing BEP = 900,000/0.6 = $1,500,000 New BEP = 720,000/0.45 = $1,600,000
When a business has heavy fixed costs it is said to be risky operationally, this step will reduce
fixed costs reducing the risk level. So, the BEP will increase by $100,000, and the risk profile
of the business will improve.

5 $2.67
The original optimal solution is first found:
Skilled labour: 5X + 3Y = 16,000
Demand for X = 2,000
So: (5 × 2,000) +3Y = 16,000
3Y = 6,000
Y = 2000
Optimal contribution is (2,000 × 6) + (2,000 × 8) = 28,000
If skilled labour capacity increased by 1 hour, then the new optimal solution would be:
Skilled labour: 5X + 3Y = 16,001
Demand for X = 2,000
So: (5 x 2,000) + 3Y = 16,001 3Y = 6,001 and Y = 2,000.333
New optimal contribution is (2,000 × 6) + (2,000.333 × 8) = 28,002.67
Hence the dual price per hour is $2.67

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6 At the optimal solution, we use:

(2,200 × 1.25) + (3,100 × 1.75) = 8,175 kg of the material. This would need 8,175/40 = 204.4
bags or 205 bags to have enough.
We currently have 8,520/40 kg =213 bags available, so 8 bags could be cancelled.

7 C
The demand function P = a –bQ; B = –5/500 or –0.01 so P = a – 0.01Q
Also when P = 2,000 then Q = 45,000
Then 2,000 = a – 0.01 × 45,000; 2,000 = a – 450 and a = 2,450
Demand is hence P = 2,450 – 0.01Q. Consequently MR = 2,450 – 0.02Q

8 A
MR = 2,450 – 0.02Q and MC = 800, the optimal quantity is found when MR = MC
2,450 – 0.02Q = 800 2,450 – 800 = 0.02Q So Q = 82,500
The price can be found when Q = 82,500 is substituted into the demand function:
2,450 – 0.01 × 82,500 = $1,625

9 D
A ‘base of similar customers’ precludes discrimination. A single product precludes product
line pricing and given the product is established then price skimming would not seem
possible.

10 B and D are correct

Although both the costs mentioned are not relevant there are likely to be other factory
costs, power for example. Future, cash incremental lease costs would be included in a
relevant costing approach so statement C is not correct. Depreciation is a fixed cost, given
the calculation method, but the fact it isn’t a cash flow is more important.

11 B
Programmers
Spare unused time is 2% of 19,200 hours or 384 hours and this time is free.
(10 people × 40 hours × 48 weeks is 19,200); Shortfall is 2,400 – 384 = 2,016 hours at
$35/hr = $70,560
Engineers
As the products are only delayed the only relevant cash flow is the penalty of $4,000.
The contribution will presumably still be earned albeit later.
Total is $70,560 + $4,000 = $74,560

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12 B
A high/low method seems appropriate here:

Total jobs Total cost ($)

January 62 13,160
February 75 15,800
Increment 13 2,640
Less extra FC –1,600
1,040

Average VC per job is $1,040/13 = $80

Substituting a VC of $80 back in to the data gives the fixed cost (‘FC’)
If TC = VC + FC
13,160 = (62 × $80) + FC
13,160 = 4,960 + FC
8,200 = FC

13 84.375%
Cumulative units Total time Average time/unit
20 80 4.000
40 135 3.375

The learning effect is 3.375/4.000 = 84.375%

14 C
The system has elements consistent with many of the answers, however, the fact that the
system will suggest areas requiring change makes this an expert system (ES).

15 D
Efficiency and effectiveness. Not ‘economy’: although the floating staff member will be
costly, there no evidence that the school overpaid for it.

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SECTION B

Tutorial note
Being told that the FD worries about the impact of getting a decision wrong should direct you
towards the minimax regret approach.
The MD is a very confident and optimistic individual so a ‘Maximax’ approach would seem
sensible.
The OD seems to be a very cautious, prudent. This kind of decision maker tends to regret errors
and would seek to minimise the effect of those errors. A minimax regret approach would
therefore be most appropriate.

16 Medium
According to the question, the MD is a very confident and optimistic individual. This can be
translated to an optimistic view point, and so a ‘Maximax’ approach would seem sensible.
The maximum contribution that can be earned is $15,600, and this is when medium vans
are acquired.

17 Small
The FD seems to be a very cautious, prudent individual. This kind of decision maker tends
to regret errors and would seek to minimise the effect of those errors. A minimax regret
approach would therefore be most appropriate, which requires the calculation of a regret
table.

Tutorial note
Calculating the ‘regrets’ means we need to find the biggest payoffs for each demand row
(i.e. for each ‘activity level’ in this question) and then subtract all other numbers in this row
from the largest number.

Regret Table

Type of Van Small Medium

Activity Level Largest number? $ $
1 $9,600 0 3,400
2 $11,400 200 0
3 $15,600 2,300 0
Maximum regret 2,300 3,400

$2,300 is the minimum regret in this table. The FD, employing the minimax regret, would
want to minimise that regret and therefore go for the ‘small’ van size.

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18 B
The OD defines himself as ‘risk neutral’. We need to calculate the expected values for each
option, which shows the long run average outcome of a decision, which is repeated time
and time again.
EV = ∑ px
Small = (0.2 × $9,600) + (0.3 × $11,200) + (0.5 × $13,300) = $11,930
Medium = (0.2 × $6,200) + (0.3 × $11,400) + (0.5 × $15,600) = $12,460
On average, in the long run, the medium van is better. The decision to purchase medium
vans therefore generates the higher EV.

19 $3,550
For indifference, the average returns would have to be the same.
The average return for the small van is fixed at $11,930 and the average return for the
medium van would have to equate to that:
Let R = the minimum return needed from the medium van at the activity level 1.
Recalculate the EV to find R.
(0.2 × R) + (0.3 × 11,400) + (0.5 × 15,600) = 11,930
(0.2 × R) = 11,930 – 11,220
(0.2 × R) = 710
R = 3,550

20 B and D are true

A is unlikely, but it is possible that an expected value could also coincidentally equal an
actual result. C is false, expected values are not difficult to calculate with all of the necessary
information to hand.

21 C
Material cost – Basic = 50g × $2/1,000 × 10/9 = $0.11/unit
Material cost – Luxury = 50g × 1.6 × $2/1,000 × 10/8 = $0.2/unit Total cost $0.31

22 $640,000
Labour cost – Basic = 10,000 × 2 × $8/hr = $160,000
Labour cost – Luxury = 20,000 × 3 × $8/hr = $480,000 Total cost $640,000

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23 D
The OAR would be = Total overheads/total labour hours
Total labour hours = (10,000 × 2) + (20,000 × 3) = 80,000 hrs
OAR = $40,000/80,000 hrs = $0.50/hr
Each batch of luxury hangers takes 3 hours to produce; the overhead allocated to the batch
will be $0.50 × 3 = $1.50. Each batch contains 1,000 hangers and so the overhead absorbed
per hanger is therefore $1.50/1,000 = $0.0015.

24 D
If activity based costing is to be used:
Cost per delivery: $10,000/25 = $400
Cost per set up: $30,000/150 = $200
Luxury hanger allocation:
Delivery = $400 × (25 × 0.8)/20,000 = $0.4 per batch or $0.0004 per hanger
Set up = $200 × 100/20,000 = $1.0 per batch or $0.001 per hanger
Total cost $0.0014

25 B
Both statements are false. ABC often makes a difference, but not always. ABM, which
springs from ABC, suggests that by reducing or changing activity levels, then cost reduction
of fixed costs is possible.

26 C
‘Forming’ will take a maximum of 120,000 cups × (7 minutes/60 minutes per hour) = 12,000
hours, which are available and therefore ‘Forming’ is not a bottleneck process.
‘Baking’ will take a maximum of 120,000 cups × (3 minutes/60 minutes per hour) = 6,000
hours, which are available and therefore ‘Baking’ is not a bottleneck process.
‘Finishing’ will take a maximum of 95,000 cups × (7 minutes/60 minutes per hour) = 11,083
hours, which are not available and therefore ‘Finishing’ is a bottleneck process.

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27 1.41
TPAR calculation (both shown here for completeness)

Small Large
$ $
Selling price/cup 3.80 6.60
Materials/cup –0.84 –1.75
Throughput 2.96 4.85

Finishing time/cup 5 mins 7 mins

Throughput/min 0.592 0.693

Total fixed costs = $295,000; So the FC OAR per minute is $295,000/(10,000 × 60 mins) =
0.492.
Consequently, the TPAR is Small 0.592/0.492 = 1.20; Large 0.693/0.492 = 1.41

28 C and D are correct

B would work but is less cost efficient than C. A would be ineffective.

29 B and C are correct

A is wrong in that if the product is making a contribution cessation would make the
financial position worse.
D is wrong in that an individual product might have a TPAR of less than one but overall
performance of other products could still give the company a profit.

30 D
JIT relies on demand pull manufacturing, once demand becomes real then the process of
manufacture begins. Demand does not have to be predictable.

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SECTION C

31 YUMMY DOUGHNUTS LIMITED

 % Change in demand
(a) Price elasticity of demand =  
 % Change in price 
 500 extra units / 8,000 units = 6.25 % 
Price elasticity of demand =  
 5p decrease in price / 60 p = 8.33% 
Price elasticity of demand = 0.75
A low PED (price elasticity of demand) means that the demand for Yummy’s
doughnuts is not very sensitive to changes in price, or ‘inelastic’.
(b) Budget revenue: 8,000 × 60c = $4,800
Budget contribution: 8,000 × 18c = $1,440
(c) Sales price variance
AQ × AP 8,500 × 55c = 4,675
AQ × SP 8,500 × 60c = 5,100
Difference 425 ADV
Sales volume variance
AQ × Std. Contribution 8,500 × 18c = 1,530
BQ × Std. Contribution 8,000 × 18c = 1,440
Difference 90 FAV
(d)

Original budget Revised Actual

Sales 8,000 7,600 8,500
Market 40,000 38,000 38,000
Share % 20% 20% 22.4%

Market size variance is = (8,000 – 7,600) × 18c = 72 ADV

Market share variance is = (8,500 – 7,600) × 18c = 162 FAV
(e) A traditional view of sales would indicate that the business beat the budget by 500
units a week, and this resulted in a favourable variance of $90 per week of the
budget period. We know that one possible cause of this is the price reduction of 5c
per doughnut (an 8.3% fall).
However, we have established that the demand for doughnuts is not very price
elastic and therefore a price reduction does not totally explain the surge in demand.
We have no information about quality, except of course that the doughnuts are very
tasty. Taste and quality of product is clearly a variable on sales volume of this type of
product. If customers enjoy their indulgence they well come back for more, even
within the week. Repeat purchasing is more than possible here.

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The traditional view actually understates the sales performance a little. Health
concerns have depressed the market but despite this, ‘Yummy’ has done better than
its budget. Yummy has managed to increase its market share to 22.4% (up from
20%) and this has resulted in a financial gain of $162 per week in terms of extra
contribution. This can only be viewed as impressive.

Marking scheme
Marks
(a) Price elasticity and commentary
Price elasticity Commentary 2
1
(b) Weekly budget revenue and contribution – 1 mark for each
Annualised figures should be awarded half marks
Maximum 2
(c) Traditional sales price and volume variances – 2 marks for each
Must use original budget figures, using revised figures here earns nothing
but you can give some marks for it within (d)
Maximum 4
(d) Market size and share variances – 3 marks for each
Be prepared to give some marks for partly correct answers
Maximum 6
(e) Commentary
Traditional review of performance comments up to 3
Contribution of price reduction 2
Quality comment 2
Market share improvement up to 2
Maximum 5
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Total 20
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32 ARMADILLO LIMITED
(a) Treatment of head office costs

Tutorial note
There are three separate arguments here: Should head office costs be allocated to the
divisions, how should this be done and should this cost be included in any ROI calculation?
Do not forget the taxation aspects in your planning of the answer, too.

Should the costs be allocated?

Given the head office has no income then failure to allocate the head office costs will
mean the head office will show a presumably substantial loss. This is to be expected
in cost centres, but it will be important that these costs are covered by the prices
charged by the divisions for their services. If the divisions are not aware of the extent
of the costs, they will not be able to do that.

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The nature of the costs is clearly traceable. This means that the divisions benefit
from the head office activity. Marketing for example is provided centrally and this
will be part of the reason for the increase in turnover between 208 and 2019 and the
successful launch of the new project. It stands to reason that where there is benefit
there should be cost and matching these together via a head office recharge is
sensible.
The counter argument is the costs are not controllable by the divisional manager and
consequently the manager cannot be held accountable for the amount of the spend.
This is easily dealt with by excluding the cost allocation from the performance
metrics that are used.
How should the allocation be made?
It is common for businesses to use revenue as a simple and understandable method
of allocation. It is therefore easy to check and divisional managers will be aware of
their expected cost. However, revenue is unlikely to be seen as a “fair” allocation.
Other methods are possible and although they are more complicated they are often
seen to be fairer. For example, as far as IT is concerned the number of users or PCs
could be used as a basis of the allocation. Or as far as HR is concerned the number of
staff employed or even recruited could be used.
Activity based allocation, although more complex, is often better than turnover.
Should the allocation be included in the ROI calculation?
An important principle of performance assessment is that the metrics used must be
fair, owned by and controllable by the individual assessed. As discussed above, an
allocation based on revenue is unlikely to be seen as fair.
Equally, and perhaps more importantly, costs incurred by head office are outside the
control of local managers. Consequently, it is possible for a local manager to lose
bonus for a mistake or a decision made by someone else. This will be de-motivating
and should be discouraged.
Taxation
Taxation is calculated and managed centrally and as stated in the question the head
office ensures the best use is made of losses and all appropriate reliefs are claimed.
As a result, there will be a disconnection between the activity and performance of an
individual division and the taxation allocated to it. As above, the cost will need to be
allocated but again as above the cost will not be controllable by the division and so
should be excluded from performance metrics.
(b)
2018 2019
Controllable profit 75 80

Opening capital employed 550 625

ROI 13.6% 12.8%

Target ROI 12.0% 12.0%
Bonus $500 $0

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(c) If the project is delayed for three months there will be a number of consequences:
• The new investment will be delayed beyond the end the 20X8. This means that
$80m will no longer appear in the capital employed figure at the start of 20X9.
This, in itself, will increase the ROI figure given.
• Presumably without the investment at least part of the growth will not
be realised as well. This might mean lower revenue and controllable profit.
The impact of this would be negligible as the delay is only 3 months, and
most projects tend to start slowly.
• There could be penalties within any contract that is delayed, and further
investigation would be needed here.
• The net effect of the above will determine the bonus levels effect. The ROI
would need to rise by only 0.2% to qualify for $500 bonus. Clearly this is not a
justification for any delay.
• Strategic and competitive effects. Delaying projects can surrender the ‘first
mover’ benefits to competitors.

Marking scheme
Marks
(a) Head office cost discussion
Up to 2 marks for each well-argued point
1 mark for only brief coverage Maximum
8 marks for head office costs Taxation 8
discussion
1 mark for each point made 2
(b) Calculations of ROI and bonus – 1 mark per correct calculation 4
(c) Delaying the investment
Impact on ROI – up to 3 marks
Impact on bonuses – 1 mark
Any other valid comment– 1 mark each point
Maximum 6
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Total 20
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