Paper 3.

3
Performance
Management

PART 3

FRIDAY 10 JUNE 2005

QUESTION PAPER

Time allowed 3 hours

This paper is divided into two sections

Section A BOTH questions are compulsory and MUST be

answered

Section B TWO questions ONLY to be answered

Present Value and Annuity Tables are on pages 14 and 15

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination
hall

The Association of Chartered Certified Accountants

Section A – BOTH questions are compulsory and MUST be attempted

1 NB Candidates are advised to read all of the information including that contained in tables 1, 2 and 3 before
attempting this question.
Quicklink Ltd operates in the distribution and haulage industry and has achieved significant growth since its formation
in 1997. Its main activities comprise the door-to-door delivery of mail, parcels and industrial machinery.
The information contained in notes (i–vii) below relates to Quicklink Ltd in respect of the year ended 31 May
2005 and changes planned in the year ending 31 May 2006.
(i) Contracted clients were charged at the following rates during the year ended 31 May 2005: Mail £6 per delivery,
Parcels £10 per delivery and Machinery £200 per delivery.
(ii) Rates for non-contract clients during each of the years ended 31 May 2005 and year ending 31 May 2006,
were/are based upon the contracted client rates per delivery plus an additional percentage fee per delivery
charged to non-contract clients as follows:
Activity Additional Fee
Mail 40%
Parcel 20%
Machinery 50%
(iii) On 1 June 2003, Quicklink Ltd entered into a fixed price contract for the provision of fuel for its delivery vehicles
for the three-year period ending 31 May 2006. For the year ending 31 May 2006 fuel costs will be as follows:
(a) £0·10 per kilometre in respect of the delivery of mail and parcels
(b) £0·50 per kilometre in respect of the delivery of industrial machinery.
Each vehicle owned by Quicklink Ltd is in use for 340 days per annum.
(iv) Employee salaries were paid throughout the year ended 31 May 2005 at a rate of £26,400 per employee, per
annum.
(v) Sundry operating costs (excluding fuel and salaries) of Quicklink Ltd amounted to £3,000,000 during the year
ended 31 May 2005.
(vi) The board of directors expect that for the year ending 31 May 2006 the following will apply:
(a) contract rates of Quicklink Ltd business will increase by 5%
(b) sales volumes are expected to remain at the same level as in the year ended 31 May 2005
(c) salaries and other operating expenses will increase by 4%.
(vii) The board of directors agreed to purchase Celer Transport, an unincorporated business, which was founded in
December 2001. The purchase took effect on 1 June 2005. Celer Transport has main activities comprising the
delivery of mail, parcels and processed food. The managing director of Quicklink Ltd has expressed his view that
‘the acquisition of the Celer Transport business would constitute a good strategic move even though it is expected
to make a loss of £50,000 during the year ending 31 May 2006’.
The information contained in notes (viii–xii) below relates to the business of Celer Transport in respect of the year
ending 31 May 2006:
(viii) A distinctive competence of the Celer Transport business relates to its success in winning contracts with major
food producers. Each contract is for a fixed term of three years and all contracts were renewed on 1 June 2005.
Contract values per annum are as follows:
Number of contracts Value per contract (£)
4 225,000
6 150,000
9 100,000
(ix) (1) The sales volume of mail and parcel deliveries to Celer Transport clients is expected to increase by 10% per
annum with effect from 1 June 2005. It is intended to use the client billing rates of Quicklink Ltd that were
in application during the year ended 31 May 2005 as the basis of charging for mail and parcel deliveries to
Celer Transport clients during the year ending 31 May 2006. This is due to the fact that Quicklink Ltd had
higher client billing rates than Celer Transport and the board of directors recognised that it would have been
difficult to adopt company-wide billing rates with effect from 1 June 2005.
(2) During the year ended 31 May 2005 the billing rates of Celer Transport in respect of contract and non-
contract mail and parcel deliveries were 90% of the level of the rates charged by Quicklink Ltd.

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(x) Fuel requirements for the Celer Transport business activities are forecast to cost £0·12 per kilometre for mail and
parcel deliveries and £0·60 per kilometre for deliveries of processed food. The fuel required for Celer Transport
business during the year ending 31 May 2006 cannot be provided under the current agreement entered into by
Quicklink Ltd as detailed in note (iii). Each Celer Transport vehicle is in use for 340 days per annum.
(xi) All Celer Transport employees will be paid on the same basis as Quicklink Ltd employees.
(xii) Sundry operating costs (excluding fuel and salaries) of the Celer Transport business will amount to £1,990,340.
Other information:
(xiii) During the year ended 31 May 2005 the number of employees was as follows:
Quicklink Ltd Celer Transport
Activity type Mail and parcels Machinery Mail and parcels Processed food
Number of Employees 50 20 20 20
The number of employees is forecast to remain unchanged during the year ending 31 May 2006.
(xiv) Quicklink Ltd implemented a new call management system for customer enquiries/orders which became fully
operational with effect from 1 June 2004.
(xv) The Managing Director of Quicklink Ltd recently attended a seminar on Total Quality Management (TQM) and is
firmly of the opinion that the adoption of a TQM philosophy would benefit the company.
Other actual operating statistics for the year ended 31 May 2005 are contained in tables 1, 2 and 3 below. Target
statistics are shown in bold type.
Table 1
Quicklink Ltd Celer Transport
Mail Parcels Machinery Mail Parcels Processed food
Number of deliveries 468,000 234,000 35,700 120,000 75,000 32,500
Contract deliveries (%) 468,060 468,060 46,090 468,030 468,30 111,100
Number of on-time deliveries 465,660 232,830 35,700 099,900 60,000 31,525
Mix of business deliveries:
Same day delivery 193,600 146,800 35,700 090,000 56,250 32,500
Next day delivery 374,400 187,200 468,0– 030,000 18,750 –
On-time delivery target (%) 468,099 187,299 468,99 468,095 468,95 31,100
Number of lost items – – – 000,120 468,25 11,1, –
Table 2
Quicklink Ltd Celer Transport
Vehicle type Mail and Machinery Mail and Processed food
parcels parcels
Average kilometres per vehicle
per day 300 400 300 300
Number of vehicles 55 21 22 22
NB The statistics in table 2 are expected to remain unchanged during the year ending 31 May 2006.
Table 3
Quicklink Ltd Celer Transport
Target time period for answering telephone calls 20 seconds 30 seconds
Number of telephone calls received 1,650,000 600,000
Number of telephone calls answered within target time period 1,633,500 540,000
Number of abandoned telephone calls – 112,000

3 [P.T.O.
Required:
(a) Prepare, in columnar format, the budgeted profit and loss accounts for the year ending 31 May 2006 of:
(i) Quicklink Ltd;
(ii) Celer Transport; and
(iii) The combined entity. (16 marks)

(b) Comment (with relevant calculations) on the performance of the business of Quicklink Ltd and Celer
Transport during the year ended 31 May 2005 and, insofar as the information permits, its projected
performance for the year ending 31 May 2006. Your answer should specifically consider:
(i) Revenue generation per vehicle
(ii) Vehicle utilisation and delivery mix
(iii) Service quality. (14 marks)

(c) Comment on four reasons why the Managing Director of Quicklink Ltd might consider the acquisition of the
Celer Transport business to be a ‘good strategic move’ insofar as may be determined from the information
provided. (5 marks)

(d) Discuss the main benefits that might accrue from the successful implementation of a Total Quality
Management programme by the management of the combined entity. (5 marks)

(40 marks)

4
 This is a blank page.
Question 2 begins on page 6.

5 [P.T.O.
2 NCL plc, which has a divisionalised structure, undertakes civil engineering and mining activities. All applications by
divisional management teams for funds with which to undertake capital projects require the authorisation of the board
of directors of NCL plc. Once authorisation has been granted to a capital application, divisional management teams
are allowed to choose the project for investment.
Under the terms of the management incentive plan, which is currently in operation, the managers of each division
are eligible to receive annual bonus payments which are calculated by reference to the return on investment (ROI)
earned during each of the first two years by new investments. ROI is calculated using the average capital employed
during the year. NCL plc depreciates its investments on a straight-line basis.
One of the most profitable divisions during recent years has been the IOA Division, which is engaged in the mining
of precious metals. The management of the IOA Division is currently evaluating three projects relating to the extraction
of substance ‘xxx’ from different areas in its country of operation. The management of the IOA Division has been given
approval by the board of directors of NCL plc to spend £24 million on one of the three proposals it is considering (i.e.
North, East and South projects).
The following net present value (NPV) calculations have been prepared by the management accountant of the IOA
Division.
North Project East Project South Project
Net cash Present Net cash Present Net cash Present
inflow/ value inflow/ value inflow/ value
(outflow) at 12% (outflow) at 12% (outflow) at 12%
£’000 £’000 £’000 £’000 £’000 £’000
Year 0 (24,000·0) (24,000·0) (24,000·0) (24,000·0) (24,000·0) (24,000·0)
Year 1 6,000·0 5,358·0 11,500·0 10,269·5 12,000·0 10,716·0
Year 2 8,000·0 6,376·0 11,500·0 9,165·5 10,000·0 7,970·0
Year 3 13,500·0 9,612·0 11,500·0 8,188·0 9,000·0 6,408·0
Year 4 10,500·0 6,678·0 – – 3,000·0 1,908·0
–––––––– –––––––– ––––––––
NPV 4,024·0 3,623·0 3,002·0
–––––––– –––––––– ––––––––
The following additional information concerning the three projects is available:
(1) Each of the above projects has a nil residual value.
(2) The life of the East project is three years. The North and South projects are expected to have a life of four years.
(3) The three projects have a similar level of risk.
(4) Ignore taxation.
Required:
(a) Explain (with relevant calculations) why the interests of the management of the I0A Division might conflict
with those of the board of directors of NCL plc. (10 marks)

(b) Explain how the adoption of residual income (RI) using the annuity method of depreciation might prove to
be a superior basis for the management incentive plan operated by NCL plc.
(N.B. No illustrative calculations should be incorporated into your explanation). (4 marks)
The IOA Division is also considering whether to undertake an investment in the West of the country (the West Project).
An initial cash outlay investment of £12 million will be required and a net cash inflow amounting to £5 million is
expected to arise in each of the four years of the life of the project.
The activities involved in the West project will cause the local river to become polluted and discoloured due to the
discharge of waste substances from mining operations.
It is estimated that at the end of year four a cash outlay of £2 million would be required to restore the river to its
original colour. This would also clear 90% of the pollution caused as a result of the mining activities of the IOA
Division.
The remaining 10% of the pollution caused as a result of the mining activities of the IOA Division could be cleared
up by a further cash outlay of £2 million.

6
(c) Evaluate the West project and, stating your reasons, comment on whether the board of directors of NCL plc
should spend the further £2 million in order to eliminate the remaining 10% of pollution. (6 marks)
(Ignore Taxation).

(20 marks)

7 [P.T.O.
Section B – TWO questions ONLY to be attempted

3 Better budgeting in recent years may have been seen as a movement from ‘incremental budgeting’ to alternative
budgeting approaches.
However, academic studies (e.g. Beyond Budgeting – Hope & Fraser) argue that the annual budget model may be
seen as (i) having a number of inherent weaknesses and (ii) acting as a barrier to the effective implementation of
alternative models for use in the accomplishment of strategic change.

Required:
(a) Identify and comment on FIVE inherent weaknesses of the annual budget model irrespective of the budgeting
approach that is applied. (8 marks)

(b) Discuss ways in which the traditional budgeting process may be seen as a barrier to the achievement of the
aims of EACH of the following models for the implementation of strategic change:
(i) benchmarking;
(ii) balanced scorecard; and
(iii) activity-based models. (12 marks)

(20 marks)

8
 This is a blank page.
Question 4 begins on page 10.

9 [P.T.O.
4 The Dental Health Partnership was established in 1992 and provides dentistry and other related services to the
population of Blaintopia, a country in which the public health service is partially funded by the Government.
Additional information relating to the Dental Health Partnership for the year ended 31 May 2005 is as follows:
(1) The partnership was open for five days per week during 48 weeks of the year.
(2) Each dentist treated 20 patients per day. The maximum number of patients that could have been treated by a
dentist on any working day was 24 patients.
(3) (i) The partnership received a payment from the government each time any patient was consulted as shown in
the following table:
Category of treatment Payments from
Government (£’s)
No treatment required 12
Minor treatment 50
Major treatment 100
(ii) In addition, adult patients paid a fee for each consultation which was equal to the amount of the payment
shown per category of treatment in the above table. Children and Senior Citizens were not required to pay
a fee for any dental consultations.
(4) The partnership received an annual fee of £20,800 from a well-known manufacturer of dental products under a
fixed-term contract of three years’ duration. The contract commenced on 1 June 2004 and relates to the
promotion of the products of the manufacturer.
(5) The total of material and consumable costs (which are 100% variable) during the year ended 31 May 2005
amounted to £446,400.
(6) Staff costs were paid as follows:
Category of Salary per annum,
Employee per employee (£’s)
Dentist 60,000
Dental Assistant 20,000
Administrator 16,000
Note: A fixed bonus payment amounting to 4% of their basic salary was paid to each Dental Assistant and
Administrator.
(7) Establishment costs and other operating costs amounted to £85,000 and £75,775 respectively for the year
ended 31 May 2005.
(8) All costs other than materials and consumables costs incurred by the Dental Health Partnership are subject to
contracts and are therefore to be treated as fixed costs.
(9) A table of non-financial information relating to the Dental Health Partnership for the year ended 31 May 2005
is as follows:
Number of Dentists: 6
Dental Assistants 7
Administrators 2
Patient ‘Mix’:
Adults 50%
Children 40%
Senior Citizens 10%
Mix of patient appointments (%):
No treatment required 70%
Minor treatment 20%
Major treatment 10%

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Required:
(a) Prepare a summary Profit and Loss Account of the Dental Health Partnership for the year ended
31 May 2005 and calculate the percentage of maximum capacity that was required to be utilised in order
to break even in the year ended 31 May 2005. (12 marks)

(b) Discuss FOUR factors that distinguish service from manufacturing organisations and explain how each of
these factors relates to the services provided by the Dental Health Partnership. (5 marks)

(c) Excluding the number of complaints by patients, identify and briefly explain THREE quantitative
non-financial performance measures that could be used to assess the ‘quality of service’ provided by the
Dental Health Partnership. (3 marks)

(20 marks)

11 [P.T.O.
5 Taliesin Ltd manufactures a range of ice-cream based confectionery products, which it sells to national supermarket
chains which market the products under their own brand labels. The board of directors is committed to a policy of
achieving growth. However because the company is a relatively small player within the industry the board of directors
is focused solely upon internal development as opposed to growth by acquisition and has further agreed that it wishes
to confine operations to the home market.
Summary financial statements for the year ended 31 May 2005 together with prior year comparative figures are as
follows:
Profit and Loss Account
2005 2004
£’000 £’000
Sales (note 1) 48,000 40,000
Cost of sales (note 2) 28,800 24,000
––––––– –––––––
Gross Profit 19,200 16,000
Operating expenses 10,200 8,000
Interest 1,000 0
Depreciation 4,000 4,000
––––––– –––––––
Net Profit 4,000 4,000
––––––– –––––––
Balance Sheet
2005 2004
£’000 £’000
Fixed Assets (net book value) 42,000 40,000
Net Current Assets 24,000 12,000
––––––– –––––––
Total Assets less Current Liabilities 66,000 52,000
Loan Finance 10,000 –
––––––– –––––––
Net Assets 56,000 52,000
––––––– –––––––
Capital Employed:
Ordinary Share Capital (£1 each) 30,000 30,000
Retained Earnings 26,000 22,000
––––––– –––––––
Capital Employed 56,000 52,000
––––––– –––––––
Other information relating to Taliesin Ltd is as follows:
(1) Sales information in respect of the years ended 31 May 2005 and 2004 is as follows:
2005 2004
Sales revenue £000 £000
1 June–30 November 33,300 26,000
1 December–31 May 14,700 14,000
(2) Cost of sales information:
2005 2004
£’000 £’000
Materials 9,360 7,800
Labour 4,620 4,200
Manufacturing overheads 14,820 12,000
––––––– –––––––
Cost of sales 28,800 24,000

12
(3) Other Information:
2005 2004
Number of employees:
Permanent 204 200
Temporary 288 240
Number of customers 5 6
Number of new products introduced 6 5
(i) Temporary employees are hired on a full-time basis between 1 June and 30 November in each year. They
were paid at the same rate as permanent employees.
(ii) Six new product lines were launched during the year ended 31 May 2005. The manufacture of each new
product line required an investment in capital equipment of £1 million.

Required:
(a) Using the above information, appraise the performance of Taliesin Ltd during the year ended 31 May 2005
and evaluate the extent to which the objective of growth has been achieved. (11 marks)

(b) Explain the major benefits of pursuing a policy of internal development. (4 marks)

(c) Explain how the use of activity-based techniques may benefit Taliesin Ltd. (5 marks)

(20 marks)

13 [P.T.O.
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14
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End of Question Paper

15