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# ACCA PAPER F5 PERFORMANCE MANAGEMENT

## MOCK EXAM DECEMBER 2010

Fundamentals Paper F5

Performance Management

Question Paper

## Answer ALL five questions

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ACCA PAPER F5 PERFORMANCE MANAGEMENT
MOCK EXAM DECEMBER 2010

## Answer ALL five questions

Question 1

The following details have been extracted from the standard cost card for product X.
\$/unit
4 machine hours @ \$8.00/hour 32.00
2 labour hours @ \$4.00/hour 8.00
During October 20X7, 5,450 units of the product were made compared to a budgeted
production target of 5,500 units. The actual overhead costs incurred were:
Machine-related variable overhead \$176,000
Labour-related variable overhead \$42,000

The actual number of machine hours was 22,000 and the actual number of labour hours was
10,800.

Required
(a) Calculate the overhead cost variances in as much detail as possible from the data
provided. (12 Marks)
(b) Explain the meaning of, and give possible causes for, the variable overhead
variances which you have calculated. (8 Marks)
(20 marks)

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ACCA PAPER F5 PERFORMANCE MANAGEMENT
MOCK EXAM DECEMBER 2010

Question 2

(a) BVX Ltd manufactures three garden furniture products - chairs, benches and tables.
The budgeted unit cost and resource requirements of each of these items is detailed
below.
Chair Bench Table
\$ \$ \$
Timber cost 5.00 15.00 10.00
Direct labour cost 4.00 10.00 8.00
Variable overhead cost 3.00 7.50 6.00
Fixed overhead cost 4.50 11.25 9.00
16.50 43.75 33.00
Budgeted volume per annum 4000 2000 1500

(i) These volumes are believed to equal the market demand for these products.
(ii) The fixed overhead costs are attributed to the three products on the basis of direct
labour hours.
(iii) The labour rate is \$4.00 per hour.
(iv) The cost of the timber is \$2.00 per square metre.

The products are made from a specialist timber. A memo from the purchasing manager advises
you that because of a problem with the supplier, it is to be assumed that this specialist
timber is limited in supply to 20,000 square metres per annum.

The sales director has already accepted an order for 500 chairs, 100 benches and 150
tables which, if not supplied, would incur a financial penalty of \$2,000. These
quantities are included in the market demand estimates above.

## The selling prices of the three products are as follows.

Chair \$20.00
Bench \$50.00
Table \$40.00

Required
(i) Determine the optimum production plan and state the net profit that this should
yield per annum. (10 Marks)

(ii) Calculate and explain the maximum prices which should be paid per square metre
in order to obtain extra supplies of timber. (4 marks)

(b) Where production capacity is ‘limiting factor’, explain briefly ways in which
management can increase it without having to acquire more plant and machinery.
(6 marks)

(20 marks)

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ACCA PAPER F5 PERFORMANCE MANAGEMENT
MOCK EXAM DECEMBER 2010

Question 3

A company is planning to launch a new product (Product Z) in an effort to recover lost sales.
Without the new product, activity in each production department would be expected to continue at
60% of practical manufacturing capacity. Annual sales of 245,000 units of Product Z are
estimated, at a price of \$9·95 per unit.

Estimated costs relating to the new product are to be established from the following information:

Direct materials:
0·3 kilos (net) of a new raw material (Material A) will be required per unit of finished product. 10%
of the weight of the material input to production is expected to be lost. Material A costs \$6·30 per
kilo before discount. A quantity discount of 5% is given on all purchases if the average monthly
purchase quantity exceeds 4,500 kilos. Other materials are expected to cost \$1·47 per unit of
Product Z.

Direct labour:
Department X: 0·35 hours per unit of finished product at \$4·60 per hour.
Department Y: 0·14 hours per unit of finished product at \$5·00 per hour.

If Product Z is launched, total overheads in Department X will be absorbed at 130% of direct
labour cost. Overhead absorption in Department Y will be established as a rate per direct labour
hour based upon the expected utilisation of capacity, and the associated overhead costs, if
Product Z is launched. The following figures for Department Y for a year are based upon practical
capacity:
Direct labour hours, 220,000.
Variable overheads in Department X are 40% of direct labour cost, and in Department Y are
\$198,000 for a year at practical manufacturing capacity.

Non-production overheads are estimated at \$0·70 per unit of Product Z for variable overheads,
and will be charged at \$1·35 per unit for fixed overheads.

Required:
(a) Calculate the estimated total unit cost of Product Z (i.e. on an absorption cost basis).
(8 marks)
(b) Discuss the viability of Product Z, at a selling price of \$9·95 per unit. (5 marks)

The company has also, with the aid of management consultants, developed another new product
(Product Y) and, at the same time, researched its market potential.

The fee, as yet unpaid, agreed with the management consultants for the work carried out is
\$70,000. Further research and development costs incurred to date by the company total \$96,000.

The sales potential of the new product, indicated by the market research, will depend upon the
price charged. At a selling price of \$20 per unit, the annual sales volume is expected to be in the
range 150,000 to 200,000 units per annum. If the selling price is set at \$18 per unit, sales of
between 240,000 and 360,000 units would be expected. Both alternatives would be supported by
advertising and promotional expenditure of \$180,000 per annum.

Variable production costs are forecast at \$12·50 per unit for production up to 200,000 units per
annum, reducing to \$12·00 per unit on any additional production. Incremental fixed production
costs, as a result of the launch of the new product, are expected to be \$220,000 per annum.

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ACCA PAPER F5 PERFORMANCE MANAGEMENT
MOCK EXAM DECEMBER 2010

There is insufficient production capacity available to satisfy the complete range of demand
estimates for Product Y. Production in excess of 240,000 units per annum would result in a loss
of contribution on Product A at a rate of \$5·00 per unit of Product Y.

Variable selling costs are 10% of sales revenue and all products are charged a further 15% of
sales revenue to recover the company’s general fixed costs incurred across all functions of the

Required:

(c) Assess the profit potential from the launch of Product Y using the full range of
demand estimates in your analysis. (7 marks)

(20 marks)

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ACCA PAPER F5 PERFORMANCE MANAGEMENT
MOCK EXAM DECEMBER 2010

Question 4

## Heighway Co is a railway company. Heighway Co operates a passenger railway service

and is responsible for the operation of services and the maintenance of track signalling
equipment and other facilities such as stations. In recent years it has been criticised for
providing a poor service to the travelling public in terms of punctuality, safety and the
standard of facilities offered to passengers. In the last year Heighway Co has invested
over \$20 million in new carriages, station facilities and track maintenance programmes in
an attempt to counter these criticisms. Summarised financial results for Heighway Co for the
last two years are given below.

## Summarised income statement for the year ended 31 December

20X3 20X4
\$ million \$ million
180.0 185.0
Sales revenue
Earnings before interest and tax 18.0 16.5
Interest (3.2) (4.7)
Tax (4.4) (3.5)
Earnings available to ordinary shareholders 10.4 8.3

## Summarised balance sheet as at 31 December

20X3 20X4
\$m \$m \$m \$m
Non-current assets (net) 100.4 120.5
Current assets
Inventory 5.3 5.9
Receivables 2.1 2.4
Cash 6.2 3.6
13.6 11.9
114.0 132.4
Ordinary share capital (\$1 shares) 25.0 25.0
Reserves 45.6 48.2
Amounts payable after more than one year
8% Debenture 20X9 15.0 15.0
Bankloan 20.0 35.0
Payables due within one year 8.4 9.2
114.0 132.4

Required
(a) Calculate the following ratios for Heighway Co for 20X3 and 20X4, clearly showing
(i) Return on capital employed (also known as return on investment) based
upon closing capital employed)
(ii) Net profit margin
(iii) Asset turnover
(iv) Current ratio, and
(v) Gearing ratio (8 marks)

(b) Briefly comment on the financial performance of Heighway Cc in 20X3 and 20X4 as
revealed by the above ratios and suggest causes for any changes. (You are not
required to calculate any other ratios.) (6 marks)

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ACCA PAPER F5 PERFORMANCE MANAGEMENT
MOCK EXAM DECEMBER 2010

(c) Suggest THREE non-financial indicators that could be useful in measuring the
performance of a passenger railway company and explain why your chosen indicators
are important. (6 marks)

(20 marks)

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ACCA PAPER F5 PERFORMANCE MANAGEMENT
MOCK EXAM DECEMBER 2010

Question 5

AME has three product lines P1, P2 and P3. Since its creation the company has been using a
single direct labour cost percentage to assign overhead costs to products.

Despite P3, a relatively new line, attracting additional business, increasing overheads costs and a
loss of market share, particularly for P2, a major product, have convinced management that the
costing system is in need of some development. A team spent several weeks collecting data (see
table below) for the different activities and products. For accounting period in question, given in
the tables below is data on AME's three products lines and overhead costs:

P1 P2 P3
Production volume 7500 units 12,500 units 4,000 units
Direct labour cost per unit \$4 \$8 \$6.4
Material cost per unit \$18 \$25 \$16
Selling price per unit \$47 \$80 \$68
Materials movements (in total) 4 25 50
Machine hour per unit 0.5 0.5 0.2
Set ups (in total) 1 5 10
Proportion of engineering work 30% 20% 50%
Orders packed (in total) 1 7 22

## Activities Overhead cost

Material handling and receiving \$150,000
Machine maintenance and depreciation 390,000
Set up labour 18,688
Engineering 100,000
Packing 60,000
Total 718,688

Required

(a) Calculate the overhead rate and the product unit costs under existing costing
system. (4 marks)

(b) Identify for each overhead activity, an appropriate cost driver from the information
supplied and then calculate the product unit costs using a system that assigns
overheads on the basis of the use of activities. (9 marks)

(c) Comment on the results of the two costing systems in (a) and (b).
(7 marks)

(20 marks)