ACCA Fundamentals Level

Paper F5
Performance Management

Class Test

December 2010
Question Paper
Time allowed
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
1 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 production overheads into the cost of production.

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

Stone Haugh
Material cost per unit $450 $550
Direct Labour cost per unit $1,250 $625
Labour rate per hour $25 $25
Fixed production overheads per hour $50 $50
Selling price per unit $9,000 $4,525
Production and sales volumes (units) 14,000 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 following
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) Absorption 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 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
2011.

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

Roadster Everest
$ $
Selling price 200 280
Material cost 80 100
Variable production conversion costs 20 60

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

(3) Expected demand volumes are: Roadster 150,000 units Everest 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.

Required
(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 producing a product based on the application
of throughput accounting principles.
(Your answer should assume that the total variable overhead cost incurred as
a result of the product mix calculated in part (a) is $4,800,000 and that this 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 in order to maximise net profit and calculate the net profit that
would be earned in the year ending 31 December 2011, based on these
quantities. (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 Lumsden Co is a manufacturer of components. At its factory, three components are in continuous
mass production. Each of these components incorporates around 40 raw material and semi-finished
items which are bought in from outside suppliers.

Sales of the components have recently been declining. Lumsden Co is considering a proposal to
discontinue these products and replace them with a large range of differentiated products. These new
products would be highly customised and will be frequently renewed to utilise the latest technology and
allow for market changes. If adopted, they would be produced in short, discontinuous batches - with production
lines switching frequently from one product to another.

Required
(a) Explain life cycle costing, and why its use might or might not give meaningful results,
Having regard to changes in the nature of Lumsden Co’s business. (6 marks)

(b) Explain target costing and how it could be used by Lumsden Co. (7 marks)

Lumsden Co has recently completed the development and testing of a new product, the Kennedy.
The development of the product has cost $300,000 and $50,000 has been spent on research. The
company has also bought a machine to produce the new product costing $75,000. The production
machine is capable of producing 1,500 units of Kennedy per month and is not expected to have a residual
value.

The company anticipates that the unit selling prices it will charge will change with the cumulative
numbers of units sold as follows.

Cumulative sales (units) Selling price -$ per unit in this band

0 to 2,000 150
2,001 to 5,000 120
5,001 to 20,000 90
20,001 to 30,000 60
30,001 and above 40

Based on these selling prices, it is expected that sales demand will be as shown below.

Months Sales demand per month (units)

1–5 150
6 – 12 400
13 – 17 800
18 – 30 1,200
31 – 36 1,000
37 – 42 700
43 – 48 300
Thereafter NIL

Unit variable costs are expected to be as follows.

$ per unit
First 2,000 units 55
Next 3,000 units 45
Next 15,000 units 35
Next 10,000 units 25
Thereafter 30

Specific fixed overheads are expected to be $20,000 per month.

Required
(c) Calculate the profits expected in each stage of the lifecycle and in total from the sale of
Kennedys. (7 marks)
(Total: 20 marks)
4 Z Co is a family owned manufacturing company which has been run for 40 years by Dan Controle. He
believes in strict cost control and sets tough targets for his management team. Staff turnover is very high and
the company is struggling to compete against rival businesses.

The budgeted and actual results of Z Co for September were as follows. The company uses a
marginal costing system. There were no opening or closing inventories.

Fixed budget Actual

Sales and production 1,000 units 700 units
$ $ $ $
Sales 30,000 21,200
Variable cost of sales
Direct materials 10,000 6,600
Direct labour 5,000 3,800
Variable overhead 3,000 2,200
18,000 12,600
Contribution 12,000 8,600
Fixed costs 10,000 10,400
Profit/(loss) 2,000 (1,800)

Required
(a) Prepare a budget that will be useful for management control purposes and briefly
comment on the company’s performance in September. (9 marks)

(b) Discuss how an awareness of the behavioural aspects of budgeting could help the
performance of Z Co. (5 marks)

(c) Assess what benefits may be achieved by an organisation adopting a zero-based

approach in its budgetary process, and what difficulties may be encountered. (6 marks)
(Total: 20 marks)
5 River Tyne Foods Co (RTF) is a manufacturer of frozen meals. It is reviewing the performance
of its main product, the Rumble. RTF operates a standard absorption costing system and the budgeted
revenue and cost data per unit of Rumble is as follows:
$
Selling price 3.99
Material A (sauce) 125g @ $2/kg 0.25
Material B (meat) 200g @ $5/kg 1.00
Material C (vegetables) 75g @ $0.80/kg 0.06
Labour 0.05hrs @ $15/hr 0.75
Fixed Overheads 0.05hrs @ $12/hr 0.60

Quarter 2 data was as follows:

$
Material price variance 2,095 (F)
Material usage variance 2,551 (A)
Material mix variance 14,306 (A)
Material yield variance 11,755 (F)
Sales price variance 3,200 (F)
Sales volume variance 5,810 (F)

Required
(a) Using the variances above, comment on the performance of the purchasing, production
and sales managers in quarter 2, including a conclusion on whether or not the managers at RTF have
performed well. (11 marks)

Budgeted and actual sales for Quarter 3 were 225,000 Rumbles .

Other data for quarter 3 were:

Actual usage of materials kg Total cost ($)
Sauce 27,555 58,000
Meat 45,905 239,375
Vegetables 12,675 10,000

(b) Calculate the materials price, mix and yield variances for Quarter 3. (9 marks)
(Total: 20 marks)