F5 - Merged

Paper F5
Fundamentals Level – Skills Module
Performance
Management
Monday 5 December 2011
Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Formulae Sheet is on page 6.
Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants

ALL FIVE questions are compulsory and MUST be attempted
1 The Telephone Co (T Co) is a company specialising in the provision of telephone systems for commercial clients. There
are two parts to the business:
– installing telephone systems in businesses, either first time installations or replacement installations;
– supporting the telephone systems with annually renewable maintenance contracts.
T Co has been approached by a potential customer, Push Co, who wants to install a telephone system in new offices
it is opening. Whilst the job is not a particularly large one, T Co is hopeful of future business in the form of replacement
systems and support contracts for Push Co. T Co is therefore keen to quote a competitive price for the job. The
following information should be considered:
1. One of the company’s salesmen has already been to visit Push Co, to give them a demonstration of the new
system, together with a complimentary lunch, the costs of which totalled $400.
2. The installation is expected to take one week to complete and would require three engineers, each of whom is
paid a monthly salary of $4,000. The engineers have just had their annually renewable contract renewed with
T Co. One of the three engineers has spare capacity to complete the work, but the other two would have to be
moved from contract X in order to complete this one. Contract X generates a contribution of $5 per engineer hour.
There are no other engineers available to continue with Contract X if these two engineers are taken off the job.
It would mean that T Co would miss its contractual completion deadline on Contract X by one week. As a result,
T Co would have to pay a one-off penalty of $500. Since there is no other work scheduled for their engineers in
one week’s time, it will not be a problem for them to complete Contract X at this point.
3. T Co’s technical advisor would also need to dedicate eight hours of his time to the job. He is working at full
capacity, so he would have to work overtime in order to do this. He is paid an hourly rate of $40 and is paid for
all overtime at a premium of 50% above his usual hourly rate.
4. Two visits would need to be made by the site inspector to approve the completed work. He is an independent
contractor who is not employed by T Co, and charges Push Co directly for the work. His cost is $200 for each
visit made.
5. T Co’s system trainer would need to spend one day at Push Co delivering training. He is paid a monthly salary
of $1,500 but also receives commission of $125 for each day spent delivering training at a client’s site.
6. 120 telephone handsets would need to be supplied to Push Co. The current cost of these is $18·20 each,
although T Co already has 80 handsets in inventory. These were bought at a price of $16·80 each. The handsets
are the most popular model on the market and frequently requested by T Co’s customers.
7. Push Co would also need a computerised control system called ‘Swipe 2’. The current market price of Swipe 2
is $10,800, although T Co has an older version of the system, ‘Swipe 1’, in inventory, which could be modified
at a cost of $4,600. T Co paid $5,400 for Swipe 1 when it ordered it in error two months ago and has no other
use for it. The current market price of Swipe 1 is $5,450, although if T Co tried to sell the one they have, it would
be deemed to be ‘used’ and therefore only worth $3,000.
8. 1,000 metres of cable would be required to wire up the system. The cable is used frequently by T Co and it has
200 metres in inventory, which cost $1·20 per metre. The current market price for the cable is $1·30 per metre.
9. You should assume that there are four weeks in each month and that the standard working week is 40 hours
long.
Required:
(a) Prepare a cost statement, using relevant costing principles, showing the minimum cost that T Co should
charge for the contract. Make DETAILED notes showing how each cost has been arrived at and EXPLAINING
why each of the costs above has been included or excluded from your cost statement. (14 marks)
(b) Explain the relevant costing principles used in part (a) and explain the implications of the minimum price
that has been calculated in relation to the final price agreed with Push Co. (6 marks)
(20 marks)
2
2 Bath Co is a company specialising in the manufacture and sale of baths. Each bath consists of a main unit plus a set
of bath fittings. The company is split into two divisions, A and B. Division A manufactures the bath and Division B
manufactures sets of bath fittings. Currently, all of Division A’s sales are made externally. Division B, however, sells to
Division A as well as to external customers. Both of the divisions are profit centres.
The following data is available for both divisions:
Division A
Current selling price for each bath $450
Costs per bath:
Fittings from Division B $75
Other materials from external suppliers $200
Labour costs $45
Annual fixed overheads $7,440,000
Annual production and sales of baths (units) 80,000
Maximum annual market demand for baths (units) 80,000
Division B
Current external selling price per set of fittings $80
Current price for sales to Division A $75
Costs per set of fittings:
Materials $5
Labour costs $15
Maximum annual production and sales of sets of fittings (units) 200,000
(including internal and external sales)
Maximum annual external demand for sets of fittings (units) 180,000
Maximum annual internal demand for sets of fittings (units) 80,000
The transfer price charged by Division B to Division A was negotiated some years ago between the previous divisional
managers, who have now both been replaced by new managers. Head Office only allows Division A to purchase its
fittings from Division B, although the new manager of Division A believes that he could obtain fittings of the same
quality and appearance for $65 per set, if he was given the autonomy to purchase from outside the company. Division
B makes no cost savings from supplying internally to Division A rather than selling externally.
Required:
(a) Under the current transfer pricing system, prepare a profit statement showing the profit for each of the
divisions and for Bath Co as a whole. Your sales and costs figures should be split into external sales and
inter-divisional transfers, where appropriate. (6 marks)
(b) Head Office is considering changing the transfer pricing policy to ensure maximisation of company profits without
demotivating either of the divisional managers. Division A will be given autonomy to buy from external suppliers
and Division B to supply external customers in priority to supplying to Division A.
Calculate the maximum profit that could be earned by Bath Co if transfer pricing is optimised. (8 marks)
(c) Discuss the issues of encouraging divisional managers to take decisions in the interests of the company as a
whole, where transfer pricing is used. Provide a reasoned recommendation of a policy Bath Co should adopt.
(6 marks)
(20 marks)
3 [P.T.O.
3 You have recently been appointed as an assistant management accountant in a large company, PC Co. When you
meet the production manager, you overhear him speaking to one of his staff, saying:
‘Budgeting is a waste of time. I don’t see the point of it. It tells us what we can’t afford but it doesn’t keep us from
buying it. It simply makes us invent new ways of manipulating figures. If all levels of management aren’t involved in
the setting of the budget, they might as well not bother preparing one.’
Required:
(a) Identify and explain SIX objectives of a budgetary control system. (9 marks)
(b) Discuss the concept of a participative style of budgeting in terms of the six objectives identified in part (a).
(11 marks)
(20 marks)
4 Fit Co specialises in the manufacture of a small range of hi-tech products for the fitness market. They are currently
considering the development of a new type of fitness monitor, which would be the first of its kind in the market. It
would take one year to develop, with sales then commencing at the beginning of the second year. The product is
expected to have a life cycle of two years, before it is replaced with a technologically superior product. The following
cost estimates have been made.
Year 1 Year 2 Year 3
Units manufactured and sold 100,000 200,000
Research and development costs $160,000
Product design costs $800,000
Marketing costs $1,200,000 $1,000,000 $1,750,000
Manufacturing costs:
Variable cost per unit $40 $42
Fixed production costs $650,000 $1,290,000
Distribution costs:
Variable cost per unit $4 $4·50
Fixed distribution costs $120,000 $120,000
Selling costs:
Variable cost per unit $3 $3·20
Fixed selling costs $180,000 $180,000
Administration costs $200,000 $900,000 $1,500,000
Note: You should ignore the time value of money.
Required:
(a) Calculate the life cycle cost per unit. (6 marks)
(b) After preparing the cost estimates above, the company realises that it has not taken into account the effect of the
learning curve on the production process. The variable manufacturing cost per unit above, of $40 in year 2 and
$42 in year 3, includes a cost for 0·5 hours of labour. The remainder of the variable manufacturing cost is not
driven by labour hours. The year 2 cost per hour for labour is $24 and the year 3 cost is $26 per hour.
Subsequently, it has now been estimated that, although the first unit is expected to take 0·5 hours, a learning
curve of 95% is expected to occur until the 100th unit has been completed.
Calculate the revised life cycle cost per unit, taking into account the effect of the learning curve.
Note: the value of the learning co-efficient, b, is –0·0740005. (10 marks)
(c) Discuss the benefits of life cycle costing. (4 marks)
(20 marks)
4
5 Choc Co is a company which manufactures and sells three types of biscuits in packets. One of them is called ‘Ooze’
and contains three types of sweeteners: honey, sugar and syrup. The standard materials usage and cost for one unit
of ‘Ooze’ (one packet) is as follows:
$
Honey 20 grams at $0·02 per gram 0·40
Sugar 15 grams at $0·03 per gram 0·45
Syrup 10 grams at $0·025 per gram 0·25
–––––
1·10
–––––
In the three months ended 30 November 2011, Choc Co produced 101,000 units of ‘Ooze’ using 2,200 kg of honey,
1,400 kg of sugar and 1,050 kg of syrup. Note: there are 1,000 grams in a kilogram (kg).
Choc Co has used activity-based costing to allocate its overheads for a number of years. One of its main overheads is
machine set-up costs. In the three months ended 30 November 2011, the following information was available in
relation to set-up costs:
Budget
Total number of units produced 264,000
Total number of set ups 330
Total set-up costs $52,800
Actual
Total number of units produced 320,000
Total number of set ups 360
Total set-up costs $60,000
Required:
(a) Calculate the following variances for materials in Ooze:
(i) Total materials usage variance; (4 marks)
(ii) Total materials mix variance; (4 marks)
(iii) Total materials quantity (yield) variance. (4 marks)
(b) Calculate the following activity-based variances in relation to the set-up cost of the machines:
(i) The expenditure variance; (3 marks)
(ii) The efficiency variance. (3 marks)
(c) Briefly outline the steps involved in allocating overheads using activity based costing. (2 marks)
(20 marks)
5 [P.T.O.
Formulae Sheet
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a= the time taken for the first unit of output
x= the cumulative number of units produced
b= the index of learning (log LR/log2)
LR = the learning rate as a decimal
Regression analysis
y=a+bx
Q[\[y
b=
Q[2 x)2
\ Ex
a= -
n n
Q[\-[y
r=
(Q[ x)2 )(n\ 2 y)2 )
2
Demand curve
P = a – bQ
b= change in price
change in quantity
a = price when Q = 0
MR = a – 2bQ
End of Question Paper
6
Answers 3rd Amend 19-09-27
Applied Skills
Performance
Management
(PM)
PM
March/June 2019 – Sample Questions
PM ACCA
Time allowed: 3 hours 15 minutes
This question paper is divided into three sections:

Section A – A
LL 15 questions are compulsory and MUST be attempted
Section B – A
Section C – B
OTH questions are compulsory and MUST be attempted
Do NOT open this question paper until instructed by the supervisor.

Do NOT record any of your answers on the question paper.
The Association of
Chartered Certified
Accountants
Section B – ALL 15 questions are compulsory and MUST be attempted
Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple choice
question. Do not write out the answers to the MCQs on the lined pages of the answer booklet.
Each question is worth 2 marks.
The following scenario relates to questions 16–20

Volt Co generates and sells electricity. It operates two types of power station: nuclear and wind.
The costs and output of the two types of power station are detailed below:
Nuclear station
A nuclear station can generate 9,000 gigawatts of electricity in each of its 40 years of useful life. Operating costs are $486m
per year. Operating costs include a provision for depreciation of $175m per year to recover the $7,000m cost of building
the power station.
Each nuclear station has an estimated decommissioning cost of $12,000m at the end of its life. The decommissioning cost
relates to the cost of safely disposing of spent nuclear fuel.
Wind station
A wind station can generate 1,750 gigawatts of electricity per year. It has a life-cycle cost of $55,000 per gigawatt and an
average operating cost of $40,000 per gigawatt over its 20-year life.
16 What is the life-cycle cost per gigawatt of the nuclear station (to the nearest $’000)?
A $54,000
B $73,000
C $87,000
D $107,000
17 Which of the following will decrease the total life-cycle cost of a nuclear station?
(1) Increasing the useful life of the station
(2) Reducing the decommissioning cost
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
18 How would the disposal cost of spent nuclear fuel be categorised in environmental management accounting
(EMA)?
A A prevention cost
B A detection cost
C An internal failure cost
D An external failure cost
19 If Volt Co sets a price to earn an operating margin of 40% over the life of a wind station, what will be the total
lifetime profit per station (to the nearest $m)?
A $35m
B $408m
C $560m
D $933m
2
20 Which of the following are benefits of life-cycle costing for Volt Co?
(1) It facilitates the designing out of costs at the product development stage
(2) It can encourage better control of operating costs over the life cycle
(3) It gives a better understanding of the causes of overhead costs
(4) It provides useful data for short-term decision-making
A 1, 2 and 3
B 1 and 2 only
C 1 and 4
D 2, 3 and 4
3 [P.T.O.

Cara Co makes two products, the Seebach and the Herdorf.
To make a unit of each product the following resources are required:
Seebach Herdorf
Materials ($100 per kg) 5 kg 7 kg
Labour hours ($45 per hour) 2 hours 3 hours
Machine hours ($60 per hour) 3 hours 2 hours
Fixed overheads are $300,000 each month.
The contribution per unit made on each product is as follows:
Seebach Herdorf
Contribution ($ per unit) 250 315
The maximum demand each month is 4,000 units of Seebach and 3,000 units of Herdorf. The products and materials are
perishable and inventories of raw materials or finished goods cannot be stored.
Cara Co has a legally binding obligation to produce a minimum of 2,000 units of Herdorf in each of months 1 and 2. There
is no minimum production required in month 3.
The manufacturing manager is planning production volumes and the maximum availability of resources for months 1, 2
and 3 are as follows:
Month 1 2 3
Materials (kg) 34,000 42,000 35,000
Labour (hours) 18,000 12,000 24,000
Machine (hours) 18,000 19,000 12,000
For month 3 the following linear programming graph has been produced:
10,000
Herdorf (H)
S = 4,000
8,000
6,000
4,000
H = 3,000
3S
+
2,000
2H
25
5S 2S
=
+
0S
+ 3H
12
7H
+
= =
,00
31
35 24
,00
5H
,00 0
0
0
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
Seebach (S)
4
21 What is/are the limiting factor(s) in month 1?

A Materials, labour hours and machine hours
B Materials and machine hours only
C Materials only
D Labour hours only
22 The production manager has identified that the only limiting factor in month 2 is labour hours.
What is the production volume for Herdorf for month 2 (to the nearest whole unit)?
A 0
B 1,333
C 2,000
D 3,000
23 If the shadow price for month 2 is $125 per labour hour, which of the following statements is/are correct?
(1) The production manager would be willing to pay existing staff a maximum overtime premium of $125 per hour
for the next 2,000 hours
(2) The production manager would be willing to pay a maximum of $170 per hour for an additional 2,000 hours of
temporary staff time
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
24 What is the maximum profit which can be earned in month 3?

A $1,080,000
B $1,380,000
C $1,445,000
D $1,145,000
25 Which of the following interpretations of the linear programming graph produced for month 3 is/are correct?
(1) Even if demand for either product increases, labour will be a slack variable if no other resources change
(2) If more machine hours were made available in month 3, they would be used initially to make Herdorfs
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
5 [P.T.O.
Marcus manages the production and sales departments for product MN at Grayshott Co. Marcus has been asked to attend
a meeting with Grayshott Co’s finance director to explain the results for product MN in the last quarter.
Budgeted and actual results for product MN were as follows:
Budget Actual
Sales volume (units) 40,000 38,000
$’000 $’000
Revenue ($65 per unit) 2,600 2,394
Material (5·2 kg at $4 per kg) (832 ) (836 )
Labour (2 hours at $8 per hour) (640 ) (798 )
Variable overheads (2 hours at $4 per hour) (320 ) (399 )
Fixed overheads (220 ) (220 )
––––––– –––––––
Profit 588 141
––––––– –––––––
There was no opening and closing inventory in the last quarter. Grayshott Co operates a marginal costing system.
Marcus is angry about having to attend the meeting as he has no involvement in setting the original budget and he believes
that the adverse results are due to the following circumstances which were beyond his control:
(1) A decision by Grayshott Co’s board to increase wages meant that the actual labour rate per hour was 25% higher than
budgeted. This decision was made in response to a request by the production department to enable it to meet a large,
one-off customer order in the last quarter.
(2) Due to the closure of a key supplier, Grayshott Co agreed to a contract with an alternative supplier to pay 6% more
per kg than the budgeted price for material. The actual cost per kg of material was $4·40.
(3) Difficult economic conditions meant that market demand for product MN was lower by 10%.
At present Grayshott Co does not operate a system of planning and operational variances and Marcus believes it should do
so.
26 What was the market share variance for product MN for the last quarter?
A $40,400 Favourable
B $80,800 Adverse
C $29,400 Favourable
D $38,000 Adverse
27 What was the adverse materials price planning variance for product MN for the last quarter?
A $30,400
B $76,000
C $45,600
D $49,920
28 What was the labour rate operational variance for product MN for the last quarter?
A $159,600 Favourable
B $159,600 Adverse
C $160,000 Favourable
D $160,000 Adverse
6
29 Which of the following would explain a labour efficiency planning variance?
(1) A change in employment legislation requiring staff to take longer rest periods
(2) Customers demanding higher quality products leading to a change in product design
(3) The learning effect for labour being estimated incorrectly in the production budget
A 1 and 2 only
B 2 and 3 only
C 3 only
D 1, 2 and 3
30 Which of the following statements regarding the problems of introducing a system of planning and operational
variances is/are true?
(1) Operational managers may argue that variances are due to the original budget being unrealistic
(2) Operational managers may seek to blame uncontrollable external factors for the variances
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
(30 marks)
7 [P.T.O.
Section C – Both questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
31 Belton Park Resort is a new theme park resort located in the country of Beeland. The resort is made up of a theme park,
a hotel and an indoor water park. The resort opened two months ago and is already very popular.
As all theme parks in Beeland are required, by law, to shut down in the colder month of January because of the risk
of accidents, Belton Park Resort must decide whether to shut down the whole resort or just the theme park. It could
choose to keep open the hotel and/or the water park.
Since Belton Park Resort has not been open for long, there is limited historical data available about costs and revenues.
However, based on the last two months, the following average monthly data is available:
Hotel
Number of rooms 120
Average room rate per night $100
Average occupancy rate per month 90%
Average nightly spend on ‘extras’ per room $20
Contribution margin for ‘extras’* 60%
Water park
Number of visitors per month 12,000
Admission price per visitor $21
Average spend on ‘extras’ per visitor $12
Contribution margin for ‘extras’* 60%
*‘Extras’ includes anything purchased by the customer not included in the room rate or admission price.
Management estimates that, for January, the average room rate per night would need to decrease by 30% and the
admission price for the water park by 20%. With such reductions, it is estimated that an occupancy rate of 50% would
be achieved for the hotel and that the number of visitors to the water park would be 52% lower than current levels. The
average nightly spend on ‘extras’ per room of $20 at the hotel and $12 per customer at the water park is expected to
remain unchanged.
The running costs for the hotel and water park for each of the last two months are as follows:
Notes Hotel Water park
$ $
Staff costs 1 120,000 75,600
Maintenance costs 2 14,600 6,000
Power costs 3 20,000 18,000
Security costs 4 13,600 8,000
Water costs 5 12,900 12,100
Notes:
(1) Staff costs
Permanent staff
Included in the staff costs for the hotel is the salary of $30,000 per annum for the hotel manager and $24,000
per annum for the head chef. These are both permanent members of staff who are paid for the full year regardless
of their working hours.
The water park employs one permanent member of staff, the manager, on a salary of $24,000 who is also paid
for the full year regardless of his working hours.
Temporary staff
The remaining staff costs relate to temporary staff who are only paid for the hours they work. If the hotel stays
open in January, half of these staff members will continue to work their current hours because their jobs are largely
unaffected by guest occupancy rates. However, the other half of the staff will work proportionately less hours to
reflect the 50% occupancy rate in January as opposed to the 90% occupancy rate of the last two months.
At the water park, the temporary staff’s working hours will fall according to the number of visitors, hence a fall of
52% would be expected for January.
8
Maintenance costs
(2)
Maintenance is undertaken by a local company, ‘Techworks’, which bills Belton Park Resort for all work carried
out each month. If the hotel and water park are closed, Techworks will instead be paid a flat fee for the month of
$4,000 for the hotel and $2,000 for the water park.
Power costs
(3)
Electricity
Belton Park Resort pays a fixed monthly charge for electricity of $8,000 for the hotel and $7,000 for the water
park, all year round.
Gas
The gas charges relate to heating and include a fixed charge of $2,200 per month for the hotel and $1,500 per
month for the water park. The remainder of the gas charges is based solely on usage and would be expected to
increase by 50% in January because of the colder weather.
Security costs
(4)
If the hotel and water park close, no changes will be made to the current arrangements for security whilst the
premises are empty.
Water costs
(5)
It is estimated that water costs for the hotel would fall to $6,450 for the month if it remains open in January.
However, the water costs for the water park would be expected to remain at their current level. If the hotel and
water park were closed, all water would be turned off and no charges would arise.
Required:
(a) Calculate the incremental cash flows, for the month of January (31 days), if Belton Park Resort decides to
keep open:
(i) the hotel;
(ii) the water park.
In each case, state whether it should remain open or should close. (15 marks)
(b) Discuss any other factors which Belton Park Resort should consider when making the decision in part (a).
(5 marks)
(20 marks)
9 [P.T.O.
32 Best Night Co operates a chain of 30 hotels across the country of Essland. It prides itself on the comfort of the rooms
in its hotels and the quality of service it offers to guests.
The majority of Best Night Co’s hotels are located in major cities and have previously been successful in attracting
business customers. In recent years, however, the number of business customers has started to decline as a result of
tough economic conditions in Essland.
Best Night Co’s policy is to set standard prices for the rooms in each of its hotels, with that price reflecting the hotel’s
location and taking account of competitors’ prices. However, hotel managers have the authority to offer discounts
to regular customers, and to reduce prices when occupancy rates in their hotel are expected to be low. The average
standard price per night, across all the hotels, was $140 in 20X7, compared to $135 in 20X6.
In addition to room bookings, the hotels also generate revenue from the additional services available to customers, such
as restaurants and bars.
Summary from Best Night Co’s management accounts:
Year ended Year ended
30 June 20X7 30 June 20X6
$’000 $’000
Revenue – rooms at standard price per night 111,890 104,976
Room discounts or rate reductions given (16,783 ) (11,540 )
Other revenue: food, drink 24,270 23,185
–––––––– ––––––––
Total revenue 119,377 116,621
Operating costs (95,462 ) (92,379 )
–––––––– ––––––––
Operating profit 23,915 24,242
–––––––– ––––––––
Other performance information:
Year ended Year ended
30 June 20X7 30 June 20X6
Capital employed (Note 1) $39.5m $39.1m
Average occupancy rates (Note 2) 74% 72%
Average customer satisfaction score (Note 3) 4·2 4·5
Note 1: Capital employed is calculated using the depreciated cost of non-current assets at all Best Night Co’s hotels.
Note 2: Occupancy rates for the year ended 30 June 20X7 were budgeted to be 72%.
Note 3: Customer satisfaction scores are graded on a scale of 1–5 where ‘5’ represents ‘Excellent’. On average, in any
given town in Essland, the top 10% of hotels earn a score of 4·5 or above and the top 25% of hotels earn a
score of 4·2 or above.
Two themes are becoming increasingly frequent in the comments Best Night Co’s customers make alongside the
scores:
(1) Repeat customers have said that the standard of service in recent visits has not been as good as in previous visits.
(2) The rooms need redecorating, and the fixtures and fittings need replacing. For example, the beds need new
mattresses to improve the level of comfort they provide.
Best Night Co had planned a two-year refurbishment programme beginning in 20X7 of all the rooms in each hotel.
However, this programme has been put on hold, due to the current economic conditions, and in order to reduce
expenditure.
Required:
Using the information provided, discuss Best Night Co’s financial and non-financial performance for the year ended
30 June 20X7.
Note: There are 5 marks available for calculations and 15 marks available for discussion.
(20 marks)
10
Formulae Sheet
Learning curve
Y = axb

a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
Demand curve
P = a – bQ
change in price
b=
change in quantity
MR = a – 2bQ
11
8
Answers
Applied Skills, PM
Performance Management (PM) March/June 2019 Sample Answers
Section B
Volt Co
16 C
Operating cost ($486m x 40 years) $19,440m
Decommissioning cost $12,000m
––––––––––
Total life-cycle costs $31,440m
––––––––––
Total gigawatts (9,000 x 40 years) 360,000
Life-cycle cost per gigawatt ($31,440m/360,000 gigawatts) $87,333
$87,000 (to the nearest $’000)
17 B
If the useful life of the nuclear station is increased, the operating cost will be incurred every year thus increasing the total life-cycle
costs. Statement (1) is not correct.
If the decommissioning cost is reduced, this will reduce the total life-cycle costs. Statement (2) is correct.
18 C
The disposal cost of the spent nuclear fuel is considered to be an internal failure cost. It is a cost incurred by Volt Co as a result of
its activities; however, it is being disposed of in a safe manner to ensure that it does not become a cost borne by society as a whole.
19 B
The selling price is based on the operating margin of 40%.
Selling price per gigawatt ($40,000/0·60) $66,667
Lifetime profit per gigawatt ($66,667 – $55,000) $11,667
Total lifetime profit (1,750 gigawatts x $11,667 x 20 years) $408·345m
$408m (to the nearest $m)
20 B
Statements (1) and (2) are benefits of life-cycle costing for Volt Co.
Statement (3) is a benefit of activity-based costing (ABC).
Statement (4) is a benefit of relevant costing.
Cara Co
21 C
Seebach Herdorf Total required Available
Material (kg) 20,000 21,000 41,000 34,000
Labour (hours) 8,000 9,000 17,000 18,000
Machine hours 12,000 6,000 18,000 18,000
There is sufficient labour hours and machine hours to meet maximum demand but there is a shortage of material, so material is the
only limiting factor in month 1.
15
22 C
As labour has been identified as the only limiting factor in month 2, the two products first have to be ranked on the contribution per
labour hour they earn.
Seebach Herdorf
Contribution per unit ($) 250 315
Labour hours per unit 2 3
Contribution per labour hour ($) 125 105
Ranking 1st 2nd
On the basis of the ranking, the optimum plan would have been to produce Seebach first up to its maximum demand level. However,
Cara Co has a legally binding obligation to produce a minimum of 2,000 units of Herdorf. The remaining hours after the production
of the minimum demand of Herdorf has been completed is (12,000 hours – (2,000 units of Herdorf x 3 hours) = 6,000, which
will be used to produce 3,000 units of Seebach (6,000 hours/2 hours).
There are no more hours available to make any more products, so the production volume for Herdorf for month 2 is 2,000 units.
23 C
The shadow price is the contribution earned from having one extra unit of limited resource available and is also the extra, on top of
the existing cost for that limited resource, which a company would be willing to pay to acquire that extra resource.
If the shadow price is $125 per labour hour, it would mean that Cara Co would be willing to pay $125 of overtime premium per
hour for the next 2,000 hours. The maximum hourly rate Cara Co would be willing to pay would be ($45 + $125) $170 for an
additional 2,000 hours of temporary staff.
Therefore both statements are correct.
24 D
To determine the optimum point from the graph, the iso-contribution line (250S + 315H) must be moved at the same gradient
through the feasible region until the last point it leaves the feasible region. This is where the machine hours constraint (3S + 2H
= 12,000) and demand constraint for Herdorf (H = 3,000) intersect. Reading from that point across to the y axis shows that H =
3,000 and reading from that point down to the x axis shows that S = 2,000.
Alternatively, the values for H and S can be determined using simultaneous equations:
H = 3,000
3S + 2H = 12,000
3S + (2 x 3,000) = 12,000
S = (12,000 – 6,000)/3 = 2,000
Maximum contribution ($250 x 2,000 units) + ($315 x 3,000 units) = $1,445,000
Less fixed costs ($300,000 )
–––––––––––
$1,145,000
–––––––––––
25 A
A slack variable occurs when there are more resources available than are required.
In the graph, the labour line 2S + 3H= 24,000 is well above the feasible region which means that it is not a binding constraint
and there are more labour hours than is required. Even if demand increases for both products, labour would still be a slack variable
as machine hours are the binding constraint and that is not expected to change. Statement (1) is correct.
If more machine hours became available in month 3, they will be used to make Seebach as the maximum demand of Herdorf
(3,000 units) has been satisfied already. Statement (2) is not correct.
16
Grayshott Co
26 A
The market share variance compares the revised sales volume to the actual sales volume:
Revised sales budget (40,000 units x 90%) 36,000 units
Actual sales 38,000 units
Difference (variance in units) 2,000 favourable
Valued at the standard contribution per unit ($)* 20·20
Variance ($) 40,000 favourable
*Standard contribution = $65 – (5·2 x $4) – (2 x $8) – (2 x $4) = $20·20
27 C
The materials price planning variance is calculated by comparing the original standard price to the revised standard price:
Original standard price per kg ($) 4·00
Revised standard price per kg ($) 4·24
Difference ($ per kg) 0·24 adverse
Actual quantity of material used (kg)* 190,000
Variance ($) 45,600 adverse
*Actual quantity of materials used = actual material costs/actual price per kg = $836,000/$4·40 per kg = 190,000 kg
28 B
Labour rate operational variance is calculated by comparing the revised standard rate per labour hour to the actual rate per labour
hour:
Revised standard rate per hour ($) 8·00
There is no revision made to the standard rate, as the increase was requested by the production department to meet a large, one-off
customer order.
Actual rate per hour (1·25 x $8) ($) 10·00
Difference ($) 2·00 adverse
Number of hours worked* 79,800
Variance ($) 159,600 adverse
*Actual hours worked = actual labour cost/actual rate per hour = $798,000/$10 = 79,800
29 D
Labour efficiency planning variance will occur when the standard hours have to be revised due to factors which are beyond the
control of the operational managers.
All the factors would require the original standard hours to be revised and would therefore cause a labour efficiency planning
variance.
Therefore statements (1), (2) and (3) are all correct.
30 C
Both statements are correct and are known issues with the introduction of a system of planning and operating variances.
17
Section C
31 (a) (i) Hotel

Incremental revenue and contribution
$
Room revenue
Number of rooms 120
Number of nights 31
Total room nights 3,720
Occupancy rate 50%
Total nights occupied 1,860
Rate per night $70
Total room revenue 130,200
Extras’ contribution
Total nights occupied 1,860
Contribution per night $12·00
Total ‘extras’ contribution 22,320
––––––––
Total cash inflows 152,520
––––––––
Incremental running costs
Staff costs $120,000
Less: manager’s salary ($2,500 )
Less: chef’s salary ($2,000 )
–––––––––
$115,500
50% normal hours 57,750
50% at reduced hours x 50/90 32,083
Maintenance costs:
If open $14,600
If closed $4,000
–––––––––
Incremental cost 10,600
Power costs:
Electric $0
Gas – fixed charge $0
Gas – variable ($20,000 – $10,200) x 1·5 14,700
Security 0
Water 6,450
––––––––
Total cash outflows 121,583
––––––––
Total incremental cash flows 30,937
––––––––
18
(ii) Water park

Incremental revenue and contribution
$
Visitor revenue
Number of visitors 5,760
Admission cost $16·80
Admission revenue 96,768
Extras’ contribution
Number of visitors 5,760
Contribution per visitor $7·20
Total contribution 41,472
––––––––
Total cash inflows 138,240
––––––––
Incremental running costs
Staff costs:
Manager $0
Other staff ($75,600 – $2,000) x 48% 35,328
Maintenance costs:
If open $6,000
If closed ($2,000 )
–––––––
Incremental cost 4,000
Power costs:
Electric $0
Gas – fixed charge $0
Gas – variable ($18,000 – $8,500) x 1·5 14,250
Security 0
Water 12,100
––––––––
Total cash outflows 65,678
––––––––
Total incremental cash flows 72,562
––––––––
Conclusion
Based on these figures, both of them should stay open because the incremental cash flows are both positive.
(b) As regards the estimates calculated, these have been based on very limited data and should be approached with caution. The
calculations are based on the first two months’ of opening only and, consequently, it is difficult to say how accurate they are
likely to be. In addition, the basis of estimating the revised occupancy rates for the hotel, for example, has not been given. If
these estimates are too optimistic, the actual results could be far worse.
The figures suggest that both the water park and the hotel should stay open. Given that this is a new business and therefore it
is still building up its customer base, this would seem like a wise decision anyway, even if the calculations had shown that the
estimated incremental cash flows were not as positive as this.
Similarly, if Belton Park were to close either the hotel or the water park, they would invariably lose some valuable staff who
might seek out other jobs after the closure. These staff might not be available again when the hotel and water park reopened
in February.
The interdependency of the two sets of projections has not been taken into account in the calculations either. Since the
incremental cash flows suggest that both the hotel and the water park should stay open, it is not a big problem. However, if
they had shown, for example, that the water park alone should close, the effect that this could have on the number of hotel
visitors would also need to be taken into account. Many visitors may be attracted to the hotel because it has a water park.
Tutorial note: There are many factors which could have been discussed here and would be given credit.
19
32 Performance for year ended 30 June 20X7

Gross room revenue – Best Night’s ‘gross’ room revenue based on standard room rates has increased by 6·6% in 20X7, which
reflects the higher occupancy rates (74% v 72%) and the increase in standard room rates ($140 v $135 per night).
However, this gives a rather misleading impression of how well the hotels have performed in the year to 20X7.
Revenue after discounts – Revenue from room sales, adjusted for discounts or rate reductions offered, has actually only increased
1·8%, and that reflects the significant 45% increase in discounts or reductions offered:
20X7 20X6 % change
$’000 $’000
Standard revenue 111,890 104,976 6·6%
Discounts/reductions 16,783 11,540 45·4%
Room revenue net of discounts 95,107 93,436 1·8%
Faced with the declining number of business customers, and consequently the prospect of lower occupancy rates, managers may
have decided to offer lower room rates to try to retain as many of their existing business customers as possible, or to try to attract
additional leisure customers.
Although occupancy rates increased by 2·8% (from 72% to 74% which now exceeds the budgeted level), revenue, net of discounts,
only increased by 1·8%. This means that revenue per room per night after discounts in 20X7 was lower than in 20X6, despite the
standard rate being higher ($140 v $135).
In the context of tough market conditions, the decision to increase the standard room rate for 20X7 appears rather optimistic.
Although the hotel managers have managed to achieve occupancy rates higher than budget, they have only managed to do so by
reducing room rates.
Additional revenue – One of the potential benefits of increased occupancy rates, even if guests are paying less per room per night, is
that they will generate additional revenue from food and drink sales. This appears to be the case because additional revenues have
increased by approximately 5%.
Total revenue – In total, revenue (net of discounts) has increased 2·4% in 20X7 v 20X6. Given the tough competitive environment,
Best Night Co could view any increase in revenues as positive. Moreover, provided the revenue achieved from selling the room is
greater than the variable cost of providing it, then increasing occupancy levels should increase the hotels’ contribution to profit.
Operating profit – However, despite the increase in revenue, operating profits have fallen by $0·3m (1·3%) between 20X7 and
20X6, due to a sizeable increase in operating costs.
There is no detail about Best Night Co’s operating costs, for example, the split between fixed and variable costs. However, in an
increasingly competitive market, cost control is likely to be very important. As such, the $3 million (3·3%) increase in operating
costs between 20X6 and 20X7 is potentially a cause for concern, and the reasons for the increase should be investigated further.
However, when looking to reduce costs, it will be very important to do so in a way which does not compromise customer satisfaction.
More generally, Best Night Co needs to avoid cutting expenditure in areas which will have a detrimental impact on customer
satisfaction ratings, for example, not replacing mattresses even though they are becoming uncomfortable to sleep on.
Operating profit margin – The increase in costs has also led to a fall in operating profit margin from 20·8% to 20·0%.
It is perhaps more instructive to look at the margin based on standard room rates per night, thereby reflecting the impact of the
discounts offered as well as the increase in costs. On this basis, the margin falls slightly more: from 18·9% to 17·6%.
20X7 20X6
$’000 $’000
Total revenue 119,377 116,621
Discounts offered 16,783 11,430
–––––––– ––––––––
Gross revenue 136,160 128,051

–––––––– ––––––––
–––––––– ––––––––
Operating profit 23,915 4,242
Operating profit margin 17·6% 18·9%
ROCE – This reduced profitability is also reflected in the company’s return on capital employed which has fallen slightly from 62%
($24·2m/$39·1m) to 60·5% ($23·9m/$39·5m). This suggests that the value which Best Night Co is generating from its assets is
falling. The decline in ROCE could be a particular concern given the relative lack of capital investment in the hotels recently. Capital
investment will increase the cost of Best Night Co’s non-current assets, thereby reducing ROCE for any given level of profit.
Customer satisfaction scores
Although the reduction in profitability should be a concern for Best Night Co, the reduction in customer satisfaction scores should
potentially be seen as a greater cause for concern. The scores suggest that, in the space of one year, Best Night Co hotels have gone
from being in the top 10% of hotels to only just being in the top 25%. This is a significant decline in one year, and one which Best
Night Co cannot afford to continue.
Best Night Co prides itself on the comfort of its rooms and the level of service it offers its guests. Both of these factors are likely to
be important considerations for people when considering whether or not to stay in a Best Night Co hotel. Therefore, falling customer
20
satisfactions levels could be seen as an indication that fewer existing customers will stay at a Best Night Co hotel in future – thereby
threatening occupancy rates, and prices, in future.
Moreover, the scores suggest that the decision to defer the refurbishment programme is likely to have a detrimental impact on future
performance.
21
Applied Skills, PM
Performance Management (PM) March/June 2019 Sample Marking Scheme
Section B Marks
Each question is worth 2 marks 30

–––
Section C Maximum marks Marks awarded
31 (a) (i) Hotel revenue 1·5

Extras contribution 1
Staff costs 2·5
Maintenance cost 1
Gas variable costs 1
Water not security 0·5
Net cash flow 0·5
Conclusion: hotel 0·5
(ii) Admission revenue 1·5
Extras contribution 1
Staff costs 0·5
Maintenance costs 1
Gas variable costs 1
Water not security 0·5
Net cash flow 0·5
Conclusion: water park 0·5
–––
15
–––
(b) Discussion 5
–––
20
–––
32 Calculations 5
Revenue 4
Operating profit 2
ROCE 2
Cust satisfaction 3
Other valid points 4
–––
20
–––
23
PM Examiner’s commentary on
March/June 2019 sample questions
This commentary has been written to accompany the published sample questions and
answers and is written based on the observations of markers. The aim is to provide
constructive guidance for future candidates and their tutors, giving insight into what the
marking team is looking for, and flagging pitfalls encountered by candidates who sat these
questions.
Question 31
The question is entirely from the decision-making section of the syllabus, focusing on relevant
costs. This can be an area which polarises candidates, with many prone to using traditional
accounting principles rather than relevant costing methods. This commentary will try to
highlight regular mistakes that are made, in order to steer candidates away from them.
Although some repetition of the model answer is inevitable, the focus for this commentary will
be exam technique, and how to get the most out of the question in the time available. Some
of the methods candidates can use to get the most out of the CBE software will also be
covered, as this is a key skill in passing all of the Applied Skills exams now.
Read the requirements

This advice is frequently published, but is very important – candidates shouldn’t waste time
reading through the scenario until they know what they’re trying to achieve. On longer
questions such as this, it is good practice to read the first paragraph of the scenario so that
the type of business can be understood then look at the requirements in detail.
The first paragraph, although short, gives some key information – the business is new (opened
two months earlier), already successful, and has three areas – a theme park, a hotel and an
indoor water park. After determining that, candidates can look at the requirements.
There are two requirements, worth 15 and 5 marks respectively. This is also important to
know, as it gives a rough idea of how long to spend on each part. It’s also important not to fall
into the trap of spending too long on part (a), and not having time to even attempt part (b),
which may mean missing out on some easy marks.
As usual, the verbs used in the requirements are key. Requirement (a) is a Calculate
requirement, which is fairly clear. However, candidates should read the requirements
carefully, as often there are further instructions given, as is the case here. Candidates were
asked to calculate the incremental cash flows (more on this later) in TWO cases – one if the
hotel stays open, and the other if the water park stays open. In addition they are also asked to
state whether it should remain open or should close – easy to miss or forget this!
Requirement (b) says Discuss any other factors Belton Park Resort should consider when
making the decision in part (a). The decision is to (open/close the hotel/water park), but
candidates should read through the requirement to see if there’s any important information.
It’s perfectly acceptable to attempt part (b) before part (a) – remember you’re asked for other
factors, so the numerical conclusion to part (a) is largely irrelevant.
Examiner’s commentary – PM March/June 2019 1

In terms of the detail of the requirements, part (a) is the more technical of the two –
candidates are asked for the incremental cash flows if the resort keeps open the hotel and/or
water park. Incremental cash flows are key to decision-making when using relevant cash
flows. What this means is the change in cash flows as a result of the decision. The decision is
to close the hotel/water park – so candidates needed to identify the difference in cash flows
compared to keeping them open. It is now essential to read the scenario and identify what the
cash flows are in each case.
Read the scenario

As candidates read the scenario, they should start to make notes, and form their answer. As
the spreadsheet software is so quick to edit, candidates shouldn’t worry about putting
something down that they don’t need – it can always be deleted later.
The second paragraph of the scenario reiterates the decision – Belton Park Resort must decide
whether to close the hotel and/or the water park. Part of the reason for this decision is that
the theme park must be closed by law. A common mistake in part (b) was to suggest that
Belton Park Resort must close the water park to comply with this law and so more time spent
reading the first two paragraphs would have made it clear that only the theme park must be
closed. Many candidates did pick up on the fact that closing the theme park might have a
knock-on effect on the performance of the other two areas though, which was good to see.
Candidates were then given information about Belton Park Resort’s first two months of
trading. Again, rushing through this information could lead to missing vital clues for
requirement (b) – the fact that there’s only two months’ data may mean that it is not reliable,
and this could be another consideration before making the decision.
On its own, the information isn’t much use yet but there is information on room usage/prices
in the hotel, and visitor figures for the water park. If Belton Park Resort closes, it will lose out
on any revenue.
The scenario then says what the expected performance would be in January – this is
absolutely crucial. Remember that the decision is ‘to open or not’. So in the example of
revenue, if Belton Park Resort closes, it gets zero, if it opens, it gets whatever these figures are
suggesting – there is a change in cash flows which needs to be calculated.
Finally, the average monthly costs over the last two months are provided. Again, a common
error was to think that these were the total costs and candidates divided by two to get the
monthly costs. Spending a little more time reading the scenario really helps to avoid mistakes
such as these.
There are five costs given, and then details underneath regarding each one. This provides the
information needed to start answering the question – the incremental cash flows will consist of
revenue, and the five costs given. Some of them might be zero, but the answer can start to
take shape.

Set up your answer

Using the information from the scenario the revenue and costs have been included in the
spreadsheet. It’s easy to edit later if necessary, so don’t worry, but this is a good starting
point:
Answer the question

Starting with the Hotel and using the information given to calculate incremental cash flows.
This isn’t the only way to lay things out, but the above items need to be calculated, so it will
give a nice, clear answer. Any workings required can be done underneath, or to the side.
The first item to calculate is revenue. For the Hotel, the resort will gain revenue from room
bookings. However, there is also contribution from extras – if a candidate didn’t notice this at
the time, it doesn’t matter – they can either work everything out and include it as one figure,
or insert a line to include it. For the sake of demonstration, this commentary will do the latter:
If a candidate is accustomed to using spreadsheets they might try and right click on the row
number (2) to insert a line but as can be seen, this does not give the option to insert a row.
This highlights the importance of candidates practising using the software so that they’re not
taken by surprise in the exam.

Instead of inserting rows, candidates can simply cut and paste to move the text around. This
can be done by selecting the text to move, right clicking and selecting cut. Candidates could
also click on the scissors (circled) to cut.
Select the row to paste into, right click and select Paste, or just click on the circled Paste
button.

There are now a couple of extra rows, and the income streams can be separated out.

Now Rooms and Extras have been added. Candidates might think that’s a lot of work (as it’s a
lot of pictures) and would take too long, but that’s why it’s so important to practise these
questions using the software – in reality the whole exercise took about 15 seconds.
Back to the question – the revenue information for the past two months is given, but the
January figures are likely to be lower. Remember that the incremental cash flows of closing
the hotel are needed – so a comparison of the revenue if the hotel closes (zero) to the revenue
if it stays open – i.e. January’s revenue. This can be worked out as follows:
As can be seen a working has been set up to the right of the main answer. As mentioned
earlier, candidates can do this anywhere, but try to make it clear what is being worked out.
Using the button makes the words Hotel and Revenue bold. This isn’t essential, but
doesn’t take much time. It is then useful to copy in current information from the question –
again, this may seem like it’s using up valuable time, but these numbers are going to be used
and it makes it very clear to the marker where they’re coming from. Also note that the
software understands the percentage symbol, so it’s fine to use that.
Now the current figures can be adjusted as necessary (some, for example, the number of
rooms available will stay the same). The average room rate will need to decrease by 30% and

this can be the first calculation performed. The software will do the calculations and should be
used. There is a risk that if candidates do the calculations separately and type in the answer
manually, marks could be lost if a typing error is made.
To perform any calculation in the spreadsheet, click in the cell and type =. Simple
calculations can be done – for example typing =5*4 will give 20 (as seen below in cell C2).
The answer is shown as 20, but the Formula Bar (at the top) shows the calculation. This is so
important, as the marker can see how the answer has been arrived at and if a mistake is
made the marker is able to award follow-on marks. The marker will be unable to do this if an
incorrect answer has simply been typed manually into the cell.
Back to the room rate – this needs to decrease by 30%. There are a few ways to do this
calculation – many candidates would just work it out in their heads, but it is recommended
that workings are shown, even on something relatively simple like this. =100*70% or
=100*(1-30%) could be typed into the cell. This would be fine, and would obviously score
full marks, but the values in other cells can be referred to in the calculations. The current rate
is in cell G4 (see below), so typing =G4*70%, will give the right answer. The benefits of this
are that (again) it makes it clearer to the marker what is being done, and if a candidate
realises they have typed the value incorrectly, then changing the value in cell G4 will change
the calculation too. This can be very useful when doing several similar calculations as
candidates can copy and paste the formulas, and only update the numbers which change
each time.
Note that when typing the formula, instead of typing G4, clicking on cell G4 will achieve the
same result (try it!). Once the formula is complete, press Enter, and the answer will be shown.

The other change is occupancy – down to 50%. This can just be typed in, as there’s no
calculation required.
Now I have the information I need, I can work out my revenue. This will be the number of
rooms used per night multiplied by the room rate multiplied by the number of days – this can
be set up as follows:
So, number of rooms (G3) multiplied January occupancy (H5) will give the average rooms per
night, then multiplied by 31 as there are 31 days in January.

The revenue is then simply the number of rooms (H8) multiplied by the daily rate (H4).
It’s easier to explain the point now about showing workings. Many candidates reached this
figure, but with no workings – this is fine as long as the answer is right! However, let’s say a
candidate misreads the number of rooms as 130. That candidate could work out revenue as
130*70*50%*31 on their calculator and write 141,050 as their answer:
This would be worth zero. The correct answer is 130,200, so this is wrong. However, using
the method of showing workings:


The same mistake has been made, i.e. number of rooms has been input as 130, but a marker
can see straight away why the mistake has been made. The new room rate of 70 has been
correctly calculated, an occupancy rate of 50% has been applied, but to the wrong figure and
then it’s been multiplied by 31 to get revenue. The marking scheme for this question says that
hotel revenue is worth 1.5 marks – because of this mistake a candidate would score 1 mark –
much better than if no workings had been shown.
Finally, the figure can be put in to the main answer. It could be typed in but this runs the risk
of typing errors. A formula can be used to say ‘use the value in cell H9’ (as seen in this
illustration).
Now the contribution from ‘Extras’ can be calculated – each occupied room spends on average
$20 – but remember Belton Park Resort has to pay for the goods it sells, so if the company
make a 60% contribution margin, $20 of revenue will earn 20*60% = $12 contribution. The
1,860 rooms predicted to be used in January has been calculated, so the contribution would
be 1,860*12 but again, workings should be shown:

Finally the total income can be calculated:

What this shows is that if the hotel is kept open, $152,520 is earned – this is the incremental
cash inflow, as if the hotel is closed $0 would be earned, so the change in cash flows from
the decision to open would be $152,520.
On to the costs now – the information given on each one is crucial in deciding what changes
as a result of the decision.
Staff costs are probably the most complicated part of the question. For the hotel, a monthly
figure of $120,000 was given, and then information was provided on both salaried and
temporary staff. Remember it is the incremental cash flows which need to be calculated, i.e.
the change in cash flows if the hotel is open compared to closing it. Often, the easiest way to
do this is to look at the cash flows if the decision to open is taken versus the cash flows if it is
closed. This commentary does it this way, partly because the model answer does it slightly
differently, and this will show that both approaches are valid.
Starting with the salaried staff, the scenario says that they’ will be paid whether the hotel is
open or not – watch out though, the figures given are their annual salaries, and it is the
monthly costs which are needed (see cells K3 and K4 below).
As the costs are the same, the figures in cells K3 and K4 can be copied and pasted into L3
and L4.

Select the two cells, right click and select Copy, or click the Copy button (circled).
Select the cell to copy to, then right click and select Paste, or click the Paste button (circled).
The scenario then gives information about temporary staff, which is where it gets a little more
complicated. Half of the temporary staff are unaffected, but half are variable with the
occupancy rate. So, of the $120,000 spent on salaries in the previous month, the salaried
staff can be discounted ($4,500), leaving $115,500 spent on temporary staff. Half of this
cost will remain the same ($57,750), but the remainder will reduce by 50/90 to reflect the
fall in occupancy.

It can be seen in the formula bar how the $57,750 has been calculated – the fixed salary
costs have been subtracted from the original figure, then it has been divided by 2 to get the
unaffected half.
Finally, the reduction for the other half – multiply by 50/90:
This brings up a useful point – the answer here looks very odd but this is because it can’t fit in
the cell. The cell width can be adjusted by clicking at the top of the columns – on the line
between each one, and dragging.

The problem is due to the number of decimal places being shown. This can be adjusted in a
number of ways. Again practise before the exam, but one way is to click on the .00 button in
the toolbar and select 0.00 – 2 decimal places. Although this means that this answer is
formatted differently to the other numbers, don’t worry about it.

Now the figures have been calculated, the incremental cash flow is the difference between
opening and closing:
As mentioned earlier, the model answer approaches this slightly differently, by excluding the
fixed salaries, and then working out the temporary amounts, but the effect is the same.
The next cash flow is maintenance. There is much less information here – essentially two
numbers; the $14,600 prior month cost and the $4,000 flat fee (ignoring the water park for
now). Again, it’s important to stress that incremental cash flows are the difference between
taking the decision to open and not close. If the hotel is open, there’s no extra information, so
it can be assumed that it will cost $14,600 again. If it closes, maintenance will cost $4,000
– therefore the difference if the hotel opens is $10,600 ($14,600 – $4,000), i.e. it only costs
an extra $10,600 to open compared to closing.


There is no need for a separate working for this – the calculation can be input directly on to
the answer.
Note that it could be argued that maintenance costs might go down if park activity was
reduced – this was a valid point made by some in part (b).
Power costs consist of two charges – electricity and gas. The scenario says that electricity is a
fixed charge of $7,000 – therefore this will be incurred whether the hotel opens or closes, so
it is not relevant to the decision and not an incremental cash flow. The gas amount is made
up of a fixed amount (which again, is not relevant), and a variable amount which will increase
from last month. As a result, the prior month’s charge needs to be split into electricity and gas
to allow identify the variable gas amount to be identified then the increase of 50% applied:
Identify the variable amount by removing the fixed amounts from the total.

For security costs, it says that no changes would be made if the hotel closes. This means that
whatever decision is made, the cash flows would be identical – therefore there are no
incremental cash flows.
The last cost is water. Prior month’s costs were $12,900. If the hotel stays open the cost will
be $6,450, and if it closes it would be zero. As the decision is between the latter two options,
the difference in cash flows is $6,450 – $0, i.e. $6,450, so that is the incremental cash flow.
Now all of the individual incremental cash flows have been calculated, the total just needs to
be worked through. First, calculate total costs:
This formula is fine, but it’s starting to get time consuming clicking on all the different cells
(and more prone to error). Like all spreadsheet software, the SUM formula can be used to
save time. To do this, instead of the above type ‘= SUM(’, then select the cells to be added
(left-click and hold, then drag the mouse over the cells) and finally close the bracket:
B6:B10 means all the cells from B6 to B10.

The get the total incremental cash flows deduct costs from income. Note that the total income
and total costs figures aren’t essential to getting full marks, but they make the calculations
easier.
Finally, don’t forget to state whether Belton Park Resort should open or close. As the
requirement was state, no justification is required. If it said Explain, then ‘The hotel should
remain open as the incremental cash flows are positive’ would be enough.
Here though, just writing Open is enough.
The requirement is complete for the hotel, but the same has to be done for the water park.
This is where the CBE software is so useful – the items are the same, so candidates can copy
and paste what they’ve already done, and tweak it for the differences in the water park. Many
candidates also took a columnar approach, which worked very well:

Whichever way is chosen, a little bit of planning while reading the scenario can allow an
answer to be presented in an effective way. This commentary won’t go through the detail of
the water park as there’s not much difference between that and the hotel, and the model
answer can be reviewed. Just remember to practise using the CBE software as much as
possible to become familiar with its capabilities.
Part (b) uses the word processing software. Candidates generally have less trouble using this.
A few pointers on this question – the requirement to ‘Discuss any factors...’ does say how
many factors to discuss, which can make it difficult. Candidates often use whatever remaining
time they have and if that’s not much, answers can be too brief. As a rule of thumb, a well
discussed point will usually score 2 marks; a weaker point can score 1. This does vary from
question to question, depending on how difficult it is, but for a 5 mark question such as this,
it is recommended that candidates aim to make three good points (more if there is time) and
at least then if each point only scores 1 mark, then 3 out of 5 means a pass on this
requirement.
There are many different points which could be made. The most common mistake here was
for candidates to suggest that the resort should look at the costs v benefits and yet this is
what was done in part (a).
In terms of layout, try and break the answer up. One paragraph with three points in it is much
harder for the marker to separate out than if a candidate has spaced them out into separate
paragraphs, or better still used headings. Some of the more common answers have already
been mentioned, so a strong answer might start like this:

Headings are easy to add. Just select the text and click the button. Click it again to turn
off underlining.
As mentioned in the model answer, there are many valid points which could be included, but
the clearer the answer is made, the easier it is to award credit. Note that this answer is a lot
briefer than the model answer – the PM examining team know candidates are under time
pressure, so as long as points are clear and well explained, they will be awarded credit.

Question 32
Best Night Co belongs to the performance measurement section of the syllabus and the focus
of the question was a discussion of the financial and non-financial performance of the
business. The scenario included a wide range of numerical information, as well as other
details regarding the business, which candidates were expected to use to discuss the
performance. This type of question has been tested many times before in the Performance
Management (PM) examination and shares many similarities with recent questions published
on ACCA’s website.
First, from an exam technique point of view, it is important to read the first paragraph (or
maybe just couple of lines if it is a long paragraph) to gather insights on the business the
question is about. In this question, Best Night Co is a business in the hospitality sector and
operates a chain of 30 hotels. It also prides itself on offering comfortable rooms and quality
services. This will give candidates an insight into the type of business the question is focused
on.
Second, a candidate should read the requirements of the question. This particular question
comprised of one 20-mark requirement (see below) which can appear daunting at first but
this can be overcome by applying good exam technique. A key skill is the ability to break the
requirement down into manageable parts and tackle each in turn.
Required:
Using the information provided, discuss Best Night Co’s financial and non-financial
performance for the year ended 30 June 20X7.
Note: There are 5 marks available for calculations and 15 marks for discussion.
(20 marks)
The first point to note about this requirement is that there is already some guidance about
how the 20 marks are broken down – 5 marks for calculations and 15 marks for discussion.
In this type of performance measurement question, each correct calculation is worth 0·5
marks so candidates should aim to be performing ten relevant and correct calculations to
score all of the 5 marks. There were in excess of 30 relevant calculations which could have
been performed from the data provided in the scenario, so these 5 calculation marks should
have been relatively simple to score.
Unfortunately, some candidates did not perform as well as they could have on this question
because they did not perform enough calculations. A number of candidates only produced four
or five calculations, which not only means they missed out on calculation marks but it also
gave them less to talk about in their subsequent discussion.
The type of calculations required was not difficult. A calculation of the percentage growth or
decline in any of the items would have scored 0·5 marks. Candidates are advised to take care
to calculate the percentage change of any figure in the correct way by taking the difference

between the two years, dividing it by the earliest year’s figure and then multiplying by 100 to
arrive at the percentage. The majority of candidates were able to calculate enough correct
figures to score well here. It is always worth showing how you have calculated your figures,
whether that is in a separate working, or in the body of your discussion.
Discussion of performance
Once candidates have calculated sufficient relevant figures, it is necessary to discuss them,
together with other information supplied in the scenario, which relates to the performance of
Best Night Co. Generally in a question of this type, each relevant discussion point is worth
1 mark, although more can be gained with further expansion on that point. Stronger
candidates broke down their discussion into headings, which not only provided a clear and
easy to follow structure for the marker but it also made it much easier for the candidate to see
where they could gather marks. The way to choose appropriate headings is by looking back to
the scenario. In this question there was plenty of information about revenue, so that would
have been a good first heading. Then some cost and operating profit details and enough
information to calculate ROCE were supplied, so these could form the next two headings. For
the final heading, looking at the non-financial information, customer satisfaction is extremely
important to Best Night Co.
Having broken down the discussion into four distinct headings, a candidate only needed to
make an average of two good points under each of them, along with a few correct
calculations, to comfortably pass this question. In the CBE, these headings can be directly
typed into the response option and the rest of the answer populated underneath. This will
ensure the answer remains structured.
As with any exam question, it is recommended candidates consider the requirement carefully:
‘Discuss Best Night Co’s financial and non-financial performance’. To address this requirement
it is necessary to give an answer which is specific to the scenario given, as it is asking about
Best Night Co. No marks were awarded for generic points about performance which didn’t
relate to the scenario. Some candidates discussed some good general points about
performance, however because they were not specific to the scenario they did not score.
Additionally, a number of candidates simply took information from the scenario and quoted it
in their answer without analysis or reasoning. For example, ‘revenue has increased year on
year’ or ‘Best Night Co takes account of competitors’ prices’. These statements are true, but
don’t score any marks as they have been lifted straight from the scenario with nothing added.
So what should a candidate do when answering this type of question? There are two key ways
of making discussion points which are worthy of marks:
Making a link between two separate pieces of information given in the scenario; and
Using information given in the scenario to state why things have changed year on year.

Linkages
There are many statements in this scenario which can be linked together. For example, it
states in the first paragraph of the question that ‘Best Night Co prides itself on the comfort of
the rooms’ but towards the end, the scenario mentions that customers have commented that
the beds need new mattresses to improve the level of comfort they provide. These two pieces
of information are clearly at odds with one another. Best Night Co appears not to be delivering
on one of its key targets. A candidate noticing and discussing this linkage would have been
given credit.
Justification
In the calculations section above, it was discussed how many of the calculation marks could
be earned by calculating the percentage growth or decline in any of the items given in the
scenario. Further discussion marks were awarded for those candidates who looked carefully
through the scenario to see if there were any reasons given for those percentage changes.
The most obvious one to look at was revenue: Room revenue at standard price had increased
by 6·6% but why had this happened? Reading through the scenario reveals that the average
standard room price per night had gone up from $135 to $140, which partially explains the
increase in room revenue at standard price. Candidates noticing this reason and stating it in
their answer scored 1 mark. Stronger candidates took it a step further and earned more marks
by commenting that the increase in standard room prices was only 3·7%, which is lower than
the room revenue increase of 6·6%, therefore there must have been something else happening
to explain the increase. Another careful read through of the scenario shows us that the
occupancy rates of the hotel increased from 72% to 74%, so more people stayed at the hotel.
The room revenue at standard price increased not only due to increased standard prices, but
also because of more rooms being sold.
Weaker candidates attempted to explain why things had changed but in doing so contradicted
the information provided in the scenario. For example, the room discounts or rate reductions
had increased hugely between the two years provided. The scenario stated that ‘hotel
managers have the authority to offer discounts and reduce prices when occupancy rates are
expected to be low’ and so some candidates concluded that room discounts had gone up
because hotel occupancy had fallen. This is clearly not true as the occupancy rate had
increased from 72% to 74%.
Finally, the most common error from candidates on this question (and a very easy mistake to
make) is to offer advice to the company. Advice does not address the requirement and so it
doesn’t matter how insightful the piece of advice is, it will not score any marks and it wastes
valuable time in the exam.

Paper F5
Performance
Management
Monday 1 June 2015
Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
This paper is divided into two sections:
Section A – ALL 20 questions are compulsory and MUST be attempted
Section B – ALL FIVE questions are compulsory and MUST be attempted
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
Do NOT record any of your answers on the exam paper.
The Association of Chartered Certified Accountants

Section A – ALL 20 questions are compulsory and MUST be attempted
Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple
choice question. Do not write out the answers to the MCQs on the lined pages of the answer booklet.
Each question is worth 2 marks.
1 A division is considering investing in capital equipment costing $2·7m. The useful economic life of the equipment is
expected to be 50 years, with no resale value at the end of the period. The forecast return on the initial investment
is 15% per annum before depreciation. The division’s cost of capital is 7%.
What is the expected annual residual income of the initial investment?

A $0
B ($270,000)
C $162,000
D $216,000
2 The Fruit Company (F Co) currently grows fruit which customers pick themselves from the fields before paying. F Co
is concerned that a large number of customers are eating some of the fruit whilst picking it and are therefore not
paying for all of it. As a result, it has to decide whether to hire staff to pick and package the fruit instead. The following
values and costs have been identified:
(i) The total sales value of the fruit currently picked and paid for by customers
(ii) The cost of growing the fruit
(iii) The cost of hiring staff to pick and package the fruit
(iv) The total sales value of the fruit if it is picked and packaged by staff instead
Which of the above are relevant to the decision?

A All of the above
B (ii), (iii) and (iv) only
C (i), (ii) and (iv) only
D (i), (iii) and (iv) only
3 Which of the following statements describes target costing?

A It calculates the expected cost of a product and then adds a margin to it to arrive at the target selling price
B It allocates overhead costs to products by collecting the costs into pools and sharing them out according to each
product’s usage of the cost driving activity
C It identifies the market price of a product and then subtracts a desired profit margin to arrive at the target cost
D It identifies different markets for a product and then sells that same product at different prices in each market
2
4 The Mobile Sandwich Co prepares sandwiches which it delivers and sells to employees at local businesses each day.
Demand varies between 325 and 400 sandwiches each day. As the day progresses, the price of the sandwiches is
reduced and, at the end of the day, any sandwiches not sold are thrown away. The company has prepared a regret
table to show the amount of profit which would be foregone each day at each supply level, given the varying daily
levels of demand.
Regret table
Daily supply of sandwiches (units)
325 350 375 400
325 $0 $21 $82 $120
Daily demand 350 $36 $0 $44 $78
for sandwiches (units) 375 $82 $40 $0 $34
400 $142 $90 $52 $0
Applying the decision criterion of minimax regret, how many sandwiches should the company decide to supply
each day?
A 325
B 350
C 375
D 400
5 The following statements have been made about transaction processing systems and executive information systems:
(i) A transaction processing system collects and records the transactions of an organisation
(ii) An executive information system is a way of integrating the data from all operations within the organisation into
a single system
Which of the above statements is/are true?

A (i) only
B (ii) only
C Both (i) and (ii)
D Neither (i) nor (ii)
6 The following information is available for a manufacturing company which produces multiple products:
(i) The product mix ratio
(ii) Contribution to sales ratio for each product
(iii) General fixed costs
(iv) Method of apportioning general fixed costs
Which of the above are required in order to calculate the break-even sales revenue for the company?
A All of the above
B (i), (ii) and (iii) only
C (i), (iii) and (iv) only
D (ii) and (iii) only
7 Which of the following is an external source of information?

A Value of sales, analysed for each customer
B Value of purchases, analysed for each supplier
C Prices of similar products, analysed for each competitor company
D Hours worked, analysed for each employee
3 [P.T.O.
8 C Co uses material B, which has a current market price of $0·80 per kg. In a linear program, where the objective is
to maximise profit, the shadow price of material B is $2 per kg. The following statements have been made:
(i) Contribution will be increased by $2 for each additional kg of material B purchased at the current market price
(ii) The maximum price which should be paid for an additional kg of material B is $2
(iii) Contribution will be increased by $1·20 for each additional kg of material B purchased at the current market
price
(iv) The maximum price which should be paid for an additional kg of material B is $2·80
Which of the above statements is/are correct?

A (ii) only
B (ii) and (iii)
C (i) only
D (i) and (iv)
9 X Co uses a throughput accounting system. Details of product A, per unit, are as follows:
Selling price $320
Material costs $80
Conversion costs $60
Time on bottleneck resource 6 minutes
What is the return per hour for product A?

A $40
B $2,400
C $30
D $1,800
10 The following ratios have been calculated for a company:

Gross profit margin 42%
Operating profit margin 28%
Gearing (debt/equity) 40%
Asset turnover 65%
What is the return on capital employed for the company?

A 27·3%
B 18·2%
C 11·2%
D 16·8%
4
11 A company manufactures three products using different amounts of the same grade of labour, which is in short supply.
The following budgeted data relates to the products:
Per unit: P1 P2 P3
$ $ $
Selling price 120 140 95
Materials ($2 per kg) (40) (32) (22)
Labour ($10 per hour) (10) (20) (11)
Variable overheads (20) (28) (24)
Fixed overheads (6) (9) (12)
–––– –––– ––––
Profit per unit 44 51 26
–––– –––– ––––
What order should the products be manufactured in to ensure that profit is maximised?
P1 P2 P3
A 2nd 1st 3rd
B 2nd 3rd 1st
C 1st 3rd 2nd
D 1st 2nd 3rd
12 The following statements have been made about life cycle costing:
(i) It focuses on the short-term by identifying costs at the beginning of a product’s life cycle
(ii) It identifies all costs which arise in relation to the product each year and then calculates the product’s profitability
on an annual basis
(iii) It accumulates a product’s costs over its whole life time and works out the overall profitability of a product
(iv) It allocates costs to each stage of a product’s life cycle and writes them off at the end of each stage

A (i) and (iii)
B (iii) only
C (i) and (iv)
D (ii) only
13 A company’s sales and cost of sales figures have remained unchanged for the last two years. The following information
has been noted:
Year ended 31 May 2015 31 May 2014
Inventory turnover period 45 days 38 days
Payables payment period 40 days 35 days
Receivables payment period 60 days 68 days
Current ratio 1·3 1·4
Quick ratio 1·1 1·3
The following statements have been made about the company’s performance for the most recent year:
(i) Customers are taking longer to pay and this may have contributed to the decline in the company’s current ratio
(ii) Inventory levels have decreased and this may have contributed to the decline in the company’s quick ratio
Which of the above statements is/are true?

A (i) only
B (ii) only
C Both (i) and (ii)
5 [P.T.O.
14 Caf Co budgeted to sell 10,000 units of a new product in the period at a budgeted selling price of $5 per unit. Actual
sales volumes in the period were as budgeted but the actual sales price achieved was only $4 per unit. This was
because a competitor launched a similar product at the same time. Caf Co had been unaware that this was going to
happen when it prepared its budget and, had it known this, it would have revised its expected selling price to $3·80
per unit, which was the price of the competitor’s product.
What is the sales price planning variance?

A $12,000 A
B $12,000 F
C $2,000 F
D $2,000 A
15 The following budgeted data for a particular period was available for a company selling two products:
Sales price Variable cost Sales volume
per unit per unit in units
Product A $20 $8 15,840
Product B $24 $11 10,560
The actual results for the period were as follows:
Sales price Variable cost Sales volume
per unit per unit in units
Product A $22 $8 14,200
Product B $26 $11 12,500
What is the total sales quantity contribution variance for the period?
A $3,720 F
B $3,720 A
C $4,320 F
D $4,320 A
16 A company predicted that the learning rate for production of a new product would be 80%. The actual learning rate
was 75%. The following possible reasons were stated for this:
(i) The number of new employees recruited was lower than expected
(ii) Unexpected problems were encountered with production
(iii) Unexpected changes to Health and Safety laws meant that the company had to increase the number of breaks
during production for employees
Which of the above reasons could have caused the difference between the expected rate of learning and the
actual rate of learning?
A All of the above
B (ii) and (iii) only
C (i) only
D None of the above
6
17 When activity-based costing is used for environmental accounting, which statement is correct for
environment-related costs and environment-driven costs?
A Environment-related costs can be attributed to joint cost centres and environment-driven costs cannot be
B Environment-driven costs can be attributed to joint cost centres and environment-related costs cannot be
C Both environment-related costs and environment-driven costs can be attributed to joint cost centres
D Neither environment-related costs nor environment-driven costs can be attributed to joint cost centres
18 The following statements have been made about the materials mix variance for a company manufacturing different
products using the same type of material (measured in kgs):
(i) The mix variance can be calculated by taking the difference between the actual quantity in the standard mix and
the actual quantity in the actual mix, then multiplying it by the actual cost per kg
(ii) The mix variance arises because there is a difference between what the input should have been for the output
achieved and the actual output

A Neither (i) nor (ii)
B Both (i) and (ii)
C (i) only
D (ii) only
19 At the start of the year, a division has non-current assets of $4 million and makes no additions or disposals during
the year. Depreciation is charged at a rate of 10% per annum on all non-current assets held at the end of the year.
Working capital is $0·5 million at the start of the year although this is expected to increase by 20% by the end of the
year. The budgeted profit of the division after depreciation is $1·2m.
What is the expected ROI of the division for the year, based on average capital employed?
A 27·59%
B 26·37%
C 18·39%
D 31·58%
20 The following statements have been made in relation to the concepts outlined in throughput accounting:
(i) Inventory levels should be kept to a minimum
(ii) All machines within a factory should be 100% efficient, with no idle time

A (i) only
B (ii) only
C Both (i) and (ii)
(40 marks)
7 [P.T.O.
Section B – ALL FIVE questions are compulsory and MUST be attempted
1 Beckley Hill (BH) is a private hospital carrying out two types of procedures on patients. Each type of procedure incurs
the following direct costs:
Procedure A B
$ $
Surgical time and materials 1,200 2,640
Anaesthesia time and materials 800 1,620
BH currently calculates the overhead cost per procedure by taking the total overhead cost and simply dividing it by
the number of procedures, then rounding the cost to the nearest 2 decimal places. Using this method, the total cost
is $2,475·85 for Procedure A and $4,735·85 for Procedure B.
Recently, another local hospital has implemented activity-based costing (ABC). This has led the finance director at BH
to consider whether this alternative costing technique would bring any benefits to BH. He has obtained an analysis
of BH’s total overheads for the last year and some additional data, all of which is shown below:
Cost Cost driver $
Administrative costs Administrative time per procedure 1,870,160
Nursing costs Length of patient stay 6,215,616
Catering costs Number of meals 966,976
General facility costs Length of patient stay 8,553,600
–––––––––––
Total overhead costs 17,606,352
–––––––––––
Procedure A B
No. of procedures 14,600 22,400
Administrative time per procedure (hours) 1 1·5
Length of patient stay per procedure (hours) 24 48
Average no. of meals required per patient 1 4
Required:
(a) Calculate the full cost per procedure using activity-based costing. (6 marks)
(b) Making reference to your findings in part (a), advise the finance director as to whether activity-based costing
should be implemented at BH. (4 marks)
(10 marks)
8
2 Mobe Co manufactures electronic mobility scooters. The company is split into two divisions: the scooter division
(Division S) and the motor division (Division M). Division M supplies electronic motors to both Division S and to
external customers. The two divisions run as autonomously as possible, subject to the group’s current policy that
Division M must make internal sales first before selling outside the group; and that Division S must always buy its
motors from Division M. However, this company policy, together with the transfer price which Division M charges
Division S, is currently under review.
Details of the two divisions are given below.
Division S
Division S’s budget for the coming year shows that 35,000 electronic motors will be needed. An external supplier
could supply these to Division S for $800 each.
Division M
Division M has the capacity to produce a total of 60,000 electronic motors per year. Details of Division M’s budget,
which has just been prepared for the forthcoming year, are as follows:
Budgeted sales volume (units) 60,000
Selling price per unit for external sales of motors $850
Variable costs per unit for external sales of motors $770
The variable cost per unit for motors sold to Division S is $30 per unit lower due to cost savings on distribution and
packaging.
Maximum external demand for the motors is 30,000 units per year.
Required:
Assuming that the group’s current policy could be changed, advise, using suitable calculations, the number of
motors which Division M should supply to Division S in order to maximise group profits. Recommend the transfer
price or prices at which these internal sales should take place.
Note: All relevant workings must be shown.
(10 marks)
9 [P.T.O.
3 Bokco is a manufacturing company. It has a small permanent workforce but it is also reliant on temporary workers,
whom it hires on three-month contracts whenever production requirements increase. All buying of materials is the
responsibility of the company’s purchasing department and the company’s policy is to hold low levels of raw materials
in order to minimise inventory holding costs. Bokco uses cost plus pricing to set the selling prices for its products once
an initial cost card has been drawn up. Prices are then reviewed on a quarterly basis. Detailed variance reports are
produced each month for sales, material costs and labour costs. Departmental managers are then paid a monthly
bonus depending on the performance of their department.
One month ago, Bokco began production of a new product. The standard cost card for one unit was drawn up to
include a cost of $84 for labour, based on seven hours of labour at $12 per hour. Actual output of the product during
the first month of production was 460 units and the actual time taken to manufacture the product totalled 1,860
hours at a total cost of $26,040.
After being presented with some initial variance calculations, the production manager has realised that the standard
time per unit of seven hours was the time taken to produce the first unit and that a learning rate of 90% should have
been anticipated for the first 1,000 units of production. He has consequently been criticised by other departmental
managers who have said that, ‘He has no idea of all the problems this has caused.’
Required:
(a) Calculate the labour efficiency planning variance and the labour efficiency operational variance AFTER taking
account of the learning effect.
Note: The learning index for a 90% learning curve is –0·1520 (5 marks)
(b) Discuss the likely consequences arising from the production manager’s failure to take into account the
learning effect before production commenced. (5 marks)
(10 marks)
10
4 ALG Co is launching a new, innovative product onto the market and is trying to decide on the right launch price for
the product. The product’s expected life is three years. Given the high level of costs which have been incurred in
developing the product, ALG Co wants to ensure that it sets its price at the right level and has therefore consulted a
market research company to help it do this. The research, which relates to similar but not identical products launched
by other companies, has revealed that at a price of $60, annual demand would be expected to be 250,000 units.
However, for every $2 increase in selling price, demand would be expected to fall by 2,000 units and for every $2
decrease in selling price, demand would be expected to increase by 2,000 units.
A forecast of the annual production costs which would be incurred by ALG Co in relation to the new product are as
follows:
Annual production (units) 200,000 250,000 300,000 350,000
$ $ $ $
Direct material 2,400,000 3,000,000 3,600,000 4,200,000
Direct labour 1,200,000 1,500,000 1,800,000 2,100,000
Overheads 1,400,000 1,550,000 1,700,000 1,850,000
Required:
(a) Calculate the total variable cost per unit and total fixed overheads. (3 marks)
(b) Calculate the optimum (profit maximising) selling price for the new product AND calculate the resulting profit
for the period.
Note: If P = a – bx then MR = a – 2bx. (7 marks)
(c) The sales director is unconvinced that the sales price calculated in (b) above is the right one to charge on the
initial launch of the product. He believes that a high price should be charged at launch so that those customers
prepared to pay a higher price for the product can be ‘skimmed off’ first.
Required:
Discuss the conditions which would make market skimming a more suitable pricing strategy for ALG, and
recommend whether ALG should adopt this approach instead. (5 marks)
(15 marks)
11 [P.T.O.
5 Lesting Regional Authority (LRA) is responsible for the provision of a wide range of services in the Lesting region,
which is based in the south of the country ‘Alaia’. These services include, amongst other things, responsibility for
residents’ welfare, schools, housing, hospitals, roads and waste management.
Over recent months the Lesting region experienced the hottest temperatures on record, resulting in several forest fires,
which caused damage to several schools and some local roads. Unfortunately, these hot temperatures were then
followed by flooding, which left a number of residents without homes and saw higher than usual numbers of
admissions to hospitals due to the outbreak of disease. These hospitals were full and some patients were treated in
tents. Residents have been complaining for some years that a new hospital is needed in the area.
Prior to these events, the LRA was proudly leading the way in a new approach to waste management, with the
introduction of its new ‘Waste Recycling Scheme.’ Two years ago, it began phase 1 of the scheme and half of its
residents were issued with different coloured waste bins for different types of waste. The final phase was due to begin
in one month’s time. The cost of providing the new waste bins is significant but LRA’s focus has always been on the
long-term savings both to the environment and in terms of reduced waste disposal costs.
The LRA is about to begin preparing its budget for the coming financial year, which starts in one month’s time. Over
recent years, zero-based budgeting (ZBB) has been introduced at a number of regional authorities in Alaia and, given
the demand on resources which LRA faces this year, it is considering whether now would be a good time to introduce
it.
Required:
(a) Describe the main steps involved in preparing a zero-based budget. (3 marks)
(b) Discuss the problems which the Lesting Regional Authority (LRA) may encounter if it decides to introduce
and use ZBB to prepare its budget for the coming financial year. (9 marks)
(c) Outline THREE potential benefits of introducing zero-based budgeting at the LRA. (3 marks)
(15 marks)
12
Formulae Sheet
Learning curve
Y = axb

Demand curve
P = a – bQ
change in price
b=
change in quantity
MR = a – 2bQ
13
Paper F5
Performance
Management
March/June 2018 – Sample Questions
F5 ACCA
Time allowed: 3 hours 15 minutes
This question paper is divided into three sections:

Section A – A
Section B – A
Section C – B
OTH questions are compulsory and MUST be attempted
Do NOT open this question paper until instructed by the supervisor.

Do NOT record any of your answers on the question paper.
The Association of
Chartered Certified
Accountants
Section C – Both questions are compulsory and MUST be attempted
31 The Portable Garage Co (PGC) is a company specialising in the manufacture and sale of a range of products for
motorists. It is split into two divisions: the battery division (Division B) and the adaptor division (Division A). Division
B sells one product – portable battery chargers for motorists which can be attached to a car’s own battery and used to
start up the engine when the car’s own battery fails. Division A sells adaptors which are used by customers to charge
mobile devices and laptops by attaching them to the car’s internal power source.
Recently, Division B has upgraded its portable battery so it can also be used to rapidly charge mobile devices and
laptops. The mobile device or laptop must be attached to the battery using a special adaptor which is supplied to the
customer with the battery. Division B currently buys the adaptors from Division A, which also sells them externally to
other companies.
The following data is available for both divisions:
Division B
Selling price for each portable battery, including adaptor $180
Costs per battery:
Adaptor from Division A $13
Other materials from external suppliers $45
Labour costs $35
Annual production and sales of portable batteries (units) 150,000
Maximum annual market demand for portable batteries (units) 180,000
Division A
Selling price per adaptor to Division B $13
Selling price per adaptor to external customers $15
Costs per adaptor:
Materials $3
Labour costs $4
Current annual production capacity and sales of adaptors – both internal and
external sales (units) 350,000
Maximum annual external demand for adaptors (units) 200,000
In addition to the materials and labour costs above, Division A incurs a variable cost of $1 per adaptor for all adaptors
it sells externally.
Currently, Head Office’s purchasing policy only allows Division B to purchase the adaptors from Division A but Division A
has refused to sell Division B any more than the current level of adaptors it supplies to it.
The manager of Division B is unhappy. He has a special industry contact who he could buy the adaptors from at exactly
the same price charged by Division A if he were given the autonomy to purchase from outside the group.
After discussions with both of the divisional managers and to ensure that the managers are not demotivated, Head
Office has now agreed to change the purchasing policy to allow Division B to buy externally, provided that it optimises
the profits of the group as a whole.
Required:
(a) Under the current transfer pricing system, prepare a profit statement showing the profit for each of the
divisions and for The Portable Garage Co (PGC) as a whole. Your sales and costs figures should be split into
external sales and inter-divisional transfers, where appropriate. (9 marks)
(b) Assuming that the new group purchasing policy will ensure the optimisation of group profits, calculate and
discuss the number of adaptors which Division B should buy from Division A and the number of adaptors
which Division A should sell to external customers.
Note: There are 3 marks available for calculations and 3 marks for discussion. (6 marks)
2
Assume now that no external supplier exists for the adaptors which Division B uses.
(c) Calculate and discuss what the minimum transfer price per unit would be for any additional adaptors supplied
above the current level by Division A to Division B so that Division B can meet its maximum annual demand
for the new portable batteries.
Note: There are 2 marks available for calculations and 3 marks available for discussion. (5 marks)
(20 marks)
3 [P.T.O.
32 The Alka Hotel is situated in a major city close to many theatres and restaurants.
The Alka Hotel has 25 double bedrooms and it charges guests $180 per room per night, regardless of single or double
occupancy. The hotel’s variable cost is $60 per occupied room per night.
The Alka Hotel is open for 365 days a year and has a 70% budgeted occupancy rate. Fixed costs are budgeted at
$600,000 a year and accrue evenly throughout the year.
During the first quarter (Q1) of the year the room occupancy rates are significantly below the levels expected at other
times of the year with the Alka Hotel expecting to sell 900 occupied room nights during Q1. Options to improve
profitability are being considered, including closing the hotel for the duration of Q1 or adopting one of two possible
projects as follows:
Project 1 – Theatre package
For Q1 only the Alka Hotel management would offer guests a ‘theatre package’. Couples who pay for two consecutive
nights at a special rate of $67·50 per room night will also receive a pair of theatre tickets for a payment of $100. The
theatre tickets are very good value and are the result of long negotiation between the Alka Hotel management and the
local theatre. The theatre tickets cost the Alka Hotel $95 a pair. The Alka Hotel’s fixed costs specific to this project
(marketing and administration) are budgeted at $20,000.
The hotel’s management believes that the ‘theatre package’ will have no effect on their usual Q1 customers, who are
all business travellers and who have no interest in theatre tickets, but will still require their usual rooms.
Project 2 – Restaurant
There is scope to extend the Alka Hotel and create enough space to operate a restaurant for the benefit of its guests.
The annual costs, revenues and volumes for the combined restaurant and hotel are illustrated in the following graph:
$’000 Breakeven chart for combined restaurant and hotel operations

2,000 Sales
1,560 Total cost

1,500
1,000
800 Fixed cost
500
Margin of safety
2,000 4,000 5,161 6,000 7,300 8,000

Number of occupied rooms
Note: The graph does not include the effect of the ‘theatre package’ offer.
4
Required:
(a) Using the current annual budgeted figures, and ignoring the two proposed projects, calculate the breakeven
number of occupied room nights and the margin of safety as a percentage. (4 marks)
(b) Ignoring the two proposed projects, calculate the budgeted profit or loss for Q1 and explain whether the hotel
should close for the duration of Q1. (4 marks)
(c) Calculate the breakeven point in sales value of Project 1 and explain whether the hotel should adopt the
project. (4 marks)
(d) Using the graph, quantify and comment upon the financial effect of Project 2 on the Alka Hotel.
Note: There are up to four marks available for calculations. (8 marks)
(20 marks)
5 [P.T.O.
Formulae Sheet
Learning curve
Y = axb

Demand curve
P = a – bQ
change in price
b=
change in quantity
MR = a – 2bQ
6
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Paper F5

Fundamentals Level – Skills Module

ALL FIVE questions are compulsory and MUST be attempted.

Formulae Sheet is on page 6.

Do NOT open this paper until instructed by the supervisor.

The Association of Chartered Certified Accountants

(c) Discuss the benefits of life cycle costing. (4 marks)

End of Question Paper

Time allowed: 3 hours 15 minutes

This question paper is divided into three sections:

Formulae Sheet is on page 11.

Do NOT open this question paper until instructed by the supervisor.

Section B – ALL 15 questions are compulsory and MUST be attempted

The following scenario relates to questions 16–20

The following scenario relates to questions 21–25

21 What is/are the limiting factor(s) in month 1?

24 What is the maximum profit which can be earned in month 3?

The following scenario relates to questions 26–30

29 Which of the following would explain a labour efficiency planning variance?

Section C – Both questions are compulsory and MUST be attempted

Where Y = cumulative average time per unit to produce x units

End of Question Paper

End of Question Paper

31 (a) (i) Hotel

(ii) Water park

32 Performance for year ended 30 June 20X7

Each question is worth 2 marks 30

Section C Maximum marks Marks awarded

31 (a) (i) Hotel revenue 1·5

Read the requirements

Examiner’s commentary – PM March/June 2019 1

Read the scenario

Examiner’s commentary – PM March/June 2019 2

Set up your answer

Answer the question

Examiner’s commentary – PM March/June 2019 3

Examiner’s commentary – PM March/June 2019 4

Examiner’s commentary – PM March/June 2019 5

Examiner’s commentary – PM March/June 2019 6

Examiner’s commentary – PM March/June 2019 7

Examiner’s commentary – PM March/June 2019 8

Examiner’s commentary – PM March/June 2019 9

Examiner’s commentary – PM March/June 2019 10

Finally the total income can be calculated:

Examiner’s commentary – PM March/June 2019 11

Examiner’s commentary – PM March/June 2019 12

Examiner’s commentary – PM March/June 2019 13

Finally, the reduction for the other half – multiply by 50/90:

Examiner’s commentary – PM March/June 2019 14

Examiner’s commentary – PM March/June 2019 15

Examiner’s commentary – PM March/June 2019 16

B6:B10 means all the cells from B6 to B10.

Examiner’s commentary – PM March/June 2019 17

Here though, just writing Open is enough.

Examiner’s commentary – PM March/June 2019 18

Examiner’s commentary – PM March/June 2019 19

Examiner’s commentary – PM March/June 2019 20

Examiner’s commentary – PM March/June 2019 21

Examiner’s commentary – PM March/June 2019 22