

Mock One

Performance
Management
F5PM-MK1-X15-A

Answers & Marking Scheme

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®
Item Answer Justification

1 D
Selling price $23·50 Estimated costs:
Less 20% margin $4·70 Materials $10·45
–––––––
Target cost $18·80 Labour $64 ÷ 20 $3·20

Var o’heads $82 ÷ 20 $4·10

Fixed costs $680,000 $3·40
–––––––– ––––––
200,000
Reduction required $2·35 Total cost $21·15
––––––

2 C $80 – ($10,000,000 × 15% ÷ 100,000)

3 B A throughput accounting approach assumes that materials are the only variable
costs. Consequently the contribution is different to that calculated using the
traditional method.
W X Y
Contribution per unit $ 139 130 120
Bottleneck minutes 7 10 7
Contribution per minute 19·9 13 17·1
Rank 1 3 2

4 C (3) and (4) are the categories where the metal is wasted irrecoverably. The company
would be happy to increase (2) by recycling more of the waste metal.

5 A Statement (2) is incorrect as lifecycle costing estimates all costs over the life of a
product.

6 A The opportunity cost is the benefit foregone by choosing a particular option, instead
of the next best option. (B = differential cost; C = committed cost; D = notional
cost)

7 C Fixed cost per unit ($33) × volume (50,000) = Total fixed costs ($1·65m)
Contribution per unit = $80
Thus, breakeven volume = $1·65m ÷ $80 = 20,625 units

8 D Margin of safety = budgeted sales – breakeven sales

Breakeven sales = fixed cost÷contribution per unit

Contribution per unit = profit per unit + fixed cost per unit

Fixed cost per unit = 65,000÷20,000 = 3.25 ⇒ contribution per unit = 8.6

⇒ Breakeven point = 65,000÷ 8.6 = 7,558.14 units

⇒ Margin of safety = 20,000 – 7558.14 = 12,441.86

9 D Place the ruler on the dotted line and move the ruler to the right, keeping it parallel
to the original dotted line. The last point at which any point of the ruler is in the
feasible region is when the ruler is at the point where the line for constraint 1
crosses the X axis.

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10 C The maximin decision rule seeks to maximise the minimum payoff from the
possible outcomes. In this case the minimum outcome for each project arises if
market demand is weak. The highest outcome in the event of weak demand is the
$47,000 result from project C.

11 D Total time for the first 16 items 200.45

Total time for the first15 items 190.79
––––––
Time for the sixteenth unit 9.66
______

Working:

Using formula y =axb, a = 24,b= −0.2344653,

When x = 16, y = 12.528. This is the cumulative average time for the first 16
⇒ total time for first 16 = 200.45
When x = 15, y = 12.719 ⇒ total time for first 15 = 190.79

12 D Usage of materials is likely to be unfavourable as the materials are substandard, thus

there will be more wastage and rejects.

Time spent by labour on rejected items that will not become output leads to higher
than standard time spent per unit of output.

13 C 10,000 litres of input should yield (90%) 9,000 litres

Actual output 9,100 litres
––––––
Surplus 100 litres
Standard cost of 1 litre (58.5 ÷ 9) $6.5
––––––
Yield variance (favourable) $650
––––––

14 B The “3Es” are economy, efficiency and effectiveness.

15 C

16 A Return on investment – the manager would accept the project if the ROI is greater
than the target of 18%. The ROI of the project is 19% (153,900÷810,000) so would
be accepted if ROI was the performance measure.

Residual income – the project will be accepted if the residual income is positive:

Profit of the project 153,900

Imputed interest (810,000 × 16%) 129,600
–––––––
Residual income 24,300
–––––––

Since the residual income of the project is positive, the project would be accepted if
residual income is used as the performance measure.

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17 B $
Design Variable costs $29 × 2,400 hours 69,600
Fixed costs 56,160
–––––––
125,760
Profit = 40% mark up 50,304
–––––––
Cost to production section 176,064
Production Variable costs ($35 × 7,000 hours) 245,000
Fixed costs 172,000
–––––––
Total costs 593,064
Revenue ($90 × 7,000 hours) 630,000
_______
Profit 36,936
_______

18 B Budgeting is an activity that is normally associated with tactical because it covers

the medium term (up to 1 year).

19 B Management information systems convert data from internal and external sources
into information used by management for planning, controlling and decision
making. They can be manual or computerised.

20 C Both statements are true

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1 RJ PRODUCTS

(a) Absorption cost per unit

Car X Car Y
$ $
Variable cost per unit 30,000 32,000
Absorbed fixed costs:
(200 / 300 hours  37.17) 7,434 11,151 1
–––––– ––––––
Total absorption cost 37,434 43,151 1
–––––– ––––––

WORKING:

Fixed overhead absorption rate per machine hour

$ $
Budgeted fixed production overhead 26,020,000

Budgeted machine hours:

Car X: 220,000
Car Y: 480,000
–––––––
700,000
–––––––––
Fixed overhead per machine hour 37.17 1
––––––––– __
3
(b) Cost per unit using activity based costing __

Split of total overhead cost by product

Car X Car Y
$000 $000
Machine costs (W1) 2,200 4,800
Set up costs (W3) 8,800 3,200
Quality inspections (W4) 2,860 4,160
–––––– ––––––
Total overhead costs 13,860 12,160
Total production (units) 1,100 1,600
–––––– ––––––
Overhead cost per unit ($) 12,600 7,600
Add variable cost per unit ($) 30,000 32,000
–––––– ––––––
Total cost per car 42,600 39,600 1
–––––– ––––––

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 WORKING

(1) Apportionment of machine costs of $7,000,000

Basis of apportionment is machine hours

Cost per machine hour = 7,000,000/ 700,000 hours (part (a)) = $10 per hour

Apportioning:
1
Car X: 220,000 hours  10 = $2,200,000
Car Y: 480,000 hour  10 = $4,800,000 1

(2) Number of set ups

Car X Car Y
Production (units) 1,100 1,600
Number of cars per setup 10 40
–––––– ––––––
Number of setups 110 40 1
–––––– ––––––

(3) Apportionment of set up costs of $12,000,000

Basis of apportionment: Number of setups

110
Car X:  12,000,000 = $8,800,000 ½
110  40

40 ½
Car Y:  12,000,000 = $3,200,000
110  40

(4) Apportionment of quality inspection overheads of $7,020,000

Basis of apportionment – number of inspections

Car X Car Y
Number of setups (= production runs) 110 40 (W2)
Inspections per production run 20 80
–––––– ––––––
Number of inspections 2,200 3,200 1

2,200 ½
Car X:  7,020,000 = $2,860,000
2,200  3,200

3,200
Car Y:  7,020,000 = $4,160,000 ½
2,200  3,200 __
7
Tutorial note: Alternative approaches to this question that lead to the same solution should __
be given equal marks.

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2 ELECTRONIC COMPONENTS MAKER

(a) Preparation of revised statement based on a flexed budget

Flexed Actual Variance

Budget
Sales units 13,000 13,000
Production units 13,500 13,500

$ $ $
Revenue 390,000 385,000 (5,000) 11
Less:
Variable production costs (243,000) (244,000) (1,000) 1
Closing inventory 9,000 9,000 0 2
––––––– ––––––– ––––––– __
Contribution 156,000 150,000 (6,000) 4
__
––––––– ––––––– –––––––

WORKINGS & NOTES

360,000
Flexed budget revenue: Original budget price × actual sales = × 13,000.
12,000

252,000
Budgeted variable cost per unit: = $18
14,000
⇒ flexed budget variable cost = 13,500 units × $18 = $243,000 and closing inventory = 500
units × $18 = 9,000 .

(b) Benefit of the updated statement

The benefit of the revised statement is that like is being compared with like. The flexible
budget and the actual amounts are based on the same quantities of sales and production, so the
variances are not distorted by differences in quantities. So for each line of costs, for example,
the actual cost of producing 13,500 units is compared to the budgeted cost of producing
13,500 units, rather than the budgeted cost of producing 14,000 units. Thus the variances are
more relevant.

(c) Incremental budgeting

Advantages

 Incremental budgeting is very easy to perform. This makes it possible for a person
without any accounting training to build a budget.

 Incremental budgeting is also very quick compared to other budgeting methods.

 The information required to complete it is also usually readily available.

Disadvantages

 On the other hand, incremental budgeting encourages inefficiency because it does

not question the preceding year’s figures on which it is based. No-one asks how
those figures could be reduced.

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  Similarly, in some organisations, it encourages slack because departmental
managers may attempt to use their entire budget up for one year, even if they do not
need to, just to ensure that that cash is available again the next year.

 Errors from one year are carried to the next, since the previous year’s figures are not
questioned.

3 QP CO

(a) Weekly production plan to maximise profit

The approach to maximising profit, in the situation of limited factors is to maximise

contribution per unit of limited factor. In this case, the limited factor is machine hours, so the
approach is to maximise contribution per hour of limiting factor:

PN BE
$ per batch $ per batch
Selling price 450 270
Materials 255 165
Labour 28 42
Variable overheads 30 10
––––– –––––
Contribution per batch 137 53 1
Machine hours per batch 3 1
––––– –––––
1
Contribution per machine hour 45.7 53
––––– –––––

In terms of ranking therefore, BE is the preferred product, followed by PN. 1

Production plan – Machine hours limited to 1,250.

In formulating the production plan, the approach is to manufacture up to maximum demand

for each product, starting with the most preferred, until all the available hours have been used
up:

Hours used Contribution

$
Produce 350 batches of BE 350 18,550 ½
Produce 300 batches of PN 900 41,100 1

––––––
Total contribution 59,650 ½
Fixed costs (350 × 80) + (350 × 40) 42,000 1
––––––
Maximum profit 17,650
–––––– ___
(b) Shadow Price 6
___
The shadow price of a scarce resource is the amount by which contribution would increase if
1 additional unit of the scarce resource were made available. Thus it is the maximum amount
above the normal price that a company would be prepared to pay for additional units of the
resource.

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 In the case of QP foods above, machine hours are limited. The company has sufficient
machine hours to make enough of product BE to satisfy demand, but not enough to satisfy
demand for product PN. If additional machine hours were to be made available, they would
be used to make additional batches of PN, which generate contribution at a rate of $45.7 per
machine hour. The shadow price of machine hours is therefore $45.7 per machine hour.

The relevance of shadow prices is that additional sources of a scarce resource may be
available, but at a higher price than normal. If the difference between the normal price and the
higher price (the premium) is less than the shadow price, then it is worth buying from those
additional sources, as contribution overall would still be increased.

Tutorial note: It is not necessary to calculate the shadow price of machine hours for QP Co.
This is included in the model solution above for learning purposes.

4 BELUN CO

(a) Assessment of financial performance

Sales revenue

Sales revenue has declined by $1.1 million, a fall of 12.2% between year 1 and year 2. The
major factor contributing to this was licence sales, which fell by $1 million, a fall of 25%.
This is likely to be due to the recession, with customers cutting back on IT spending, or
deferring it. Given this fact, a fall of 25% may not be considered to be too bad. It may also
relate to the new software release – many customers delay ordering new releases of software
until the bugs have been identified and fixed.

Maintenance revenue is more stable, having only fallen by $100,000, a fall of 2%. This is
likely to reflect the fact that maintenance contracts are sold to existing customers. Even
during recessions, clients may feel that it is important to maintain their software, so this type
of revenue is likely to be more stable.

Profit margins

In spite of the fall in revenues of $1.1 million, profits only fell by $100,000, a fall of 5%. Net
profit margins therefore rose from 22.2% to 24%. This largely reflects the cost cutting
exercise carried out by the finance director, whereby costs have fallen by more than revenues.

Costs

Research and development costs have fallen in absolute terms by $300,000, a fall of 20%. As
a percentage of revenue, R&D has fallen from 16.7% in year 1 to just above 15% in year 2.
However, R&D is not likely to be directly linked to the sales of the year in which it occurred.
The cut in R&D is likely to be part of the finance director’s cost cutting exercise. It may be
seen as a good thing from a financial point of view. However, it is not clear what impact this
cut will have on the development of the product. Belun operates in a competitive market, and
R&D is an important function in keeping the product attractive to customers. Cutting R&D
now may harm the business in the longer term.

Customer support costs have also decreased by 20%, also as a result of the finance director’s
cost cutting exercise. Such costs are not likely to be related to revenue from licenses; more
likely they are related to revenue from maintenance. As a percentage of maintenance revenue,
customer support costs fell from 20% in year 1 to 16% in year 2. From a purely financial
perspective, this appears to be good, as the same services are being provided more efficiently.

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 Sales and marketing costs were down, also by 20%. Since these account for a bigger portion
of overall costs, the impact on profits was larger. Sales and marketing costs accounted for
33% of revenues in year 1, and this fell to 30.4% in year 2. This is likely to be due to the cost
cutting exercise. Again, this can be seen as a good sign from a financial point of view, as the
company is reducing costs in a period when sales are low.

General administrative expenses on the other hand rose in both absolute terms and as a % of
revenue. The $100,000 increase represents a 6.67% increase. As a % of revenue, admin
expenses rose from 16.67% in year 1 to 20.2% in year 2. This suggests poor cost control. This
is particularly worrying when the other customer facing departments have all had their costs
reduced. Many administrative costs may be fixed in nature, so an increase in costs is even
more unexpected.

Overall comment

Overall, the company has performed well financially during a difficult period. While revenues
fell by 12.2% due to poor economic conditions, the company managed to limit the fall in
profits to only 5%.

WORKINGS

Year 2 Year 1
Profit before tax 1,900 2,000
Net profit margin =
Revenue 7,900 9,000
24% 22.22%

(b) Non financial performance

Calls to hotline increased by 10% between year 1 and year 2. Calls to hotline may reflect
difficulties in using the software, or could be due to the existence of bugs in the system.
Given that a new version of the software was released at the start of year 2, an increase in the
number of calls to the hotline would be expected. In fact the increase of 10% may be rather
low, given that a new version of the product has been released. This reflects positively on the
quality of the software product.

Average time taken to close hotline issues on the other hand rose from 0.5 days to 2 days.
This is a large increase. Such delays in closing problems are likely to irritate clients, and
could lead to lost business in the future. The reason for the increase is not clear. It may be
related to the cost cutting exercise of the finance director – given a lower number of support
staff, it could be taking longer to solve issues. Staff may also be less familiar with a new
version of the product. However, staff should have been given sufficient training to deal with
issues, and such a large increase in the delay is not acceptable.

Number of bugs reported increased by 6.4%. Given that a new version of the software product
has been released this is a very small increase. It suggests that the new version was well tested
before release, so few errors have been found.

The number of bug fixes issued fell by 57% in spite of the number of bugs reported
increasing. The number of bug fixes issued as a percentage of bugs reported fell even more
steeply from 74.5% in year 1 to 40% in year 2. This may relate to the reduction in expenditure
of research and development. If less than half the bugs reported are actually being fixed, this
is likely to leave clients frustrated, and they may decide in future years to replace the software
with another product.

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 Overall conclusion

The non-financial performance measures send out a mixed message. Those that relate to the
quality of the software (calls to hotline and number of bugs reported) appear to reflect well on
the company. Those that reflect the level of service being provided to clients on the other
hand show a definite fall in the level of customer care. What is more worrying is that the
measures related to the quality of the product probably reflect on the quality of work
performed in year 1 and earlier years, while the measures related to the quality of staff service
reflect on the year 2. The cost cutting exercise may damage the reputation of the business,
which may bring a loss of business when the economic situation improves.

5 GTK CO

(a) Calculation of selling price variance and selling volume variance Marks

Sales price variance = (12.48 – 12.36)  32,000 = $3,840 (Adverse) 1

Sales volume variance = (30,000 – 32,000)  8.28 = $16,560 (Favourable) 1

(b) Planning and operational variances

Planning selling price variance:

$
Actual quantity × original standard price
(32,000 12.48) 399,360
Actual quantity × revised standard price
(32,000  12.18) 389,760
–––––––
Planning price variance (adverse) 9,600 2
–––––––
Operational price variance

$
Actual quantity  actual price (32,000 × 12.36) 395,520
Actual quantity  revised standard price
(32,000  12.18) 398,760
–––––––
Operational price variance (favourable) 5,760 2
–––––––

Tutorial note: The sum of the operational price variance and the planning price variance is
$3,840 adverse. This is the same as the price variance calculated in part (a) of the question

(c) Performance of the sales department

The traditional sales price variance shows the sales department sold the headphones for a
lower price than standard – perhaps because they offered discounts to customers. At the same
time, the volume of sales was higher than budget, which was most likely the result of the
lower sales price. When prices are lower, demand for a product usually increases. The sum of
the two variances is a favourable $12,720 (16,560 – 3,840), suggesting that overall the sales
department performed well – by cutting the price they achieved higher contribution overall.

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 The traditional variances ignore any changes in the external environment that took place after
the original standard was set. The operational variances provide a more relevant assessment of
performance because they are calculated by comparing actual performance against a revised
standard. Unlike the traditional price variance, which was adverse, the operating price
variance is favourable, showing that the price achieved was actually higher than expected.
This is because the original standard was based on a wrong forecast of inflation. This means
that the sales department managed to sell the headphones for a higher price than would be
expected, and achieved a higher volume.

The planning sales price variance simply shows the impact on budgeted profit of revising the
standard selling price. In this case the selling price was revised downwards, which would
result in a lower contribution.

Before reaching any conclusions, it would be useful to know what basis was used for
planning the budgeted output. The question indicates that the market for headphones is
growing rapidly. Given this fact, it would be useful to know if the actual market for
headphones grew by more than expected. If this is the case, it may not be entirely fair to
congratulate the sales team on doing a good job if the market was better than expected.
Budgeted market share and actual market share achieved would provide better information to
assess this.

Marks should be given for other relevant comments. Marks limited to 4 marks for this session.

(d) Request of production manager

The production manager has requested that the standard be revised to take into account a pay
rise given to the workers above the expected pay rise when the standard was set.

Generally a standard should be revised if something occurs after the original standard was set
which makes the original standard inappropriate. Such an event may be internal or external,
but would generally be outside of the control of the manager whose performance is being
assessed. Standards may also be revised if it turns out that the original standards were not
realistic. Standards should not be revised in order to hide poor operating performance.

It could be argued that the standard provided a guide to the production manager about the
acceptable level of pay rises. The higher than expected pay rise was a decision of the
production manager. Since this was within his control (he chose to ignore the standard, rather
than being forced to do so), the standard should not be revised. The higher pay rise was an
operational decision, and should be reflected in the operational variance.

On the other hand, the production manager argued that the staff were demotivated. Perhaps
the original pay rise was unrealistic. As such, there is an argument that the standard should be
revised to a more realistic level.

In my opinion, the standard should not be revised. The pay rise was an operational decision. If
staff really have been motivated by the pay rise, this may be reflected in the labour efficiency
variance, which would be favourable.

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 Marking Scheme

Marks Marks
1 RJ

(a) Calculate fixed overhead per machine hour 1

Overhead cost per unit (1/2 per product) 1
Total cost per unit 1
––– 3

(b) Apportioning of overheads between the two products:

Machine costs 2
Setup costs 2
Quality inspection costs 2

Calculation of total cost per unit 1

––– 7

Note: The overhead cost may be apportioned between the two

products on a per unit basis, or in total. Full credit should be
given for either method.
–––
10
–––

2 ELECTRONIC COMPONENT MAKER

(a) 1 mark for flexing each of revenue and variable costs 2

2 marks for calculation of closing inventory 2
__
4

(b) Up to 2 marks for one benefit 2

(c) Up to 2 marks for discussing advantages of incremental 2

Up to 2 marks for discussing the disadvantages 2
___
4
–––
10
–––
3 QP CO

(a) See marking guide next to solution 6

(b) Up to 2 marks for an explanation of shadow price 2

(note: it was not necessary to calculate the shadow price for QP Co)
Up to 2 marks for explaining its relevance 2
–––
10
–––

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4 BELUN CO

(a) Comments on sales 2

Comments on margin 2
Comments on R&D 2
Comments on Support staff costs 1
Comments on Sales & Marketing staff 1
Comments on Administration costs 2
Overall comment 2
––– max 8

(b) Comment on calls to hotline 2

Comment on average time to close hotline issues 2
Comment on number of bugs reported 2
Comment on number of bugs fixed 1
Overall comment 2
––– max 7
–––
15
–––
The following guidance should be used when awarding credits
for comments:

 No marks for stating what the change is in percentage terms, for example, “sales
revenue fell by 12.2% between year 1 and year 2” scores nothing.
 1 mark for explaining the cause of the change, or for linking it to one of the other items
for example, “sales fell because of the economic climate being poor”. More than one
mark can be awarded if more than one cause is mentioned.
 1 mark for offering an opinion, provided that the opinion is supported by relevant data.
Stating simply “the fall in sales of 12.2% was bad” would not be worth a mark. Stating
“the fall in sales of 12.2% was good given that the economy was going through a bad
period” would gain 1 mark.

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5 GTK CO

(a) Calculation of sales price variance 1

Calculation of volume variance 1
––– 2

(b) Calculation of planning price variance 2

Calculation of operating price variance 2
––– 4
(c) Comments on performance
1 mark per valid comment max 4

Note to markers: a valid comment would require more than simply explaining the
mathematical calculation of the variance. A comment such as “The price variance is adverse
because the actual selling price was less than the standard” would not gain a mark. However
a comment such as “The price variance is adverse, showing that the sales department may
have had to offer discounts to achieve sales targets” would be worth a mark.

(d) Arguments for and against revision to standard

For explaining principle of when standards should be revised 1
Up to 2 marks for valid argument in favour 2
Up to 2 marks for valid argument against 2
Conclusion 1
––– max 5
–––
15
–––

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