VIETSOURCING TRAINING CENTRE

PROGRESS TEST 2
Paper F5 – Performance Management

Time allowed: 30 minutes

Date:

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Good luck to you./.

 Association of Chartered Certified Accountants
Paper F5–Performance Management
Progress test 2

1. A company which makes two products, Alpha and Zeta, uses activity-
based costing to absorb its overheads. It has recently identified a new
overhead cost pool for inspection costs and has decided that the cost
driver is the number of inspections.
The following information has been provided:
Total inspection costs $250,000
Alpha Zeta
Production volume (units) 2,500 8,000
Machine hours per unit 1 1.5
Units per batch 500 1,000
Inspections per batch 4 1
What is the inspection cost per unit for product Alpha?
A. $23.81
B. $17.24
C. $71.43
D. $80.00
Alpha uses: 2500/500 x 4 = 20 inspections
Cost per cost driver – inspection: OH cost/No of inspections = 250,000/ (20 +
8) = $8,929
Cost asb to Alpha = (8,929 x 20)/2,500 = 71.43

2. The ABC Company manufactures two products, Product Alpha and

Product Beta. Both are produced in a very labour-intensive environment
and use similar processes. Alpha and Beta differ by volume. Beta is a
high-volume product, while Alpha is a low-volume product.
Details of product inputs, outputs and the costs of activities are as
follows:

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 Association of Chartered Certified Accountants
Paper F5–Performance Management
Progress test 2

Direct labour Annual output Number of Number of

hours/unit (units) purchase orders set-ups
Alpha 5 1,200 75
40
Beta 5 12,000 85 60
–––– ––––
160 100
–––– ––––
Fixed overhead costs amount to a total of $420,000 and have been
analysed as follows:
$
Volume-related 100,000
Purchasing related 145,000
Set-up related 175,000
Using a traditional method of overhead absorption based on labour
hours, what is the overhead cost per unit for each unit of product Beta?
A. $6.36
B. $22.75
C. $31.82
D. $122.55
Cost asb to Beta: OAR x 5
OAR = OH cost/No of LB hrs = 420,000/(5x1200 + 5 x 12000) = $6.36 per LB
hr
Cost to Beta = 6.36 x 5 =31.82

3. Which of the following strategies would be immediately acceptable

methods to reduce an identified cost gap?
A. Reduce the desired margin without discussion with business owners
B. Reduce the predicted selling price

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 Association of Chartered Certified Accountants
Paper F5–Performance Management
Progress test 2

C. Source similar quality materials from another supplier at reduced cost

D. Increase the predicted selling price

4. The predicted selling price for a product has been set at $56 per unit. The
desired mark-up on cost is 25% and the material cost for the product is
estimated to be $16 before allowing for additional materials to allow for
shrinkage of 20% (for every 10 kg of material going in only 8 kg comes out). If
labour is the only other cost and 2 hours are needed what is the most the
business can pay per hour if a cost gap is to be avoided?
The maximum rate per hour is $ 12.4
Selling price 56
Mark up on cost 25% -> Profit 25% = 56 x 25/125 = 11.2 -> target cost = 44.8
DM = 16 x 10/8 = 20
DLB = 44.8 – 20 = 24.8 each unit used 2hrs -> rate per hr = 12.4

5. The following statements relate to the justification of the use of life

cycle costing:
(i) Product life cycles are becoming increasingly short. This means that the
initial costs are an increasingly important component in the product’s overall
costs.
(ii) Product costs are increasingly weighted to the start of a product’s life
cycle, and to properly understand the profitability of a product these costs
must be matched to the ultimate revenues.
(iii) The high costs of (for example) research, design and marketing in the
early stages in a product’s life cycle necessitate a high initial selling price.
(iv) Traditional capital budgeting techniques do not attempt to minimise the
costs or maximise the revenues over the product life cycle.
Which of these statements are substantially true?
A. (i), (ii) and (iv)
B. (ii), and (iii) only

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 Association of Chartered Certified Accountants
Paper F5–Performance Management
Progress test 2

C. (i) and (iv) only

D. All of them

6. Skye Limited has a two process environment, and details of these processes
are as follows:
Process P: Each machine produces 6 units an hour and Skye has 8 machines
working at 90% capacity.
Process Q: Each machine produces 9 units per hour and Skye has 6 machines
working at 85% capacity.
One of Skye products is Cloud. Cloud is not particularly popular but does sell
at a selling price of $20 although discounts of 15% apply. Material costs are $5
and direct labour costs are double the material cost. Cloud spends 0.2 hours in
process P but 0.3 hours in process Q.
What is Cloud’s throughput per hour in its bottleneck process?
$ 60
Process P: 6 x 8 x 90% = 43,2
Process Q : 9 x 6 x 85% = 45,9
-> Process P is bottle neck
Return per factory hr = selling price – RM cost / number of hrs
Return per factory hr = (20 x 85% - 5)/0.2 = 60

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 Association of Chartered Certified Accountants
Paper F5–Performance Management
Progress test 2

7. A manufacturing company uses three processes to make its two

products, X and Y. The time available on the three processes is reduced
because of the need for preventative maintenance and rest breaks.
The table below details the process times per product and daily time
available:

Process Hours available Hours required to Hours

required to
per day make one unit of make one unit of
product X product Y

1 22 1.00 0.75
2 22 0.75 1.00
3 18 1.00 0.50

Daily demand for product X and product Y is 10 units and 16 units

respectively.
Which of the following will improve throughput?
A. Increasing the efficiency of the maintenance routine for Process 2
B. Increasing the demand for both products
C. Reducing the time taken for rest breaks on Process 3
D. Reducing the time product X requires for Process 1
TP available requirement
1 22 10 x 1 +16 x 0.75 = 22
2 22 10 x 0.75 + 16 x 1 = 23.5 -> TP
3 18 10 x 1 +16 x 0.5 = 18

8. The following statements have been made about throughput

accounting:

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 Association of Chartered Certified Accountants
Paper F5–Performance Management
Progress test 2

A. Throughput accounting considers that the only variable costs in the short
run are materials and components.
B. Throughput accounting considers that time at a bottleneck resource has
value, not elsewhere.
C. Throughput accounting views stock building as a non-value-adding activity,
and therefore discourages it.
D. Throughput accounting was designed as a decision-making tool for
situations where there is a bottleneck in the production process.

Which ONE of the above statements is not true of throughput

accounting?
A. A
B. B
C. C
D. D

9. Which of the following are advantages of using Activity Based Costing

for Environmental Management Accounting?
(i) Higher environmental costs can be reflected in higher prices.
(ii) cost savings achieved through environmental policies can be measured.
(iii) it is simple to determine the environmental costs and cost drivers.
(iv) It considers all environmental effects of the company’s actions.

A. (i) and (ii) only

B. (ii) only
C. (ii) and (iii)
D. (ii) and (iv)

10. Environmental costs are difficult to deal with for an accountant.

Which of the following is not a reason for this?

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 Association of Chartered Certified Accountants
Paper F5–Performance Management
Progress test 2

A. Costs are often hidden

B. Costs are mostly minor
C. Costs are often very long term
D. Accounting systems rarely split off these costs automatically

HELOT CO (SEPTEMBER 2016)

Helot Co develops and sells computer games. It is well known for launching
innovative and interactive role-playing games and its new releases are always
eagerly anticipated by the gaming community. Customers value the technical
excellence of the games and the durability of the product and packaging.
Helot Co has previously used a traditional absorption costing system and full
cost plus pricing to cost and price its products. It has recently recruited a new
finance director who believes the company would benefit from using target
costing. He is keen to try this method on a new game concept called Spartan,
which has been recently approved.
After discussion with the board, the finance director undertook some market
research to find out customers’ opinions on the new game concept and to
assess potential new games offered by competitors. The results were used to
establish a target selling price of $45 for Spartan and an estimated total sales
volume of 350,000 units. Helot Co wants to achieve a target profit margin of
35%.
The finance director has also begun collecting cost data for the new
game and has projected the following:
Production costs per unit $
Direct material 3.00
Direct labour 2.50
Direct machining 5.05
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 Association of Chartered Certified Accountants
Paper F5–Performance Management
Progress test 2

Set-up 0.45
Inspection and testing 4.30
Total non-production costs $000
Design (salaries and technology) 2,500
Marketing consultants 1,700
Distribution 1,400

11. Which of the following statements would the finance director have
used to explain to Helot Co’s board what the benefits were of adopting a
target costing approach so early in the game’s life-cycle?
(1) Costs will be split into material, system, and delivery and disposal
categories for improved cost reduction analysis.
(2) Customer requirements for quality, cost and timescales are more likely to
be included in decisions on product development.
(3) Its key concept is based on how to turn material into sales as quickly as
possible in order to maximise net cash.
(4) The company will focus on designing out costs prior to production, rather
than cost control during live production.

A. (1), (2) and (4)

B. (2), (3) and (4)
C. (1) and (3)
D. (4) only

12. What is the forecast cost gap for the new game?
A. $2.05
B. $0.00

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 Association of Chartered Certified Accountants
Paper F5–Performance Management
Progress test 2

C. $13.70
D. $29.25
Selling price = 45 Profit 35% -> cost 65% = 65% x 45 = 29.25
Current cost = variable cost 15,3 + allocated cost 16 = 31,3
Cost gap = 31,3 – 29,25 = 2.05

13. The board of Helot Co has asked the finance director to explain what
activities can be undertaken to close a cost gap on its computer games.
Which of the following would be appropriate ways for Helot Co to close a
cost gap?

(1) Buy cheaper, lower grade plastic for the game discs and cases.
(2) Using standard components wherever possible in production.
(3) Employ more trainee game designers on lower salaries.
(4) Use the company’s own online gaming websites for marketing.
A. (1), (2) and 3)
B. (1), (3) and (4)
C. (2) and (4)
D. (2) and (3) only

14. The direct labour cost per unit has been based on an expected
learning rate of 90% but now the finance director has realised that a
95% learning rate should be applied.
Which of the following statements is true?
A. The target cost will decrease and the cost gap will increase
B. The target cost will increase and the cost gap will decrease
C. The target cost will remain the same and the cost gap will increase
D. The target cost will remain the same and the cost gap will decrease

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 Association of Chartered Certified Accountants
Paper F5–Performance Management
Progress test 2

15. Helot Co is thinking about expanding its business and introducing a

new computer repair service for customers. The board has asked if
target costing could be applied to this service.
Which of the following statements regarding services and the use of
target costing within the service sector is true?
A. The purchase of a service transfers ownership to the customer
B. Labour resource usage is high in services relative to material
requirements
C. A standard service cannot be produced and so target costing cannot be
used
D. Service characteristics include uniformity, perishability and
intangibility

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