Mock One

Performance
Management
F5PM-MK1-X15-Q

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours

Section A – All 20 questions are compulsory and MUST

be attempted
Section B – All FIVE questions are compulsory and MUST
be attempted

Formulae are provided on page 14.

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 open this paper until instructed by the supervisor.

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®
Section A – All TWENTY questions are compulsory and MUST be attempted.

1 Hera Co is developing a new product using a target costing approach. The initial assumption
was that a sales volume of 200,000 units could be achieved at a selling price of $25 per unit.
However, market research indicates that to achieve the sales volume of 200,000 units, the
selling price should be $23·50.

Hera wishes to obtain an average profit margin of 20% on sales.

The following data have been estimated for the product:

Direct material $10·45 per unit

Hourly production volume 20 units
Direct labour cost $64 per hour
Variable overheads $82 per hour (absorbed on a direct labour hour basis)

Fixed costs to produce 200,000 units are estimated to be $680,000.

What reduction in the cost per unit is required in order to achieve the target cost per
unit?

A $0·38
B $1·15
C $1·88
D $2·35 (2 marks)

2 A company could sell 100,000 units per annum of a new product at a competitive market
price of $80 per unit. Capital investment of $10,000,000 would be required to manufacture
the product. The company seeks to earn a return on initial capital employed of 15% per
annum. Preliminary costings show that prime cost is likely to be $40 per unit.

What is the target cost per unit of the new product?

A $34
B $55
C $65
D $68 (2 marks)

3 A company manufactures three products: W, X and Y. The products use a series of different
machines, but there is a common machine that is a bottleneck.

The standard selling price and standard cost per unit for each product for the next period are
as follows:
W X Y
$ $ $
Selling price 180 150 150

Cost:
Direct material 41 20 30
Direct labour 30 20 50
Variable production overheads 24 16 20
Fixed production overheads 36 24 30
–––– –––– ––––
Profit 49 70 20
–––– –––– ––––
Time (minutes) on bottleneck machine 7 10 7

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 The company is trying to plan the best use of its resources.

What would the rank order (best first) of the products be using a throughput accounting
approach?

A W, X, Y
B W, Y, X
C X, W, Y
D Y, X, W (2 marks)

4 Smith Co has introduced environmental management accounting. The monthly environmental

management accounts include input output analysis relating to a scarce metal used by Smith
Co in its production process. Output is analysed into the following four categories:

(1) % of input included in the final product

(2) % of input included in waste for recycling
(3) % of input included in waste that is not recycled
(4) % of input not accounted for

Which of the four categories would management wish to reduce?

A 2 and 3
B 2 and 4
C 3 and 4
D 1 and 4 (2 marks)

5 The following statements have been made about lifecycle costing:

(1) it encourages managers to plan the pricing strategy for the whole life of a product;
(2) it ignores costs incurred after the manufacturing stage of the products life.

Which of the statements is/are correct?

A 1 only
B 2 only
C both 1 and 2
D neither 1 nor 2 (2 marks)

6 Which of the following best describe the term “opportunity cost”?

A the benefits which would have been obtained from the next best alternative foregone
B the difference in relevant costs between two choices
C a future cost which cannot be avoided
D an assumed cost to reflect the use of a benefit, for which no cash is paid (2 marks)

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7 The company produces a single product

Budgeted sales volume for the forthcoming three month period is 50,000 units
Production capacity is 18,000 units per month
All sales are within the UK

The UK market is stable

per unit $ $
Selling price 160
Variable cost 80
Fixed overheads 33
––––
Total cost 113
––––
Profit 47
––––
What is the breakeven volume for the forthcoming three month period?

A 1,064 units
B 10,313 units
C 20,625 units
D 35,106 units (2 marks)

8 Quastir Co manufactures a single product which sells for $48·80 per unit. At this selling
price, the profit per unit is $5·35, after apportionment of the $65,000 of fixed costs. The
budgeted production and sales volume is 20,000 units.

What is the margin of safety, expressed in units (to the nearest unit)?

A 7,559
B 7,850
C 12,150
D 12,442 (2 marks)

9 The following graph relates to a linear programming problem:

y
(1)

(2)
(3)

0 x

The objective is to maximise contribution and the dotted line on the graph depicts this
function. There are three constraints which are all of the “less than or equal to” type which
are depicted on the graph by the three solid lines labelled (1), (2) and (3).

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 At which of the following intersections is contribution maximised?

A Constraints (1) and (2)

B Constraints (2) and (3)
C Constraints (1) and (3)
D Constraint (1) and the x-axis (2 marks)

10 Eamon Attwood must choose between four mutually exclusive projects, all of which require
the same initial investment. He has prepared the following payoff matrix:

Annual Contribution if market demand is:

Weak Moderate Strong
$000 $000 $000
Project A 32 48 61
Project B 41 54 70
Project C 47 57 68
Project D 25 36 41

If Eamon uses the maximin decision rule, which project will he choose?

A Project A
B Project B
C Project C
D Project D (2 marks)

11 A product requires 24 hours to complete the first unit. Managerial experience has estimated
the learning rate at 85 percent. For a learning rate of 85 percent, the value of the index of
learning b is -0.2344653

How much time should be required to produce the sixteenth item?

A Between 16 and 18 hours

B Between 10 and 12 hours
C Between 14 and 16 hours
D Between 8 and 10 hours (2 marks)

12 A company is obliged to buy sub-standard materials at lower than standard price because
nothing else is available.

As an indirect result of this purchase, are the materials usage variance and labour
efficiency variance likely to be adverse or favourable?

Materials usage Labour efficiency

variance variance
A Favourable Favourable
B Adverse Favourable
C Favourable Adverse
D Adverse Adverse (2 marks)

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13 A company has a process in which the standard mix for producing 9 litres of output is as
follows:

$
4.0 litres of D at $9 per litre 36.00
3.5 litres of E at $5 per litre 17.50
2.5 litres of F at $2 per litre 5.00
––––––
58.50
––––––

A standard loss of 10% of inputs is expected to occur. The actual inputs for the latest period
were:

$
4,300 litres of D at $9 per litre 38,700
3,600 litres of E at $5.5 per litre 19,800
2,100 litres of F at $2.2 per litre 4,620
––––––
63,120
––––––
Actual output for this period was 9,100 litres.

What is the yield variance for the period?

A An adverse variance of $3,463

B A favourable variance of $631.2
C A favourable variance of $650
D A favourable variance of $5,850 (2 marks)

14 Which of the following are used in assessing value for money?

(1) Earnings
(2) Effectiveness
(3) Efficiency
(4) Evaluation

A 1 and 2 only
B 2 and 3 only
C 3 and 4 only
D 1 and 4 only (2 marks)

15 Which of the following best describes the Residual Income of a division?

A the remaining profit after all divisional costs have been charged
B the remaining profit after a charge for the use of central resources
C the remaining profit after a charge for the use of capital invested
D the remaining profit after the charge for taxation (2 marks)

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16 The manager of a division is considering a new project. The project is expected to increase
the division’s annual net profit by $153,900, but it will cause net current assets to rise by
$810,000.

The manager’s performance is evaluated against a target Return on Investment. The target is
18%. However the use of Residual Income is being considered.

The cost of capital for the division is 16%.

Would the manager adopt the project if the performance measure was either (i) Return
on Investment (ROI) or (ii) Residual Income (RI)?

(i) ROI (ii) RI

A Yes Yes
B Yes No
C No Yes
D No No (2 marks)

17 Admedia Co provides an advertising design and production service to clients. The production
section is the only customer of the design section, with all design work being transferred at
full cost plus 40%. The production section charges clients $90 per hour. In the forthcoming
three months, Admedia has budgeted that 7,000 hours will be charged to clients. The
budgeted costs are:

Design Production
Variable costs $29 per hour $35 per hour
Fixed costs $56,160 $172,000
Hours 2,400 7,000

What is the budgeted profit for the two sections?

Design Production
A $22,464 $87,240
B $50,304 $36,936
C $27,840 $115,560
D $50,304 $213,000 (2 marks)

18 Of what level of a finance and accounting information system is the preparation of

short-term budgets an example?

A operational level
B tactical level
C knowledge level
D strategic level (2 marks)

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19 The following statements have been made about management information systems:

(1) they include sophisticated computer hardware;

(2) they process external and internal data.

Which of the statements is/are correct?

A 1 only
B 2 only
C both 1 and 2
D neither 1 nor 2 (2 marks)

20 In systems theory, systems can be open or closed. The following statements have been made
in relation to open systems.

(1) they take inputs from the environment around them;

(2) they adapt as the environment around them changes.

Which of the statements is/are correct?

A 1 only
B 2 only
C both 1 and 2
D neither 1 nor 2 (2 marks)

(40 marks)

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Section B – All FIVE questions are compulsory and MUST be attempted.

1 RJ produces two high performance motorcars: Car X and Car Y. The company uses a
standard absorption costing system. The following budgeted information has been provided
for the two products:

Car X Car Y
$ $
Budgeted production (units) 1,100 1,600
Variable cost per unit 30,000 32,000
Machine hours to produce one car 200 300
⇒ Total budgeted machine hours 220,000 480,000

The fixed production overhead is a general production overhead (it is not product specific).
The total budgeted fixed production overhead is $26,020,000 and is absorbed using a machine
hour rate.

Required:

(a) Calculate the total absorption cost per unit of the two cars using the machine
hour rate. (3 marks)

(b) The company is considering changing to an activity based costing system. The
company has analysed the budgeted fixed production overheads and found that
costs for various activities are as follows:

$000
Machining costs 7,000
Set up costs 12,000
Quality inspections 7,020
––––––
Total overheads 26,020
––––––
The analysis also revealed the following information:

Car X Car Y
Cars per production run 10 40
Inspections per production run 20 80

Required:

Calculate the budgeted production cost of one Car X and one Car Y using the
activity based costing information provided above. (7 marks)

(10 marks)

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2 A manufacturer of electronic components produces a statement comparing actual performance
against budgets on a monthly basis. The statement for the most recent month is set out below.
The management accountant values closing inventory at the budgeted variable production
cost per unit.

Budget Actual Variance

Sales units 12,000 13,000 1,000
Production units 14,000 13,500 (500)
$ $ $
Revenue 360,000 385,000 25,000

Variable production costs (252,000) (244,000) 8,000

Closing inventory 36,000 9,000 (27,000)

––––––– ––––––– –––––––

Contribution 144,000 150,000 (6,000)
––––––– ––––––– –––––––
The management accountant has started to prepare the budget for the following financial
period, and is using an incremental approach to budgeting, whereby the budget for the current
year will be used as a starting point for calculating next year’s budget.

Required:

(a) Recalculate the statement replacing the original budget with a flexed budget.
(4 marks)

(b) Explain ONE benefit of the statement you have produced. (2 marks)

(c) Discuss the advantages and disadvantages of using incremental budgeting.

(4 marks)

(10 marks)

3 QP Co is a food processing company that produces pre prepared meals for sale to major
supermarket groups. The company makes two types of pre prepared meals. These are
produced in batches of 100 units. Costs and selling price per batch are as follows.

PN BE
$ per batch $ per batch
Selling price 450 270

Materials 255 165

Labour 28 42
Variable production overheads 30 10
Factory fixed overheads absorbed 80 40

Machine hours per batch 3 1

Budgeted weekly output 350 350
Maximum weekly demand 400 350.

Variable production costs relate to machine time. They are charged at $10 per machine hour,
and reflect the power used by the machines per hour.

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 Factory fixed costs are not specific to the products, and are absorbed based on an old activity
based study. Fixed costs will be 100% absorbed if production is as per the budget.

Due to a limited number of machines, and the need to clean these overnight, machine hours
are limited to 1,250 hours per week.

Required:

(a) Calculate the weekly production quantity that would maximise weekly profit,
and calculate the value of that profit. (6 marks)

(b) Briefly explain the term “shadow price”, and its relevance to the management
of a business such as QP Co (4 marks)

(10 marks)

4 Belun Co produces a client relationship management software package that is used in by

customer service departments to monitor dealings with customers. Clients of Belun Co buy a
license, which gives them the right to run the software on their computer systems. The price
of the license depends on the number of users. Clients may also pay for a maintenance
package, which means that for an annual fee, they have the right to various services, including
unlimited access to Belun’s hotline, automatic software upgrades and free support in the case
of problems running the system.

The market for client relationship management software is a competitive one – there are
several other CRM systems available. In order to maintain its competitive position, the
company maintains a research and development department that continuously works on
adding new features to the package, as well as correcting bugs in the existing software. As a
result, Belun’s software package is considered to be excellent, and traditionally the clients
have been very happy.

Due to recession, the last two years have been a difficult period for the software industry, as
many companies have cut back on their IT spending.

At the start of the most recent financial year, a new finance director was appointed. He
immediately went on a large efficiency drive, identifying what he saw as unnecessary waste.
This included cutting back the number of staff in all areas, including research and
development and hotline.

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 The financial results for the last two financial years are presented in table 1. Year 2 is the
most recent financial year

Table 1
Year 2 Year 1
$000 $000
Revenue:
Licenses 3,000 4,000
Maintenance 4,900 5,000
–––––– ––––––
Total revenue 7,900 9,000
Operating costs:
Research and development 1,200 1,500
Customer support (hotline) 800 1,000
Sales and marketing 2,400 3,000
General administrative expenses 1,600 1,500
–––––– ––––––
Profit before tax 1,900 2,000
–––––– ––––––
Required:

(a) Assess the performance of the business during year 2 compared to the year 1,
using only the data in table 1. (8 marks)

(b) The management reports also contain some additional non-financial information.
This information is presented in table 2:

Table 2
Year 2 Year 1
Calls to hotline 2,100 1,900
Average time to close hotline issues 2 days 0.5 days
Number of bug’s reported 500 470
Number of bug fixes issued 200 350

Additional information

At the start of year 2,, the company launched an improved version of its software,
Belun III. This version contained many additional features. Customers with valid
maintenance contracts were provided with the newer version for no additional cost,
while all new licenses were for sales of Belun III only.

It is quite common for bugs (programming errors) to exist in newly issued software,
since no matter how extensively the software is tested before release, some errors
are not detected until the software is used for real. After bugs are reported, the
research and development teams fix the bugs, and issue bug fixes – which are
updates to the software to correct the bugs.

Required:

Assess the non-financial performance of Belun Co based on the information in

table 2. (7 marks)

(15 marks)

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5 GTK Co makes high quality stereo headphones. The market for this product is growing
rapidly due to the increased use of MP3 players and mobile devices.

The company uses a standard costing system to assess the performance of its managers. At
the start of the period under review, the following standard cost card was calculated for one
product, the delta:
$
Selling price 12.48
Variable cost per unit (standard and actual) 4.20
–––––
Standard contribution per unit 8.28
–––––
Forecast sales volume 30,000
Actual sales volume 32,000
Actual selling price 12.36

At the end of the period, the finance director noted that a mistake had been made in
forecasting selling price inflation. Inflation was lower than expected, and the finance director
believes that a lower standard selling price per unit of $12.18 should have been used.

Required:

(a) Using a marginal costing approach, calculate the selling price variance and the
sales volume contribution variance. (2 marks)

(b) Using a marginal costing approach, analyse the selling price variance into
planning and operational variances. (4 marks)

(c) Comment on the performance of the sales department using the variances
calculated in parts (a) and (b). (4 marks)

(d) The production manager has requested that the standard cost be revised to reflect a
higher than expected wage increase. When the standard was set, the expected pay
rise was 2% – in line with inflation. The production manager claimed that the extra
pay rise was necessary as the workers were demotivated. “I gave them all 5% to
keep them happy!” he said.

Required:

Discuss the request of the production manager to revise the standard cost,
putting what you see as both sides of the argument and reach a conclusion as to
whether or not the standard should be revised. (5 marks)

(15 marks)

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 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/log 2)
LR = the learning rate as a decimal

Demand curve

P = a – bQ

change in price
b=
change in quantity

a = price when Q = 0

MR = a – 2bQ

End of Question Paper

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