Abbot Manufacturing has two departments, each making a single standardised product. Factory cost Profit mark-up 50% 10 25% 7.

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1 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Question 1 ABBOT MANUFACTURING Abbot Manufacturing has two departments, each making a single standardised product. The data for unit cost and selling price of these products are as follows. Department Department Alpha Beta $ $ Direct material cost Direct labour cost Variable manufacturing overheads Fixed manufacturing overheads Factory cost Profit mark-up 50% 10 25% 7.50 Selling price The factory cost figures are used in the departmental accounts for the valuation of finished goods inventory. The departmental income statements have been prepared for the year to 30 June These are given below separately for the two halves of the year. Departmental income statements for the year to 30 June Jul 31 Dec Jan 30 Jun2009 Dept Dept Dept Dept Alpha Beta Alpha Beta $000 $000 $000 $000 Sales revenue Manufacturing costs Direct material Direct labour Variable overheads Fixed overheads Factory cost of production Add Opening inventory of finished goods Less Closing inventory of finished goods (120) (180) (20) (300) Factory cost of goods sold Administrative and selling costs Cost of sales Net profit

2 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK The total sales revenue was the same in each six monthly period but in the second half of the year the company increased the sales of Department Alpha (which has the higher profit mark-up) and reduced the sales of Department Beta (which has the lower profit mark-up). An increase in company profits for the second six months was anticipated but the profit achieved was $8,000 lower for the second half of the year than for the first half. The profit for Department Alpha fell by $41,000, while the profit for Department Beta rose by $33,000. There has been no change in prices of inputs or outputs. Explain the situation described in the last paragraph. Illustrate your answer with appropriate supporting calculations. (8 marks) Redraft the departmental income statements using marginal cost to value unsold inventory. (7 marks) (15 marks) Question 2 SUNSHINE SALES LTD Sunshine Sales Ltd is drafting a budget on the basis of the following data. Direct material Direct labour Variable production expenses Fixed production costs Normal output 9,000 units per month Sales price $10 per unit $5 per unit $8 per unit $27,000 per month 90% capacity $30 per unit In order to build up inventory in anticipation of an increase in demand which is expected later in the year, production is to exceed sales in the first three months of the year as follows. Month 1 Month 2 Month 3 Production 6,500 9,000 10,000 Sales 5,000 8,500 9,500 Prepare two profit statements, both in comparative columnar form, covering each of the three months (i) On a marginal costing basis (7 marks) (ii) On a full absorption costing basis. (8 marks) Reconcile the difference in profits for each month. (5 marks) (20 marks) 2

3 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Question 3 PLB LTD PLB Ltd is a company producing bulk meat substitutes for the vegetarian food industry. It produces three meat types: pork (P), lamb (L) and beef (B). Direct costs per tonne are as follows. P L B Materials $500 $700 $850 Labour time 12 hours 14 hours 8 hours Budget production (tonnes) 1, Direct labour costs $10 per hour The three products use the same process necessitating several production runs. The cost of this is estimated at $10m for labour and $6m in tools and destroyed parts. Total costs associated with ordering materials are $1.125m. P L B Production runs Inventory orders Inventory of finished goods need to be treated with a preservative in proportion to the number of days between production runs (the longer the gap, the more preservative is used). Total cost of preservative is $990,000 and is used in proportion to the volume of product preserved (the greater the volume, the more preservative is used). The company operates for 360 days per year and holds no long-term inventory. Sales of all products are in batches of 50 tonnes at a cost of $2,000 per batch in packing materials. Calculate the cost of the finished products using activity-based costing techniques where appropriate. (12 marks) Question 4 PLANTAGENET LTD Plantagenet Ltd, whose financial year ends on 31 October, owns one department store located in a busy shopping centre in a large city. The shop has four operating departments fashions, sports, household and electrical, and customer restaurant. There are also two service departments staff canteen and administration. Rent, rates and other fixed overheads for the year to 31 October 2009 were $400,000, and the relevant contributions by the six departments were as follows. $000 Operating departments Fashions 240 Sports 200 Household and electrical 600 Customer restaurant 80 Service departments Staff canteen (20) Administration (100) 3

4 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK In reviewing performance for the previous twelve months, the chairman suggests that the control system needs tightening up and that consequently, overheads should be allocated to the four operating departments. He argues that this should make it easier to assess their individual performances. In particular, he is concerned at the customer restaurant s low overall margin on sales and wonders whether it might be better to close it down and expand the store s other departments into the floor space thus released. The managing director thinks it would be a good idea to tighten up the control system in this way. He suggests that the $400,000 of rent, rates and other fixed overheads should be allocated to the six departments according to floor space occupied; and the revised staff canteen loss and administration costs be apportioned to the four operating departments according to the number of personnel employed. He points out that, in this particular case, the effect is the same regardless of whether the step or reciprocal method is used. Moreover, similar departmental profit figures can be derived, first by allocating rent, rates and other fixed overheads according to floor space occupied, and then by aggregating administration and staff canteen costs and apportioning them to the four revenuegenerating departments. The profit/ (loss) of the four operating departments after making such allocations are as follows for the year to 31 October $000 Fashions 83 Sports 90 Household and electrical 477 Customer restaurant (50) The finance director is less sure about the wisdom of making such allocations and of trying to evaluate the different parts of the business as though they were completely separate. Write a brief report critically examining the proposals of the chairman and managing director. In so doing, refer specifically to the relevance of overhead allocation in the circumstances described for decision-making, motivating departmental managers and assessing performance. (Calculations relating to the allocation of overheads are not required.) Ignore taxation and external reporting requirements. (10 marks) Question 5 REPAK LTD Repak Ltd is a warehousing and distribution company which receives products from customers, stores the products and then re-packs them for distribution as required. There are three customers for whom the service is provided John Ltd, George Ltd and Paul Ltd. The products from all three customers are similar in nature but of varying degrees of fragility. Basic budget information has been gathered for the year to 30 June 2009 and is shown in the following table. Products handled (Cubic metres) John Ltd 30,000 George Ltd 45,000 Paul Ltd 25,000 Costs $000 Packaging materials (Note) 1,950 Labour Basic 350 Overtime 30 Occupancy 500 Administration and management 60 4

5 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Note Packaging materials are used in re-packing each cubic metre of product for John Ltd, George Ltd and Paul Ltd in the ratio 1:2:3 respectively. This ratio is linked to the relative fragility of the goods for each customer. Additional information has been obtained in order to enable unit costs to be prepared for each of the three customers, using an activity based costing approach. The additional information for the year to 30 June 2009 has been estimated as follows. (1) Labour and overhead costs have been identified as attributable to each of three work centres receipt and inspection, storage, and packing as follows. Cost allocation proportions Receipt and Storage Packing inspection % % % Labour Basic Overtime Occupancy Administration and management (2) Studies have revealed that the fragility of different goods affects the receipt and inspection time needed for the products for each customer. Storage required is related to the average size of the basic incoming product units from each customer. The re-packing of goods for distribution is related to the complexity of packaging required by each customer. The relevant requirements per cubic metre of product for each customer have been evaluated as follows. John Ltd George Ltd Paul Ltd Receipt and inspection (minutes) Storage (square metres) Packing (minutes) Calculate the budgeted average cost per cubic metre of packaged products for each customer for each of the following two situations. (i) Where only the basic information is to be used. (6 marks) (ii) Where the additional information enables an activity based costing approach to be applied. (14 marks) Comment on the activities and cost drivers which have been identified as relevant for the implementation of activity based costing by Repak Ltd, and discuss ways in which activity based costing might improve product costing and cost control in Repak Ltd. Make reference to your answer to part of the question, as appropriate. (10 marks) (30 marks) 5

6 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK Question 6 EGERTON MANUFACTURING LTD Egerton Manufacturing Ltd produces a range of products at seven separate sites. Each site produces a maximum of four products. The directors have decided to introduce Activity Based Costing (ABC) and have asked each site manager to obtain and analyse the relevant data for their site. Product costs are currently calculated using absorption costing, with overheads being absorbed on a machine hour basis. As part of the process of introducing ABC, the directors wish to assess the profitability of individual products, with the possibility that the product range may be reduced. You are the Manager of the Brumley site and you have obtained the following data: Product A B C $ $ $ Selling price per unit Direct material per unit Direct labour per unit Overheads per unit Total cost per unit Budgeted production volume 600 units 400 units 200 units Machine hours per unit Production runs in period Number of sales orders Number of deliveries of material The budgeted overheads of the site for the period are: Machine running costs $78,560 Set up costs $82,900 Material handling costs $49,500 Machine hours are limited to 1,140 hours per period. Calculate the cost of each product using ABC. (12 marks) Draft a memo to the Managing Director which: (i) (ii) Using the ABC information, indicates which product(s) should no longer be manufactured and justifies your recommendation; (4 marks) Discusses the other factors which should be considered before a final decision is made. (4 marks) (20 marks) 6

7 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Question 7 FLOPRO Flopro plc makes and sells two products A and B, each of which passes through the same automated production operations. The following estimated information is available for period 1: (i) Product unit data: A B Direct material cost ($) 2 40 Variable production overhead cost ($) 28 4 Overall hours per product unit (hours) (ii) (iii) (iv) Production/sales of products A and B are 120,000 units and 45,000 units respectively. The selling prices per unit for A and B are $60 and $70 respectively. Maximum demand for each product is 20% above the estimated sales levels. Total fixed production overhead cost is $1,470,000. This is absorbed by products A and B at an average rate per hour based on the estimated production levels. Using net profit as the decision measure, show why the management of Flopro plc argues that it is indifferent on financial grounds as to the mix of products A and B which should be produced and sold, and calculate the total net profit for period 1. (6 marks) One of the production operations has a maximum capacity of 3,075 hours which has been identified as a bottleneck which limits the overall production/sales of products A and B. The bottleneck hours required per product unit for products A and B are 0 02 and respectively. All other information detailed in still applies. Calculate the mix (units) of products A and B which will maximise net profit and the value ($) of the maximum net profit. (8 marks) (c) The bottleneck situation detailed in still applies. Flopro plc has decided to determine the profit maximising mix of products A and B based on the Throughput Accounting principle of maximising the throughput return per production hour of the bottleneck resource. This may be measured as: Throughput return per production hour = (selling price material cost)/bottleneck hours per unit. All other information detailed in and still applies, except that the variable overhead cost as per is now considered to be fixed for the short/intermediate term, based on the value ($) which applied to the product mix in. (i) (ii) Calculate the mix (units) of products A and B which will maximise net profit and the value of that net profit. (8 marks) Calculate the throughput accounting ratio for product B which is calculated as: throughput return per hour of bottleneck resource for product B/overall total overhead cost per hour of bottleneck resource. (3 marks) 7

8 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK (iii) (iv) Comment on the interpretation of throughput accounting ratios and their use as a control device. You should refer to the ratio for product B in your answer. 6 marks) It is estimated that the direct material cost per unit of product B may increase by 20% due to shortage of supply. Calculate the revised throughput accounting ratio for product B and comment on it. (4 marks) Appendix 3.1 Actual statistics for component X Period 1 Period 2 Period 3 Invoiced to customers (units) 5,400 5,500 5,450 Worked-on in the process (units) 6,120 6,200 5,780 Total costs: Materials A and B ($) 440, , ,160 Variable cost of production ($) (excluding material cost) 91,800 93,000 86,700 Fixed cost ($) 162, , ,000 (35 marks) Question 8 ENNERDALE LTD Ennerdale Ltd has been asked to quote a price for a one-off contract. The company s management accountant has asked for your advice on the relevant costs for the contract. The following information is available: Materials The contract requires 3,000 kg of material K, which is a material used regularly by the company in other production. The company has 2,000 kg of material K currently in stock which had been purchased last month for a total cost of $19,600. Since then the price per kilogram for material K has increased by 5%. The contract also requires 200 kg of material L. There are 250 kg of material L in stock which are not required for normal production. This material originally cost a total of $3,125. If not used on this contract, the stock of material L would be sold for $11 per kg. Labour The contract requires 800 hours of skilled labour. Skilled labour is paid $9 50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P. The following information relates to product P: $ per unit $ per unit Selling price 100 Less Skilled labour 38 Other variable costs 22 (60) 40 8

9 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Prepare calculations showing the total relevant costs for making a decision about the contract in respect of the following cost elements: (i) materials K and L; and (ii) skilled labour. (7 marks) Explain how you would decide which overhead costs would be relevant in the financial appraisal of the contract. (3 marks) (10 marks) Question 9 PROJECT PF201 You are part of a project team working on the development of an improved design for the warning system for a passenger ferry. This project has been given the code PF201. An impending change in legislation means that a modification to the fire warning system is required. This modification will add $2 4m to the development costs and will also require an engineering team to be transferred from another project (BR156) which is close to completion. The engineering team will be required to work on the ferry project for four weeks at cost of $112,500 per week. The transfer of the team will delay the completion of project BR156, reducing the number of units which will be sold. Data relating to the two projects is given below: Project Note PF201 BR156 Cost to date 1 $3 35m $32 86m Costs to complete 2 $31 14m $0 75m Expected sales volumes (units): Year Year Year Selling price per unit $1 43m $2 86m Variable cost per unit $1 12m $1 96m Standard hours per unit ,100 Note 1 Note 2 Note 3 Note 4 It is the company s policy to recover development costs over the first three years of a project s life. If the project is abandoned, costs incurred to date cannot be recovered and must be written off against profit in the accounting period in which the project is abandoned. The costs relating to Project PF201 are before the transfer of the engineering team. Expected sales volumes do not take into account the effect of the transfer of the engineering team. The delay resulting from the transfer of the engineering team is expected to lead to a loss of the sale of three units of Project BR156 in the first year. The sale of these units will not be recovered in subsequent periods. The company absorbs fixed costs on the basis of standard hours at a rate of $100 per standard hour. 9

10 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK The project manager has shown you a memo from the Managing Director which includes the following comments: You will be aware that the company requires all projects to generate a profit over the first three years in which sales are made. The calculation of profit should include the full write off of development costs. When external factors lead to a major change in the resources required for a project, a revised assessment should be carried out. This is to establish if the profit objective is still likely to be achieved. Such an assessment should take full account of sunk costs and opportunity costs. If the revised assessment indicates that the project will not generate a profit over the first three years, it should not be continued. Please let me have your assessment of Project PF201, based on these criteria. The project manager does not know what is meant by the terms sunk costs and opportunity costs. He has asked you to explain these terms and to prepare the revised assessment. Define, and in relation to Project PF201, give an example of: (i) sunk cost (3 marks) (ii) opportunity cost (2 marks) (iii) relevant cost (2 marks) Prepare the revised assessment of Project PF201, and indicate whether or not it should be continued. (13 marks) (20 marks) Question 10 SAPU PLC Sapu plc makes and sells a number of products. Products A and B are products for which market prices are available at which Sapu plc can obtain a share of the market as detailed below. Estimated data for the forthcoming period is as follows: (i) (ii) (iii) (iv) (v) Product data Product A Product B Other products Production/sales (units) 5,000 10,000 40,000 $000 $000 $000 Total direct material cost ,020 Total direct labour cost Variable overhead cost is $1,500,000 of which 40% is related to the acquisition, storage and use of direct materials and 60% is related to the control and use of direct labour: It is current practice in Sapu plc to absorb variable overhead cost into product units using overall company wide percentages on direct material cost and direct labour cost as the absorption bases: Market prices for Products A and B are $75 and $95 per unit respectively. Sapu plc requires a minimum estimated contribution: sales ratio of 40% before proceeding with the production/sale of any product. 10

11 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Prepare estimated unit product costs for Product A and Product B where variable overhead is charged to product units as follows: (i) Using the existing absorption basis as detailed above. (6 marks) (ii) Using an activity based costing approach where cost drivers have been estimated for material and labour related overhead costs as follows: Other Product A Product B products Direct material related overheads cost driver is material bulk. The bulk proportions per unit are: Direct labour related overheads cost driver is number of labour operations (not directly time related). Labour operations per product unit (10 marks) (c) (d) Prepare an analysis of the decision strategy which Sapu plc may implement with regard to the production and sale of Products A and B. Use unit costs as calculated in (i) and (ii) together with other information given in the question in your analysis. Your answer should include relevant calculations and discussion and be prepared in a form suitable for presentation to management. (10 marks) Explain how Sapu plc could make use of target costing in conjunction with activity based costing with respect to Products A and B. (6 marks) If spare production capacity exists in Sapu plc, comment on the relevance of the present decision criterion of a minimum Contribution: Sales ratio of 40%. (3 marks) (35 marks) Question 11 PALACE A company manufactures two products (X and Y). The production and sales constraints in each period may be expressed as: 2x + 4y 1980 (machine hours) 6x + 6y 4800 (labour hours) y x y 300 x 0 Draw a graph to represent the above constraints, clearly identifying the feasible production area. (7 marks) The contributions of the two products are: Product X Product Y $11.50 per unit $21.30 per unit 11

12 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK Assuming that all the constraints in above apply: (i) (ii) Calculate the contribution of each product per unit of binding constraint. (4 marks) Determine the product mix, and the resulting contribution, in each period which will maximise profit for the company. (3 marks) (c) The constraints: no longer apply. Y X Y 300 Using simultaneous equations, determine the product mix in each period which will maximise profit for the company under this changed scenario. (6 marks) Question 12 ROTHWELL LTD (20 marks) Rothwell Ltd makes various novelty items which are sold to wholesalers particularly in the toy trade. It has just decided to produce a new line, namely small umbrellas to decorate cocktails, which will be sold to various chains of cocktail bars and called a bar brolly. The company has a microcomputer with a financial modelling package but does not know how to use either the package or the microcomputer. It feels that the total cost of annual production and the prices at which that production could be sold are as shown below. Annual production Total cost Selling price and sales (per 100) (boxes of 100) $000 $ 2, , , , , , , Determine the optimal selling price for bar brollies. (10 marks) Question 13 SLADE Hill Ltd has recently developed a new product, the Slade. Its parent company, Powell plc, requires that subsidiaries achieve of 16% a return on opening capital employed on all new investment. Financial data regarding the development and production of the Slade is as follows. The development of the product took three years and cost $120,000. It is anticipated that demand for the product will be 4,000 units per annum and that it will last six years. Investment in machinery will amount to $200,000 and this will be scrapped at the end of the product s life for $20,

13 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Incremental cash fixed costs will be $40,000 pa and the unit variable cost of production is expected to be $50. Calculate a price which, based on the above data, will achieve the target ROCE of 16%. (8 marks) Question 14 BRAITHWAITE LTD Braithwaite Ltd manufactures and sells a single product. The following data have been extracted from the current year s budget: Contribution per unit $8 Total weekly fixed costs $10,000 Weekly profit $22,000 Contribution to sales ratio 40% The company s production capacity is not being fully utilised in the current year and three possible strategies are under consideration. Each strategy involves reducing the unit selling price on all units sold with a consequential effect on the budgeted volume of sales. Details of each strategy are as follows: Strategy Reduction in unit Expected increase in weekly selling price sales volume over budget % % A 2 10 B 5 18 C 7 25 The company does not hold Inventories of finished goods. (c) Calculate for the current year: (i) the selling price per unit for the product; and (ii) the weekly sales (in units). (3 marks) Determine, with supporting calculations, which one of the three strategies should be adopted by the company in order to maximise weekly profits. (4 marks) Briefly explain the practical problems that a management accountant might encounter in separating costs into their fixed and variable components. (3 marks) (10 marks) 13

14 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK Question 15 TABULAR APPROACH A company manufactures a single product, product Y. It has documented levels of demand at certain selling prices for this product as follows: Demand Selling price per unit Cost per unit Units $ $ 1, , , , Using a tabular approach calculate the marginal revenues and marginal costs for product Y at the different levels of demand, and so determine the selling price at which the company profits are maximised. Question 16 ALBANY (10 marks) Albany has recently spent some time on researching and developing a new product for which they are trying to establish a suitable price. Previously they have used cost plus 20% to set the selling price. The standard cost per unit has been estimated as follows: $ Direct materials Material 1 10 (4 kg at $2 50/kg) Material 2 7 (1 kg at $7/kg) Direct labour 13 (2 hours at $6 50/hour) Fixed overheads 7 (2 hours at $3 50/hour) 37 Using the standard costs calculate two different cost plus prices using two different bases and explain an advantage and disadvantage of each method. (6 marks) Give two other possible pricing strategies that could be adopted and describe the impact of each one on the price of the product. (4 marks) (10 marks) 14

15 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Question 17 TAYLOR (1990) LTD The directors of Taylor (1990) Ltd, a firm manufacturing balls, are trying to decide which of two spinning machines to rent to replace the existing equipment which is old and unreliable. The larger and more sophisticated machine, the James, will cost $42,000 pa to rent and, if used, would produce balls at a cost of $15 per dozen. The alternative machine, the Henry, is cheaper to rent but more costly to run. Annual rental for a Henry is only $30,000 but produces balls at a cost of $17 per dozen. Maintenance costs and other incidentals for both machines are identical. Balls are sold for $27 per dozen, though demand is uncertain. The sales director feels that there is a 0.4 chance that sales next year will be 4,800 dozen and a 0.6 chance of 8,000 dozen. Show which machine should be rented. (4 marks) Explain the limitations of the method used above. (3 marks) Question 18 SPORTS COMPLEX (7 marks) A sports complex includes an ice rink and a swimming pool in its facilities. Management of the sports complex are currently investigating a proposal that would reduce the cost of heating the swimming pool. Under the proposal, the heat removed from the ice rink, in keeping the ice temperature at the required temperature could be used to heat the swimming pool. Currently this heat is simply vented into the atmosphere. If the proposal is adopted, it will be used from 1 January The following additional information is available: (i) A survey of the sports complex has already been carried out at a cost of $30,000 to check whether or not the proposal is technically feasible. It has concluded that it is feasible. (ii) The expected costs for the ice rink heat extraction for the year ended 31 December 2008 are $120,000. It is estimated that due to rising prices, this cost will increase by 10% during the year to 31 December Heat extracted is expected to total 500,000 units of heat during the year to 31 December 2008 and this figure is expected to apply for the year to 31 December This cost will be incurred whether or not the proposal is adopted. (iii) (iv) In order to utilise the heat extracted from the ice rink for heating the water in the swimming pool, equipment would be hired at a cost of $75,000 per annum. This equipment would be supervised by an employee who is currently paid a salary of $15,000 for another post in the year ended 31 December 2008 and who would be retiring if not given this post. His salary for the year to 31 December 2009 would be $17,500. His previous post would not be filled on his retirement. It is anticipated that this system would help to improve the ice quality on the rink. Only part of the heat extracted from the ice rink could be recovered for use in heating the water in the swimming pool using the new equipment. The current most likely estimate of the recovery level is 25% of the heat extracted from the ice rink. If the quantity of heat available was insufficient for the heating of the swimming pool, any balance could continue to be obtained from the existing system, which would continue to operate alongside the new system. 15

16 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK (v) In the year ended 31 December 2008 the heating for the swimming pool is expected to use 200,000 units of heat. The expected costs of this are $150,000. This is made up of 70% variable avoidable costs and 30% which is a share of general fixed overhead for using the existing system. On average all such costs will increase by 10% through price changes in the year to 30 September Prepare an analysis for the year to 31 December 2009 to show whether the sports complex should proceed with the heat recovery proposal on financial grounds where a 25% level of recovery applies. Explain any assumptions made and give reasons for the figures used in or omitted from your calculations. (9 marks) Note you may ignore the time value of money. Mr Ellis, the manager of the ice rink is trying to decide what price per person to charge for a five week ice skating course that would be held on Saturday mornings. He is considering three possible prices- $20, $30 or $50. Roddy Dean, a local ice skating dancer is competing in an International Competition, and this has increased interest in skating. If Mr Dean wins the competition, Mr Ellis believes that demand for the courses will be high. If Mr Dean reaches the finals, but does not win the competition, demand would be medium, and if Mr Dean does not reach the finals, demand would be low. A decision on what price to charge has to be taken before the results of the competition are known as the sports complex wishes to start to advertise the course. Mr Ellis has provided you with a table showing his estimates of the number of people who would attend the course, based on the price charged and the level of demand: Price charged Demand (number of persons) High Medium Low Determine which price Mr Ellis should charge for the course based on the following decision making rules. Your answer should include a brief explanation of the meaning of each rule, and what type of risk taker would use it. (i) (ii) (iii) Maximax Maximin Minimax regret (16 marks) Note there are 8 marks available for calculations and 8 marks for discussion in part of the question. (25 marks) 16

17 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Question 19 ROCKINGHAM HOSPITAL LTD A new private hospital of 100 beds was opened to receive patients on 2 January 2009 although many senior staff members, including the supervisor of the laundry department, had been in situ for some time previously. The first three months were expected to be a settling-in period, the hospital facilities being used to full capacity only in the second and subsequent quarters. On 1 May 2009 the supervisor of the laundry department received her first quarterly performance report from the hospital administrator, together with an explanatory memorandum. Copies of both documents are set out below. The supervisor had never seen the original budget, nor had she been informed that there would be a quarterly performance report. She knew she was responsible for her department and had made every endeavour to run it as efficiently as possible. It had been made clear to her that there would be a slow build-up in the number of patients accepted by the hospital and so she would need only three members of staff, but she had had to take on a fourth during the quarter due to the extra work. This extra hiring had been anticipated for May, not late February. Memorandum Rockingham Private Patients Hospital Ltd To All department heads/supervisors From Hospital administrator Date 30 April 2009 Attached is the quarterly performance report for your department. The hospital has adopted a responsibility accounting system so you will be receiving one of these reports quarterly. Responsibility accounting means that you are accountable for ensuring that the expenses of running your department are kept in line with the budget. Each report compares the actual expenses of running your department for the quarter with our budget for the same period. The difference between the actual and forecast will be highlighted so that you can identify the important variations from budget and take corrective action to get back on budget. Any variation in excess of 5% from budget should be investigated and an explanatory memorandum sent to me giving reasons for the variations and the proposed corrective actions. 17

18 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK Performance report Laundry department Three months to 31 March 2009 Actual Budget Variation % (over) variation under Patient days 8,000 6,500 (1,500) (23.0) Weight of laundry processed (kilos) 101,170 81,250 (19,920) (24.5) Department expenses $ $ $ % Wages 4,125 3,450 (675) (19.5) Supervisor salary 1,490 1,495 5 Washing materials (150) (19.5) Heating and power (50) (10.0) Equipment depreciation Allocated administration costs 2,460 2,000 (460) (23.0) Equipment maintenance ,815 8,520 (1,295) (15.0) Comment. We need to have a discussion about the over-expenditure of the department. Discuss in detail the various possible effects on the behaviour of the laundry supervisor of the way that her budget was prepared, and the form and content of the performance report. (10 marks) Re-draft, giving explanations, the performance report and supporting memorandum in a way which, in your opinion, would make them more effective management tools. (7 marks) (17 marks) Question 20 INCLUSION Discuss the behavioural arguments for and against involving those members of management who are responsible for the implementation of the budget in the annual budget-setting process. (10 marks) Explain how the methods by which annual budgets are formulated might help to overcome behavioural factors likely to limit the efficiency and effectiveness of the budget. (7 marks) (17 marks) 18

19 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Question 21 RESPONSIBILITY ACCOUNTING A manufacturing company has a range of production departments and service departments. Three of the service departments are maintenance, computer services and health, safety and welfare. Discuss the differing problems which may exist in setting budgets for each of the above service departments. (9 marks) Identify three different reasons for the charging of service department costs to user departments and comment on the charging methods which may be relevant in the case of each of the above service departments. (8 marks) (17 marks) Question 22 BRT LTD BRT Ltd makes a range of glassware ornaments. The marketing plan for 2008 is based on the three products which have proved most popular in the past: Dog, Bunny and Cat. The expected sales for each product and selling price are as follows. Dog Bunny Cat Sales 10,000 20,000 5,000 Price $10 $5 $20 The following are direct costs of manufacturing each ornament. Dog Bunny Cat Materials $2/kg 5.0 kgs 6.0 kgs 7.0 kgs Recycled 10 /kg 1.2 kgs 1.3 kgs 1.4 kgs Labour $2/hour 30 mins 45 mins 60 mins Finishing and $3/hour 30 mins 30 mins 60 mins Opening inventory levels are as follows. Dog Bunny Cat Recycled glass Silicates 2,000 units 2,000 units 1,000 units 1,000 kgs 23,500 kgs The required closing inventory levels for finished products are Dog 1,000 Bunny 2,000 Cat 500 There must also be sufficient closing raw materials inventory to cope with a level of production equivalent to 20% of the 2008 demand. 19

20 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK Prepare the following budgets. Sales budget (4 marks) Production budget (in numbers of Dog, Bunny and Cat) (5 marks) (c) Materials usage budget (for recycled glass and silicates in kgs) (3 marks) (d) Materials purchases budget (in quantities and $s) (4 marks) (e) Labour budget (in hours and $s) (4 marks) Question 23 TOMKINS LTD (20 marks) Tomkins Ltd is engaged in the production of electronic musical instruments. The management accountant wishes to prepare a flexible budget for He obtains the following information from a summary of electricity cost as related to direct labour hours for Month Electricity cost Direct labour hours $ May 1, June 1, July 1, August 1, September 1, October 1, November 1, December 1, Using the above data, estimate (i) (ii) The annual fixed element of electricity cost The variable element per hour of direct labour. (c) Calculate the coefficient of correlation and interpret your result. Recalculate the estimates made in, using the high-low method. (20 marks) Question 24 WILLIAM PLC William plc has achieved the following sales in recent years $000 $000 $000 $000 Period 1 1 January to 30 April Period 2 1 May to 31 August Period 3 1 September to 31 December

21 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Using trend analysis, discover the seasonal variations to sales. Assuming that the trend value for the last four months of is $440,000, calculate the best estimate of sales for this period. (c) What other variations may cause this estimate to be incorrect? (10 marks) Question 25 TRENDY SALES LTD Explain the four characteristic movements of a time series. State with which characteristic movement you would mainly associate each of the following: (i) A fire in a factory delaying production by three weeks. (ii) An era of prosperity. (iii) An after Easter sale in a department store. (iv) A need for increased wheat production due to a constant increase in population. (v) The monthly number of mm of rainfall in a city over a five year period. (vi) A recession. (vii) An increase in employment during summer months. (viii) The decline in the death rate due to advances in science. (ix) A steel strike (x) A continually increasing demand for smaller cars. (10 marks) The following data shows the number of cash receipts per day made by Trendy Sales Ltd over a period of four working weeks. Plot the data on a graph and superimpose a trend line. Week Day Calculate the trend using 5-day moving averages and plot the result on the graph. (10 marks) (20 marks) Question 26 SASHA PLC Sasha plc is currently preparing a budget forecast for the year to 30 June 2010 for one of its products, the concept. The product method of manufacture has been redesigned and the amended method has been operated from the beginning of quarter two, The production method is labour intensive and is estimated to be subject to an 85% learning effect. This is based on batches produced and uses batch one in quarter two, 2009 as the starting point. The budgeted labour cost for batch one, quarter two 2009 is $450. The learning curve formula is y = ax b, where b = log (% learning)/log (2). 21

22 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK Actual and budgeted production quantities since quarter are given below: 2009 Qr Qr Qr Qr Qr2 Production/sales budget (batches) Calculate the total budgeted labour cost for each of quarters one and two, (8 marks) Explain the principles on which the learning effect is based and discuss its relevance and possible limitations to its use. (6 marks) (14 marks) Question 27 PORTLAND LTD Portland Ltd manufactures one product from a standard grade of material. The standard cost card indicates the following. $ Material 6 $ Labour 3 $ Variable overhead 3 $ Fixed overhead 3 $ Standard cost per unit Standard selling price Standard profit per unit 4.30 Budgeted production and sales for week 1 1,100 units Actual results for the week were as follows. Production 1,000 units $ Materials 6,500 $1.50 9,750 Labour 3,200 hours (of which 3,100 hours were productive time) 12,500 Variable overhead 5,200 Fixed overhead 9,800 37,250 Sales 1,000 $39 39,000 Actual profit 1,750 Produce an operating statement for the period reconciling budgeted and actual profit. (10 marks) 22

23 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Question 28 DALLAS LTD Dallas Ltd operates a standard marginal costing system. The results for period 2 were as follows. Budget Actual Units produced and sold 7,000 6,000 Per unit $ $ $ Materials 5 $ ,000 (33,000 kgs) Labour 4 $2 8 54,675 (25,000 hours) Variable overhead ,800 Variable cost ,475 Selling price ,000 Contribution 5 35,000 16,525 Fixed overhead (14,000) (13,560) Net profit 21,000 2,965 Prepare a marginal standard costing operating statement for period 2. (10 marks) Question 29 CARMEL LTD Carmel Ltd is studying the returns from certain profit centres. The Alpha division manufactures a substance called topple from three materials. materials cost for 80 kgs of topple is as follows. The standard kgs $ Material B $5.50 per kg 220 Material S $2.50 per kg 100 Material T $5.00 per kg 100 $4.20 per kg 420 Normal loss (20) $5.25 per kg 420 Production for the period showed the following. kgs $ Material B 25, ,700 Material S 14,000 38,000 Material T 11,000 53,000 50, ,700 Actual loss (7,800) 42,200 kgs of topple produced for 236,700 23

24 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK Calculate all the appropriate variances from the above data. (6 marks) Question 30 SHOES PLC Shoes plc, a company whose objective is to maximise profits, commenced manufacturing and selling two perfumes, Alpha and Beta, in October The processes require the use of a single grade of labour and inputs of two raw materials, X and Y. It is the company s policy to hold no inventory of raw materials, work in progress or finished goods. The plant used for manufacturing is leased for a fixed payment each calendar month. The original budget for production and sales of Alpha and Beta in October 2009 was as follows. Alpha Beta Total Bottles 10,000 6,000 Variable production costs $ $ $ Labour 0.4 hours per bottle 0.5 hours per $5 per hour $5 per hour 15,000 35,000 Raw materials Material X 15 grams per bottle 20 grams per 10 per gram 10 per gram 12,000 27,000 Material Y 5 grams per bottle 10 grams per 20 per gram 20 per gram 12,000 22,000 45,000 39,000 84,000 $6 per bottle $10 per bottle 60, ,000 Contribution 15,000 21,000 36,000 Fixed costs (15,000) Profit 21,000 24

25 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Actual outcomes in October 2009 were as follows. Alpha Beta Total Bottles manufactured and sold 12,000 4,000 Alpha Beta Total $ $ $ Variable production costs Labour 0.4 hours per bottle 0.5 hours per $5 per hour $5 per hour 10,000 34,000 Raw materials Material X 16 grams per bottle 20 grams per 11 per gram 11 per gram 8,800 29,920 Material Y 4 grams per bottle 10 grams per 20 per gram 20 per gram 8,000 17,600 54,720 26,800 81,520 $5.80 per bottle $10 per bottle 40, ,600 Contribution 14,880 13,200 28,080 Fixed costs (16,000) Profit 12,080 Calculate the following variances for October 2009: Sales price Raw materials yield Raw materials mix Raw materials price Fixed overhead expenditure Where they occur nil variances should be shown clearly, but in such circumstances detailed workings are not required. (5 marks) From the information available, write a report to the chairman of the company explaining the variances calculated in your answer to (5 marks) Show all relevant calculations. Identify clearly any relevant assumptions you make. Ignore taxation. (10 marks) 25

26 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK Question 31 EGJ PRODUCTS LTD EGJ Products Ltd held its quarterly directors meeting to review budgets and examine variances. The two following matters were raised. The paint shop is treated as a production service department and a simple formula exists for estimating the standard quantity of paint needed for any job. (1) During the quarter 900 gallons of paint was used. 8,200 units were sprayed for which the standard consumption should be 820 gallons. Paint costs $5 per gallon. (2) The directors were informed that at the start of the quarter a new compressor and sprayer were installed, which tests showed increased the quantities of paint used by 5%. This was not taken into account in the original budget. In addition, a new extension to a shady competitor s works had been seen painted in a somewhat unusual colour. 25 gallons of this colour was in inventory at the start of the quarter. None had been bought or sold during the quarter, but there was none in inventory at the end of the quarter. (i) Calculate the materials usage variance for paint. (ii) Analyse the above materials usage variance. (5 marks) The moulding department tried a new venture during the quarter, making plastic parking cones. (1) The original standard suggested that each cone would require 1.5 kgs of plastic at $0.60 per kg. Production during the quarter was 6,000 cones for which 9,700 kgs of plastic were used at a cost of $5,350. (2) It soon became apparent that no allowance had been made for trim loss in the original estimates and 1.6 kgs would have been a better standard. In addition, when the first batch of raw plastic was ordered, a supplier suggested using a lower quantity plastic for which the average price over the quarter, given the quantities used and supplier available was $0.55 per kg. (i) (ii) Calculate the price and usage variances. Produce total planning and operational variances, and analyse each of these into a price and usage variance. (10 marks) (15 marks) 26

27 STUDY QUESTION BANK PERFORMANCE MANAGEMENT (F5) Question 32 PAN-OCEAN CHEMICALS Pan-Ocean Chemicals has one product which requires inputs from three types of material to produce batches of product Synthon. Standard cost details for a single batch are shown below: Materials Labour Material Standard Standard Standard Standard type Kgs price per hours rate per Kg ($) hour ($) S S S A standard loss of 10% of input is expected. Actual production was 15,408 kgs for the previous week. Details of the materials used were: Actual material used (kg) S1 8,284 S2 7,535 S3 3,334 Total labour cost for the week was $6,916 for 1,235 hours worked. Calculate: (i) Total material mix, yield and usage variances; (9 marks) (ii) Labour rate and efficiency variances. (2 marks) (c) Explain why the sum of the mix variances for materials measured in kg should be zero. (3 marks) Write a report to management which explains and interprets your results in part. The report should pay particular attention to: explaining what is meant by mix and yield variances in respect of materials, and possible reasons for all the results you have derived. (11 marks) (25 marks) 27

28 PERFORMANCE MANAGEMENT (F5) STUDY QUESTION BANK Question 33 DARTH LIMITED The following are the summarised accounts for Darth for the year ending 30 September 2009, together with comparative figures for the previous year. Statement of financial position (Balance Sheet) $000 $000 $000 $000 Tangible non-current assets at cost less depreciation 4,995 12,700 Current assets: Inventories 40,145 50,455 Trade receivables 40,210 43,370 Cash at bank 12,092 5,790 92,447 99,615 97, ,315 Capital and reserves Issued capital shares of 25c 9,920 9,920 Accumulated profits 30,820 40,080 40,740 50,000 Non-current liabilities: 10% debentures 19,840 19,840 Current liabilities Trade payables 32,604 37,230 Income tax 2,473 3,260 Proposed dividend 1,785 1,985 36,862 42,475 97, ,315 Changes in equity $000 $000 Balance at 1 October 33,460 40,740 Net profit for the year 9,520 11,660 Dividends (2,240) (2,400) Balance at 30 September 40,740 50,000 28