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Fundamentals Level – Skills Module
Time allowed Reading and planning: 15 minutes Writing: 3 hours
This paper is divided into two sections:
Section A – ALL 20 questions are compulsory and MUST be attempted
Section B – ALL FIVE questions are compulsory and MUST be attempted
Formulae Sheet is on page 13.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor.
Do NOT record any of your answers on the exam paper.
This question paper must not be removed from the examination hall.
Paper F
Performance
Management
Monday 1 June 2015
The Association of Chartered Certified Accountants
Section A – ALL 20 questions are compulsory and MUST be attempted
Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple choice question. Do not write out the answers to the MCQs on the lined pages of the answer booklet. Each question is worth 2 marks.
1 A division is considering investing in capital equipment costing $2·7m. The useful economic life of the equipment is expected to be 50 years, with no resale value at the end of the period. The forecast return on the initial investment is 15% per annum before depreciation. The division’s cost of capital is 7%.
What is the expected annual residual income of the initial investment? A $ B ($270,000) C $162, D $216,
2 The Fruit Company (F Co) currently grows fruit which customers pick themselves from the fields before paying. F Co is concerned that a large number of customers are eating some of the fruit whilst picking it and are therefore not paying for all of it. As a result, it has to decide whether to hire staff to pick and package the fruit instead. The following values and costs have been identified: (i) The total sales value of the fruit currently picked and paid for by customers (ii) The cost of growing the fruit (iii) The cost of hiring staff to pick and package the fruit (iv) The total sales value of the fruit if it is picked and packaged by staff instead
Which of the above are relevant to the decision? A All of the above B (ii), (iii) and (iv) only C (i), (ii) and (iv) only D (i), (iii) and (iv) only
3 Which of the following statements describes target costing?
A It calculates the expected cost of a product and then adds a margin to it to arrive at the target selling price B It allocates overhead costs to products by collecting the costs into pools and sharing them out according to each product’s usage of the cost driving activity C It identifies the market price of a product and then subtracts a desired profit margin to arrive at the target cost D It identifies different markets for a product and then sells that same product at different prices in each market
8 C Co uses material B, which has a current market price of $0·80 per kg. In a linear program, where the objective is to maximise profit, the shadow price of material B is $2 per kg. The following statements have been made: (i) Contribution will be increased by $2 for each additional kg of material B purchased at the current market price (ii) The maximum price which should be paid for an additional kg of material B is $ (iii) Contribution will be increased by $1·20 for each additional kg of material B purchased at the current market price (iv) The maximum price which should be paid for an additional kg of material B is $2·
Which of the above statements is/are correct? A (ii) only B (ii) and (iii) C (i) only D (i) and (iv)
9 X Co uses a throughput accounting system. Details of product A, per unit, are as follows:
Selling price $ Material costs $ Conversion costs $ Time on bottleneck resource 6 minutes
What is the return per hour for product A? A $ B $2, C $ D $1,
10 The following ratios have been calculated for a company:
Gross profit margin 42% Operating profit margin 28% Gearing (debt/equity) 40% Asset turnover 65%
What is the return on capital employed for the company? A 27·3% B 18·2% C 11·2% D 16·8%
11 A company manufactures three products using different amounts of the same grade of labour, which is in short supply. The following budgeted data relates to the products: Per unit: P1 P2 P $ $ $ Selling price 120 140 95 Materials ($2 per kg) (40) (32) (22) Labour ($10 per hour) (10) (20) (11) Variable overheads (20) (28) (24) Fixed overheads (6) (9) (12) –––– –––– –––– Profit per unit 44 51 26 –––– –––– ––––
What order should the products be manufactured in to ensure that profit is maximised? P1 P2 P A 2nd 1st 3rd B 2nd 3rd 1st C 1st 3rd 2nd D 1st 2nd 3rd
12 The following statements have been made about life cycle costing:
(i) It focuses on the short-term by identifying costs at the beginning of a product’s life cycle (ii) It identifies all costs which arise in relation to the product each year and then calculates the product’s profitability on an annual basis (iii) It accumulates a product’s costs over its whole life time and works out the overall profitability of a product (iv) It allocates costs to each stage of a product’s life cycle and writes them off at the end of each stage
Which of the above statements is/are correct? A (i) and (iii) B (iii) only C (i) and (iv) D (ii) only
13 A company’s sales and cost of sales figures have remained unchanged for the last two years. The following information has been noted: Year ended 31 May 2015 31 May 2014 Inventory turnover period 45 days 38 days Payables payment period 40 days 35 days Receivables payment period 60 days 68 days Current ratio 1·3 1· Quick ratio 1·1 1· The following statements have been made about the company’s performance for the most recent year: (i) Customers are taking longer to pay and this may have contributed to the decline in the company’s current ratio (ii) Inventory levels have decreased and this may have contributed to the decline in the company’s quick ratio
Which of the above statements is/are true? A (i) only B (ii) only C Both (i) and (ii) D Neither (i) nor (ii)
5 [P.T.O.
17 When activity-based costing is used for environmental accounting, which statement is correct for environment-related costs and environment-driven costs?
A Environment-related costs can be attributed to joint cost centres and environment-driven costs cannot be B Environment-driven costs can be attributed to joint cost centres and environment-related costs cannot be C Both environment-related costs and environment-driven costs can be attributed to joint cost centres D Neither environment-related costs nor environment-driven costs can be attributed to joint cost centres
18 The following statements have been made about the materials mix variance for a company manufacturing different products using the same type of material (measured in kgs): (i) The mix variance can be calculated by taking the difference between the actual quantity in the standard mix and the actual quantity in the actual mix, then multiplying it by the actual cost per kg (ii) The mix variance arises because there is a difference between what the input should have been for the output achieved and the actual output
Which of the above statements is/are correct? A Neither (i) nor (ii) B Both (i) and (ii) C (i) only D (ii) only
19 At the start of the year, a division has non-current assets of $4 million and makes no additions or disposals during the year. Depreciation is charged at a rate of 10% per annum on all non-current assets held at the end of the year. Working capital is $0·5 million at the start of the year although this is expected to increase by 20% by the end of the year. The budgeted profit of the division after depreciation is $1·2m.
What is the expected ROI of the division for the year, based on average capital employed? A 27·59% B 26·37% C 18·39% D 31·58%
20 The following statements have been made in relation to the concepts outlined in throughput accounting:
(i) Inventory levels should be kept to a minimum (ii) All machines within a factory should be 100% efficient, with no idle time
Which of the above statements is/are correct? A (i) only B (ii) only C Both (i) and (ii) D Neither (i) nor (ii)
(40 marks)
7 [P.T.O.
Section B – ALL FIVE questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
1 Beckley Hill (BH) is a private hospital carrying out two types of procedures on patients. Each type of procedure incurs the following direct costs: Procedure A B $ $ Surgical time and materials 1,200 2, Anaesthesia time and materials 800 1, BH currently calculates the overhead cost per procedure by taking the total overhead cost and simply dividing it by the number of procedures, then rounding the cost to the nearest 2 decimal places. Using this method, the total cost is $2,475·85 for Procedure A and $4,735·85 for Procedure B. Recently, another local hospital has implemented activity-based costing (ABC). This has led the finance director at BH to consider whether this alternative costing technique would bring any benefits to BH. He has obtained an analysis of BH’s total overheads for the last year and some additional data, all of which is shown below: Cost Cost driver $ Administrative costs Administrative time per procedure 1,870, Nursing costs Length of patient stay 6,215, Catering costs Number of meals 966, General facility costs Length of patient stay 8,553, ––––––––––– Total overhead costs 17,606, ––––––––––– Procedure A B No. of procedures 14,600 22, Administrative time per procedure (hours) 1 1· Length of patient stay per procedure (hours) 24 48 Average no. of meals required per patient 1 4
Required: (a) Calculate the full cost per procedure using activity-based costing. (6 marks)
(b) Making reference to your findings in part (a), advise the finance director as to whether activity-based costing should be implemented at BH. (4 marks)
(10 marks)
3 Bokco is a manufacturing company. It has a small permanent workforce but it is also reliant on temporary workers, whom it hires on three-month contracts whenever production requirements increase. All buying of materials is the responsibility of the company’s purchasing department and the company’s policy is to hold low levels of raw materials in order to minimise inventory holding costs. Bokco uses cost plus pricing to set the selling prices for its products once an initial cost card has been drawn up. Prices are then reviewed on a quarterly basis. Detailed variance reports are produced each month for sales, material costs and labour costs. Departmental managers are then paid a monthly bonus depending on the performance of their department. One month ago, Bokco began production of a new product. The standard cost card for one unit was drawn up to include a cost of $84 for labour, based on seven hours of labour at $12 per hour. Actual output of the product during the first month of production was 460 units and the actual time taken to manufacture the product totalled 1, hours at a total cost of $26,040. After being presented with some initial variance calculations, the production manager has realised that the standard time per unit of seven hours was the time taken to produce the first unit and that a learning rate of 90% should have been anticipated for the first 1,000 units of production. He has consequently been criticised by other departmental managers who have said that, ‘He has no idea of all the problems this has caused.’
Required: (a) Calculate the labour efficiency planning variance and the labour efficiency operational variance AFTER taking account of the learning effect. Note: The learning index for a 90% learning curve is –0·1520 (5 marks)
(b) Discuss the likely consequences arising from the production manager’s failure to take into account the learning effect before production commenced. (5 marks)
(10 marks)
4 ALG Co is launching a new, innovative product onto the market and is trying to decide on the right launch price for the product. The product’s expected life is three years. Given the high level of costs which have been incurred in developing the product, ALG Co wants to ensure that it sets its price at the right level and has therefore consulted a market research company to help it do this. The research, which relates to similar but not identical products launched by other companies, has revealed that at a price of $60, annual demand would be expected to be 250,000 units. However, for every $2 increase in selling price, demand would be expected to fall by 2,000 units and for every $ decrease in selling price, demand would be expected to increase by 2,000 units. A forecast of the annual production costs which would be incurred by ALG Co in relation to the new product are as follows: Annual production (units) 200,000 250,000 300,000 350, $ $ $ $ Direct material 2,400,000 3,000,000 3,600,000 4,200, Direct labour 1,200,000 1,500,000 1,800,000 2,100, Overheads 1,400,000 1,550,000 1,700,000 1,850,
Required: (a) Calculate the total variable cost per unit and total fixed overheads. (3 marks)
(b) Calculate the optimum (profit maximising) selling price for the new product AND calculate the resulting profit for the period. Note: If P = a – bx then MR = a – 2bx. (7 marks)
(c) The sales director is unconvinced that the sales price calculated in (b) above is the right one to charge on the initial launch of the product. He believes that a high price should be charged at launch so that those customers prepared to pay a higher price for the product can be ‘skimmed off’ first.
Required: Discuss the conditions which would make market skimming a more suitable pricing strategy for ALG, and recommend whether ALG should adopt this approach instead. (5 marks)
(15 marks)
11 [P.T.O.
Formulae Sheet
Learning curve
Y = axb
Demand curve
Where Y = cumulative average time per unit to produce x units a = the time taken for the first unit of output x = the cumulative number of units produced b = the index of learning (log LR/log2) LR = the learning rate as a decimal
P = a – bQ
b = change in price change in quantity a = price when Q = 0 MR = a – 2bQ
End of Question Paper
