cima | p1 - management accounting performance evaluation solved past papers

The Chartered institute of Management Accountants 2004 1

Re-issued May 2004

MANAGERIAL LEVEL

MANAGEMENT ACCOUNTING PILLAR

PAPER P1 – MANAGEMENT ACCOUNTINGPERFORMANCE EVALUATION

This is a Pilot Paper and is intended to be an indicative guide fortutors and students of the style and type of questions that are likelyto appear in future examinations. It does not seek to cover the fullrange of the syllabus learning outcomes for this subject.

Management Accounting Performance Evaluation will be a threehour paper with two compulsory sections (50 marks and 30 marksrespectively) and one section with a choice of questions for 20marks.

CONTENTS

Pilot Question Paper

Section A: Nineteen objective test questions Pages 2-12

Section B: Six short answer questions Pages 13

Section C: Two scenario questions Pages 14-16

Indicative Maths Tables and Formulae Pages 17-20

Pilot Solutions Pages 21-32 P1

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P1 PILOT PAPER 2



P

SECTION A – 50 MARKS

ANSWER ALL SUB-QUESTIONS

– Questions 1.1 to 1.10 are worth 2 marks each (20 marks in total)– Questions 1.11 to 1.19 are worth 30 marks in total

Question One

The following data are given for questions 1.1 and 1.2 below

Trafalgar Limited budgets to produce 10,000 units of product D12, each requiring 45minutes of labour. Labour is charged at £20 per hour, and variable overheads at £15per labour hour. During September 2003, 11,000 units were produced. 8,000 hours oflabour were paid at a total cost of £168,000. Variable overheads in Septemberamounted to £132,000.

1.1 What is the correct labour efficiency variance for September 2003?

A £5,000 Adverse

B £5,000 Favourable

C £5,250 Favourable

D

1

A

B

C

D

REQUIRED:

On the indicative ANSWER SHEET, enter either your answer in the space providedwhere the sub-question requires a written response, or place a circle “O” around theletter that gives the correct answer to the sub-question where a list of distractorshas been provided.

If you wish to change your mind about an answer to such a sub-question, blockout your first answer completely and then circle another letter. You will not receivemarks if more than one letter is circled.

Space has been provided on the four-page answer sheet for workings. If yourequire further space, please use the last page of your answer book and clearlyindicate which question(s) these workings refer to.

You must detach the answer sheet from the question paper and attach it to thefront cover of your answer book before you hand it to the invigilators at the end ofthe examination.

£10,000 Adverse

1 PILOT PAPER 3

.2 What is the correct variable overhead expenditure variance for September 2003?

£3,750 Favourable

£4,125 Favourable

£12,000 Adverse

£12,000 Favourable



P1 PILOT PAPER 4

Management Accounting Performance Write here your full examination number:

Evaluation Centre Code

INDICATIVE ANSWER SHEET FOR SECTION A Hall Code

SUB-QUESTIONS 1.1 TO 1.10 Desk Number

1.1 A B C D

1.2 A B C D

1.3 A B C D

1.4 A B C D

1.5 A B C D

1.6 A B C D

1.7 A B C D

1.8 A B C D

1.9 A B C D

1.10 A B C D

You must detach the answer sheet from the question paper and attach it to theinside front cover of your answer book before you hand it in to the invigilators at theend of the examination.



P1 PILOT PAPER 5

Space for workings for Section A



P1 PILOT PAPER 6




P1 PILOT PAPER 7




P1 PILOT PAPER 8

1.3 Which of the following definitions best describes “Zero-Based Budgeting”?

A A method of budgeting where an attempt is made to make the expenditure undereach cost heading as close to zero as possible.

B A method of budgeting whereby all activities are re-evaluated each time a budgetis formulated.

C A method of budgeting that recognises the difference between the behaviour offixed and variable costs with respect to changes in output and the budget isdesigned to change appropriately with such fluctuations.

D A method of budgeting where the sum of revenues and expenditures in eachbudget centre must equal zero.

1.4 Copenhagen plc is an insurance company. Recently there has been concern thattoo many quotations have been sent to clients either late or containing errors.The department concerned has responded that it is understaffed, and a highproportion of current staff has recently joined the firm. The performance of thisdepartment is to be carefully monitored.

Which ONE of the following non-financial performance indicators would NOT be anappropriate measure to monitor and improve the department’s performance?

A Percentage of quotations found to contain errors when checked.

B Percentage of quotations not issued within company policy of three working days.

C Percentage of department’s quota of staff actually employed.

D Percentage of budgeted number of quotations actually issued.

1.5 Nile Limited is preparing its sales budget for 2004. The sales manager estimatesthat sales will be 120,000 units if the Summer is rainy, and 80,000 units if theSummer is dry. The probability of a dry Summer is 0⋅4.

What is the expected value for sales volume for 2004?

A 96,000 units

B 100,000 units

C 104,000 units

D 120,000 units



P1 PILOT PAPER 9

1.6 MN plc uses a Just-in-Time (JIT) system and backflush accounting. It does notuse a raw material stock control account. During April, 1,000 units were producedand sold. The standard cost per unit is £100: this includes materials of £45.During April, conversion costs of £60,000 were incurred.

What was the debit balance on the cost of goods sold account for April?

A £90,000

B £95,000

C £105,000

D £110,000

1.7 Division A transfers 100,000 units of a component to Division B each year.

The market price of the component is £25 per unit.

Division A's variable cost is £15 per unit.

Division A's fixed costs are £500,000 each year.

What price per unit would be credited to Division A for each component that it transfersto Division B under marginal cost pricing and under two-part tariff pricing (where theDivisions have agreed that the fixed fee will be £200,000)?

Marginal cost pricing Two-part tariff pricing

A £15 £15

B £25 £15

C £15 £17

D £25 £17

1.8 Which of the following statements are true?

(i) A flexible budget can be used to control operational efficiency.

(ii) Incremental budgeting can be defined as a system of budgetary planningand control that measures the additional costs that are incurred when thereare unplanned extra units of activity.

(iii) Rolling budgets review and, if necessary, revise the budget for the nextquarter to ensure that budgets remain relevant for the remainder of theaccounting period.

A (i) and (ii) only

B (ii) and (iii) only

C (iii) only

D (i) only



P1 PILOT PAPER 10

1.9 Green division is one of many divisions in Colour plc. At its year-end, the fixedassets invested in Green were £30 million, and the net current assets were£5 million. Included in this total was a new item of plant that was delivered threedays before the year end. This item cost £4 million and had been paid for byColour, which had increased the amount of long term debt owed by Green by thisamount.

The profit earned in the year by Green was £6 million before the deduction of£1⋅4 million of interest payable to Colour.

What is the most appropriate measure of ROI for the Green division?

A 13⋅1%

B 14⋅8%

C 17⋅1%

D 19⋅4%

1.10 Division G has reported annual operating profits of £20⋅2 million. This was aftercharging £3 million for the full cost of launching a new product that is expected tolast three years. Division G has a risk adjusted cost of capital of 11% and ispaying interest on a substantial bank loan at 8%. The historical cost of the assetsin Division G, as shown on its balance sheet, is £60 million, and the replacementcost has been estimated at £84 million.

Ignore the effects of taxation.

What would be the EVA for Division G?

A £15⋅40 million

B £15⋅48 million

C £16⋅60 million

D £12⋅96 million

(Total for sub-questions 1.1 –1.10 = 20 marks)



P1 PILOT PAPER 11

1.11 The overhead costs of RP Limited have been found to be accurately representedby the formula

y = £10,000 + £0·25x

where y is the monthly cost and x represents the activity level measured as thenumber of orders.

Monthly activity levels of orders may be estimated using a combined regressionanalysis and time series model:

a = 100,000 + 30b

where a represents the de-seasonalised monthly activity level and b representsthe month number.

In month 240, the seasonal index value is 108.

Required:

Calculate the overhead cost for RP Limited for month 240 to the nearest £1,000.(3 marks)

1.12 The following data have been extracted from the budget working papers ofWR Limited:

Activity Overhead cost(machine hours) £

10,000 13,46812,000 14,16216,000 15,54918,000 16,242

In November 2003, the actual activity was 13,780 machine hours and the actualoverhead cost incurred was £14,521.

Required:

Calculate the total overhead expenditure variance for November 2003.(4 marks)

REQUIRED:

Each of the sub-questions numbered 1.11 to 1.19 below require a brief writtenresponse.

This response should be in note form and should not exceed 50 words.

Write your answers to these sub-questions in your answer book.



P1 PILOT PAPER 12

The following data are given for questions 1.13 and 1.14 belowDRP Limited has recently introduced an Activity Based Costing system. It manufacturesthree products, details of which are set out below:

Product D Product R Product PBudgeted annual production (units) 100,000 100,000 50,000Batch size (units) 100 50 25Machine set-ups per batch 3 4 6Purchase orders per batch 2 1 1Processing time per unit (minutes) 2 3 3

Three cost pools have been identified. Their budgeted costs for the year ending31 December 2004 are as follows:

Machine set-up costs £150,000

Purchasing of materials £70,000Processing £80,000

1.13 Calculate the annual budgeted number of:

(a) batches

(b) machine set-ups

(c) purchase orders

(d) processing minutes(2 marks)

1.14 Calculate the budgeted overhead unit cost for Product R for inclusion in thebudget for 2004.

(4 marks)

The following data are given for questions 1.15 and 1.16 belowSW plc manufactures a product known as the TRD100 by mixing two materials. Thestandard material cost per unit of the TRD100 is as follows:

£Material X 12 litres

@£2·50 30

Material Y 18 litres@

£3·00 54

In October 2003, the actual mix used was 984 litres of X and 1,230 litres of Y. Theactual output was 72 units of TRD100.

1.15 Calculate the total material mix variance for October 2003.(3 marks)



P1 PILOT PAPER 13

1.16 Calculate the total material yield variance for October 2003.(2 marks)

The following data are given for questions 1.17 and 1.18

A company produces three products using three different machines. No other productsare made on these particular machines. The following data is available for December2003.

Product A B CContribution per unit £36 £28 £18Machine hours required per unit

Machine 1 5 2 1.5Machine 2 5 5.5 1⋅5Machine 3 2.5 1 0⋅5

Estimated sales demand (units) 50 50 60

Maximum machine capacity in December will be 400 hours per machine.

1.17(a) Calculate the machine utilisation rates for each machine for December

2003.(2 marks)

(b) Identify which of the machines is the bottleneck machine.(2 marks)

1.18(a) State the recommended procedure given by Goldratt in his “Theory of

Constraints” for dealing with a bottleneck activity.(2 marks)

(b) Calculate the optimum allocation of the bottleneck machine hours to thethree products.

(3 marks)

1.19 Explain three circumstances where the First in, First out (FIFO) valuation methodof process costing will give very similar results to the Weighted Average valuationmethod.

(3 marks)

(Total for sub-questions 1.11 – 1.19 = 30 marks)

(Total for Section A = 50 marks)



P1 PILOT PAPER 14

End of Section A



P1 PILOT PAPER 15

SECTION B – 30 MARKS

ANSWER ALL PARTS OF THIS QUESTION – ALL PARTS CARRY EQUALMARKS

Question Two

(a) Briefly outline the main features of “feedback control”, and the “feedback loop”and explain how, in practice, the procedures of feedback control can betransformed into “feed-forward control”.

(b) Give FOUR reasons why the adoption of Total Quality Management (TQM) isparticularly important within a Just-in-Time (JIT) production environment.

(c) Briefly outline the advantages and disadvantages of allowing profit centremanagers to participate actively in the setting of the budget for their units.

(d) Explain and discuss the similarities and differences between Residual Incomeand Economic Value Added as methods for assessing the performance ofdivisions.

(e) Define the “controllability principle” and give arguments for and against itsimplementation in determining performance measures.

(f) Discuss the problems that arise specifically when determining transfer priceswhere divisions are located in different countries.

(Total = 30 marks)

End of Section B



P1 PILOT PAPER 16

SECTION C – ANSWER ONE QUESTION ONLY

BOTH QUESTIONS CARRY 20 MARKS

Question Three

Marshall Limited operates a business that sells advanced photocopying machines andoffers on-site servicing. There is a separate department that provides servicing. Thestandard cost for one service is shown below along with the operating statements forthe Service Department for the six months to 30 September 2003. Each service is verysimilar and involves the replacement of two sets of materials and parts.

Marshall Limited’s budgets for 5,000 services per month.

Standard cost for one service£

Materials – 2 sets @ £20 per set 40Labour – 3 hours @ £11 per hour 33Variable overheads – 3 hours @ £5 per hour 15Fixed overheads – 3 hours @ £8 per hour 24Total standard cost 112

Operating Statements for six months ending 30 September 2003

Months 1 2 3 4 5 6 Total

Number ofservices permonth

5,000 5,200 5,400 4,800 4,700 4,500 29,600

£ £ £ £ £ £ £

Flexible budgetcosts

560,000 582,400 604,800 537,600 526,400 504,000 3,315,200

Less: Variances:

Materials

Price 5,150F 3,090F 1,100F -2,040A -5,700A -2,700A -1,100A

Usage -6,000A 2,000F -4,000A -12,000A -2,000A 0 -22,000A

Labour

Rate 26,100F 25,725F 27,331F 18,600F 17,400F 15,515F 130,671F

Efficiency 5,500F 9,900F 12,100F -12,100A -4,400A -11,000A 0

Variable overheads:

Spending -3,500A -3,500A -2,500A -4,500A 500F 2,500F -11,000A

Efficiency 2,500F 4,500F 5,500F -5,500A -2,000A -5,000A 0

Fixed overheads:

Expenditure -3,000A -5,000A -5,000A -15,000A 5,000F 5,000F -18,000A

Volume 0 4,800F 9,600F - 4,800A -7,200A -12,000A -9,600A

Actual costs 533,250 540,885 560,669 574,940 524,800 511,685 3,246,229

Note: “A” = adverse variance; “F” = favourable variance



P1 PILOT PAPER 17

Required:

(a) Prepare a summary financial statement showing the overall performance of theService Department for the six months to 30 September 2003.

(4 marks)

(b) Write a report to the Operations Director of Marshall Limited commenting on theperformance of the Service Department for the six months to 30 September 2003.

Suggest possible causes for the features you have included in your report andstate the further information that would be helpful in assessing the performance ofthe department.

(16 marks)

(Total = 20 marks)



P1 PILOT PAPER 18

Question Four

PQR plc is a chemical processing company. The company produces a range ofsolvents by passing materials through a series of processes. The company uses theFirst In First Out (FIFO) valuation method.

In Process 2, the output from Process 1 (XP1) is blended with two other materials (P2Aand P2B) to form XP2. It is expected that 10% of any new input to Process 2 (that is,transfers from Process 1 plus Process 2 materials added) will be immediately lost andthat this loss will have no resale value. It is also expected that in addition to the loss,5% of any new input will form a by-product, Z, which can be sold without additionalprocessing for £2·00 per litre.

Data from Process 2 for November 2003 was as follows:

Opening work in processProcess 2 had 1,200 litres of opening work in process. The value and degree ofcompletion of this was as follows:

£ % degree of completion

XP1 1,560 100P2A 1,540 100P2B 750 100Conversion costs 3,790 40

7,640

InputDuring November, the inputs to Process 2 were:

£XP1 5,000 litres 15,679P2A 1,200 litres 6,000P2B 3,000 litres 4,500Conversion costs 22,800

Closing work in processAt the end of November, the work in process was 1,450 litres. This was fully completein respect of all materials, but only 30% complete for conversion costs.

OutputThe output from Process 2 during November was:

Z 460 litresXP2 7,850 litres

Required:

Prepare the Process 2 account for November 2003.(17 marks)

Note: 3 marks will be awarded for presentation.(Total = 20 marks)

End of question paperMaths Tables and Formulae follow on pages 17-20



P1 PILOT PAPER 19

INDICATIVE MATHS TABLES AND FORMULAE



P1 PILOT PAPER 20



P1 PILOT PAPER 21

Formulae

PROBABILITY

A ∪B = A or B. A ∩ B = A and B (overlap).

P(B A) = probability of B, given A.

Rules of AdditionIf A and B are mutually exclusive: P(A ∪B) = P(A) + P(B)If A and B are not mutually exclusive: P(A ∪B) = P(A) + P(B) – P(A ∩ B)

Rules of MultiplicationIf A and B are independent: P(A ∩B) = P(A) * P(B)If A and B are not independent: P(A ∩B) = P(A) * P(B A)

E(X) = ∑ (probability * payoff)

Quadratic EquationsIf aX2 + bX + c = 0 is the general quadratic equation, the two solutions (roots) are givenby:

a

acbbX

2

42 −±−=

DESCRIPTIVE STATISTICSArithmetic Mean

n

xx

∑=

f

fxx

∑∑

= (frequency distribution)

Standard Deviation

n

xxSD

2)( −∑= 2

2

xf

fxSD −

∑∑


INDEX NUMBERSPrice relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

Price: 100 x

1

w

P

pw

o

∑

∗∑

Quantity: 100 x

1

w

Q

Qw

o

∑

∗∑

TIME SERIESAdditive Model

Series = Trend + Seasonal + Random

Multiplicative ModelSeries = Trend * Seasonal * Random



P1 PILOT PAPER 22

LINEAR REGRESSION AND CORRELATIONThe linear regression equation of y on x is given by:

Y = a + bX or Y - Y = b(X – X)

where

b = 22 )(

))((

)( Variance

)( Covariance

xxn

yxXYn

X

XY

∑−∑

∑∑−∑=

and a = Y – bX

or solve∑ Y = na + b ∑ x

∑ XY = a ∑ x + b∑ x2

Coefficient of correlation

})(}{)({

))((

)().(

)( Covariance2222 yynxxn

YXXYn

YVarXVar

XYr

∑−∑∑−∑

∑∑−∑==

R(rank) = 1 - )1(

62

2

−

∑

nn

d

FINANCIAL MATHEMATICS

Compound Interest (Values and Sums)Future Value of S, of a sum of X, invested for n periods, compounded at r% interest

S = X[1 + r]n

AnnuityPresent value of an annuity of £1 per annum receivable or payable for n years,commencing in one year, discounted at r% per annum:

PV =

+−

nrr ]1[

11

1

PerpetuityPresent value of £1 per annum, payable or receivable in perpetuity, commencing in oneyear, discounted at r% per annum:

PV = r

1



P1 PILOT PAPER 23

SOLUTIONS TO PILOT PAPER

Note:In some cases, these solutions are more substantial and wide ranging thanwould be expected of candidates under exam conditions. They providebackground on theorists, frameworks and approaches to guide studentsand lecturers in their studies, preparation and revision.

SECTION A

Question One

1.1 [(11,000 x 0⋅75) - 8,000] x £20 = £5,000 Favourable

Therefore the answer is B

1.2 [8,000 x £15] - £132,000 = £12,000 Adverse

Therefore the answer is C

1.3 The answer is B

1.4 The answer is D

1.5 104,000 units = [80,000 x 0⋅4] + [120,000 x 0⋅6]


1.6

£Cost of goods sold 100,000Less material cost £45 x 1,000 45,000Conversion cost allocated 55,000Conversion cost incurred 60,000Excess charged to cost of goods sold account 5,000

Total debit on cost of goods sold account £100,000 + £5,000 = 105,000




P1 PILOT PAPER 24

1.7 Marginal cost will be same as Variable cost, that is £15

The two-part tariff transfer price per unit is the marginal cost £15. This is becausethe £200,000 will be transferred as a total fixed fee and not, therefore, as part ofthe unit transfer price.

Therefore the answer is A

1.8 The answer is D

1.9 The most appropriate measure of ROI will include only assets available to earnprofit during the year and will not include interest payable.

Thus ROI will be £6 million/(£35 million - £4 million) = 19⋅4%

Therefore the answer is D

1.10 Adjustment needed for launch costs – spread over 3 years, and need to usereplacement cost of net assets so EVA = (£20⋅2 million + £2million) – (£84 millionx 11%) = £12⋅96 million.

Therefore the answer is D

1.11 Orders = [100,000 + (30 x 240)] x 1·08 = 115,776

Overhead cost = £10,000 + (£0·25 x 115,776) = £38,944

Answer is £39,000

1.12 Use high/low method to separate fixed and variable budgeted overhead cost:

Hours £High 18,000 16,242Low 10,000 13,468Difference 8,000 2,774

Variable cost per machine hour

= 34675£08,000£2,774 ⋅=

By substitution fixed cost= £13,468 - (10,000 x £0·34675) = £10,000

Budget cost allowance £= £10,000 + (13,780 x £0·34675) = 14,778Actual cost = 14,521

257 (F)



P1 PILOT PAPER 25



P1 PILOT PAPER 26

1.13

Budgeted number of batches:Product D (100,000/100) = 1,000Product R (100,000/50) = 2,000Product P (50,000/25) = 2,000

5,000

Budgeted machine set-ups:Product D (1,000 x 3) = 3,000Product R (2,000 x 4) = 8,000Product P (2,000 x 6) = 12,000

23,000

Budgeted number of purchase orders:Product D (1,000 x 2) = 2,000Product R (2,000 x 1) = 2,000Product P (2,000 x 1) = 2,000

Budgeted processing minutes:Product D (100,000 x 2)Product R (100,000 x 3)Product P (50,000 x 3)

===

6,000

200,000300,000150,000

650,000 minutes

1.14 Budgeted cost/set-up:

= 52£623,000

£150,000 ⋅= Budgeted unit cost of R: = 52£050

4 x 52£6 ⋅=⋅

Budgeted cost/purchase orders

= 6711£000,6

000,70£ ⋅= Budgeted unit cost of R: = 23£050

1 x 67£11 ⋅=⋅

Budgeted processing cost per minute:

= 21£0650,000£80,000 ⋅= Budgeted unit cost of R= £0.12 x 3 = £0.36

Total budgeted unit cost of R is:

£Set-up costs = 0⋅52Purchasing costs = 0⋅23Processing costs = 0⋅36Total cost = 1.11 per unit



P1 PILOT PAPER 27

1.15

Actual mix Standardmix

Difference Price Variance

litres litres litres £ £X 984 885⋅6 98⋅4 (A) 2⋅50 246⋅0 (A)Y 1,230 1,328⋅4 98⋅4 (F) 3⋅00 295⋅2 (F)Totals 2,214 2,214⋅0 nil 49⋅2 (F)

1.16

Expected output = 30214,2 = 73⋅8 units

Actual output = 72⋅0 unitsShortfall = 1⋅8 units1⋅8 units x £84/unit = £151⋅2 (A)

An alternative would be only 73 complete units of output were expected, thus theshortfall would be 1 unit. The variance would be 1⋅0 x £84 per unit = £84 adverse.

1.17(a) Machine utilisation rates

ProductRequired machine hours A B C TotalMachine 1 250 100 90 440

Machine 2 250 275 90 615

Machine 3 125 50 30 205

Utilisation rates:

Machine 1 (440/400) = 110%Machine 2 (615/400) = 154%Machine 3 (205/400) = 51%

(b) Machine 2 is the bottleneck – it has the highest utilisation and this is greaterthan 100%.



P1 PILOT PAPER 28

1.18(a) The Goldratt procedure is:

• Identify the system’s bottleneck• Decide how to exploit or relieve the bottleneck• Sub-ordinate everything else to relieving the bottleneck• Elevate the system’s bottlenecks• When one bottleneck is no longer a constraint, start procedure again (there

will always be a new bottleneck).

(b) Optimal allocation would be on the basis of contribution from the bottleneckresource.

Ranking of contribution per product from machine 2 is:

Product A B CContribution per unit £36 £28 £18Machine 2 hours 5 5.5 1⋅5Contribution per machine hour £7⋅20 £5⋅09 £12⋅00Ranking 2 3 1

Thus allocation on this ranking

Product C 60 units Using 90 hoursProduct B 50 units Using 250 hours

This uses 340 hours, leaving an available balance of 60 hours.This will make 60/5.5 = 10.9 units of Product B or 10 whole units.

1.19 FIFO and weighted average methods give very similar results under variouscircumstances including the following:

• Where the conversion percentage is virtually constant between accountingperiods.

• Where the conversion costs in work-in-process at the end of the month arevery small in relation to the total conversion costs during the month. This islikely to occur where the process time is short and the process is repeatedmany times in the month.

• In general, where unit cost fluctuations are minimal between the months.

End of Section A



P1 PILOT PAPER 29

SECTION B

Answer to Question Two

Requirement (a)

The classic control loop, shown above for a budgeting context, controls by setting an exante target (budget), measuring ex post performance (activity), making a comparison,seeking explanation for any significant variation and then taking one or both of twopossible actions. Either action is taken to ensure that activity in future periods is in linewith target, or in exceptional circumstances, the target is changed to conform withchanges that have occurred since the target was set.

A major criticism of this approach is that it is reactive and backward looking. In otherwords, action is triggered by a report of variations from the set target or budget. Onecounter to this argument is the notion of “feed-forward” control. The same procedurestake place as in feedback control outlined above. However, it is argued that the fact thata comparison and explanation will take place in the future affects behaviour and thusmanagers act to ensure that when the comparison takes place, the actual performancewill be in line with the set target. This results in control being forward looking andproactive.

Requirement (b)

The aim of TQM (Total Quality Management) is that all goods and services producedcan be relied upon to meet their specifications at all times. These specifications willinclude technical features and timing. The importance of TQM in a JIT environmentincludes the following:

• JIT requires very precise planning that is only possible when goods can berelied upon.

• JIT requires very low, or no, stocks to be held; thus there must be totalreliability that goods will perform to specification, as there will be noalternative stock if goods or services fail.

BUDGET

ACTIVITY

BUDGET REVISION

EXPLAN-ATION

EITHER/OR

CORRECTIVE ACTION

COMPARISON



P1 PILOT PAPER 30

• Where JIT is operated with a Kanban system for stock replacement, thestock re-order point is decided on the basis that all stock is usable and thatreplacement stock will be delivered in the specified and very short timeperiod.

• The consequences of poor quality are magnified in a JIT system and couldcause considerable hold-ups in a process.

Requirement (c)

Some of the main advantages of participation in the setting of budgets include:

• Acceptance and commitment – where managers have taken part in thesetting of the budget they are more likely to accept the resulting targets asrelevant;

• Us v Them attitudes can be reduced when targets and budgets are set withparticipation, not simply imposed. If managers are involved in the budgetsetting process more knowledge is made available since the managershave considerable detailed knowledge of day to day operations;

• Better communication is achieved through participation, in particularcommunication is both upwards and downwards within the organisation;

• It is also generally accepted from research findings that participation willlead to:

• increased job satisfaction;

• decreased job-related tension;

• improved job attitudes.

However, there are potential disadvantages to participation, including:

• Under some circumstances, participation may lead to setting less difficulttargets – the creation of “budget slack”;

• Some personality types have been shown to react much better to animposed budget, for example, “externals under a locus of control”personality indicator;

• Increased need for training for non-financial managers – though this couldalso be argued as an advantage;

• The whole process may be more time-consuming.

Requirement (d)

There are significant similarities between Residual Income (RI) and EconomicValue Added (EVA). In both, the basic measure is the profit for the division lessan interest charge based on the net assets that have been invested in thedivision. This results in an absolute value, whereas Return on Investment yields apercentage or relative measure. There are considerable theoretical advantagesfor the absolute measure.



P1 PILOT PAPER 31

The major differences between the two are that EVA has a number ofcomplications or developments from the simple RI. RI was developed in the earlyyears of the last century, whereas EVA became popular in the early 1990s.

EVA adjusts the operating profit to bring “accounting profit” in line with a measureof “economic profit”. Thus, major long-term expenditure, such as R&D ormarketing costs for a new product, can be capitalised over the expected usefullife of the expenditure. More complex forms of depreciation are used, andtaxation is treated in a more complex manner.

EVA also calculates the interest charge in a more complex manner than wastraditionally the case for RI.

Requirement (e)

Controllability is defined by Horngren, Bhimani et al as “the degree of influencethat a specific manager has over costs, revenues or other items in question”.Controllability refers to a specific manager – a superior may be able to control acost, and for a period of time – all costs are controllable in the long run. Thecontrollability principle is that managers should only be held responsible for coststhat they have direct control over. So, for example, a divisional manager wouldnot be held responsible for the allocation of central costs to her department if shehas no control over the incurrence or magnitude of these costs. Under thisprinciple, it would be held that dysfunctional consequences would arise ifmanagers were held accountable for costs over which they have no control.

An alternative view argues that there are considerable advantages to be gainedin holding managers responsible for costs even when they do not have any directcontrol over them. For example, it stops managers treating some costs as “freegoods” and thus stops them over-using these goods and services. Further,holding managers responsible for items outside their control may encourage themto become more involved with such issues and, as a result, the total cost may bereduced or the goods or services may be provided more efficiently.

There is no clear evidence as to which of these views will produce the bestperformance from a division or a division manager.

Requirement (f)

The basic analysis of transfer pricing assumes that one of the key objectives insetting such prices is that relevant divisions can be evaluated effectively, that is,that the transfer price will not distort the divisional performance evaluation. Inpractice, however, the existence of divisions in different countries, and particularlydifferent systems of taxation, can add another objective. It may be valuable to thecompany to set transfer prices to minimise overall group tax liabilities andmaximise overall group profits.

For example, profits could be reduced in a country with high taxation andincreased in a country with low taxation, thus reducing the overall tax liability andincreasing overall profits. If customs duties were based on the value of the goods,there would be an incentive to transfer the goods at a low transfer price tominimise customs duties. Some countries levy “withholding taxes” on dividendspaid outside the country. Here it would be possible to set transfer prices for goodsin or out of the country in such a manner that minimise the profits, and thus thedividends.



P1 PILOT PAPER 32

Most countries have tax legislation that limits the extent to which these practicescan be used, but there is still considerable scope for using transfer prices toinfluence the incidence of profit and, through differing tax regimes, the overallamount of group profit. Where this occurs, the effectiveness of measuringdivisional performance may have been substantially reduced.



P1 PILOT PAPER 33

SECTION C

Answer to Question Three

Summary Statement for six months to 30 September 2003

Cumulativeactual to

date

Cumulativebudget to

date

Totalvariance

Price/spendingvariance

Efficiency/volumevariance

£ £ £ £ £Production 29,600 30,000 400

Costs £ £ £ £ £Materials 1,207,100 1,184,000 (23,100) (1,100) (22,000)Labour 846,129 976,800 130,671 130,671 0Variableoverheads

455,000 444,000 (11,000) (11,000) 0

Fixed overheads 738,000 710,400 (27,600) (18,000) (9,600)

Total costs 3,246,229 3,315,200 68,971 100,571 (31,600)

() = Adverse variance

Note: Alternative statements that summarise the performance of the ServiceDepartment would be acceptable.

Requirement (b)

Report to the Operations Director of Marshall Limited

Re: Performance of the Service Department for six months to 30 September 2003

A summary performance statement is attached to this report. The main features are setout below, along with issues that require further explanation or information.

• There has been a rise, then fall in volumes. Is this seasonal variation, such asfewer services required during the summer, or the result of other factors, such asaction from competitors in months 4 to 6. If the trend in the last three monthscontinues, this could be a serious problem that needs to be addressed promptly.

• A favourable material usage variance, as occurred in month 2 must mean thatsome parts were not replaced during the service. Is this acceptable? Thereseems to be a general inefficiency in material usage. Is this caused by a lack ofcare by service engineers, or by poor quality sets? The price variance – seebelow – does not indicate cheap parts are being purchased.

• Material prices are on a general upward path. Is there a general drift in materialprices; is there a material shortage? Are there other suppliers offering a betterprice?

• Labour price is massively out of line with budget yielding large favourablevariances. Is this caused by a mistake in the budget or an unexpected change inthe price, for example, using different grades/mix of labour. This variance is morethan 13% of budgeted cost and thus must be investigated quickly and thoroughly.



P1 PILOT PAPER 34

• Labour efficiency gets seriously worse after month 4. Has something unusualhappened to labour during this month, perhaps a dispute? Is this significantlyworse labour efficiency linked to the fall in output over the same months?

• Month 4 is significantly out of line with other months. What happened? Wasproduction disrupted; was there a labour dispute or supplier problems or didanother factor affect the result? It is important to find satisfactory explanations forthe results in this month and attempt to ensure this performance is not repeated.

• Only total variable overhead variance has meaning and reveals a worseningposition after the disaster in month 4, giving further evidence for some unusualcircumstances.

• Fixed overhead spending seems to come under control from month 5, but whatcaused the problems in the early months? Has management acted to remedymatters?

• The fixed overhead volume variance is purely technical and representsdifferences between planned and actual production.

• Overall costs are 2% below budget, but this apparently satisfactory positionmasks considerable variation. Nevertheless, the general performance of theService Department has been close to budget.

Answer to Question Four

Process 2 Accountlitres £ litres £

Opening work inprocess 1,200 7,640

Normal waste 920 nil

XP1 5,000 15,679 By-product Z 460 920P2A 1,200 6,000 XP2 7,850 51,450P2B 3,000 4,500

Conversion cost 22,800

Abnormal gain 280 1,753Closing work inprocess 1,450 6,002

10,680 58,372 10,680 58,372



P1 PILOT PAPER 35

Solution workings:

Equivalent Units Table Process 1 andmaterials added

Conversion

Output:Started & finished this period 6,650 6,650Completion of opening work in process nil 720Abnormal gain (280) (280)Closing work in process 1,450 435

7,820 7,525

£ £Period costs 26,179 22,800

(920)25,259 22,800

By-product value

Cost per equivalent unit £3⋅23 £3⋅03

Requirement (b)

Valuation Statement

Finished output: £Started and finished 6,650 litres x (£3⋅23 + £3⋅03) = 41,629

Opening work in process:cost brought forward = 7,640cost of completion 720 litres x £3⋅03 = 2,181

51,450

Abnormal gain280 litres x (£3⋅23 + £3⋅03) = £1,753

Closing work in process:1,450 litres x £3⋅23 = £4,684 435 litres x £3⋅03 = £1,318

£6,002



P1 PILOT PAPER 36



P1 PILOT PAPER 37



P1 PILOT PAPER 38



P1 PILOT PAPER 39



The Chartered Institute of Management Accountants 2005

Management Accounting Pillar

Managerial Level Paper

P1 – Management Accounting – Performance Evaluation

24 May 2005 – Tuesday Morning Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are allowed 20 minutes reading time before the examination begins during which you should read the question paper, and if you wish, make annotations on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time.

You are strongly advised to carefully read the question requirement before attempting the question concerned. The requirements for the questions in Section C are contained in a dotted box.

Answer the ONE compulsory question in Section A. This is comprised of 19 sub-questions and is on pages 2 to 9.

Answer all SIX compulsory sub-questions in Section B on pages 10 and 11.

Answer ONE of the two questions in Section C on pages 12 to 15.

Maths Tables and Formulae are provided on pages 17 to 21. These pages are detachable for ease of reference.

Write your full examination number, paper number and the examination subject title in the spaces provided on the front of the examination answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close.

Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered.

P1 –

Per

form

ance

Eva

luat

ion

TURN OVER



P1 2 May 2005

SECTION A – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER ALL NINETEEN SUB-QUESTIONS

Question One

The following data are given for sub-questions 1.1 and 1.2 below.

Summary financial statements are given below for one division of a large divisionalised company.

Summary Divisional Financial Statements for the year to 31 December

Balance sheet Income statement £000 £000Non-current assets 1,500 Revenue 4,000Current assets 600 Operating costs 3,600Total assets 2,100 Operating profit 400 Interest paid 70Divisional equity 1,000 Profit before tax 330Long-term borrowings 700 Current liabilities 400 Total equity and liabilIties 2,100 The cost of capital for the division is estimated at 12% each year. Annual rate of interest on the long term loans is 10%. All decisions concerning the division’s capital structure are taken by central management. 1.1 The divisional Return on Investment (ROI) for the year ended 31 December is A 19·0% B 19·4%

C 23·5%

D 33·0%

(2 marks)

Sub-question 1.2 is on the opposite page

Instructions for answering Section A: The answers to the nineteen sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering. For sub-questions 1.11 to 1.18 you should show your workings as marks are available for the method you use to answer these sub-questions.



May 2005 3 P1

1.2 The divisional Residual Income (RI) for the year ended 31 December is A £160,000 B £196,000 C £230,000 D £330,000

(2 marks)

The following data are given for sub-questions 1.3 and 1.4 below

X40 is one of many items produced by the manufacturing division. Its standard cost is based on estimated production of 10,000 units per month. The standard cost schedule for one unit of X40 shows that 2 hours of direct labour are required at £15 per labour hour. The variable overhead rate is £6 per direct labour hour. During April, 11,000 units were produced; 24,000 direct labour hours were worked and charged; £336,000 was spent on direct labour; and £180,000 was spent on variable overheads.

1.3 The direct labour rate variance for April is A £20,000 Favourable B £22,000 Favourable C £24,000 Adverse D £24,000 Favourable

(2 marks)

1.4 The variable overhead efficiency variance for April is A £12,000 Adverse B £12,000 Favourable C £15,000 Adverse D £15,000 Favourable

(2 marks)

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P1 4 May 2005

1.5 The fixed overhead volume variance is defined as A the difference between the budgeted value of the fixed overheads and the standard fixed

overheads absorbed by actual production. B the difference between the standard fixed overhead cost specified for the production

achieved, and the actual fixed overhead cost incurred. C the difference between budgeted and actual fixed overhead expenditure. D the difference between the standard fixed overhead cost specified in the original budget

and the same volume of fixed overheads, but at the actual prices incurred. (2 marks)

1.6 Summary results for Y Limited for March are shown below.

£000 Units Sales revenue 820 Variable production costs 300 Variable selling costs 105 Fixed production costs 180 Fixed selling costs 110 Production in March 1,000 Opening inventory 0 Closing inventory 150

Using marginal costing, the profit for March was A £170,000

B £185,750

C £197,000

D £229,250

(2 marks) 1.7 The CIMA definition of zero-based budgeting is set out below, with two blank sections. “Zero-based budgeting: A method of budgeting which requires each cost element

___________, as though the activities to which the budget relates _______________.” Which combination of two phrases correctly completes the definition? Blank 1

Blank 2

A to be specifically justified could be out-sourced to an external supplier

B to be set at zero could be out-sourced to an external supplier

C to be specifically justified were being undertaken for the first time

D to be set at zero were being undertaken for the first time

(2 marks)



May 2005 5 P1

1.8 Definition A: “A technique where the primary goal is to maximise throughput while

simultaneously maintaining or decreasing inventory and operating costs.”

Definition B: “A system whose objective is to produce or procure products or components as they are required by a customer or for use, rather than for inventory.”

Which of the following pairs of terms correctly matches the definitions A and B above? Definition A

Definition B

A Manufacturing resource planning Just-in-time

B Enterprise resource planning Material requirements planning

C Optimised production technology Enterprise resource planning

D Optimised production technology Just-in-time

(2 marks)

1.9 Division P produces plastic mouldings, all of which are used as components by Division

Q. The cost schedule for one type of moulding – item 103 – is shown below.

Direct material cost per unit £3·00 Direct labour cost per unit £4·00 Variable overhead cost per unit £2·00 Fixed production overhead costs each year £120,000 Annual demand from Division Q is expected to be 20,000 units

Two methods of transfer pricing are being considered:

(i) Full production cost plus 40% (ii) A two-part tariff with a fixed fee of £200,000 each year

The transfer price per unit of item 103 transferred to Division Q using both of the transfer pricing methods listed above is (i) Full production cost plus 40% (ii) Two-part tariff

A

£21·00 £9

B

£21·00 £15

C

£15·00 £19

D

£12·60 £9

(2 marks)

Section A continues on the next page

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P1 6 May 2005

1.10 Which of the following statements is/are true?

(i) Computer-integrated manufacturing (CIM) brings together advanced manufacturing technology and modern quality control into a single computerised coherent system.

(ii) Flexible manufacturing systems (FMS) are simple systems with low levels of automation

that offer great flexibility through a skilled workforce working in teams. (iii) Electronic data interchange (EDI) is primarily designed to allow the operating units in an

organisation to communicate immediately and automatically with the sales and purchasing functions within the organisation.

A (i) only

B (i) and (ii) only

C (i) and (iii) only

D (ii) and (iii) only

(2 marks)

1.11 D Limited manufactures and sells musical instruments, and uses a standard cost system.

The budget for production and sale of one particular drum for April was 600 units at a selling price of £72 each. When the sales director reviewed the results for April in the light of the market conditions that had been experienced during the month, she believed that D Limited should have sold 600 units of this drum at a price of £82 each. The actual sales achieved were 600 units at £86 per unit.

Calculate the following variances for this particular drum for April:

(a) Selling price planning variance (b) Selling price operating variance

(4 marks)

1.12 A plastics company operates a process in which all materials are added at the beginning

of the process. At the beginning of March, the work-in-process in a plastic moulding machine was 200 units, which were 25% complete with respect to conversion costs. During March, 1,400 units were completed and transferred to the next process. Also during March, 50 units were scrapped due to an operator error at the end of the process, although it is unusual for this to occur. At the end of March, there were 200 units in process, which were 50% complete with respect to conversion costs.

Using the First-in-First-out (FIFO) method, calculate the equivalent units of production for the month of March that would be used in the computation of the cost per equivalent unit for

(a) Material costs (b) Conversion costs

(4 marks)



May 2005 7 P1

1.13 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 36·003·5 litres of E at $5 per litre 17·502·5 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 $9·00 per litre 38,7003,600 litres of E at $5·50 per litre 19,8002,100 litres of F at $2·20 per litre 4,620

63,120 Actual output for this period was 9,100 litres.

You are required to calculate

(a) the total materials mix variance (b) the total materials yield variance

(4 marks)


TURN OVER



P1 8 May 2005

The following data are given for sub-questions 1.14 to 1.16 below SM makes two products, Z1 and Z2. Its machines can only work on one product at a time. The two products are worked on in two departments by differing grades of labour. The labour requirements for the two products are as follow:

Minutes per unit of product Z1 Z2 Department 1 12 16 Department 2 20 15

There is currently a shortage of labour and the maximum times available each day in Departments 1 and 2 are 480 minutes and 840 minutes, respectively. The current selling prices and costs for the two products are shown below:

Z1 Z2 £ per unit £ per unit Selling price 50·00 65·00 Direct materials 10·00 15·00 Direct labour 10·40 6·20 Variable overheads 6·40 9·20 Fixed overheads 12·80 18·40 Profit per unit 10·40 16·20

As part of the budget-setting process, SM needs to know the optimum output levels. All output is sold. 1.14 Calculate the maximum number of each product that could be produced each day, and

identify the limiting factor/bottleneck. (3 marks)

1.15 Using traditional contribution analysis, calculate the ‘profit-maximising’ output each day,

and the contribution at this level of output. (3 marks)

1.16 Using a throughput approach, calculate the ‘throughput-maximising’ output each day, and

the ‘throughput contribution’ at this level of output. (3 marks)

1.17 A is a food processing company. The following data have been produced for one of its

processes for April. There were no inventories in the process at the beginning or end of the month.

£ Inputs: 2,400kg at £8 per kg 19,200 Process costs 4,800 Transferred to packing department: 2,060kg 22,889

There is usually a loss of 10% by weight of inputs during the process. The normal loss does not have a sale value. During April there was an abnormal loss that was sold for £400.

Prepare the Process Account and the Abnormal Loss Account to record the events that occurred in this process during April.

(4 marks)



May 2005 9 P1


The summarised financial statements for P Limited, a potential major supplier, are shown below. Before a contract is signed, the financial performance of P Limited is to be reviewed.

Summary Balance Sheets for P Limited at year end 2003 2002 £000 £000 Non-current assets 1,600 1,400 Inventories 300 280 Trade receivables 200 210 Cash 50 10 Trade payables (280) (290) Long-term borrowings (900) (800) Net assets 970 810 Share capital 600 600 Retained earnings 370 210 970 810

Summary Income Statements for the years 2003 2002 £000 £000 Sales 3,000 2,500 Cost of sales 1,600 1,300 Operating profit 600 450

1.18 Calculate the following financial statistics for P Limited for 2003

(a) Receivables days (b) Payables days (c) Inventory days

(3 marks)

1.19 Calculate the following financial statistics for P Limited for 2003 (a) Current ratio (b) Acid test (quick ratio)

(2 marks)


End of Section A

Section B starts on the next page

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P1 10 May 2005

SECTION B – 30 MARKS [the indicative time for answering this section is 54 minutes] ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS Question Two (a) A general insurance company is about to implement a Balanced Scorecard. You are

required to

(i) State the four perspectives of a Balanced Scorecard; and (ii) Recommend one performance measure that would be appropriate for a general

insurance company, for each of the four perspectives, and give a reason to support each measure. (You must recommend one measure only for each perspective.)

(5 marks)

(b) (i) Briefly explain the main features of Economic Value Added (EVA®) as it would be used to assess the performance of divisions.

(2 marks)

(ii) Briefly explain how the use of EVA® to assess divisional performance might affect the behaviour of divisional senior executives.

(3 marks)

(c) Briefly discuss three different circumstances where participation in setting budgets is

likely to contribute to poor performance from managers. (5 marks)

(d) W Limited designs and sells computer games. There are many other firms in this

industry. For the last five years the senior management has required detailed budgets to be produced for each year with slightly less detailed plans for the following two years. The managing director of W Limited has recently attended a seminar on budgeting and heard the ‘Beyond Budgeting’ arguments that have been advanced by Hope and Fraser, among others.

You are required to

(i) Briefly describe the ‘Beyond Budgeting’ approach; and (2 marks)

(ii) Advise the management of W Limited whether or not it should change its current

budgeting system to a ‘Beyond Budgeting’ approach. (3 marks)

Sub-questions (e) and (f) are on the opposite page



May 2005 11 P1

The following information is to be used to answer sub-questions (e) and (f)

C plc is a large company that manufactures and sells wooden garden furniture. It has three divisions: The Wood Division (WD) purchases logs and produces finished timber as planks or beams. Approximately two-thirds of its output is sold to the Products Division, with the remainder sold on the open market. The Products Division (PD) manufactures wooden garden furniture. The policy of C plc is that the PD must buy all its timber from the WD and sell all its output to the Trading Division. The Trading Division (TD) sells wooden garden furniture to garden centres, large supermarkets, and similar outlets. It only sells items purchased from PD. The current position is that all three divisions are profit centres and C plc uses Return on Investment (ROI) measures as the primary means to assess divisional performance. Each division adopts a cost-plus pricing policy for external sales and for internal transfers between divisions. The senior management of C plc has stated that the divisions should consider themselves to be independent businesses as far as possible.

(e) For each division suggest, with reasons, the behavioural consequences that might arise

as a result of the current policy for the structure and performance evaluation of the divisions.

(5 marks)

(f) The senior management of C plc has requested a review of the cost-plus transfer pricing policy that is currently used.

Suggest with reasons, an appropriate transfer pricing policy that could be used for transfers from PD to TD, indicating any problems that may arise as a consequence of the policy you suggest.

(5 marks)

(Total for Question Two = 30 marks)

(Total for Section B = 30 marks)

End of Section B

Section C starts on the next page

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P1 12 May 2005

SECTION C – 20 MARKS [the indicative time for answering this section is 36 minutes] ANSWER ONE OF THE TWO QUESTIONS

Question Three F plc supplies pharmaceutical drugs to drug stores. Although the company makes a satisfactory return, the directors are concerned that some orders are profitable and others are not. The management has decided to investigate a new budgeting system using activity based costing principles to ensure that all orders they accept are making a profit. Each customer order is charged as follows. Customers are charged the list price of the drugs ordered plus a charge for selling and distribution costs (overheads). A profit margin is also added, but that does not form part of this analysis. Currently F plc uses a simple absorption rate to absorb these overheads. The rate is calculated based on the budgeted annual selling and distribution costs and the budgeted annual total list price of the drugs ordered. An analysis of customers has revealed that many customers place frequent small orders with each order requesting a variety of drugs. The management of F plc has examined more carefully the nature of its selling and distribution costs, and the following data have been prepared for the budget for next year:

Total list price of drugs supplied £8m Number of customer orders 8,000

Selling and Distribution Costs £000 Cost driver Invoice processing 280 See Note 2 Packing 220 Size of package – see Note 3 Delivery 180 Number of deliveries – see Note 4 Other overheads 200 Number of orders Total overheads 880

Notes:

1. Each order will be shipped in one package and will result in one delivery to the customer and one invoice (an order never results in more than one delivery).

2. Each invoice has a different line for each drug ordered. There are 28,000 invoice lines

each year. It is estimated that 25% of invoice processing costs are related to the number of invoices, and 75% are related to the number of invoice lines.

3. Packing costs are £32 for a large package, and £25 for a small package.

4. The delivery vehicles are always filled to capacity for each journey. The delivery

vehicles can carry either 6 large packages or 12 small packages (or appropriate combinations of large and small packages). It is estimated that there will be 1,000 delivery journeys each year, and the total delivery mileage that is specific to particular customers is estimated at 350,000 miles each year. £40,000 of delivery costs are related to loading the delivery vehicles, and the remainder of these costs are related to specific delivery distance to customers.



May 2005 13 P1

The management has asked for two typical orders to be costed using next year’s budget data, using the current method, and the proposed activity-based costing approach. Details of two typical orders are shown below:

Order A Order B Lines on invoice 2 8 Package size small large Specific delivery distance 8 miles 40 miles List price of drugs supplied £1,200 £900

Required:

(a) Calculate the charge for selling and distribution overheads for Order A and Order B

using:

(i) the current system; and (ii) the activity-based costing approach.

(10 marks)

(b) Write a report to the management of F plc in which you

(i) assess the strengths and weaknesses of the proposed activity-based costing approach for F plc; and

(5 marks)

(ii) recommend actions that the management of F plc might consider in the light of the data produced using the activity-based-costing approach.

(5 marks)

(Total for requirement (b) = 10 marks)

(Total for Question Three = 20 marks)

Section C continues on the next page

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P1 14 May 2005

Question Four S Limited installs complex satellite navigation systems in cars, at a very large national depot. The standard cost of an installation is shown below. The budgeted volume is 1,000 units installed each month. The operations manager is responsible for three departments, namely: purchasing, fitting and quality control. S Limited purchases navigation systems and other equipment from different suppliers, and most items are imported. The fitting of different systems takes differing amounts of time, but the differences are not more than 25% from the average, so a standard labour time is applied.

Standard cost of installation of one navigation system £ Quantity Price (£) Materials 400 1 unit 400 Labour 320 20 hours 16 Variable overheads 140 20 hours 7 Fixed overheads 300 20 hours 15 Total standard cost 1,160 The Operations Department has gathered the following information over the last few months. There are significant difficulties in retaining skilled staff. Many have left for similar but better paid jobs and as a result there is a high labour turnover. Exchange rates have moved and commentators have argued this will make exports cheaper, but S Limited has no exports and has not benefited. Some of the fitters have complained that one large batch of systems did not have the correct adapters and would not fit certain cars, but this was not apparent until fitting was attempted. Rent, rates, insurance and computing facilities have risen in price noticeably. The financial results for September to December are shown below.

Operating Statement for S Limited for September to December September October November December 4 months £ £ £ £ £ Standard cost of

actual output 1,276,000 1,276,000 1,102,000 1,044,000 4,698,000 Variances Materials

Price 5,505F 3,354F 9,520A 10,340A 11,001AUsage 400A 7,200A 800A 16,000A 24,400A

Labour

Rate 4,200A 5,500A 23,100A 24,000A 56,800AEfficiency 16,000F 0 32,000A 32,000A 48,000A

Variable overheads

Expenditure 7,000A 2,000A 2,000F 0 7,000AEfficiency 7,000F 0 14,000A 14,000A 21,000A

Fixed overheads

Expenditure 5,000A 10,000A 20,000A 20,000A 55,000AVolume 30,000F 30,000F 15,000A 30,000A 15,000F

Actual costs 1,234,095 1,267,346 1,214,420 1,190,340 4,906,201

A = adverse variance F = favourable variance



May 2005 15 P1

Required: (a) Prepare a report to the operations manager of S Limited commenting on the

performance of the company for the four months to 31 December. State probable causes for the key issues you have included in your report and state the further information that would be helpful in assessing the performance of the company.

(15 marks)

(b) Prepare a short report to the operations manager of S Limited suggesting ways that

the budgeting system could be used to increase motivation and improve performance.

(5 marks)

(Total for Question Four = 20 marks)

(Total for Section C = 20 marks)

End of question paper

Maths Tables and Formulae are on pages 17 to 21

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P1 16 May 2005

[this page is blank]



May 2005 17 P1



P1 18 May 2005

PRESENT VALUE TABLE

Present value of $1, that is ( ) nr −+1 where r = interest rate; n = number of periods until payment or receipt.

Interest rates (r) Periods (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Interest rates (r) Periods

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026



May 2005 19 P1

Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n

years rr n−+− )(11


(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514


(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870



P1 20 May 2005

Formulae

PROBABILITY A ∪B = A or B. A ∩ B = A and B (overlap). P(B A) = probability of B, given A. Rules of Addition If A and B are mutually exclusive: P(A ∪B) = P(A) + P(B) If A and B are not mutually exclusive: P(A ∪B) = P(A) + P(B) – P(A ∩ B) Rules of Multiplication If A and B are independent: P(A ∩B) = P(A) * P(B) If A and B are not independent: P(A ∩B) = P(A) * P(B | A) E(X) = ∑ (probability * payoff) Quadratic Equations If aX2 + bX + c = 0 is the general quadratic equation, the two solutions (roots) are given by:

aacbbX

242 −±−

=

DESCRIPTIVE STATISTICS Arithmetic Mean

nxx ∑

= ffxx

∑∑


Standard Deviation

nxxSD

2)( −∑= 2

2x

ffxSD −∑∑


INDEX NUMBERS Price relative = 100 * P1/P0 Quantity relative = 100 * Q1/Q0

Price: 100 x

1

wPpw

o

∑

∗∑

Quantity: 100 x

1

wQQw

o

∑

∗∑

TIME SERIES Additive Model

Series = Trend + Seasonal + Random Multiplicative Model

Series = Trend * Seasonal * Random



May 2005 21 P1

LINEAR REGRESSION AND CORRELATION The linear regression equation of y on x is given by:

Y = a + bX or Y - Y = b(X – X) where

b = 22 )(

))(()( Variance

)( Covariancexxn

yxXYnXXY

∑−∑

∑∑−∑=

and a = Y – bX or solve

∑ Y = na + b ∑ x ∑ XY = a ∑ x + b∑ x2


})(}{)({

))(()().()( Covariance

2222 yynxxn

YXXYnYVarXVar

XYr∑−∑∑−∑

∑∑−∑==

R(rank) = 1 - )1(

62

2

−

∑

nnd

FINANCIAL MATHEMATICS Compound Interest (Values and Sums) Future Value of S, of a sum of X, invested for n periods, compounded at r% interest

S = X[1 + r]n Annuity Present value of an annuity of £1 per annum receivable or payable for n years, commencing in one year, discounted at r% per annum:

PV =

+−

nrr ]1[111

Perpetuity Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per annum:

PV = r1



P1 22 May 2005




May 2005 23 P1




P1 24 May 2005


Managerial Level


May 2005

Tuesday Morning Session



Paper P1 – Management Accounting – Performance Evaluation Post Exam Guide May 2005 Exam

The Chartered Institute of Management Accountants Page 1

General Comments The revised syllabus and assessment methodology appear to have successfully discriminated candidates’ performance. A full range of marks was recorded and it was felt that the standard achieved and the pass rate were appropriate. Generally candidates coped quite well with the short questions in section A. As this section represented half of the marks available on the paper it was inevitable that to be successful a strong performance in section A was important. Candidates seemed less comfortable with the compulsory question 2 which formed section B. At times no attempt was made to answer some parts of this compulsory question; at others the candidates’ expression was often poor or unclear. In section C question 4 was slightly preferred by candidates but there were some good attempts at both questions 3 and 4. However a number of poor or incomplete answers were submitted in this section. Candidates must manage the time they spend on questions in accordance with the marks available. In both sections B and C candidates would be advised to work on their ability to apply management accounting principles to the particular circumstances mentioned in the question rather than providing answers which basically regurgitate the theory.





Section A – 50 marks

The following data are given for sub-questions 1.1 and 1.2 below. Summary financial statements are given below for one division of a large divisionalised company.

Summary Divisional Financial Statements for the year to 31 December

Balance sheet Income statement £000 £000 Non-current assets 1,500 Revenue 4,000 Current assets 600 Operating costs 3,600 Total assets 2,100 Operating profit 400 Interest paid 70 Divisional equity 1,000 Profit before tax 330 Long-term borrowings 700 Current liabilities 400 Total equity and liabilities 2,100 The cost of capital for the division is estimated at 12% each year. Annual rate of interest on the long term loans is 10%. All decisions concerning the division’s capital structure are taken by central management.

Question 1.1 The divisional Return on Investment (ROI) for the year ended 31 December is A 19·0% B 19·4% C 23·5% D 33·0%

(2 marks)

The answer is C

Workings 400 / 1700 = 23·5%





Question 1.2 The divisional Residual Income (RI) for the year ended 31 December is A £160,000 B £196,000 C £230,000 D £330,000

(2 marks)

The answer is B

Workings 400 - [1,700 x 12%] = £196,000


X40 is one of many items produced by the manufacturing division. Its standard cost is based on estimated production of 10,000 units per month. The standard cost schedule for one unit of X40 shows that 2 hours of direct labour are required at £15 per labour hour. The variable overhead rate is £6 per direct labour hour. During April, 11,000 units were produced; 24,000 direct labour hours were worked and charged; £336,000 was spent on direct labour; and £180,000 was spent on variable overheads.

Question 1.3 The direct labour rate variance for April is A £20,000 Favourable B £22,000 Favourable C £24,000 Adverse D £24,000 Favourable

(2 marks)

The answer is D

Workings Actual rate is £336,000 / 24,000 = £14 per hour 24,000 x [£15-£14] = £24,000 Fav





Question 1.4 The variable overhead efficiency variance for April is A £12,000 Adverse B £12,000 Favourable C £15,000 Adverse D £15,000 Favourable

(2 marks)

The answer is A

Workings [(11,000 x 2) - 24,000] x £6 = £12,000 Adv

Question 1.5 The fixed overhead volume variance is defined as A the difference between the budgeted value of the fixed overheads and the standard fixed overheads

absorbed by actual production. B the difference between the standard fixed overhead cost specified for the production achieved, and

the actual fixed overhead cost incurred. C the difference between budgeted and actual fixed overhead expenditure. D the difference between the standard fixed overhead cost specified in the original budget and the

same volume of fixed overheads, but at the actual prices incurred. (2 marks)

The answer is A

Question 1.6 Summary results for Y Limited for March are shown below. £000 Units Sales revenue 820 Variable production costs 300 Variable selling costs 105 Fixed production costs 180 Fixed selling costs 110 Production in March 1,000 Opening inventory 0 Closing inventory 150





Using marginal costing, the profit for March was A £170,000 B £185,750 C £197,000 D £229,250

(2 marks)

The answer is A

Workings Closing inventory would be valued at £300,000 / 1,000 = £300 per unit. £ Turnover 820,000 Production costs [£300,000 – (150 x £300)] 255,000 Other costs 395,000 Profit 170,000

Question 1.7 The CIMA definition of zero-based budgeting is set out below, with two blank sections. “Zero-based budgeting: A method of budgeting which requires each cost element ___________, as

though the activities to which the budget relates _______________.” Which combination of two phrases correctly completes the definition? Blank 1

Blank 2

A to be specifically justified could be out-sourced to an external supplier B to be set at zero could be out-sourced to an external supplier C to be specifically justified were being undertaken for the first time D to be set at zero were being undertaken for the first time

(2 marks)

The answer is C





Question 1.8 Definition A: “A technique where the primary goal is to maximise throughput while simultaneously maintaining or decreasing inventory and operating costs.” Definition B: “A system whose objective is to produce or procure products or components as they are required by a customer or for use, rather than for inventory.” Which of the following pairs of terms correctly matches the definitions A and B above? Definition A

Definition B

A Manufacturing resource planning Just-in-time B Enterprise resource planning Material requirements planning C Optimised production technology Enterprise resource planning D Optimised production technology Just-in-time

(2 marks)

The answer is D

Question 1.9 Division P produces plastic mouldings, all of which are used as components by Division Q. The cost schedule for one type of moulding – item 103 – is shown below. Direct material cost per unit £3·00 Direct labour cost per unit £4·00 Variable overhead cost per unit £2·00 Fixed production overhead costs each year £120,000 Annual demand from Division Q is expected to be 20,000 units

Two methods of transfer pricing are being considered:

(i) Full production cost plus 40% (ii) A two-part tariff with a fixed fee of £200,000 each year

The transfer price per unit of item 103 transferred to Division Q using both of the transfer pricing methods listed above is (i) Full production cost plus 40% (ii) Two-part tariff A £21·00 £9 B £21·00 £15 C £15·00 £19 D £12·60 £9

(2 marks)

The answer is A





Workings Full cost £ Variable cost 9 Fixed cost = 120,000 /20,000 = 6 Full cost 15 plus 40% 6 Total cost plus 21 Two-part tariff requires only variable cost of £9 for additional transfers

Question 1.10 Which of the following statements is/are true?

(i) Computer-integrated manufacturing (CIM) brings together advanced manufacturing technology and modern quality control into a single computerised coherent system.

(ii) Flexible manufacturing systems (FMS) are simple systems with low levels of automation that offer great flexibility through a skilled workforce working in teams.

(iii) Electronic data interchange (EDI) is primarily designed to allow the operating units in an organisation to communicate immediately and automatically with the sales and purchasing functions within the organisation.

A (i) only B (i) and (ii) only C (i) and (iii) only D (ii) and (iii) only

(2 marks)

The answer is A

Question 1.11 D Limited manufactures and sells musical instruments, and uses a standard cost system. The budget for production and sale of one particular drum for April was 600 units at a selling price of £72 each. When the sales director reviewed the results for April in the light of the market conditions that had been experienced during the month, she believed that D Limited should have sold 600 units of this drum at a price of £82 each. The actual sales achieved were 600 units at £86 per unit. Calculate the following variances for this particular drum for April:

(a) Selling price planning variance (b) Selling price operating variance

(4 marks)





Workings A - Original plan

600 x £72 = £43,200

B - Revised ex post plan 600 x £82 = £49,200 C - Actual results 600 x £86 = £51,600 Selling price planning variance is B – A = £6,000 Fav Selling price operating variance is C – B = £2,400 Fav (Total variance is C – A = £8,400 Fav to check)

Question 1.12 A plastics company operates a process in which all materials are added at the beginning of the process. At the beginning of March, the work-in-process in a plastic moulding machine was 200 units, which were 25% complete with respect to conversion costs. During March, 1,400 units were completed and transferred to the next process. Also during March, 50 units were scrapped due to an operator error at the end of the process, although it is unusual for this to occur. At the end of March, there were 200 units in process, which were 50% complete with respect to conversion costs. Using the First-in-First-out (FIFO) method, calculate the equivalent units of production for the month of March that would be used in the computation of the cost per equivalent unit for

(a) Material costs (b) Conversion costs

(4 marks) Workings Units Material Conversion Opening stock (200) (200) (50) Completed and transferred 1,400 1,400 1,400 Abnormal loss 50 50 50 Closing stock 200 200 100 Equivalent Units 1,450 1,450 1,500





Question 1.13 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 $9·00 per litre 38,700 3,600 litres of E at $5·50 per litre 19,800 2,100 litres of F at $2·20 per litre 4,620 63,120

Actual output for this period was 9,100 litres.

You are required to calculate

(a) the total materials mix variance (b) the total materials yield variance

(4 marks) Workings Mix variance Actual usage in standard proportions $ D = 4,000 litres at $9 per litre 36,000 E = 3,500 litres at $5 per litre 17,500 F = 2,500 litres at $2 per litre 5,000 10,000 58,500 (1) Actual usage in actual proportions D = 4,300 litres at $9 per litre 38,700 E = 3,600 litres at $5 per litre 18,000 F = 2,100 litres at $2 per litre 4,200 10,000 60,900 (2) Mix variance is (1) – (2) = $2,400 Adverse Yield variance Standard cost of 1 litre is $58.50 / 9 = $6·50 Expected output is 10,000 x 90% = 9,000 litres Actual output = 9,100 litres Yield variance is (9,100 – 9,000) x $6.50 = $650 Fav





The following data are given for sub-questions 1.14 to 1.16 below

SM makes two products, Z1 and Z2. Its machines can only work on one product at a time. The two products are worked on in two departments by differing grades of labour. The labour requirements for the two products are as follows:

Minutes per unit of product Z1 Z2 Department 1 12 16 Department 2 20 15

There is currently a shortage of labour and the maximum times available each day in Departments 1 and 2 are 480 minutes and 840 minutes, respectively. The current selling prices and costs for the two products are shown below:

Z1 Z2 £ per unit £ per unit Selling price 50·00 65·00 Direct materials 10·00 15·00 Direct labour 10·40 6·20 Variable overheads 6·40 9·20 Fixed overheads 12·80 18·40 Profit per unit 10·40 16·20

As part of the budget-setting process, SM needs to know the optimum output levels. All output is sold.

Question 1.14 Calculate the maximum number of each product that could be produced each day, and identify the limiting factor/bottleneck.

(3 marks) Workings Maximum no of units of Z1 Maximum no of units of Z2 Dept 1 480 / 12 = 40 480 / 16 = 30 Dept 2 840 / 20 = 42 840 / 15 = 56 Dept 2 has more capacity than Dept 1 for both products, therefore Dept 1 is the limiting factor or bottleneck.





Question 1.15 Using traditional contribution analysis, calculate the ‘profit-maximising’ output each day, and the contribution at this level of output.

(3 marks) Workings Z1 Z2 Variable cost £26·80 £30·40 Sales price £50·00 £65·00 Contribution £23·20 £34·60 Calculate contribution per limiting factor (Dept 1 time) Z1 = £23.20 / 12 = £1.933 per minute Z2 = £34.60 / 16 = £2.1625 per minute So maximum contribution would be to make as many Z2 as possible, that is 30 units x £34.60 = £1,038

Question 1.16 Using a throughput approach, calculate the ‘throughput-maximising’ output each day, and the ‘throughput contribution’ at this level of output.

(3 marks) Workings Throughput or throughput contribution is sales less direct materials, so Z1 is £50 - £10 = £40 Z2 is £65 - £15 = £50 Throughput per bottleneck minute is: Z1 £40 / 12 = £3.333 Z2 £50 / 16 = £3.125 Thus maximum throughput is by production of maximum number of Z1, that is, 40 units of Z1 giving throughput contribution of 40 x £40 = £1,600





Question 1.17 A is a food processing company. The following data have been produced for one of its processes for April. There were no inventories in the process at the beginning or end of the month. £ Inputs: 2,400kg at £8 per kg 19,200 Process costs 4,800 Transferred to packing department: 2,060kg

22,889

There is usually a loss of 10% by weight of inputs during the process. The normal loss does not have a sale value. During April there was an abnormal loss that was sold for £400. Prepare the Process Account and the Abnormal Loss Account to record the events that occurred in this process during April.

(4 marks) Workings

Process Account

Kg £ Kg £ Input materials 2,400 19,200 Normal loss 240 - Process costs 4,800 Abnormal loss 100 1,111 Transfer to packing 2,060 22,889 2,400 24,000 2,400 24,000

Abnormal Loss Account £ £ Process Account 1,111 Cash sale 400 To Income Statement 711 1,111 1,111






The summarised financial statements for P Limited, a potential major supplier, are shown below. Before a contract is signed, the financial performance of P Limited is to be reviewed.

Summary Balance Sheets for P Limited at year end 2003 2002 £000 £000 Non-current assets 1,600 1,400 Inventories 300 280 Trade receivables 200 210 Cash 50 10 Trade payables (280) (290) Long-term borrowings (900) (800) Net assets 970 810 Share capital 600 600 Retained earnings 370 210 970 810

Summary Income Statements for the years 2003 2002 £000 £000 Sales 3,000 2,500 Cost of sales 1,600 1,300 Operating profit 600 450

Question 1.18 Calculate the following financial statistics for P Limited for 2003.

(a) Receivables days (b) Payables days (c) Inventory days

(3 marks) Workings Receivables days 200 / 3000 x 365 = 24 days Payables days 280 / 1600 x 365 = 64 days Inventory days 300 / 1600 x 365 = 68 days Alternative answers for these calculations using average figures would be equally allowable.





Question 1.19 Calculate the following financial statistics for P Limited for 2003.

(a) Current ratio (b) Acid test (quick) ratio

(2 marks) Workings Current ratio 550:280 1·96:1 Quick ratio 250:280 0·89:1





Section B – 30 marks ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS

Question 2(a) A general insurance company is about to implement a Balanced Scorecard. You are required to (i) State the four perspectives of a Balanced Scorecard; and (ii) Recommend one performance measure that would be appropriate for a general insurance

company, for each of the four perspectives, and give a reason to support each measure. (You must recommend one measure only for each perspective.)

(5 marks) Rationale This part of the question covers learning outcome C(xii) – Discuss the role of non-financial performance indicators and compare and contrast traditional approaches to budgeting with recommendations based on the ‘balanced scorecard’. Suggested Approach

• List the four perspectives. • For each perspective, recommend a different performance measure. • For each performance measure, provide a reason why this measure is appropriate. Marking Guide

Marks

State four perspectives

1

Performance measure and reason 4 x 1 4 Examiner’s Comments Candidates tended to know the perspectives of the balanced scorecard. However the performance measures and particularly the reasons why each measure is appropriate were not always clearly indicated in answers. Common Errors • Not generating measures in all four perspectives. • Suggesting unusual, implausible or unclear measures. • Not providing reasons for the measures suggested.





Question 2(b) (i) Briefly explain the main features of Economic Value Added (EVA®) as it would be used to assess the

performance of divisions.

(2 marks) (ii) Briefly explain how the use of EVA® to assess divisional performance might affect the behaviour of

divisional senior executives.

(3 marks) Rationale This part of the question covers learning outcome D(v) – Discuss the likely behavioural consequences of the use of performance metrics in managing cost, profit and investment centres. Suggested Approach

• Explain the main features of EVA, including adjustments to profit and the charge for capital. • Discuss the fact that EVA is designed to create incentives for certain behaviour, in particular the

creation of long term decision making and relating income to the full amount of capital being used by the division.

Marking Guide

Marks

Main features

2

Three ways that behaviour might be affected 3 Examiner’s Comments Though there were a few good answers, it seemed that many candidates were not clear about the exact nature of EVA and even more so about its impact on the behaviour of executives. Common Errors • Providing brief answers to part (ii) that were restricted to generalities, thus giving an impression of

limited understanding.





Question 2(c) Briefly discuss three different circumstances where participation in setting budgets is likely to contribute to poor performance from managers.

(5 marks) Rationale This part of the question covers learning outcome C(xiii) – Evaluate the impact of budgetary control systems on human behaviour. Suggested Approach

• Discuss ways in which participation might produce POOR performance. Creation of budget slack is the

most obvious. Marking Guide

Marks

Up to two marks for each of the three circumstances to a maximum of 5 marks

5

Examiner’s Comments Candidates responded well to this part. They seemed to have prepared well for it and were often able to develop focussed answers. Common Errors • Failing to read the question carefully and thus not dealing with ‘participation’ or ‘poor performance’ but

instead producing a much broader answer in relation to budgets.





Question 2(d) W Limited designs and sells computer games. There are many other firms in this industry. For the last five years the senior management has required detailed budgets to be produced for each year with slightly less detailed plans for the following two years. The managing director of W Limited has recently attended a seminar on budgeting and heard the ‘Beyond Budgeting’ arguments that have been advanced by Hope and Fraser, among others. You are required to (i) Briefly describe the ‘Beyond Budgeting’ approach; and

(2 marks)

(ii) Advise the management of W Limited whether or not it should change its current budgeting system to a ‘Beyond Budgeting’ approach.

(3 marks) Rationale This part of the question covers learning outcome C(xiv) – Evaluate the criticisms of budgeting particularly from the advocates of techniques that are ‘beyond budgeting’. Suggested Approach

• Describe the basics of the ‘beyond budgeting’ approach. • Analyse the nature of the business and its environment. • Explain how this analysis relates to the beyond budgeting approach, in particular assess the extent to

which the key variables in the budget can be reliably forecast. Marking Guide

Marks

Main features of beyond budgeting

2

Analysis and recommendation: guide is a mark for each relevant point that is well explained

3

Examiner’s Comments This part was not popular. Some candidates did not answer it at all and others seemed to guess at the description of Beyond Budgeting. Common Errors • Not relating answers clearly to the scenario provided. • Offering little reasoned advice.





The following information is to be used to answer sub-questions (e) and (f)

C plc is a large company that manufactures and sells wooden garden furniture. It has three divisions: The Wood Division (WD) purchases logs and produces finished timber as planks or beams. Approximately two-thirds of its output is sold to the Products Division, with the remainder sold on the open market. The Products Division (PD) manufactures wooden garden furniture. The policy of C plc is that the PD must buy all its timber from the WD and sell all its output to the Trading Division. The Trading Division (TD) sells wooden garden furniture to garden centres, large supermarkets, and similar outlets. It only sells items purchased from PD. The current position is that all three divisions are profit centres and C plc uses Return on Investment (ROI) measures as the primary means to assess divisional performance. Each division adopts a cost-plus pricing policy for external sales and for internal transfers between divisions. The senior management of C plc has stated that the divisions should consider themselves to be independent businesses as far as possible.

Question 2(e) For each division suggest, with reasons, the behavioural consequences that might arise as a result of the current policy for the structure and performance evaluation of the divisions.

(5 marks) Rationale This part of the question covers learning outcome D(vi) – Explain the typical consequences of divisional structure for performance measurement as divisions compete or trade with each other. Suggested Approach

• Briefly analyse the structure given in the data section, and analyse the methods of performance

evaluation. • Analyse the likely behavioural consequences from the analysis above. • Ensure that the scenario information is used in the answer. Marking Guide

Marks

Many approaches are possible. Marking guide is up to one mark for each relevant point well explained, but all three divisions must be discussed

5





Examiner’s Comments Candidates need to practice responding to ‘applied’ questions. They seemed to have difficulty interpreting the behavioural consequences in the divisionalised structure indicated. Good answers were rare. Common Errors • Repeating the principles of divisionalisation learned from a textbook rather than applying these

principles, with reasoning, to the circumstances described in the question.





Question 2(f) The senior management of C plc has requested a review of the cost-plus transfer pricing policy that is currently used. Suggest with reasons, an appropriate transfer pricing policy that could be used for transfers from PD to TD, indicating any problems that may arise as a consequence of the policy you suggest.

(5 marks) Rationale This part of the question covers learning outcome D(vii) – Identify the likely consequences of different approaches to transfer pricing…. Suggested Approach

• Analyse the market position of the transfer between PD and TD; to what extent can external prices be

established. • Discuss the conditions where a cost-plus approach would be appropriate. • Suggest an alternative approach to transfer pricing and discuss the extent to which it might be

suitable. Marking Guide

Marks

Many approaches are possible. Marking guide is up to one mark for each relevant point well explained in the three aspects mentioned above.

5 Examiner’s Comments Answers were often brief and limited to describing various transfer pricing approaches. In a somewhat similar manner to part 2(e) answers relied upon text book theory. Common Errors • Not justifying with reasons the transfer pricing policy suggested. • Failing to indicate potential problems.





Section C – 20 marks ANSWER ONE OF THE TWO QUESTIONS

Question 3(a)

Calculate the charge for selling and distribution overheads for Order A and Order B using: (i) the current system; and (ii) the activity-based costing approach.

(10 marks) Rationale This part of the question covers learning outcome A(vi) – Compare activity-based costing with traditional …absorption costing methods and evaluate its potential as a system of cost accounting. Suggested Approach

• Calculate the labour-based overhead rate and then apply it to calculate the overhead charge for each

order. • Calculate the cost driver rates. • Apply these rates to the activities undertaken for each order to obtain the total charge for overheads. Marking Guide

Marks

Current system 2 Cost driver rates 3.5 ABC costs 4.5

Examiner’s Comments Part (i) was often correctly computed though surprisingly there were a few miscalculations. In part (ii) candidates were able to generate parts of the answer but the ability to follow all calculations through, to a correct total charge for each order, was rare. Common Errors • In part (ii) making errors in the calculation of some of the cost driver rates and extending these to the

respective orders.





Question 3(b) Write a report to the management of F plc in which you (i) assess the strengths and weaknesses of the proposed activity-based costing approach for F plc;

and (5 marks)

(ii) recommend actions that the management of F plc might consider in the light of the data

produced using the activity-based costing approach. (5 marks)

Rationale This part of the question covers learning outcome C(vi) – Evaluate and apply alternative approaches to budgeting. Suggested Approach

• Start with report headings. • Separately provide strengths and weaknesses; this can be done in numbered list form. • State the actual management actions required, that is, decisions taken as a result of the ABC

information. Marking Guide

Marks

Part (i) Up to one mark for each strength and weakness well explained

5

Part (ii) Up to one mark for each recommendation well explained 5 Examiner’s Comments In part (i) the strengths and weaknesses were reasonably well understood. However in part (ii), which required recommended action, candidates had fewer good ideas. Common Errors • In part (i), failing to apply the strengths and weaknesses to F plc. • In part (ii), demonstrating a lack of ideas and/or failing to generate recommended action specific to F

plc.





Question 4(a)

Prepare a report to the operations manager of S Limited commenting on the performance of the company for the four months to 31 December. State probable causes for the key issues you have included in your report and state the further information that would be helpful in assessing the performance of the company.

(15 marks) Rationale This part of the question covers learning outcome B(ii) – Calculate and interpret material, labour, variable overhead, fixed overhead and sales variances. Suggested Approach

• Start with report headings. • Review the overall performance of S Limited, highlighting both good features and apparent poor

performance. • Suggest probable causes for the main features described above, relating these to the data in the

question scenario. • For each of the probable causes state any additional information that would be needed to assess

performance. Marking Guide

Marks

This style of question can be answered in many ways and thus a marking guide is not binding Up to one mark for comments on each of the eight rows of variances Comment on volume changes Comment on November/December change Comment on inter-relationships between variances Comments on further information needed

8 1 1 2 3

Examiner’s Comments This question was quite popular. However the standard of answers was only reasonable. Too many candidates did not write enough in their commentary and explanation of the variances and possible causes. Common Errors • Demonstrating an inability to link the variances reported to the possible causes, many of which were

alluded to in the scenario. • Not offering in the candidates’ discussion many of their own ideas. • Not developing the report comprehensively.





Question 4(b) Prepare a short report to the operations manager of S Limited suggesting ways that the budgeting system could be used to increase motivation and improve performance.

(5 marks) Rationale This part of the question covers learning outcome B(vi) – Discuss the behavioural implications of setting standard costs. Suggested Approach • Start with report headings. • Describe at least five ways in which the budgeting system can be used to increase motivation.

Marking Guide

Marks

Up to one mark for each recommendation well explained 5 Examiner’s Comments Answers here were brief and not of a good standard. Common Errors • Demonstrating very limited ideas in any direction or at any level about how to increase motivation and

improve performance through enhancing the budgeting system.



Paper P1 – Management Accounting – Performance Evaluation Post Exam Guide November 2005 Exam


General Comments Overall candidates’ performance was disappointing and below that achieved in the first examination of this paper. Performance in the multiple choice questions in the first part of Section A, worth 20 marks, was generally satisfactory. However, many candidates failed to attempt all of the short-form questions in the remaining part of section A, worth 30 marks. Questions 1.14, 1.15 and 1.16 were generally attempted but all of the other questions were omitted on occasions, especially questions 1.17 and 1.18. Many candidates had difficulty with questions 1.12 to 1.16 which all covered mainstream topics and techniques. Overall, the performance in these short-form questions was disappointing, partly as a result of the failure to answer all parts. Candidates’ performance in the largely narrative question 2 (Section B – also a compulsory question) was, apart from the answers to part (a), also disappointing. A common problem was the failure of candidates to read carefully, and/or respond to, the specific questions asked. In Section C question 3 was much more popular than question 4. While some excellent answers were submitted for both questions, many candidates provided poor or incomplete answers. Candidates must try to manage the time spent on questions according to the marks available. In both Sections B and C candidates are advised to study more carefully what is being asked and to improve their ability to apply management accounting principles to the particular circumstances described in the questions.






The following data are given for sub-questions 1.1 and 1.2 below. The following data relate to a manufacturing company. At the beginning of August there was no inventory. During August 2,000 units of product X were produced, but only 1,750 units were sold. The financial data for product X for August were as follow:

£ Materials 40,000Labour 12,600Variable production overheads 9,400Fixed production overheads 22,500Variable selling costs 6,000Fixed selling costs 19,300 Total costs for X for August 109,800

Question 1.1 The value of inventory of X at 31 August using a marginal costing approach is A £6,575 B £7,750

C £8,500

D £10,562

(2 marks)

The answer is B

Workings Marginal cost of inventory is an approximation of variable production cost of £62,000. 1/8th production in inventory = £7,750





Question 1.2 The value of inventory of X at 31 August using a throughput accounting approach is A £5,000 B £6,175 C £6,575 D £13,725

(2 marks)

The answer is A

Workings Throughput approach values inventory at direct materials cost = 1/8th of £40,000 = £5,000

Question 1.3 1.3 A company has a budget to produce 5,000 units of product B in December. The budget for

December shows that for Product B the opening inventory will be 400 units and the closing inventory will be 900 units. The monthly budgeted production cost data for product B for December is as follows:

Variable direct costs per unit £6·00 Variable production overhead costs per unit £3·50 Total fixed production overhead costs £29,500

The company absorbs overheads on the basis of the budgeted number of units produced. The budgeted profit for product B for December, using absorption costing, is A £2,950 lower than it would be using marginal costing. B £2,950 greater than it would be using marginal costing. C £4,700 lower than it would be using marginal costing. . D £4,700 greater than it would be using marginal costing.

(2 marks)

The answer is B

Workings Absorption costing overhead rate is £29,500 / 5,000 units = £5·90 per unit Absorption costing profit greater by £5·90 x 500 units = £2,950





Question 1.4

Y has set the current budget for operating costs for its delivery vehicles, using the formula described below. Analysis has shown that the relationship between miles driven and total monthly vehicle operating costs is described in the following formula: y = £800 + £0·0002x2

where y is the total monthly operating cost of the vehicles, and x is the number of miles driven each month The budget for vehicle operating costs needs to be adjusted for expected inflation in vehicle operating costs of 3%, which is not included in the relationship shown above.

The delivery mileage for September was 4,100 miles, and the total actual vehicle operating costs for September were £5,000. The total vehicle operating cost variance for September was closest to A £713 Adverse B £737 Adverse C £777 Adverse D £838 Adverse

(2 marks)

The answer is A

Workings y = £800 + (0·0002 x 4,1002) = £4,162 Total budgeted vehicle costs are £4,162 x 1·03 = £4,287 Variance is £4,287 - £5,000 = £713 adverse





Question 1.5 The CIMA official definition of the “variable production overhead efficiency variance” is set out below with two blank sections.

“Measures the difference between the variable overhead cost budget flexed on _____________ and the variable overhead cost absorbed by _______________ .”

Which combination of phrases correctly completes the definition? Blank 1

Blank 2

A actual labour hours budgeted output

B standard labour hours budgeted output

C actual labour hours

output produced

D standard labour hours output produced

(2 marks)

The answer is C





The following data are given for sub-questions 1.6 to 1.8 below.

The following data relate to Product Z and its raw material content for September.

Budget Output 11,000 units of Z Standard materials content

3 kg per unit at $4·00 per kg

Actual Output 10,000 units of Z Materials purchased and used

32,000 kg at $4·80 per kg

It has now been agreed that the standard price for the raw material purchased in September should have been $5 per kg.

Question 1.6 1.6 The materials planning price variance for September was A $6,000 Adverse

B $30,000 Adverse

C $32,000 Adverse

D $33,000 Adverse

(2 marks)

The answer is B

Workings Planning price variance 30,000 x ($4·00 - $5·00) = $30,000 adverse





Question 1.7 The materials operational usage variance for September was A $8,000 Adverse

B $9,600 Adverse

C $9,600 Favourable

D $10,000 Adverse

(2 marks)

The answer is D

Workings

Operational usage variance [30,000 - 32,000] x $5·00 = $10,000 adverse

Question 1.8 The materials operational price variance for September was A $6,000 Adverse

B $6,400 Favourable

C $30,000 Adverse

D $32,000 Adverse

(2 marks)

The answer is B

Workings

Operational price variance 32,000 x [$5·00 - $4·80] = $6,400 favourable





Question 1.9 A company operates a just-in-time purchasing and production system and uses a backflush accounting system with a single trigger point at the point of sale. A summary of the transactions that took place in June (valued at cost) is:

£

Conversion costs incurred 890,000

Finished goods produced 1,795,000

Finished goods sold 1,700,000

Conversion costs allocated 840,000

The two items debited to the cost of goods sold account in June would be £ £

A

890,000 and 95,000

B

1,700,000 and 50,000

C

1,700,000 and 95,000

D

1,795,000 and 50,000

(2 marks)The answer is B

Workings Items debited to Cost of Goods Sold account will be:

Finished goods sold £1,700,000

Difference between conversion costs incurred and conversion costs allocated, that is, £890,000 - £840,000 = £50,000





Question 1.10 Division Y has reported annual operating profits of £40·2 million. This was after charging £6 million for the full cost of launching a new product that is expected to last three years. Division Y has a risk adjusted cost of capital of 11% and is paying interest on a substantial bank loan at 8%. The historical cost of the assets in Division Y, as shown on its balance sheet, is £100 million, and the replacement cost has been estimated at £172 million. Ignore the effects of taxation. The EVA® for Division Y is

A £23·28 million

B £25·28 million

C £29·20 million

D £30·44 million

(2 marks)

The answer is B

Workings Adjustments needed are: 1. for launch costs – spread over 3 years; and 2. need to use replacement cost of net assets. So EVA = (£40·2 million + £4 million) – (£172 million x 11%) = £25·28 million.





Question 1.11 Z plc has found that it can estimate future sales using time-series analysis and regression techniques.

The following trend equation has been derived: y = 25,000 + 6,500x where y is the total sales units per quarter, and x is the time period reference number. Z has also derived the following set of seasonal variation index values for each quarter using a multiplicative (proportional) model:

Quarter 1 70 Quarter 2 90 Quarter 3 150 Quarter 4 90

Using the above model, calculate the forecast for sales units for the third quarter of year 7, assuming that the first quarter of year 1 is time period reference number 1.

(3 marks) Workings

x = 27 so trend value is 25,000 + (6,500 x 27) = 200,500 units

Quarter 3 adjustment is 150%, so forecast is 300,750 units





Question 1.12 Three products P, Q and R are produced together in a common process. Products P and Q are sold without further processing, but product R requires an additional process before it can be sold. No inventories are held. There is no loss of volume in the additional process for product R. The following data apply to March.

Output Product P 3,600 litres Product Q 4,100 litres Product R 2,800 litres Selling prices Product P £4·60 per litre Product Q £6·75 per litre Product R £10·50 per litre Costs incurred in the common process £42,500 Costs incurred in the additional process for R £19,600

Calculate the value of the common process costs that would be allocated to product R using the sales proxy method (notional sales value method).

(3 marks) Workings Post separation costs per unit are £19,600 / 2,800 = £7 per litre Notional price at separation point is £10·50 - £7 = £3·50 per litre

Weighted sales value is P 3,600 x £4·60 = £16,560 Q 4,100 x £6·75 = £27,675 R 2,800 x £3·50 = £9,800 £54,035

Allocation of common process costs to R is £42,500 x (£9,800 / £54,035) = £7,708





Question 1.13 A company is preparing its cash budget for February using the following data. One line in the cash budget is for purchases of a raw material, J. The opening inventory of J in January is expected to be 1,075 units. The price of J is expected to be £8 per unit. The company pays for purchases at the end of the month following delivery. One unit of J is required in the production of each unit of product 2, and J is only used in this product. Monthly sales of product 2 are expected to be:

January 4,000 units February 5,000 units March 6,000 units

The opening inventory of product 2 in January is expected to be 1,200 units. The company implements the following inventory policies. At the end of each month the following amounts are held:

Raw materials: 25% of the requirement for the following month’s production

Finished goods: 30% of the following month’s sales

Calculate the value for purchases of J to be included in the cash budget for February.

(4 marks)

Workings

January February March units units units Sales 4,000 5,000 6,000 Closing inventory - 30% next month 1,500 1,800 less opening inventory (1,200) (1,500) Production in month 4,300 5,300

Raw material requirement January units Monthly production 4,300 Closing inventory: 25% of next month’s production

1,325

Less opening inventory (1,075) Material purchases 4,550

Payments for purchases for the cash budget in February are the actual purchases delivered in January, that is:

4,550 units at £8 per unit = £36,400





The following data are given for sub-questions 1.14 to 1.16 below K makes many products, one of which is Product Z. K is considering adopting an activity-based costing approach for setting its budget, in place of the current practice of absorbing overheads using direct labour hours. The main budget categories and cost driver details for the whole company for October are set out below, excluding direct material costs:

Budget category £ Cost driver details Direct labour 128,000 8,000 direct labour hours Set-up costs 22,000 88 set-ups each month Quality testing costs* 34,000 40 tests each month Other overhead costs 32,000 absorbed by direct labour hours

* A quality test is performed after every 75 units produced The following data for Product Z is provided:

Direct materials budgeted cost of £21·50 per unit Direct labour budgeted at 0·3 hours per unit Batch size 30 units Set-ups 2 set-ups per batch Budgeted volume for October 150 units

Question 1.14 Calculate the budgeted unit cost of product Z for October assuming that a direct labour-based absorption method was used for all overheads.

(2 marks) Workings Total overhead cost £88,000 Direct labour hours 8,000 Absorption rate £11 per direct labour hour

Budgeted unit cost for product Z for October is: £ Direct materials 21·50Direct labour 0·3 x £16 4·80Overhead costs 0·3 x £11 3·30Total unit cost 29·60





Question 1.15 Calculate the budgeted unit cost of product Z for October using an activity-based costing approach.

(3 marks)

Workings Cost driver rates are needed

Set-ups £22,000 / 88 = £250 per set-up Quality tests £34,000 / 40 = £850 per test Other overheads £32,000 / 8,000 = £4 per direct labour hour (note this is not a true cost driver)

Activity-based cost of product Z

£ Direct materials 21·50Direct labour 4·80 Set-up costs 2 x £250 / 30 16·67Quality tests £850 / 75 11·33Other overhead costs 0·3 x £4 1·20 Total activity-based costs for October 55·50

An alternative approach to these calculations would be:

Set-up costs = [(150 / 30) x 2 x £250] / 150 = £16·67 Quality costs = (2 x £850) / 150 = £11·33

Question 1.16 Explain in less than 50 words, why the costs absorbed by a product using an activity-based costing approach could be higher than those absorbed if a traditional labour-based absorption system were used, and identify two implications of this for management.

(4 marks)

Workings Costs under ABC could be higher where: there is production complexity not represented in direct labour hours; small batch sizes; or high levels of non-manufacturing activity. This may lead management to: increase batch sizes, simplify processes to reduce activities, or review pricing if this is not in line with ABC costs. Three implications are given, though only two are required.





The following data are given for sub-questions 1.17 to 1.18 below The KL Company provides legal and secretarial services to small businesses. KL has two divisions. Secretarial Division This division provides secretarial services to external clients and to the Legal Division. It charges all its clients, including the Legal Division, at a rate of £40 per hour. The marginal cost of 1 hour of secretarial services is £20. Legal Division The Legal Division provides legal services. One service, called L&S, involves a combination of legal and secretarial services. Each hour of L&S charged to clients involves one hour of legal services and one hour of secretarial services. The secretarial element of this service is purchased from the Secretarial Division. The likely demand for L&S at different prices is as follows:

Demand (hours)

Price per hour (£)

0 100 1,000 90 2,000 80 3,000 70 4,000 60 5,000 50

The marginal cost of one hour of legal services is £25.

Question 1.17 Calculate the level of sales (hours) and total contribution of L&S that would maximise the profit from this service for the Legal Division. Assume the Legal Division pays the Secretarial Division at a rate of £40 per hour for secretarial services.

(3 marks) Workings LD view (VC = 25+40) KL view (VC = 25 + 20)

Hours sold Price per hour

Contribution per hour

Contribution Contribution per hour

Contribution

£ £ £ £ £ 0 100

1,000 90 25 25,000 45 45,000 2,000 80 15 *30,000 35 70,000 3,000 70 5 15,000 25 *75,000 4,000 60 -5 -20,000 15 60,000 5,000 50 -15 -75,000 5 25,000

The level of sales for the Legal division that will maximise the profit in the Legal Division is 2,000 hours, giving contribution to the division of £30,000.





Question 1.18

Calculate the level of sales (hours) and total contribution that would maximise the profit from L&S for the KL Company as a whole.

(3 marks) Workings LD view (VC = 25+40) KL view (VC = 25 + 20)

Hours sold Price per hour

Contribution per hour

Contribution Contribution per hour

Contribution

£ £ £ £ £ 0 100

1,000 90 25 25,000 45 45,000 2,000 80 15 *30,000 35 70,000 3,000 70 5 15,000 25 *75,000 4,000 60 -5 -20,000 15 60,000 5,000 50 -15 -75,000 5 25,000

The level of sales for the KL company that will maximise the profit in KL company is 3,000 hours giving a contribution of £75,000.





The following data are given for sub-questions 1.19 and 1.20 below T is a large pharmaceutical manufacturing company that is implementing a ‘Kaplan and Norton style’ Balanced Scorecard for its research and development division. The goals and measures for the ‘customer perspective’ and the ‘financial perspective’ have been set.

Question 1.19 For each of the two perspectives given in the question data, state an appropriate performance measure.

(2 marks)

Workings Customer perspective performance measure could be the percentage of new product developments delivered to the manufacturing division on time. Financial perspective performance measure could be number of projects completed within 5% of the budgeted cost. Question 1.20 List the other two perspectives in the Balanced Scorecard for T’s research and development division, and state for each of the perspectives a relevant goal and performance measure.

(3 marks)

Workings Two perspectives required are ‘Internal Business’ perspective and ‘Innovation and Learning‘ perspective. Appropriate objectives or goals could be: The Internal Business perspective captures the processes at which the division must excel, so a goal might be a continuous stream of new products to the market. A suitable measure could be measuring the trend in the average time it takes to bring new drugs to market. The Innovation and Learning perspective emphasises how the division can continuously improve and create value. Thus the division’s goal might be to maintain its reputation for innovating new products and treatments. A suitable measure might be the number of new patents registered.






Question 2(a) J Limited has recently been taken over by a much larger company. For many years the budgets in J have been set by adding an inflation adjustment to the previous year’s budget. The new owners of J are insisting on a ‘zero-base’ approach when the next budget is set, as they believe many of the indirect costs in J are much higher than in other companies under their control.

(i) Explain the main features of ‘zero-based budgeting’.

(2 marks)

(ii) Discuss the problems that might arise when implementing this approach in J Limited.

(3 marks)

Rationale Covers learning outcome C(vi) – Evaluate and apply alternative approaches to budgeting Suggested Approach • (i) outline the main features • (ii) discuss problems of implementation Marking Guide

Marks

(i) 4 points with half mark for each 2 (ii) 3 problems to be discussed with up to 1 mark for each 3 Examiner’s Comments This was generally fairly well-answered although frequently not covered in sufficient depth. Common Errors • In (i) failing to appreciate the need for prioritisation with ZBB and how elements of cost may be justified.• In (ii) demonstrating lack of awareness of the difficulties of undertaking such a process and the

experience required.





Question 2(b) An analysis of past output has shown that batches have a mean weight of 90 kg and that the weights conform to the normal distribution with a standard deviation of 10 kg. The company has a policy to investigate variances that fall outside the range that includes 95% of outcomes. In September one sample batch weighed 110 kg.

(i) Calculate whether the material usage variance for this batch should be investigated according to the company policy described above.

(3 marks)

(ii) Discuss two other important factors that should be taken into account when deciding whether to investigate this variance.

(2 marks) Rationale Covers learning outcome B(ii) – Calculate and interpret material, labour, variable overhead, fixed overhead and sales variances Suggested Approach (i) use basic statistical test for significance for a normal distribution (ii) discuss two factors relating to whether a variance should be investigated Marking Guide

Marks

(i) 2 marks for the statistical calculation and 1 for its interpretation (ii) up to 1 mark for each additional factor discussed

3 2

Examiner’s Comments Very few candidates scored many marks on either part of this sub-question. Common Errors • In (i) nearly all candidates were unable to use the normal distribution to evaluate the statistical

significance of the sample batch deviation from the mean. • In (ii) candidates frequently focused on possible reasons for the variance which often would not be

known without investigation. Reasons suggested for the variance were in any case frequently unrelated to the specific situation.





Question 2(c)

UV Limited is a catering company that provides meals for large events. It has a range of standard meals at fixed prices. It also provides meals to meet the exact requirements of a customer and prices for this service are negotiated individually with each customer.

Discuss how a ‘McDonaldisation’ approach to service delivery would impact on budget preparation and control within UV Limited.

(5 marks)

Rationale Covers learning outcome B(i) – Explain why and how standards are set in manufacturing and in service industries with particular reference to the maximisation of efficiency and minimisation of waste. Suggested Approach • After a brief comment on the nature of McDonaldisation, discuss how this approach would affect

budget preparation and control in UV Limited. It is important to distinguish the standardised products where McDonaldisation may be important, from the non-standard meals where this approach could be harmful.

Marking Guide

Marks

1 mark for comment on nature of McDonaldisation 1 Up to 1 mark for four points relating to budget preparation and control in UV 4

Examiner’s Comments Many candidates wrote a lot about McDonaldisation, describing fully each of the four dimensions as they relate to McDonalds, but invariably failed to apply it to either the scenario presented or the question asked. Common Errors • Failing to discuss McDonaldisation in relation to its impact on budget preparation and control. • Failing to discuss the implications for budget preparation and control in the two separate parts of UV

Limited’s business.





Question 2(d) A management consulting company had budgeted the staff requirements for a particular job as follows:

£ 40 hours of senior consultant at £100 per hour 4,000 60 hours of junior consultant at £60 per hour 3,600 Budgeted staff cost for job 7,600

The actual hours recorded were:

£ 50 hours of senior consultant at £100 per hour 5,000 55 hours of junior consultant at £60 per hour 3,300 Actual staff cost for job 8,300

The junior consultant reported that for 10 hours of the 55 hours recorded there was no work that she could do. Calculate the following variances:

• Idle time variance • Labour mix variance • Labour efficiency variance

(5 marks)

Rationale Covers learning outcome B(ii) – Calculate and interpret material, labour, variable overhead, fixed overhead and sales variances Suggested Approach • Calculate the three variances in the order given – this is deliberately the easiest way to approach the

question Marking Guide

Marks

1 mark for idle time variance 2 marks for mix variance 2 marks for efficiency variance

1 2 2

Examiner’s Comments Most candidates were able to calculate the idle time variance but performed less well on mix and efficiency. Common Errors • Failing to exclude idle time from the mix variance calculations. • Confusing labour efficiency with labour yield. • Calculating the total labour variance as the efficiency variance.





Question 2(e)

ST plc is a medium-sized engineering company using advanced technology. It has just implemented an integrated enterprise resource planning (ERP) system in place of an old MRP (manufacturing resource planning) system. Discuss the changes that are likely to be seen after the implementation of the ERP system in

(i) the budget-setting process; and (ii) the budgetary control process

(5 marks) Rationale Covers learning outcome A(vii) – explain the role of MRP and ERP systems in supporting standard costing systems, calculating variances and facilitating the posting of ledger entries. Suggested Approach • Demonstrate how the new ERPS will have direct consequences for budget setting and for budgetary

control. Marking Guide

Marks

(i) Up to 1 mark for 3 points (ii) Up to 1 mark for 3 points

Up to 3 Up to 3

Max of 5

Examiner’s Comments Candidates had a general awareness of ERP in comparison to MRP but were often unable to identify the consequences for budget setting and for budgetary control. Common Errors • Discussing generic aspects of budgetary planning and control rather than the impact of an ERP

system.





Question 2(f) W Limited has conducted a review of its budget-setting procedures. The review coordinator frequently heard the following comment from staff interviewed:

“It’s impossible to make this system work because senior managers want budgets to be a challenging target whereas the finance department require an accurate forecast.” Discuss the issues raised in this comment, and advise the review coordinator on practical action that could be taken to alleviate the situation described.

(5 marks) Rationale Covers learning outcome C(xii) – evaluate the impact of budgetary control systems on human behaviour. Suggested Approach • The main issue in this comment is the difference between a budget as a target and as an estimate of

expected performance. Discuss this and other issues first and then recommend two or three practical steps to alleviate any problems identified.

Marking Guide

Marks

Up to 1 mark for each of 5 points 5 Examiner’s Comments Candidates failed to appreciate the main issue but were awarded marks for sensible interpretation of the situation described and for suggesting practical action that could be taken. Common Errors • Demonstrating lack of appreciation of the use of a budget both as a target and as an estimate of

expected performance. • Discussing irrelevant aspects of budgeting such as flexible budgets and rolling budgets.






Question 3(a)

Using the FIFO method, prepare the process account for October.

(12 marks)

Rationale (a) and (b) cover learning outcome A(ii) – Apply marginal and absorption costing approaches in job, batch and process environments. Suggested Approach

1. Calculate the cost per equivalent unit for each cost element 2. Use these unit costs to evaluate each part of the output, such as inventory, finished goods,

losses 3. Prepare the actual process account

Marking Guide

Marks

1. above 5 2. above 4 3. above 3 12 Examiner’s Comments Correct answers were rare but many candidates made a reasonable attempt at each of the three stages of process account preparation. This question was much more popular than question 4. Common Errors • Identifying only one or two, rather than three, separate cost elements. • Miscalculating the equivalent units for each cost element. • Treating the loss as normal or valuing the abnormal loss at $200. • Including the cost of opening WIP with the period costs in the calculation of cost per equivalent unit,

applying the AVCO method to the apportionment of costs.





Question 3(b)

Explain to the Managing Director any errors in the comment he had made, and discuss whether the data from the process account indicate that there has been production inefficiency.

(8 marks)

Rationale As above Suggested Approach • Analyse and discuss the comments made by the Managing Director Marking Guide

Marks

1 or 2 marks for each good point made 8 Examiner’s Comments Most candidates appreciated the need to value the partly processed product. However they rarely appreciated that the major impact would be due to the differential between the opening and the closing work in progress (WIP) both in terms of units and also in terms of stage of completion. Common Errors • Limiting the discussion to WIP only. • Not appreciating the effect of differences in WIP.





Question 4(a)

Calculate the annualised Return on Investment (ROI) for divisions Y and Z, and discuss the relative performance of the two divisions using the ROI data and other information given above.

(9 marks)

Rationale The three parts of this question cover learning outcomes: D(iv) – Calculate and apply measures of performance for investment centres (often ‘strategic business units’ or divisions of larger groups), and D(v) – Discuss the likely behavioural consequences of the use of performance metrics in managing cost, profit and investment centres. Suggested Approach • Calculate the ROI using annualised data and comment on the results Marking Guide

Marks

Calculation of ROIs 4 Comparison of performance at 1 mark per point 5 Examiner’s Comments This was a very unpopular question but it should have been straightforward for candidates who had studied investment centre performance measures. Many of the candidates who did choose to answer this question did not answer it particularly well, although the fact that it was generally the last question attempted may have been a factor. Common Errors • Failing to annualise the income figures for the two divisions despite this aspect being clearly indicated

in the requirements of the question. • Using controllable income, or even contribution, to calculate ROI, without justification. • Failing to use the other information provided in the question. • Providing a limited discussion of performance.





Question 4(b)

Calculate the annualised Residual Income (RI) for divisions Y and Z, and explain the implications of this information for the evaluation of the divisions’ performance.

(6 marks)

Rationale As above Suggested Approach • Calculate the RI using annualised data and comment on the performance of the divisions

Marking Guide

Marks

Calculation 3 Comment at 1 mark per point 3 Examiner’s Comments Many candidates were able to calculate RI, using their income figures from part (a), but interpretation of the results was often lacking. Common Errors • Demonstrating lack of appreciation of what the RI measure indicates. • Providing a limited discussion of performance.





Question 4(c)

Briefly discuss the strengths and weaknesses of ROI and RI as methods of assessing the performance of divisions. Explain two further methods of assessment of divisional performance that could be used in addition to ROI or RI.

(5 marks)

Rationale As above Suggested Approach • Comment on the strengths and weaknesses of ROI and RI and explain two alternative methods

Marking Guide

Marks

Comments on strengths and weaknesses at 1 mark per point made 3 State and brief comment on two alternatives 2 Examiner’s Comments Reasonable discussion of strengths and weaknesses was often provided but suggestions for further assessment methods were limited. Common Errors • Limiting discussion to one or two points only. • Failing to suggest further measures for the assessment of divisional performance, or suggesting

inappropriate measures







22 November 2005 – Tuesday Morning Session




You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is, all parts and/or sub- questions). The requirements for the questions in Section C are contained in a dotted box.



Answer ONE of the two questions in Section C on pages 14 and 15.




P1 –

Per

form

ance

Eva

luat

ion

TURN OVER



P1 2 November 2005

SECTION A – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER ALL TWENTY SUB-QUESTIONS

Question One

The following data are given for sub-questions 1.1 and 1.2 below.

The following data relate to a manufacturing company. At the beginning of August there was no inventory. During August 2,000 units of product X were produced, but only 1,750 units were sold. The financial data for product X for August were as follow:

£ Materials 40,000Labour 12,600Variable production overheads 9,400Fixed production overheads 22,500Variable selling costs 6,000Fixed selling costs 19,300 Total costs for X for August 109,800

1.1 The value of inventory of X at 31 August using a marginal costing approach is A £6,575 B £7,750

C £8,500

D £10,562

(2 marks)


Instructions for answering Section A: The answers to the twenty sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answers option you have chosen. You do not need to start a new page for each sub-question. For sub-questions 1.11, 1.12, 1.13, 1.15, 1.17 and 1.18 you should show your workings as marks are available for the method you use to answer these sub-questions.



November 2005 3 P1

1.2 The value of inventory of X at 31 August using a throughput accounting approach is A £5,000 B £6,175 C £6,575 D £13,725

(2 marks)

1.3 A company has a budget to produce 5,000 units of product B in December. The budget

for December shows that for Product B the opening inventory will be 400 units and the closing inventory will be 900 units. The monthly budgeted production cost data for product B for December is as follows:

Variable direct costs per unit £6·00 Variable production overhead costs per unit £3·50 Total fixed production overhead costs £29,500

The company absorbs overheads on the basis of the budgeted number of units produced. The budgeted profit for product B for December, using absorption costing, is A £2,950 lower than it would be using marginal costing. B £2,950 greater than it would be using marginal costing. C £4,700 lower than it would be using marginal costing. . D £4,700 greater than it would be using marginal costing.

(2 marks)


TURN OVER



P1 4 November 2005

1.4 Y has set the current budget for operating costs for its delivery vehicles, using the formula described below. Analysis has shown that the relationship between miles driven and total monthly vehicle operating costs is described in the following formula:

y = £800 + £0·0002x2

where y is the total monthly operating cost of the vehicles, and x is the number of miles driven each month

The budget for vehicle operating costs needs to be adjusted for expected inflation in vehicle operating costs of 3%, which is not included in the relationship shown above.

The delivery mileage for September was 4,100 miles, and the total actual vehicle operating

costs for September were £5,000. The total vehicle operating cost variance for September was closest to A £713 Adverse B £737 Adverse C £777 Adverse D £838 Adverse

(2 marks) 1.5 The CIMA official definition of the “variable production overhead efficiency variance” is set

out below with two blank sections.

“Measures the difference between the variable overhead cost budget flexed on _____________ and the variable overhead cost absorbed by _______________ .”

Which combination of phrases correctly completes the definition? Blank 1

Blank 2

A actual labour hours budgeted output

B standard labour hours budgeted output

C actual labour hours

output produced

D standard labour hours output produced

(2 marks)



November 2005 5 P1

The following data are given for sub-questions 1.6 to 1.8 below.

The following data relate to Product Z and its raw material content for September.

Budget Output 11,000 units of Z Standard materials content

3 kg per unit at $4·00 per kg

Actual Output 10,000 units of Z Materials purchased and used

32,000 kg at $4·80 per kg

It has now been agreed that the standard price for the raw material purchased in September should have been $5 per kg. 1.6 The materials planning price variance for September was A $6,000 Adverse

B $30,000 Adverse

C $32,000 Adverse

D $33,000 Adverse

(2 marks) 1.7 The materials operational usage variance for September was A $8,000 Adverse

B $9,600 Adverse

C $9,600 Favourable

D $10,000 Adverse

(2 marks)

1.8 The materials operational price variance for September was A $6,000 Adverse

B $6,400 Favourable

C $30,000 Adverse

D $32,000 Adverse

(2 marks)


TURN OVER



P1 6 November 2005

1.9 A company operates a just-in-time purchasing and production system and uses a

backflush accounting system with a single trigger point at the point of sale. A summary of the transactions that took place in June (valued at cost) is:

£ Conversion costs incurred 890,000Finished goods produced 1,795,000Finished goods sold 1,700,000Conversion costs allocated 840,000

The two items debited to the cost of goods sold account in June would be £ £

A

890,000 and 95,000

B

1,700,000 and 50,000

C

1,700,000 and 95,000

D

1,795,000 and 50,000

(2 marks)

1.10 Division Y has reported annual operating profits of £40·2 million. This was after charging

£6 million for the full cost of launching a new product that is expected to last three years. Division Y has a risk adjusted cost of capital of 11% and is paying interest on a substantial bank loan at 8%. The historical cost of the assets in Division Y, as shown on its balance sheet, is £100 million, and the replacement cost has been estimated at £172 million.

Ignore the effects of taxation. The EVA® for Division Y is A £23·28 million

B £25·28 million

C £29·20 million

D £30·44 million

(2 marks)



November 2005 7 P1

1.11 Z plc has found that it can estimate future sales using time-series analysis and regression techniques. The following trend equation has been derived:

y = 25,000 + 6,500x where y is the total sales units per quarter, and x is the time period reference number. Z has also derived the following set of seasonal variation index values for each quarter using a multiplicative (proportional) model:

Quarter 1 70 Quarter 2 90 Quarter 3 150 Quarter 4 90

Using the above model, calculate the forecast for sales units for the third quarter of year 7, assuming that the first quarter of year 1 is time period reference number 1.

(3 marks) 1.12 Three products P, Q and R are produced together in a common process. Products P and

Q are sold without further processing, but product R requires an additional process before it can be sold. No inventories are held. There is no loss of volume in the additional process for product R.

The following data apply to March.

Output Product P 3,600 litres Product Q 4,100 litres Product R 2,800 litres Selling prices Product P £4·60 per litre Product Q £6·75 per litre Product R £10·50 per litre Costs incurred in the common process £42,500 Costs incurred in the additional process for R £19,600

Calculate the value of the common process costs that would be allocated to product R using the sales proxy method (notional sales value method).

(3 marks)


TURN OVER



P1 8 November 2005

1.13 A company is preparing its cash budget for February using the following data. One line in the cash budget is for purchases of a raw material, J. The opening inventory of J in January is expected to be 1,075 units. The price of J is expected to be £8 per unit. The company pays for purchases at the end of the month following delivery.

One unit of J is required in the production of each unit of product 2, and J is only used in this product. Monthly sales of product 2 are expected to be:

January 4,000 units February 5,000 units March 6,000 units

The opening inventory of product 2 in January is expected to be 1,200 units. The company implements the following inventory policies. At the end of each month the following amounts are held: Raw materials: 25% of the requirement for the following month’s production Finished goods: 30% of the following month’s sales Calculate the value for purchases of J to be included in the cash budget for February.

(4 marks)

Section A continues on the opposite page



November 2005 9 P1

The following data are given for sub-questions 1.14 to 1.16 below K makes many products, one of which is Product Z. K is considering adopting an activity-based costing approach for setting its budget, in place of the current practice of absorbing overheads using direct labour hours. The main budget categories and cost driver details for the whole company for October are set out below, excluding direct material costs:

Budget category £ Cost driver details Direct labour 128,000 8,000 direct labour hours Set-up costs 22,000 88 set-ups each month Quality testing costs* 34,000 40 tests each month Other overhead costs 32,000 absorbed by direct labour hours

* A quality test is performed after every 75 units produced The following data for Product Z is provided:

Direct materials budgeted cost of £21·50 per unit Direct labour budgeted at 0·3 hours per unit Batch size 30 units Set-ups 2 set-ups per batch Budgeted volume for October 150 units

1.14 Calculate the budgeted unit cost of product Z for October assuming that a direct labour-

based absorption method was used for all overheads. (2 marks)

1.15 Calculate the budgeted unit cost of product Z for October using an activity-based costing

approach. (3 marks)

1.16 Explain in less than 50 words, why the costs absorbed by a product using an activity-

based costing approach could be higher than those absorbed if a traditional labour-based absorption system were used, and identify two implications of this for management.

(4 marks)


TURN OVER



P1 10 November 2005

The following data are given for sub-questions 1.17 to 1.18 below The KL Company provides legal and secretarial services to small businesses. KL has two divisions. Secretarial Division This division provides secretarial services to external clients and to the Legal Division. It charges all its clients, including the Legal Division, at a rate of £40 per hour. The marginal cost of 1 hour of secretarial services is £20. Legal Division The Legal Division provides legal services. One service, called L&S, involves a combination of legal and secretarial services. Each hour of L&S charged to clients involves one hour of legal services and one hour of secretarial services. The secretarial element of this service is purchased from the Secretarial Division. The likely demand for L&S at different prices is as follows:

Demand (hours)

Price per hour (£)

0 100 1,000 90 2,000 80 3,000 70 4,000 60 5,000 50

The marginal cost of one hour of legal services is £25. 1.17 Calculate the level of sales (hours) and total contribution of L&S that would maximise the

profit from this service for the Legal Division. Assume the Legal Division pays the Secretarial Division at a rate of £40 per hour for secretarial services.

(3 marks)

1.18 Calculate the level of sales (hours) and total contribution that would maximise the profit

from L&S for the KL Company as a whole.

(3 marks)




November 2005 11 P1

The following data are given for sub-questions 1.19 and 1.20 below T is a large pharmaceutical manufacturing company that is implementing a ‘Kaplan and Norton style’ Balanced Scorecard for its research and development division. The goals and measures for the ‘customer perspective’ and the ‘financial perspective’ have been set.

1.19 For each of the two perspectives given in the question data, state an appropriate

performance measure.

(2 marks)

1.20 List the other two perspectives in the Balanced Scorecard for T’s research and development division, and state for each of the perspectives a relevant goal and performance measure.

(3 marks)


End of Section A


TURN OVER



P1 12 November 2005

SECTION B – 30 MARKS [the indicative time for answering this section is 54 minutes] ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS Question Two (a) J Limited has recently been taken over by a much larger company. For many years the

budgets in J have been set by adding an inflation adjustment to the previous year’s budget. The new owners of J are insisting on a ‘zero-base’ approach when the next budget is set, as they believe many of the indirect costs in J are much higher than in other companies under their control.

(i) Explain the main features of ‘zero-based budgeting’.

(2 marks)

(ii) Discuss the problems that might arise when implementing this approach in J Limited.

(3 marks)

(b) An analysis of past output has shown that batches have a mean weight of 90 kg and that the weights conform to the normal distribution with a standard deviation of 10 kg. The company has a policy to investigate variances that fall outside the range that includes 95% of outcomes. In September one sample batch weighed 110 kg.

(i) Calculate whether the material usage variance for this batch should be

investigated according to the company policy described above. (3 marks)

(ii) Discuss two other important factors that should be taken into account when

deciding whether to investigate this variance. (2 marks)

(c) UV Limited is a catering company that provides meals for large events. It has a range of standard meals at fixed prices. It also provides meals to meet the exact requirements of a customer and prices for this service are negotiated individually with each customer.

Discuss how a ‘McDonaldisation’ approach to service delivery would impact on budget preparation and control within UV Limited.

(5 marks)




November 2005 13 P1

(d) A management consulting company had budgeted the staff requirements for a particular job as follows:

£ 40 hours of senior consultant at £100 per hour 4,000 60 hours of junior consultant at £60 per hour 3,600 Budgeted staff cost for job 7,600

The actual hours recorded were:

£ 50 hours of senior consultant at £100 per hour 5,000 55 hours of junior consultant at £60 per hour 3,300 Actual staff cost for job 8,300

The junior consultant reported that for 10 hours of the 55 hours recorded there was no work that she could do.

Calculate the following variances:

• Idle time variance • Labour mix variance • Labour efficiency variance

(5 marks) (e) ST plc is a medium-sized engineering company using advanced technology. It has just

implemented an integrated enterprise resource planning (ERP) system in place of an old MRP (manufacturing resource planning) system.

Discuss the changes that are likely to be seen after the implementation of the ERP system in

(i) the budget-setting process; and (ii) the budgetary control process

(5 marks)

(f) W Limited has conducted a review of its budget-setting procedures. The review

coordinator frequently heard the following comment from staff interviewed:

“It’s impossible to make this system work because senior managers want budgets to be a challenging target whereas the finance department require an accurate forecast.” Discuss the issues raised in this comment, and advise the review coordinator on practical action that could be taken to alleviate the situation described.

(5 marks) (Total for Question Two = 30 marks)


Section C is on the next page

TURN OVER



P1 14 November 2005


Question Three (a) M Pty produces ‘Biotinct’ in a lengthy distillation and cooling process. Base materials are

introduced at the start of this process, and further chemicals are added when it is 80% complete. Each kilogram of base materials produces 1 kilogram of Biotinct.

Data for October are:

Opening work in process: 40 kg of base materials, 25% processed Cost of opening work in process Base materials $1,550 Processing $720 Costs incurred in October: Base materials (80 kg) $3,400 Conversion costs $6,864 Further chemicals $7,200 Closing work in process: 50kg of base materials, 90% processed

Finished output: 65 kg of Biotinct Under normal conditions there are no losses of base materials in this process. However, in October 5kg of partially complete Biotinct were spoiled immediately after the further chemicals had been added. The 5kg of spoiled Biotinct were not processed to finished goods stage and were sold for a total of $200.

Required:

Using the FIFO method, prepare the process account for October. (12 marks)

(b) One of the company’s management accountants overheard the Managing Director arguing as follows, “These process accounts are complicated to produce, and often conceal the true position. As I see it, the value of partly processed Biotinct is zero. In October we spent $17,464 and the output was 65 kg. So the average cost was $268·68 per kilogram, while the target cost is $170 ($40 for base materials, $70 for processing and $60 for further chemicals). These figures make me concerned about production efficiency.”

Required:

Explain to the Managing Director any errors in the comment he had made, and discuss whether the data from the process account indicate that there has been production inefficiency.

(8 marks)




November 2005 15 P1

Question Four Y and Z are two divisions of a large company that operate in similar markets. The divisions are treated as investment centres and every month they each prepare an operating statement to be submitted to the parent company. Operating statements for these two divisions for October are shown below:

Operating Statements for October Y

£000 Z

£000 Sales revenue 900 555 Less variable costs 345 312 Contribution 555 243 Less controllable fixed costs 95 42 (includes depreciation on divisional assets) Controllable income 460 201 Less apportioned central costs 338 180 Net income before tax 122 21 Total divisional net assets £9·76m £1·26m

The company currently has a target return on capital of 12% per annum. However, the company believes its cost of capital is likely to rise and is considering increasing the target return on capital. At present the performance of each division and the divisional management are assessed primarily on the basis of Return on Investment (ROI).

Required:

(a) Calculate the annualised Return on Investment (ROI) for divisions Y and Z, and discuss the relative performance of the two divisions using the ROI data and other information given above.

(9 marks)

(b) Calculate the annualised Residual Income (RI) for divisions Y and Z, and explain the implications of this information for the evaluation of the divisions’ performance.

(6 marks)

(c) Briefly discuss the strengths and weaknesses of ROI and RI as methods of

assessing the performance of divisions. Explain two further methods of assessment of divisional performance that could be used in addition to ROI or RI.

(5 marks)



End of question paper Maths Tables and Formulae are on pages 17 to 21

TURN OVER



P1 16 November 2005




November 2005 17 P1



P1 18 November 2005

PRESENT VALUE TABLE




(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026



November 2005 19 P1




(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514


(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870



P1 20 November 2005

Formulae


aacbbX

242 −±−

=


nxx ∑

= ffxx

∑∑


Standard Deviation

nxxSD

2)( −∑= 2

2x

ffxSD −∑∑



Price: 100 x w

PP

wo

1

∑

∗∑

Quantity: 100 x

1

wQQw

o

∑

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November 2005 21 P1

LINEAR REGRESSION AND CORRELATION The linear regression equation of Y on X is given by:


b = 22 )X(Xn

)yY)(X(XYn)X( Variance

)XY( Covariance∑−∑

∑∑−∑=


∑ Y = na + b ∑ X ∑ XY = a ∑ X + b∑X2


})Y(Yn}{)X(Xn{

)Y)(X(XYn)Y(Var).X(Var)XY( Covariancer

2222 ∑−∑∑−∑

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R(rank) = 1 - )1(

62

2

−

∑

nnd

FINANCIAL MATHEMATICS Compound Interest (Values and Sums) Future Value S, of a sum of X, invested for n periods, compounded at r% interest


PV =

+−

nrr ]1[111


PV = r1



P1 22 November 2005




November 2005 23 P1




P1 24 November 2005


Managerial Level


November 2005








23 May 2006 – Tuesday Morning Session











P1 –

Per

form

ance

Eva

luat

ion

TURN OVER



P1 2 May 2006

SECTION A – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER ALL TWENTY ONE SUB-QUESTIONS

Question One 1.1 Definition 1: “A system that converts a production schedule into a listing of materials and components required to meet the schedule so that items are available when needed.” Definition 2: “An accounting system that focuses on ways by which the maximum return per unit of bottleneck activity can be achieved.” Which of the following pairs of terms correctly matches definitions 1 and 2 above? Definition 1

Definition 2

A Manufacturing resources planning (MRP2) Backflush accounting

B Material requirements planning (MRP1) Throughput accounting

C Material requirements planning (MRP1) Theory of constraints

D Supply chain management Throughput accounting

(2 marks)


Instructions for answering Section A: The answers to the twenty one sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answer option you have chosen. You do not need to start a new page for each sub-question. For sub-questions 1.11 to 1.21 you should show your workings as marks are available for the method you use to answer these sub-questions.



May 2006 3 P1

1.2 Which of the following statements is/are true?

(i) Enterprise Resource Planning (ERP) systems use complex computer systems, usually comprehensive databases, to provide plans for every aspect of a business.

(ii) Flexible Manufacturing Systems (FMS) are simple systems with low levels of

automation that offer great flexibility through a skilled workforce working in teams.

(iii) Just-in-time (JIT) purchasing requires the purchasing of large quantities of inventory items so that they are available immediately when they are needed in the production process.


(2 marks)

1.3 Which of the following statements apply to feedforward control?

(i) It is the measurement of differences between planned outputs and actual outputs. (ii) It is the measurement of differences between planned outputs and forecast outputs. (iii) Target costing is an example. (iv) Variance analysis is an example.

A (i) and (iii) B (i) and (iv) C (ii) and (iii) . D (ii) and (iv)

(2 marks)


TURN OVER



P1 4 May 2006

1.4 The final stage of production adds Material Z to units that have been transferred into Process D and converts them to the finished product. There are no losses in Process D. Data for Process D in the latest period are shown below:

Units Opening work in progress 225 Material Z: 80% complete Conversion costs: 80% complete Units transferred in 500Units transferred out 575Closing work in progress 150 Material Z: 60% complete Conversion costs: 40% complete

The equivalent units to be used in the calculations of the cost per equivalent unit for Material Z and Conversion Costs, assuming first-in-first-out (FIFO) costing are: Material Z

Conversion costs

A 485 455

B 485 500

C 575 455

D 575 500

(2 marks)

1.5 If the budgeted fixed costs increase, the gradient of the line plotted on the budgeted

Profit/Volume (P/V) chart will A increase. B decrease. C not change. D become curvi-linear.

(2 marks)




May 2006 5 P1

1.6 A company operates a standard costing system and prepares monthly financial

statements. All materials purchased during February were used during that month. After all transactions for February were posted, the general ledger contained the following balances:

The standard cost of the goods produced during February was £128,500. The actual cost of the goods produced during February was A £96,998

B £124,448

C £132,552

D £160,002

(2 marks) 1.7 Overheads will always be over-absorbed when A actual output is higher than budgeted output.

B actual overheads incurred are higher than the amount absorbed.

C actual overheads incurred are lower than the amount absorbed.

D budgeted overheads are lower than the overheads absorbed.

(2 marks)


TURN OVER

Debit Credit £ £

Finished goods control 27,450 Materials price variance 2,400 Materials usage variance 8,400 Labour rate variance 5,600 Labour efficiency variance 3,140 Variable production overhead variance 2,680 Fixed production overhead variance 3,192



P1 6 May 2006

1.8 The following extract is taken from the production cost budget of L plc:

Output 2,000 units 3,500 unitsTotal cost £12,000 £16,200

The budget cost allowance for an output of 4,000 units would be: A £17,600

B £18,514

C £20,400

D £24,000

(2 marks) 1.9 A company uses time series and regression techniques to forecast future sales. It has

derived a seasonal variation index to use with the multiplicative (proportional) seasonal variation model. The index values for the first three quarters are as follows:

Quarter Index value

Q1 80 Q2 80 Q3 110

The index value for the fourth quarter (Q4) is: A -270

B -269

C 110

D 130

(2 marks)




May 2006 7 P1

1.10 The budgeted profit statement for a company, with all figures expressed as percentages of revenue, is as follows:

% Revenue 100Variable costs 30Fixed costs 22Profit 48

After the formulation of the above budget it has now been realised that the sales volume will only be 60% of that originally forecast. The revised profit, expressed as a percentage of the revised revenue will be: A 20%

B 33·3%

C 60%

D 80%

(2 marks)


A company has a process in which three inputs are mixed together to produce Product S. The standard mix of inputs to produce 90 kg of Product S is shown below:

$ 50 kg of ingredient P at $75 per kg 3,75030 kg of ingredient Q at $100 per kg 3,00020 kg of ingredient R at $125 per kg 2,500 9,250

During March 2,000 kg of ingredients were used to produce 1,910 kg of Product S. Details of the inputs are as follows:

$ 1,030 kg of ingredient P at $70 per kg 72,100 560 kg of ingredient Q at $106 per kg 59,360 410 kg of ingredient R at $135 per kg 55,350 186,810

1.11 Calculate the materials mix variance for March. (3 marks)

1.12 Calculate the materials yield variance for March.

(2 marks)


TURN OVER



P1 8 May 2006

1.13 Division L has reported a net profit after tax of £8·6m for the year ended 30 April 2006. Included in the costs used to calculate this profit are the following items:

• interest payable of £2·3m; • development costs of £6·3m for a new product that was launched in May 2005, and

is expected to have a life of three years; • advertising expenses of £1·6m that relate to the re-launch of a product in June

2006. The net assets invested in Division L are £30m. The cost of capital for Division L is 13% per year. Calculate the Economic Value Added® for Division L for the year ended 30 April 2006.

(3 marks)

1.14 The following details have been taken from the debtor collection records of W plc:

Invoices paid in the month after sale 60% Invoices paid in the second month after sale 20% Invoices paid in the third month after sale 15% Bad debts 5%

Customers paying in the month after the sale are allowed a 10% discount. Invoices for sales are issued on the last day of the month in which the sales are made. The budgeted credit sales for the final five months of this year are: Month August September October November December Credit sales $80,000 $100,000 $120,000 $130,000 $160,000 Calculate the total amount budgeted to be received in December from credit sales.

(2 marks)

1.15 State four aims of a transfer pricing system.

(3 marks)




May 2006 9 P1

1.16 Process 2 takes transfers from Process 1 and converts them to finished goods. Additional materials are added during the process. An abnormal loss occurred part way through the process in April. Output data for April are shown below:

Equivalent units (Kg) Kg From P1 Materials Conversion Transferred to finished goods 2,800 2,800 2,800 2,800 Normal loss 200 Abnormal loss 100 100 100 50 Closing work in progress 700 700 700 150

The losses cannot be sold. Costs incurred during April were:

Transfer from Process 1 £34,200Materials added £16,200Conversion costs £26,700

There was no opening work in progress at the beginning of the month. Calculate the value of the abnormal loss that will be debited to the abnormal loss account.

(3 marks) 1.17 D plc operates a retail business. Purchases are sold at cost plus 25%. The management

team are preparing the cash budget and have gathered the following data: 1. The budgeted sales are as follows:

Month £000 July 100August 90September 125October 140

2. It is management policy to hold inventory at the end of each month which is sufficient to

meet sales demand in the next half month. Sales are budgeted to occur evenly during each month.

3. Creditors are paid one month after the purchase has been made. Calculate the entries for “purchases” that will be shown in the cash budget for

(i) August (ii) September (iii) October

(3 marks)


TURN OVER



P1 10 May 2006

1.18 ZY is an airline operator. It is implementing a balanced scorecard to measure the success of its strategy to expand its operations. It has identified two perspectives and two associated objectives. They are:

Perspective Objective Growth Fly to new destinations Internal capabilities Reduce time between touch down and take off

(i) For the “growth perspective” of ZY, recommend a performance measure and briefly

justify your choice of the measure by explaining how it will reflect the success of the strategy.

(2 marks)

(ii) For the “internal capabilities perspective” of ZY, state data that you would gather and

explain how this could be used to ensure the objective is met.

(2 marks)

The following data are given for sub-questions 1.19 and 1.20 below Q plc uses standard costing. The details for April were as follows:

Budgeted output 15,000 units Budgeted labour hours 60,000 hours Budgeted labour cost £540,000 Actual output 14,650 units Actual labour hours paid 61,500 hours Productive labour hours 56,000 hours Actual labour cost £522,750

1.19 Calculate the idle time variance for April.

(2 marks)

1.20 Calculate the labour efficiency variance for April. (2 marks)




May 2006 11 P1

1.21 S plc produces and sells three products, X, Y and Z. It has contracts to supply products X and Y, which will utilise all of the specific materials that are available to make these two products during the next period. The revenue these contracts will generate and the contribution to sales (c/s) ratios of products X and Y are as follows:

Product X Product Y Revenue £10 million £20 million C/S ratio 15% 10%

Product Z has a c/s ratio of 25%. The total fixed costs of S plc are £5·5 million during the next period and management have budgeted to earn a profit of £1 million. Calculate the revenue that needs to be generated by Product Z for S plc to achieve the budgeted profit.

(3 marks)


End of Section A


TURN OVER



P1 12 May 2006

SECTION B – 30 MARKS [the indicative time for answering this section is 54 minutes] ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS Question Two (a) A manufacturing company uses a standard costing system. Extracts from the budget for

April are shown below:

Sales 1,400 units Production 2,000 units $ Direct costs 15 per unit Variable overhead 4 per unit

The budgeted fixed production overhead costs for April were $12,800. The budgeted profit using marginal costing for April was $5,700.

(i) Calculate the budgeted profit for April using absorption costing. (3 marks)

(ii) Briefly explain two situations where marginal costing is more useful to management

than absorption costing. (2 marks)

(Total for sub-question (a) = 5 Marks)

(b) The standard cost schedule for hospital care for a minor surgical procedure is shown below.

Standard Cost of hospital care for a minor surgical procedure

Staff: patient ratio is 0·75:1 £ Nursing costs: 2 days x 0·75 x £320 per day 480 Space and food costs: 2 days x £175 per day 350 Drugs and specific materials 115 Hospital overheads: 2 days x £110 per day 220 Total standard cost 1,165

The actual data for the hospital care for one patient having the minor surgical procedure showed that the patient stayed in hospital for three days. The cost of the drugs and specific materials for this patient was £320. There were 0·9 nurses per patient on duty during the time that the patient was in hospital. The daily rates for nursing pay, space and food, and hospital overheads were as expected. Prepare a statement that reconciles the standard cost with the actual costs of hospital care for this patient. The statement should contain five variances that will give useful information to the manager who is reviewing the cost of hospital care for minor surgical procedures.

(5 Marks)



May 2006 13 P1

(c) C plc uses a just–in–time (JIT) purchasing and production process to manufacture Product P. Data for the output of Product P, and the material usage and material price variances for February, March and April are shown below:

Month Output (units) Material usage variance Material price variance February 11,000 £15,970 Adverse £12,300 Favourable March 5,100 £5,950 Adverse £4,500 Favourable April 9,100 £8,400 Adverse £6,200 Favourable

The standard material cost per unit of Product P is £12. Prepare a sketch (not on graph paper) of a percentage variance chart for material usage and for material price for Product P for the three month period. (Note: your workings must show the co-ordinates of the points that would be plotted if the chart was drawn accurately.)

(5 Marks)

(d) Briefly discuss three reasons why standard costing may not be appropriate in a modern

business environment. (5 Marks)

(e) Compare and contrast marginal costing and throughput accounting.

(5 Marks) (f) T plc is a large insurance company. The Claims Department deals with claims from policy

holders who have suffered a loss that is covered by their insurance policy. Policy holders could claim, for example, for damage to property, or for household items stolen in a burglary. The Claims Department staff investigate each claim and determine what, if any, payment should be made to the claimant.

The manager of the Claims Department has decided to benchmark the performance of the department and has chosen two areas to benchmark:

• the detection of false claims • the speed of processing claims

For each of the above two areas:

(i) state and justify a performance measure (ii) explain how relevant benchmarking data could be gathered.



End of Section B

Section C starts on the next page TURN OVER



P1 14 May 2006


Question Three M plc designs, manufactures and assembles furniture. The furniture is for home use and therefore varies considerably in size, complexity and value. One of the departments in the company is the Assembly Department. This department is labour intensive; the workers travel to various locations to assemble and fit the furniture using the packs of finished timbers that have been sent to them. Budgets are set centrally and they are then given to the managers of the various departments who then have the responsibility of achieving their respective targets. Actual costs are compared against the budgets and the managers are then asked to comment on the budgetary control statement. The statement for April for the Assembly Department is shown below.

Budget Actual Variance Assembly labour hours 6,400 7,140 $ $ $ Assembly labour 51,970 58,227 6,257 Adverse Furniture packs 224,000 205,000 19,000 Favourable Other materials 23,040 24,100 1,060 Adverse Overheads 62,060 112,340 50,280 Adverse Total 361,070 399,667 38,597 Adverse

Note: the costs shown are for assembling and fitting the furniture (they do not include time spent travelling to jobs and the related costs). The hours worked by the Manager are not included in the figure given for the assembly labour hours. The Manager of the Assembly Department is new to the job and has very little previous experience of working with budgets but he does have many years’ experience as a supervisor in assembly departments. Based on that experience he was sure that the department had performed well. He has asked for your help in replying to a memo he has just received asking him to “explain the serious overspending in his department”. He has sent you some additional information about the budget: 1. The budgeted and actual assembly labour costs include the fixed salary of $2,050 for the

Manager of the Assembly Department. All of the other labour is paid for the hours they work.

2. The cost of furniture packs and other materials is assumed by the central finance office of

M plc to vary in proportion to the number of assembly labour hours worked. 3. The budgeted overhead costs are made up of three elements: a fixed cost of $9,000 for

services from central headquarters, a stepped fixed cost which changes when the assembly hours exceed 7,000 hours, and some variable overheads. The variable overheads are assumed to vary in proportion to the number of assembly labour hours. Working papers for the budget showed the impact on the overhead costs of differing amounts of assembly labour hours:

Assembly labour hours 5,000 7,500 10,000Overhead costs $54,500 $76,500 $90,000

The actual fixed costs for April were as budgeted.



May 2006 15 P1

Required: (a) Prepare, using the additional information that the Manager of the Assembly

Department has given you, a budgetary control statement that would be more helpful to him.

(7 marks)

(b) (i) Discuss the differences between the format of the statement that you have

produced and that supplied by M plc. (4 marks)

(ii) Discuss the assumption made by the central office of M plc that costs vary in

proportion to assembly labour hours.

(3 marks) (c) Discuss whether M plc should change to a system of participative budgeting.

(6 marks)



TURN OVER



P1 16 May 2006

Question Four FP sells and repairs photocopiers. The company has operated for many years with two departments, the Sales Department and the Service Department, but the departments had no autonomy. The company is now thinking of restructuring so that the two departments will become profit centres. The Sales Department This department sells new photocopiers. The department sells 2,000 copiers per year. Included in the selling price is £60 for a one year guarantee. All customers pay this fee. This means that during the first year of ownership if the photocopier needs to be repaired then the repair costs are not charged to the customer. On average 500 photocopiers per year need to be repaired under the guarantee. The repair work is carried out by the Service Department who, under the proposed changes, would charge the Sales Department for doing the repairs. It is estimated that on average the repairs will take 3 hours each and that the charge by the Service Department will be £136,500 for the 500 repairs. The Service Department This department has two sources of work: the work needed to satisfy the guarantees for the Sales Department and repair work for external customers. Customers are charged at full cost plus 40%. The details of the budget for the next year for the Service Department revealed standard costs of:

Parts at cost Labour £15 per hour Variable overheads £10 per labour hourFixed overheads £22 per labour hour

The calculation of these standards is based on the estimated maximum market demand and includes the expected 500 repairs for the Sales Department. The average cost of the parts needed for a repair is £54. This means that the charge to the Sales Department for the repair work, including the 40% mark-up, will be £136,500. Proposed Change It has now been suggested that FP should be structured so that the two departments become profit centres and that the managers of the Departments are given autonomy. The individual salaries of the managers would be linked to the profits of their respective departments. Budgets have been produced for each department on the assumption that the Service Department will repair 500 photocopiers for the Sales Department and that the transfer price for this work will be calculated in the same way as the price charged to external customers. However the manager of the Sales Department has now stated that he intends to have the repairs done by another company, RS, because they have offered to carry out the work for a fixed fee of £180 per repair and this is less than the price that the Sales Department would charge.



May 2006 17 P1

Required: (a) Calculate the individual profits of the Sales Department and the Service

Department, and of FP as a whole from the guarantee scheme if:

(i) The repairs are carried out by the Service Department and are charged at full cost plus 40%;

(ii) The repairs are carried out by the Service department and are charged at marginal cost;

(iii) The repairs are carried out by RS. (8 marks)

(b) (i) Explain, with reasons, why a ‘full cost plus’ transfer pricing model may not be

appropriate for FP. (3 marks)

(ii) Comment on other issues that the managers of FP should consider if they decide to

allow RS to carry out the repairs. (4 marks)

(c) Briefly explain the advantages and disadvantages of structuring the departments as

profit centres. (5 marks)




TURN OVER



P1 18 May 2006




May 2006 19 P1



P1 20 May 2006

PRESENT VALUE TABLE




(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026



May 2006 21 P1




(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514


(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870



P1 22 May 2006

Formulae


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P1 24 May 2006




May 2006 25 P1




P1 26 May 2006




May 2006 27 P1




P1 28 May 2006


Managerial Level


May 2006






General Comments Performance on this paper was an improvement on the previous examinations. This was especially due to better performance in both parts of question 1, the multiple-choice questions (1.1 to 1.10) and particularly the short-form questions (1.11 to 1.21). Question 1 overall gave candidates every opportunity for success in this paper but this was too often not achieved due to poor performance in question 2 and, especially, questions 3 or 4. Generally, candidates attempted question 1 first (compulsory Section A) and were able to complete most parts. Performance in the multiple-choice questions, in the first part of the question, was on average good although a number of candidates surprisingly failed to attempt all ten questions. In the second part of question 1 (1.11 to 1.21) most candidates attempted all of the short-form sub-questions, although a common omission was 1.21. This contrasts with the November 2005 examination when several of the short-form questions were frequently not attempted. Reasonable average marks were gained on nearly all of these questions in this examination. Candidates seemed generally to be more comfortable with the numerical questions where they were able to apply learned techniques. In dealing with the short narrative questions, candidates tended to score less well because they seemed to have a less than adequate understanding and did not construct good, clear and concise answers. Improved performance was also achieved in question 2 (compulsory Section B) but from a fairly low base. Part (c), however, presented candidates with special problems and was frequently omitted. Narrative answers too often indicated a failure to read questions carefully and a failure to focus on the specifics of the scenario presented or the questions asked. The choice from the two questions in Section C (questions 3 and 4) was usually made last. While some excellent answers were submitted for both questions, many candidates provided poor or incomplete answers and performance overall was not good. There was clear indication that most candidates found these questions more problematic, or they were running out of time because on many occasions the numerical part (a) was not attempted. This very much repeated the disappointing performance seen in this section of the paper in the two previous sittings. Candidates must try to manage the time they spend on questions in accordance with the marks available. They must also come to the paper with a good knowledge of all topic areas and must read questions carefully. They must then respond to the specifics of the question instead of simply writing generally about a topic. They must try to understand the practical implications of applying what they have learned and offer recommendations in their answers that adequately reflect question scenarios where this is required.






Question 1.1 Definition 1: “A system that converts a production schedule into a listing of materials and components required to meet the schedule so that items are available when needed.” Definition 2: “An accounting system that focuses on ways by which the maximum return per unit of bottleneck activity can be achieved.” Which of the following pairs of terms correctly matches definitions 1 and 2 above? Definition 1

Definition 2

A Manufacturing resources planning (MRP2) Backflush accounting

B Material requirements planning (MRP1) Throughput accounting

C Material requirements planning (MRP1) Theory of constraints

D Supply chain management Throughput accounting

(2 marks)

The answer is B

Question 1.2 Which of the following statements is/are true?

(i) Enterprise Resource Planning (ERP) systems use complex computer systems, usually comprehensive databases, to provide plans for every aspect of a business.

(ii) Flexible Manufacturing Systems (FMS) are simple systems with low levels of automation that

offer great flexibility through a skilled workforce working in teams.

(iii) Just-in-time (JIT) purchasing requires the purchasing of large quantities of inventory items so that they are available immediately when they are needed in the production process.


(2 marks)

The answer is A





Question 1.3 Which of the following statements apply to feedforward control?

(i) It is the measurement of differences between planned outputs and actual outputs. (ii) It is the measurement of differences between planned outputs and forecast outputs. (iii) Target costing is an example. (iv) Variance analysis is an example.

A (i) and (iii) B (i) and (iv) C (ii) and (iii) . D (ii) and (iv)

(2 marks)

The answer is C

Question 1.4 The final stage of production adds Material Z to units that have been transferred into Process D and converts them to the finished product. There are no losses in Process D. Data for Process D in the latest period are shown below:

Units Opening work in progress 225 Material Z: 80% complete Conversion costs: 80% complete Units transferred in 500Units transferred out 575Closing work in progress 150 Material Z: 60% complete Conversion costs: 40% complete

The equivalent units to be used in the calculations of the cost per equivalent unit for Material Z and Conversion Costs, assuming first-in-first-out (FIFO) costing are: Material Z

Conversion costs

A 485 455

B 485 500

C 575 455

D 575 500

(2 marks)

The answer is A





Workings Equivalent Units Units Material Z Conversion cost 225 To complete opening wip 45 45 350 Started and finished 350 350 150 Closing wip 90 60

Total E. U. 485 455

Question 1.5 If the budgeted fixed costs increase, the gradient of the line plotted on the budgeted Profit/Volume (P/V) chart will A increase. B decrease. C not change. D become curvi-linear.

(2 marks)

The answer is C





Question 1.6 A company operates a standard costing system and prepares monthly financial statements. All materials

purchased during February were used during that month. After all transactions for February were posted, the general ledger contained the following balances:

The standard cost of the goods produced during February was £128,500. The actual cost of the goods produced during February was A £96,998

B £124,448

C £132,552

D £160,002

(2 marks)

Debit Credit £ £

Finished goods control 27,450 Materials price variance 2,400 Materials usage variance 8,400 Labour rate variance 5,600 Labour efficiency variance 3,140 Variable production overhead variance 2,680 Fixed production overhead variance 3,192

The answer is B

Workings

£

£

Std cost of goods produced 128,500 Plus adverse variances Materials price 2,400 Labour rate 5,600 Variable overheads 2,680 10,680 Less favourable variances Material usage 8,400Labour efficiency 3,140Fixed overheads 3,192 (14,732)Actual cost of goods produced 124,448





Question 1.7 Overheads will always be over-absorbed when A actual output is higher than budgeted output.




(2 marks)

The answer is C

Question 1.8 The following extract is taken from the production cost budget of L plc:

Output 2,000 units 3,500 unitsTotal cost £12,000 £16,200

The budget cost allowance for an output of 4,000 units would be: A £17,600

B £18,514

C £20,400

D £24,000

(2 marks)

The answer is A

Workings Difference Output 2,000 units 3,500 units 1,500 unitsTotal cost £12,000 £16,200 £4,200

Variable cost per unit = £4,200/1,500 = £2·80. Fixed cost = £12,000 – (2,000 * £2·80) = £6,400 (Note: Alternatively you could have used the figures for 3,500 units). Therefore the budget cost allowance for 4,000 units = £6,400 + (4,000 * £2·80) = £17,600.





Question 1.9

A company uses time series and regression techniques to forecast future sales. It has derived a seasonal variation index to use with the multiplicative (proportional) seasonal variation model. The index values for the first three quarters are as follows:

Quarter Index value Q1 80 Q2 80 Q3 110

The index value for the fourth quarter (Q4) is: A -270

B -269

C 110

D 130

(2 marks)

The answer is D

Workings The index values for a multiplicative model with four seasons add to 400.





Question 1.10 The budgeted profit statement for a company, with all figures expressed as percentages of revenue, is as follows:

% Revenue 100Variable costs 30Fixed costs 22Profit 48

After the formulation of the above budget it has now been realised that the sales volume will only be 60% of that originally forecast. The revised profit, expressed as a percentage of the revised revenue will be:

A 20%

B 33·3%

C 60%

D 80%

(2 marks)

The answer is B

Workings Assuming the revenue was $100 will lead to the following revised figures:

Original Revised Revenue 100 60 Variable costs 30 18 Fixed costs 22 22 Profit 48 20






A company has a process in which three inputs are mixed together to produce Product S. The standard mix of inputs to produce 90 kg of Product S is shown below:

$ 50 kg of ingredient P at $75 per kg 3,75030 kg of ingredient Q at $100 per kg 3,00020 kg of ingredient R at $125 per kg 2,500 9,250

During March 2,000 kg of ingredients were used to produce 1,910 kg of Product S. Details of the inputs are as follows:

$ 1,030 kg of ingredient P at $70 per kg 72,100 560 kg of ingredient Q at $106 per kg 59,360 410 kg of ingredient R at $135 per kg 55,350 186,810

Question 1.11 Calculate the materials mix variance for March.

(3 marks)

Workings Mix variance = $500 favourable

Actual Mix Standard Mix Kg $ $ Kg $ $ P 1,030 75 77,250 1,000 75 75,000Q 560 100 56,000 600 100 60,000R 410 125 51,250 400 125 50,000 2,000 184,500 2,000 185,000





Question 1.12 Calculate the materials yield variance for March.

(2 marks) Workings Yield variance = $196,305 – $185,000 = $11,305 favourable Output was 1,910kg. The standard input for this should be 1,910/90% = 2,122·22kg

Standard mix of input

Standard mix for output

Kg $ $ Kg $ $ P 1,000 75 75,000 1,061·11 75 79,583Q 600 100 60,000 636·67 100 63,667R 400 125 50,000 424·44 125 53,055 2,000 185,000 2,122·22 196,305

Alternative method: Standard cost of 1 kg of output is $9,250/90 = $102·78 Expected output was 2,000 * 0·9 = 1,800 kg. Actual output was 1,910 kg There is a favourable yield of 110 kg. Therefore the yield variance is 110 * $102·78 = $11,306 favourable





Question 1.13 Division L has reported a net profit after tax of £8·6m for the year ended 30 April 2006. Included in the costs used to calculate this profit are the following items:

• interest payable of £2·3m; • development costs of £6·3m for a new product that was launched in May 2005, and is

expected to have a life of three years; • advertising expenses of £1·6m that relate to the re-launch of a product in June 2006.

The net assets invested in Division L are £30m. The cost of capital for Division L is 13% per year. Calculate the Economic Value Added® for Division L for the year ended 30 April 2006.

(3 marks)

Workings £m £mNet profit after tax 8·6Add Interest 2·3Development costs 6·3Advertising 1·6 10·2 18·8Less 1/3 development costs 2·1 16·7Less capital charge: 30*13% 3·9EVA 12·8





Question 1.14

The following details have been taken from the debtor collection records of W plc:

Invoices paid in the month after sale 60%Invoices paid in the second month after sale 20%Invoices paid in the third month after sale 15%Bad debts 5%

Customers paying in the month after the sale are allowed a 10% discount. Invoices for sales are issued on the last day of the month in which the sales are made. The budgeted credit sales for the final five months of this year are: Month August September October November December Credit sales $80,000 $100,000 $120,000 $130,000 $160,000

Calculate the total amount budgeted to be received in December from credit sales.

(2 marks)

Workings Month of sale Factor Receive December

$ November 60% * 90% 70,200 October 20% 24,000 September 15% 15,000 Total 109,200

Question 1.15

State four aims of a transfer pricing system.

Workings 1.15 Any four relevant aims. For example:

• Ensure optimal allocation of resources; • Promote goal congruence; • Motivate divisional managers; • Facilitate performance measurement; • Not stifle autonomy.





Question 1.16 Process 2 takes transfers from Process 1 and converts them to finished goods. Additional materials are added during the process. An abnormal loss occurred part way through the process in April. Output data for April are shown below: Equivalent units (Kg) Kg From P1 Materials Conversion Transferred to finished goods 2,800 2,800 2,800 2,800 Normal loss 200 Abnormal loss 100 100 100 50 Closing work in progress 700 700 700 150

The losses cannot be sold. Costs incurred during April were:

Transfer from Process 1 £34,200Materials added £16,200Conversion costs £26,700

There was no opening work in progress at the beginning of the month. Calculate the value of the abnormal loss that will be debited to the abnormal loss account.

(3 marks) Workings Equivalent units (Kg) Kg From P1 Materials Conversion Transferred to finished goods 2,800 2,800 2,800 2,800Normal loss 200 Abnormal loss 100 100 100 50Closing work in progress 700 700 700 150 3,800 3,600 3,600 3,000Costs (£) 34,200 16,200 26,700Cost per E.U. (£) 9·50 4·50 8·90

Abnormal loss = (100*£9·50) + (100*£4·50) + (50*£8·90) = £1,845





Question 1.17 D plc operates a retail business. Purchases are sold at cost plus 25%. The management team are preparing the cash budget and have gathered the following data: 1. The budgeted sales are as follows:

Month £000 July 100August 90September 125October 140

2. It is management policy to hold inventory at the end of each month which is sufficient to meet sales

demand in the next half month. Sales are budgeted to occur evenly during each month.

3. Creditors are paid one month after the purchase has been made. Calculate the entries for “purchases” that will be shown in the cash budget for

(i) August (ii) September (iii) October

(3 marks)

Workings All figures are £000

Month Sales Cost of sales

Opening inventory

Closing inventory

Purchase Paid

July 100 80 40 36 76 August 90 72 36 50 86 76 September 125 100 50 56 106 86 October 140 112 56 106





Question 1.18 ZY is an airline operator. It is implementing a balanced scorecard to measure the success of its strategy to expand its operations. It has identified two perspectives and two associated objectives. They are:

Perspective Objective Growth Fly to new destinations Internal capabilities Reduce time between touch down and take off

(i) For the “growth perspective” of ZY, recommend a performance measure and briefly justify your

choice of the measure by explaining how it will reflect the success of the strategy.

(2 marks)

(ii) For the “internal capabilities perspective” of ZY, state data that you would gather and explain how this could be used to ensure the objective is met.

(2 marks)

Workings Fly to new destinations: percentage occupancy on flights to new destinations. This will show how popular the routes are. Reduce ground time: measure baggage unloading/loading times, cleaning times, re-stocking meals and duty free, staff availability etc. This will identify the key factor.






Q plc uses standard costing. The details for April were as follows:

Budgeted output 15,000 units Budgeted labour hours 60,000 hours Budgeted labour cost £540,000 Actual output 14,650 units Actual labour hours paid 61,500 hours Productive labour hours 56,000 hours Actual labour cost £522,750

Question 1.19

Calculate the idle time variance for April. (2 marks)

Workings Labour standard for 1 unit is 4 hours * £9 per hour

Idle time variance = (61,500 – 56,000) * £9 = 5,500 * £9 =£49,500 adverse

Question 1.20 Calculate the labour efficiency variance for April.

(2 marks)

Workings Efficiency variance = (std hours for actual output – actual hours) * std rate = [(14,650 * 4) – 56,000] * £9 = (58,600 – 56,000) * £9 = £23,400 favourable





Question 1.21 S plc produces and sells three products, X, Y and Z. It has contracts to supply products X and Y, which will utilise all of the specific materials that are available to make these two products during the next period. The revenue these contracts will generate and the contribution to sales (c/s) ratios of products X and Y are as follows:

Product X Product Y Revenue £10 million £20 million C/S ratio 15% 10%

Product Z has a c/s ratio of 25%. The total fixed costs of S plc are £5·5 million during the next period and management have budgeted to earn a profit of £1 million. Calculate the revenue that needs to be generated by Product Z for S plc to achieve the budgeted profit.

(3 marks) Workings Budgeted profit = £1m. Therefore total contribution = £6·5m and contribution from Z must be £3m.

Product X Product Y Product Z Total Revenue £10 million £20 million £12 million C/S ratio 15% 10% 25% Contribution (£m) 1·5 2·0 3·0 6·5 Fixed costs (£m) 5·5 Profit (£m) 1·0






Question 2(a) A manufacturing company uses a standard costing system. Extracts from the budget for April are shown below:

Sales 1,400 units Production 2,000 units $ Direct costs 15 per unit Variable overhead 4 per unit

The budgeted fixed production overhead costs for April were $12,800. The budgeted profit using marginal costing for April was $5,700.

(i) Calculate the budgeted profit for April using absorption costing. (3 marks)

(ii) Briefly explain two situations where marginal costing is more useful to management than absorption costing.

(2 marks)

(Total for sub-question (a) = 5 Marks) Rationale Covers learning outcome A(i) – Compare and contrast marginal and absorption costing methods in respect of profit reporting and stock valuation. Suggested Approach (i) The difference between profits calculated using absorption costing and marginal costing is due to fixed production overheads being absorbed when absorption costing is used. The first thing to do is to calculate the fixed production overhead absorption rate (OAR): given the data in the question the only way to do this is to base it on a rate per unit (this gives an OAR of $6.40 per unit). Inventory has increased during the period by 600 units because production exceeds sales by that amount. Each unit of closing inventory, using absorption costing, will carry the absorbed fixed production overhead with it into the next period and therefore profit will be higher with absorption costing (because the fixed overhead absorbed in the closing inventory will not be charged against the profit for this period). (ii) The question asks “more useful to management”. Consequently the approach should be to think about what management do (e.g. forecast, plan, control and make decisions) and then give examples of how marginal costing can be useful in those situations. Marking Guide

Marks

Calculation of OAR 1 Calculation of profit 2 Two explanations 2





Examiner’s Comments Relatively easy marks were available here for a reasonably prepared candidate, however success was mixed. Part (i) was generally fairly well answered but part (ii) was not well answered. Common Errors Part (i) • deducting, rather than adding, the stock change; • including all costs, not just fixed production overhead, in the adjustment. Part (ii) • focussing on the stock valuation issue, or on whether stock building is encouraged, rather than upon

the usefulness for management.





Question 2(b) The standard cost schedule for hospital care for a minor surgical procedure is shown below.

Standard Cost of hospital care for a minor surgical procedure Staff: patient ratio is 0·75:1 £ Nursing costs: 2 days x 0·75 x £320 per day 480Space and food costs: 2 days x £175 per day 350Drugs and specific materials 115Hospital overheads: 2 days x £110 per day 220Total standard cost 1,165

The actual data for the hospital care for one patient having the minor surgical procedure showed that the patient stayed in hospital for three days. The cost of the drugs and specific materials for this patient was £320. There were 0·9 nurses per patient on duty during the time that the patient was in hospital. The daily rates for nursing pay, space and food, and hospital overheads were as expected. Prepare a statement that reconciles the standard cost with the actual costs of hospital care for this patient. The statement should contain five variances that will give useful information to the manager who is reviewing the cost of hospital care for minor surgical procedures.

(5 Marks) Rationale Covers learning outcome A(v) – Apply standard costing methods within costing systems and demonstrate the reconciliation of budgeted and actual profit margins. Suggested Approach The question asks for a reconciliation. Therefore candidates need to prepare a statement that starts with the standard (i.e. expected) cost for the two day procedure and then moves through to the actual cost of the three day stay. The obvious difference is that there was an extra day. Therefore the first thing to do is to flex the cost to show what would be expected for a three day stay and then calculate the operational variances. Marking Guide

Marks

Variances Standard and actual costs Format and follow through

2.5 1.5 1

Examiner’s Comments Candidates generally scored well here, invariably with a list of variances rather than with the layout presented in the Examiner’s answer. Common Errors • not separating the total nursing cost variance; • calculating the actual costs incorrectly; • calculating variances but making no attempt at standard and actual cost reconciliation.





Question 2(c)

C plc uses a just–in–time (JIT) purchasing and production process to manufacture Product P. Data for the output of Product P, and the material usage and material price variances for February, March and April are shown below: Month Output (units) Material usage variance Material price variance February 11,000 £15,970 Adverse £12,300 Favourable March 5,100 £5,950 Adverse £4,500 Favourable April 9,100 £8,400 Adverse £6,200 Favourable

The standard material cost per unit of Product P is £12. Prepare a sketch (not on graph paper) of a percentage variance chart for material usage and for material price for Product P for the three month period. (Note: your workings must show the co-ordinates of the points that would be plotted if the chart was drawn accurately.)

(5 Marks) Rationale Covers learning outcome B(ii) – Calculate and interpret material, labour, variable overhead, fixed overhead and sales variances. Suggested Approach A variance chart plots variances as percentages of the standards. The variances for usage and price, and the actual output are given. Therefore it is necessary to calculate the standard usage for the actual output and the standard price for the actual quantity purchased. Marking Guide

Marks

Variances as percentages 3 Plotting on graph 2 Examiner’s Comments This part was poorly answered with relatively few candidates appreciating what was required. Candidates who understood the meaning of a % variance invariably had more success with the calculation of the usage % than with the price %. Common Errors • demonstrating an inability to calculate a % variance; • failing to base the % on an appropriate cost value of material: for example, the price variance was

frequently compared with the standard cost of output rather than with the standard cost of purchases; • using inappropriate axes on the chart.





Question 2(d) Briefly discuss three reasons why standard costing may not be appropriate in a modern business environment.

(5 Marks) Rationale Covers learning outcome B(i) – Explain why and how standards are set in manufacturing and in service industries with particular reference to the maximisation of efficiency and minimisation of waste. Suggested Approach The question states “in a modern business environment” . Therefore answers must be in the context of the modern business environment. Answers should state changes that have occurred in the business environment and then explain why those changes may lead to standard costing being inappropriate. Marking Guide

Marks

Two marks per valid explanation (maximum 5) 5 Examiner’s Comments There were some very good answers but many candidates failed to focus on the specific question asked. Common Errors • writing about standard costing generally with little or no mention of the modern business environment; • discussing the implications of JIT for stock holding (with seemingly an implied impact on standard

costing); • focussing on service industries where standard costing has never been easily applied; • discussing the implications for overhead apportionment and absorption of a change from labour

intensity to capital intensity; • mentioning TQM without explanation of the implications for standard costing.





Question 2(e)

Compare and contrast marginal costing and throughput accounting. (5 Marks)

Rationale Covers learning outcome A(iv) – Explain the origins of throughput accounting as ‘super variable costing’ and its application as a variant of marginal or variable cost accounting. Suggested Approach Define and explain the uses of marginal costing and throughput accounting and then compare and contrast them. Marking Guide

Marks

One mark for each valid comment (maximum 5) 5 Examiner’s Comments Comparison and contrast were very rarely made clear in answers although there was a reasonable knowledge of how the 'contribution' was calculated in each case. Common Errors • demonstrating a lack of appreciation of how the two methods are used; • failing to provide a clear contrast and comparison between the two methods





Question 2(f) T plc is a large insurance company. The Claims Department deals with claims from policy holders who have suffered a loss that is covered by their insurance policy. Policy holders could claim, for example, for damage to property, or for household items stolen in a burglary. The Claims Department staff investigate each claim and determine what, if any, payment should be made to the claimant. The manager of the Claims Department has decided to benchmark the performance of the department and has chosen two areas to benchmark:

• the detection of false claims • the speed of processing claims

For each of the above two areas:

(i) state and justify a performance measure (ii) explain how relevant benchmarking data could be gathered.

(5 marks)

Rationale Covers learning outcome B(v) – Prepare reports using a range of internal and external benchmarks and interpret the results. Suggested Approach The question is in a specified context (the Claims Department of an insurance company). Therefore answers must focus on the stated context. Marking Guide

Marks

One mark for each performance measure 2 One mark for each valid explanation of data gathering (maximum 3) 3

Examiner’s Comments Many candidates scored reasonable marks but rarely focused their answers sufficiently to the specifics of the question. Common Errors • failing to identify any performance measures; • describing how measures fit into the balanced scorecard which was not required; • suggesting unrealistic/inappropriate sources of benchmark data; • providing a generic listing of sources of benchmark data without reference to the specific scenario; • believing that current actual data for the Claims Department is benchmarking data.






Question 3(a) Prepare, using the additional information that the Manager of the Assembly Department has given you, a budgetary control statement that would be more helpful to him.

(7 marks)

Rationale Covers learning outcome C(xi) – Evaluate performance using fixed and flexible budget reports. Suggested Approach The starting point for this answer is to think “What is wrong with the current control statement?” The major problems are that it does not compare like with like (the budget is based on 6,400 hours but the actual results are for 7,140 hours), and that fixed and variable costs are not shown separately. It is therefore necessary to identify and separate the fixed and variable costs and then prepare a flexed budget. Variances should then be based on the flexed statement. Marking Guide

Marks

Flexed costs 3.5 Variances 2 Format 1.5 Examiner’s Comments Candidates did not find this part of the question easy. Sometimes they simply repeated the budget statement given in the question, rather than making any adjustments to it, or made no attempt at this part. Common Errors • demonstrating no understanding cost behaviour patterns; • carrying out a simple application of the high/low method without any recognition of the step increase in

fixed costs; • failing to separate fixed from variable costs or controllable from uncontrollable costs in the statement.





Question 3(b)

(i) Discuss the differences between the format of the statement that you have produced and that supplied by M plc.

(4 marks)

(ii) Discuss the assumption made by the central office of M plc that costs vary in proportion to assembly labour hours.

(3 marks)

Rationale (b)(i) covers learning outcome D(ii) - Prepare cost information in appropriate formats for cost centre

managers, taking due account of controllable/uncontrollable costs and the importance of budget flexing.

(b)(ii) covers learning outcome C(vi) – Evaluate and apply alternative approaches to budgeting. Suggested Approach (i) In Part (a) you did the thinking and then prepared the revised statement. Now you are required to

explain why you did it! (ii) Think, “will costs vary with labour hours?” Is there any indication in the scenario that labour hours

might not be the most appropriate base to use for flexing the budget? Marking Guide

Marks

(i) Explain the need to flex the budget One mark per other valid comment

2 2

(ii) State and explain relevant evidence form the scenario 3 Examiner’s Comments Many candidates appreciated the difference, in answer to part (i), resulting in a comparison of like with like, but generally provided little else that was relevant. Common Errors • failing to appreciate that it was only the cost of furniture packs and the other materials that were

assumed in the question to vary in proportion to the number of assembly hours worked; • failing to provide evidence from the question scenario to support the views expressed.





Question 3(c) Discuss whether M plc should change to a system of participative budgeting.

(6 marks)

Rationale Covers learning outcome C(xiii) - Evaluate the impact of budgetary control systems on human behaviour. Suggested Approach The question states “whether M plc should change”. Consequently candidates should think about issues that would arise in M plc if participative budgeting was introduced. A major theme throughout the scenario is that the Manager of the Assembly Department is new to the job but he does have many years’ experience as a supervisor and will therefore have considerable knowledge about assembling furniture. Marking Guide

Marks

One mark for each valid point 6 Examiner’s Comments This part was fairly well answered providing opportunity for candidates to summarise what they knew about participation in budget setting. Common Errors • describing, often at some length, what participation/bottom-up and top-down budgets are, rather than

discussing the pros and cons of a change; • failing to relate answers to the scenario described.





Question 4(a)

Calculate the individual profits of the Sales Department and the Service Department, and of FP as a whole from the guarantee scheme if:

(i) The repairs are carried out by the Service Department and are charged at full cost plus

40%; (ii) The repairs are carried out by the Service Department and are charged at marginal cost; (iii) The repairs are carried out by RS.

(8 marks)

Rationale Covers learning outcome D(vii) – Identify the likely consequences of different approaches to transfer pricing for divisional decision making, divisional and group profitability, the motivation of divisional management and the autonomy of individual divisions. Suggested Approach The answer requires the profits of the two departments and the company as a whole to be calculated using three different bases of charging for the repairs. To help with this it is first necessary to calculate the cost of the repairs under each of the three stated methods. Marking Guide

Marks

Profit statements 8 Examiner’s Comments Some candidates gained full marks but most who attempted this part did not score well. A significant number, having chosen the question, made little or no attempt at this part. Common Errors • misunderstanding of the implications, for the two departments and for the company, of the three

different scenarios; • treating the fixed costs inconsistently in the analysis of the three scenarios; • not realising that the profits/losses of FP are the sum of the profits/losses of the two departments.





Question 4(b)

(i) Explain, with reasons, why a ‘full cost plus’ transfer pricing model may not be appropriate for

FP. (3 marks)

(ii) Comment on other issues that the managers of FP should consider if they decide to allow RS

to carry out the repairs. (4 marks)

Rationale Covers learning outcome D(vi) - Explain the typical consequences of a divisional structure for performance measurement as divisions compete or trade with each other. Suggested Approach

(i) The question states “for FP”. Consequently candidates should use evidence from the scenario to validate their answers.

(ii) Answers need to be about the issues for “the managers of FP”.

Marking Guide

Marks

One mark for each relevant comment 7 Examiner’s Comments This part was often answered briefly and candidates did not score highly. Part (ii) was generally much better answered than part (i). Common Errors • in part (i) failing to identify the two key issues – motivation and goal congruence; • not developing an answer that applied to the case scenario given.





Question 4(c)

Briefly explain the advantages and disadvantages of structuring the departments as profit centres.

(5 marks) Rationale Covers learning outcome D(i) - Discuss the use of cost, revenue, profit and investment centres in devising organisation structure and in management control. Suggested Approach Again candidates need to think about the information given in the scenario and then use it to answer the question.

Marking Guide

Marks

One mark for each valid comment 5 Examiner’s Comments Candidates did have some idea here based on their general study of the subject area. This was generally the strongest part of answers to this question. Common Errors • explaining an insufficient number of advantages and disadvantages; • discussing cost control.







21 November 2006 – Tuesday Morning Session





Answer the ONE compulsory question in Section A. This has 18 sub-questions and is on pages 2 to 10.

Answer ALL SIX compulsory sub-questions in Section B on pages 12 and 13.





P1 –

Per

form

ance

Eva

luat

ion

TURN OVER



P1 2 November 2006

SECTION A – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER ALL EIGHTEEN SUB-QUESTIONS

Question One


A company uses standard absorption costing. The following information was recorded by the company for October:

Budget Actual Output and sales (units) 8,700 8,200Selling price per unit £26 £31Variable cost per unit £10 £10Total fixed overheads £34,800 £37,000

1.1 The sales price variance for October was A £38,500 favourable B £41,000 favourable C £41,000 adverse D £65,600 adverse

(2 marks)


Instructions for answering Section A: The answers to the eighteen sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answer option you have chosen. You do not need to start a new page for each sub-question. For sub-questions 1.11 to 1.18 you should show your workings as marks are available for the method you use to answer these sub-questions.



November 2006 3 P1

1.2 The sales volume profit variance for October was A £6,000 adverse B £6,000 favourable C £8,000 adverse D £8,000 favourable

(2 marks)

1.3 The fixed overhead volume variance for October was A £2,000 adverse B £2,200 adverse C £2,200 favourable D £4,200 adverse

(2 marks)

1.4 A master budget comprises the A budgeted income statement and budgeted cash flow only. B budgeted income statement and budgeted balance sheet only. C budgeted income statement and budgeted capital expenditure only. D budgeted income statement, budgeted balance sheet and budgeted cash flow only.

(2 marks)


TURN OVER



P1 4 November 2006


The annual operating statement for a company is shown below:

£000 Sales revenue 800 Less variable costs 390 Contribution 410 Less fixed costs 90 Less depreciation 20 Net income 300 Assets £6·75m

The cost of capital is 13% per annum. 1.5 The return on investment (ROI) for the company is closest to A 4·44% B 4·74% C 5·77% D 6·07%

(2 marks) 1.6 The residual income (RI) for the company is closest to £000

A

(467)

B

(487)

C

(557)

D

(577)

(2 marks)




November 2006 5 P1

1.7 A company has reported annual operating profits for the year of £89·2m after charging

£9·6m for the full development costs of a new product that is expected to last for the current year and two further years. The cost of capital is 13% per annum. The balance sheet for the company shows fixed assets with a historical cost of £120m. A note to the balance sheet estimates that the replacement cost of these fixed assets at the beginning of the year is £168m. The assets have been depreciated at 20% per year.

The company has a working capital of £27·2m.

Ignore the effects of taxation. The Economic Value Added® (EVA) of the company is closest to

A £64·16m

B £70·56m

C £83·36m

D £100·96m

(2 marks)

1.8 Which of the following definitions are correct?

(i) Just-in-time (JIT) systems are designed to produce or procure products or components as they are required for a customer or for use, rather than for inventory;

(ii) Flexible manufacturing systems (FMS) are integrated, computer-controlled

production systems, capable of producing any of a range of parts and of switching quickly and economically between them;

(iii) Material requirements planning (MRP) systems are computer based systems that

integrate all aspects of a business so that the planning and scheduling of production ensures components are available when needed.

A (i) only

B (i) and (ii) only



(2 marks)


TURN OVER



P1 6 November 2006

1.9 RJD Ltd operates a standard absorption costing system. The following fixed production overhead data is available for one month:

Budgeted output 200,000 units Budgeted fixed production overhead £1,000,000 Actual fixed production overhead £1,300,000 Total fixed production overhead variance £100,000 Adverse

The actual level of production was A 180,000 units.

B 240,000 units.

C 270,000 units.

D 280,000 units.

(2 marks)

1.10 WTD Ltd produces a single product. The management currently uses marginal costing

but is considering using absorption costing in the future.

The budgeted fixed production overheads for the period are £500,000. The budgeted output for the period is 2,000 units. There were 800 units of opening inventory at the beginning of the period and 500 units of closing inventory at the end of the period.

If absorption costing principles were applied, the profit for the period compared to the marginal costing profit would be

A £75,000 higher.

B £75,000 lower.

C £125,000 higher.

D £125,000 lower.

(2 marks)




November 2006 7 P1

1.11 JJ Ltd 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 forthcoming

period are as follows:

W X Y £ £ £ Selling price 200 150 150 Cost Direct materials 41 20 30 Labour 30 20 36 Overheads 60 40 50 Profit 69 70 34 Bottleneck machine – minutes per unit

9

10

7

40% of the overhead cost is classified as variable

Using a throughput accounting approach, what would be the ranking of the products for

best use of the bottleneck? (3 marks)

1.12 X Ltd has two production departments, Assembly and Finishing, and two service

departments, Stores and Maintenance.

Stores provides the following service to the production departments: 60% to Assembly and 40% to Finishing. Maintenance provides the following service to the production and service departments: 40% to Assembly, 45% to Finishing and 15% to Stores. The budgeted information for the year is as follows:

Budgeted fixed production overheads Assembly £100,000 Finishing £150,000 Stores £ 50,000 Maintenance £ 40,000

Budgeted output 100,000 units At the end of the year after apportioning the service department overheads, the total fixed production overheads debited to the Assembly department’s fixed production overhead control account were £180,000. The actual output achieved was 120,000 units. Calculate the under/over absorption of fixed production overheads for the Assembly department.

(4 marks)


TURN OVER



P1 8 November 2006

1.13 A company simultaneously produces three products (X, Y and Z) from a single process. X and Y are processed further before they can be sold; Z is a by-product that is sold immediately for $6 per unit without incurring any further costs. The sales prices of X and Y after further processing are $50 per unit and $60 per unit respectively.

Data for October are as follows:

$ Joint production costs that produced 2,500 units of X, 3,500 units of Y

and 3,000 units of Z 140,000

Further processing costs for 2,500 units of X 24,000Further processing costs for 3,500 units of Y 46,000

Joint costs are apportioned using the final sales value method. Calculate the total cost of the production of X for October.

(3 marks)

1.14 ZP Plc operates two subsidiaries, X and Y. X is a component manufacturing subsidiary

and Y is an assembly and final product subsidiary. Both subsidiaries produce one type of output only. Subsidiary Y needs one component from subsidiary X for every unit of Product W produced. Subsidiary X transfers to Subsidiary Y all of the components needed to produce Product W. Subsidiary X also sells components on the external market.

The following budgeted information is available for each subsidiary:

X Y Market price per component $800 Market price per unit of W $1,200 Production costs per component $600 Assembly costs per unit of W $400 Non production fixed costs $1·5m $1·3m External demand 10,000 units 12,000 units Capacity 22,000 units Taxation rates 25% 30%

The production cost per component is 60% variable. The fixed production costs are absorbed based on budgeted output. X sets a transfer price at marginal cost plus 70%. Calculate the post tax profit generated by each subsidiary.

(4 marks)



November 2006 9 P1

1.15 PP Ltd operates a standard absorption costing system. The following information has been extracted from the standard cost card for one of its products:

Budgeted production 1,500 units Direct material cost: 7 kg x £4·10 £28·70 per unit Actual results for the period were as follows: Production 1,600 units Direct material (purchased and used): 12,000 kg £52,200

It has subsequently been noted that due to a change in economic conditions the best price that the material could have been purchased for was £4·50 per kg during the period.

(i) Calculate the material price planning variance.

(ii) Calculate the operational material usage variance.

(4 marks)

1.16 CJD Ltd manufactures plastic components for the car industry. The following budgeted

information is available for three of their key plastic components:

W X Y £ per unit £ per unit £ per unit Selling price 200 183 175 Direct material 50 40 35 Direct labour 30 35 30 Units produced and sold 10,000 15,000 18,000 The total number of activities for each of the three products for the period is as follows: Number of purchase requisitions 1,200 1,800 2,000 Number of set ups 240 260 300

Overhead costs have been analysed as follows:

Receiving/inspecting quality assurance £1,400,000 Production scheduling/machine set up £1,200,000

Calculate the budgeted profit per unit for each of the three products using activity based budgeting.

(4 marks)

TURN OVER



P1 10 November 2006

1.17 CW Ltd makes one product in a single process. The details of the process for period 2 were as follows:

There were 800 units of opening work in progress valued as follows:

Material £98,000Labour £46,000Production overheads £7,600

During the period 1,800 units were added to the process and the following costs were incurred:


There were 500 units of closing work in progress, which were 100% complete for material, 90% complete for labour and 40% complete for production overheads. A normal loss equal to 10% of new material input during the period was expected. The actual loss amounted to 180 units. Each unit of loss was sold for £10 per unit. CW Ltd uses weighted average costing. Calculate the cost of the output for the period.

(4 marks)

1.18 SS Ltd operates a standard marginal costing system. An extract from the standard cost

card for the labour costs of one of its products is as follows:

Labour Cost 5 hours x £12 £60 Actual results for the period were as follows: Production 11,500 units Labour rate variance £45,000 adverse Labour efficiency variance £30,000 adverse

Calculate the actual rate paid per direct labour hour.

(4 marks)


End of Section A

Section B starts on page 12



November 2006 11 P1


TURN OVER



P1 12 November 2006

SECTION B – 30 MARKS [the indicative time for answering this section is 54 minutes] ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS Question Two

The following scenario is given for sub-questions (a) to (f) opposite

X Plc manufactures specialist insulating products that are used in both residential and commercial buildings. One of the products, Product W, is made using two different raw materials and two types of labour. The company operates a standard absorption costing system and is now preparing its budgets for the next four quarters. The following information has been identified for Product W:

Sales Selling price £220 per unit Sales demand

Quarter 1 2,250 units Quarter 2 2,050 units Quarter 3 1,650 units Quarter 4 2,050 units Quarter 5 1,250 units Quarter 6 2,050 units

Costs Materials

A 5 kgs per unit @ £4 per kg B 3 kgs per unit @ £7 per kg

Labour

Skilled 4 hours per unit @ £15 per hour Semi-skilled 6 hours per unit @ £9 per hour

Annual overheads £280,000

40% of these overheads are fixed and the remainder varies with total labour hours. Fixed overheads are absorbed on a unit basis.

Inventory holding policy Closing inventory of finished goods 30% of the following quarter’s sales demand Closing inventory of materials 45% of the following quarter’s materials usage

The management team are concerned that X Plc has recently faced increasing competition in the market place for Product W. As a consequence there have been issues concerning the availability and costs of the specialised materials and employees needed to manufacture Product W, and there is concern that these might cause problems in the current budget setting process.



November 2006 13 P1

(a) Prepare the following budgets for each quarter for X Plc:

(i) Production budget in units; (ii) Raw material purchases budget in kgs and value for Material B.

(5 Marks)

(b) X Plc has just been informed that Material A may be in short supply during the year for which it is preparing budgets. Discuss the impact this will have on budget preparation and other areas of X Plc.

(5 Marks)

(c) Assuming that the budgeted production of Product W was 7,700 units and that the

following actual results were incurred for labour and overheads in the year:

Actual production 7,250 units Actual overheads

Variable £185,000 Fixed £105,000

Actual labour costs Skilled - £16·25 per hour £568,750 Semi-skilled - £8 per hour £332,400

Prepare a flexible budget statement for X Plc showing the total variances that have occurred for the above four costs only.

(5 Marks)

(d) X Plc currently uses incremental budgeting. Explain how Zero Based Budgeting could

overcome the problems that might be faced as a result of the continued use of the current system.

(5 Marks) (e) Explain how rolling budgets are used and why they would be suitable for X Plc.

(5 Marks)

(f) Briefly explain how linear regression analysis can be used to forecast sales and briefly

discuss whether it would be a suitable method for X Plc to use. (5 marks)



End of Section B

Section C starts on page 15 TURN OVER



P1 14 November 2006




November 2006 15 P1


Question Three X Ltd uses an automated manufacturing process to produce an industrial chemical, Product P. X Ltd operates a standard marginal costing system. The standard cost data for Product P is as follows:

Standard cost per unit of Product P Materials

A 10 kgs @ £15 per kilo £150 B 8 kgs @ £8 per kilo £64 C 5 kgs @ £4 per kilo £20

23 kgs Total standard marginal cost £234 Budgeted fixed production overheads £350,000

In order to arrive at the budgeted selling price for Product P the company adds 80% mark-up to the standard marginal cost. The company budgeted to produce and sell 5,000 units of Product P in the period. There were no budgeted inventories of Product P. The actual results for the period were as follows:

Actual production and sales 5,450 units Actual sales price £445 per unit Material usage and cost

A 43,000 kgs £688,000 B 37,000 kgs £277,500 C 23,500 kgs £99,875

103,500 kgs Fixed production overheads £385,000

Required:

(a) Prepare an operating statement which reconciles the budgeted profit to the actual

profit for the period. (The statement should include the material mix and material yield variances).

(12 marks)

(b) The Production Manager of X Ltd is new to the job and has very little experience of

management information. Write a brief report to the Production Manager of X Ltd that

(i) interprets the material price, mix and yield variances; (ii) discusses the merits, or otherwise, of calculating the materials mix and

yield variances for X Ltd.

(8 marks) (Total for Question Three = 20 marks)

TURN OVER



P1 16 November 2006

Question Four

The ZZ Group has two divisions, X and Y. Each division produces only one type of product: X produces a component (C) and Y produces a finished product (FP). Each FP needs one C. It is the current policy of the group for C to be transferred to Division Y at the marginal cost of £10 per component and that Y must buy all the components it needs from X. The markets for the component and the finished product are competitive and price sensitive. Component C is produced by many other companies but it is thought that the external demand for the next year could increase to 1,000 units more than the sales volume shown in the current budget for Division X. Budgeted data, taken from the ZZ Group Internal Information System, for the divisions for the next year is as follows: Division X

Income statement Sales £70,000 Cost of sales Variable costs £50,000 Contribution £20,000 Fixed costs (controllable) £15,000 Profit £ 5,000 Production/Sales (units) 5,000 (3,000 of which are transferred to Division Y) External demand (units) 3,000 (Only 2,000 of which can be currently satisfied) Capacity (units) 5,000 External market price per unit £20 Balance sheet extract Capital employed £60,000 Other information Cost of capital charge 10%

Division Y

Income statement Sales £270,000 Cost of sales Variable costs £114,000 Contribution £156,000 Fixed costs (controllable) £100,000 Profit £ 56,000 Production/Sales (units) 3,000 Capacity (units) 7,000 Market price per unit £90 Balance sheet extract Capital employed £110,000 Other information Cost of capital charge 10%



November 2006 17 P1

Four measures are used to evaluate the performance of the Divisional Managers. Based on the data above, the budgeted performance measures for the two divisions are as follows:

Division X Division Y Residual income (£1,000) £45,000 Return on capital employed 8·33% 50·91% Operating profit margin 7·14% 20·74% Asset turnover 1·17 2·46

Current policy It is the current policy of the group for C to be transferred to Division Y at the marginal cost of £10 per component and that Y must buy all the components that it needs from X. Proposed policy ZZ Group is thinking of giving the Divisional Managers the freedom to set their own transfer price and to buy the components from external suppliers but there are concerns about problems that could arise by granting such autonomy.

Required:

(a) If the transfer price of the component is set by the Manager of Division X at the current market price (£20 per component), recalculate the budgeted performance measures for each division.

(8 marks)

(b) Discuss the changes to the performance measures of the divisions that would arise as a result of altering the transfer price to £20 per component.

(6 marks)

(c) (i) Explain the problems that could arise for each of the Divisional Managers

and for ZZ Group as a whole as a result of giving full autonomy to the Divisional Managers.

(ii) Discuss how the problems you have explained could be resolved without

resorting to a policy of imposed transfer prices. (6 marks)




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P1 18 November 2006




November 2006 19 P1



P1 20 November 2006

PRESENT VALUE TABLE




(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026



November 2006 21 P1




(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514


(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870



P1 22 November 2006

Formulae


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November 2006 23 P1



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P1 24 November 2006




November 2006 25 P1




P1 26 November 2006




November 2006 27 P1




P1 28 November 2006


Managerial Level


November 2006




Paper P1 – Management Accounting – Performance Evaluation Post Exam Guide

November 2006 Exam General Comments Performance on this paper was broadly in line with that achieved at previous sittings. Performance on the calculation questions, especially the shorter-form question 1, was relatively strong and once again gave candidates every opportunity for success. However, also once again, success was too often not achieved due to poor performance in the remaining questions. Poor time management seemed to be a factor for some candidates. Another problem was a lack of preparation for the analysis and application required in the longer-form scenario based questions which were also more narrative based. Candidates must recognise that narrative answers, required in many of the questions in Sections B and C, form a significant part of the paper (approximately 30%). Question 1 (compulsory Section A) was invariably attempted first and most candidates were able to complete all parts of the question. However it was surprising to find that a number of candidates once again failed to attempt all ten multiple-choice questions. In the second part of question 1 (1.11 to 1.18) reasonable marks were gained on average on all parts, which this time all required calculations. Common errors to highlight were the comparison of budgeted and actual overhead costs (in 1.12), the apportionment of a share of joint costs to a by-product (in 1.13) and the inclusion of elements of the FIFO method (in 1.17). The improved performance in question 2 (compulsory Section B), seen at the last examination, was maintained. However, candidates’ performance remains disappointing. Narrative answers too often indicated a failure to read questions carefully and a general failure to answer the question with reference to the scenario presented. The choice from the two questions in Section C was made last by the majority of candidates. A very clear preference was demonstrated for question 3 despite the fact that the calculations required in answer to part (a) of question 4, for eight marks, were straightforward. Reasonable marks were gained for the numerical part (a) of questions 3 and 4 but narrative answers to the remaining parts were very disappointing. Candidates must try to manage the time they spend on each question in accordance with the marks available. They must also prepare themselves with a good knowledge of topic areas and read questions carefully. Reading time is provided in the examination for that purpose. Candidates must then respond to the specifics of a question and relate their narrative answers to the scenario presented, not simply write generally about a topic.





November 2006 Exam Section A – 50 marks


A company uses standard absorption costing. The following information was recorded by the company for October:

Budget Actual Output and sales (units) 8,700 8,200Selling price per unit £26 £31Variable cost per unit £10 £10Total fixed overheads £34,800 £37,000

Question 1.1 The sales price variance for October was A £38,500 favourable B £41,000 favourable C £41,000 adverse D £65,600 adverse

(2 marks)

The answer is B

Workings Standard selling price £26 Actual selling price £31 £ 5 x 8,200 = £41,000 Favourable





November 2006 Exam

Question 1.2 The sales volume profit variance for October was A £6,000 adverse B £6,000 favourable C £8,000 adverse D £8,000 favourable

(2 marks)

The answer is A

Workings

Sales profit volume variance Units Budgeted sales 8,700 Actual sales 8,200 500 x (£26 - £10 - £4) = £6,000 Adverse

Question 1.3 The fixed overhead volume variance for October was A £2,000 adverse B £2,200 adverse C £2,200 favourable D £4,200 adverse

(2 marks)

The answer is A

Workings

Fixed overhead volume variance Units Budgeted output 8,700 Actual output 8,200 500 x £4 = £2,000 Adverse





November 2006 Exam

Question 1.4 A master budget comprises the A budgeted income statement and budgeted cash flow only. B budgeted income statement and budgeted balance sheet only. C budgeted income statement and budgeted capital expenditure only. D budgeted income statement, budgeted balance sheet and budgeted cash flow only.

(2 marks)

The answer is D


The annual operating statement for a company is shown below:

£000 Sales revenue 800 Less variable costs 390Contribution 410 Less fixed costs 90 Less depreciation 20Net income 300 Assets £6·75m

The cost of capital is 13% per annum.

Question 1.5 The return on investment (ROI) for the company is closest to A 4·44% B 4·74% C 5·77% D 6·07%

(2 marks)

The answer is A

Workings

ROI 300,000 / 6,750,000 x 100 = 4·44%





November 2006 Exam

Question 1.6

The residual income (RI) for the company is closest to £000

A

(467)

B

(487)

C

(557)

D

(577)

(2 marks)

The answer is D

Workings RI £300K – 877·5K (13% x £6·75m) = -£577·5K





November 2006 Exam

Question 1.7

A company has reported annual operating profits for the year of £89·2m after charging £9·6m for the full development costs of a new product that is expected to last for the current year and two further years. The cost of capital is 13% per annum. The balance sheet for the company shows fixed assets with a historical cost of £120m. A note to the balance sheet estimates that the replacement cost of these fixed assets at the beginning of the year is £168m. The assets have been depreciated at 20% per year. The company has a working capital of £27·2m. Ignore the effects of taxation. The Economic Value Added® (EVA) of the company is closest to A £64·16m

B £70·56m

C £83·36m

D £100·96m

(2 marks)

The answer is A

Workings

£m Profit 89·20 Add Current depreciation (120 x 20%) 24·00 Development costs (9·60 x 2/3) 6·40 Less Replacement depreciation (168 x 20%) 33·60 Adjusted profit 86·00 Less cost of capital charge (Working 1) 21·84 EVA 64·16 Working 1 Cost of capital charge Fixed assets (168 – 33·6) 134·4 Working capital 27·2 Development costs 6·4 168.0 x 13% = 21·84





November 2006 Exam

Question 1.8 Which of the following definitions are correct?

(i) Just-in-time (JIT) systems are designed to produce or procure products or components as they are required for a customer or for use, rather than for inventory;

(ii) Flexible manufacturing systems (FMS) are integrated, computer-controlled production

systems, capable of producing any of a range of parts and of switching quickly and economically between them;

(iii) Material requirements planning (MRP) systems are computer based systems that integrate all

aspects of a business so that the planning and scheduling of production ensures components are available when needed.

A (i) only

B (i) and (ii) only



(2 marks)

The answer is B





November 2006 Exam

Question 1.9

RJD Ltd operates a standard absorption costing system. The following fixed production overhead data is available for one month:

Budgeted output 200,000 units Budgeted fixed production overhead £1,000,000 Actual fixed production overhead £1,300,000 Total fixed production overhead variance £100,000 Adverse

The actual level of production was A 180,000 units.

B 240,000 units.

C 270,000 units.

D 280,000 units.

(2 marks)

The answer is B

Workings OAR 1,000/200 = £5 per unit

Total variance Actual £1,300,000 Absorbed £1,200,000 £ 100,000 adverse £1,200,000/£5 = 240,000





November 2006 Exam

Question 1.10 WTD Ltd produces a single product. The management currently uses marginal costing but is considering using absorption costing in the future. The budgeted fixed production overheads for the period are £500,000. The budgeted output for the period is 2,000 units. There were 800 units of opening inventory at the beginning of the period and 500 units of closing inventory at the end of the period. If absorption costing principles were applied, the profit for the period compared to the marginal costing profit would be A £75,000 higher.

B £75,000 lower.

C £125,000 higher.

D £125,000 lower.

(2 marks)

The answer is B

Workings Units Opening inventory 800 Closing inventory 500Decrease 300 x (£500,000/2,000) = £75,000 lower





November 2006 Exam

Question 1.11 JJ Ltd 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 forthcoming period are as follows:

W X Y £ £ £ Selling price 200 150 150 Cost Direct materials 41 20 30 Labour 30 20 36 Overheads 60 40 50Profit 69 70 34 Bottleneck machine – minutes per unit

9 10

7

40% of the overhead cost is classified as variable

Using a throughput accounting approach, what would be the ranking of the products for best use of the bottleneck?

(3 marks)

Workings W X Y £ £ £ Selling price 200 150 150 Cost Direct materials 41 20 30Throughput contribution 159 130 120 TP/LF 159/9 130/10 120/7 £17·66 £13·00 £17·14 Ranking 1st 3rd 2nd





November 2006 Exam

Question 1.12

X Ltd has two production departments, Assembly and Finishing, and two service departments, Stores and Maintenance. Stores provides the following service to the production departments: 60% to Assembly and 40% to Finishing. Maintenance provides the following service to the production and service departments: 40% to Assembly, 45% to Finishing and 15% to Stores. The budgeted information for the year is as follows:

Budgeted fixed production overheads Assembly £100,000 Finishing £150,000 Stores £ 50,000 Maintenance £ 40,000 Budgeted output 100,000 units

At the end of the year after apportioning the service department overheads, the total fixed production overheads debited to the Assembly department’s fixed production overhead control account were £180,000. The actual output achieved was 120,000 units. Calculate the under/over absorption of fixed production overheads for the Assembly department.

(4 marks)

Workings Assembly

(£) Finishing

(£) Stores

(£) Maintenance

(£) Overheads 100,000 150,000 50,000 40,000 Reapportion Maintenance 16,000 18,000 6,000 -40,000 Stores 33,600 22,400 -56,000 149,600 190,400 Nil Nil OAR 149,600/100,000 £1·496 per unit Assembly Absorbed 120,000 x £1·496 £179,520 Incurred £180,000 Under absorbed £480





November 2006 Exam

Question 1.13

A company simultaneously produces three products (X, Y and Z) from a single process. X and Y are processed further before they can be sold; Z is a by-product that is sold immediately for $6 per unit without incurring any further costs. The sales prices of X and Y after further processing are $50 per unit and $60 per unit respectively. Data for October are as follows: $ Joint production costs that produced 2,500 units of X, 3,500 units of Y and 3,000 units of Z

140,000

Further processing costs for 2,500 units of X 24,000 Further processing costs for 3,500 units of Y 46,000

Joint costs are apportioned using the final sales value method. Calculate the total cost of the production of X for October.

(3 marks)

Workings $140,000 - $18,000 (by product) $122,000 Sales revenue X (2,500 x $50) $125,000 Y (3,500 x $60) $210,000 $335,000 Split between products X [($125,000/$335,000) x $122,000] + $24,000 = $69,522Y [($210,000/$335,000) x $122,000] + $46,000 = $122,475 $191,997 rounding





November 2006 Exam

Question 1.14 ZP Plc operates two subsidiaries, X and Y. X is a component manufacturing subsidiary and Y is an assembly and final product subsidiary. Both subsidiaries produce one type of output only. Subsidiary Y needs one component from subsidiary X for every unit of Product W produced. Subsidiary X transfers to Subsidiary Y all of the components needed to produce Product W. Subsidiary X also sells components on the external market. The following budgeted information is available for each subsidiary:

X Y Market price per component $800 Market price per unit of W $1,200 Production costs per component $600 Assembly costs per unit of W $400 Non production fixed costs $1·5m $1·3m External demand 10,000 units 12,000 units Capacity 22,000 units Taxation rates 25% 30%

The production cost per component is 60% variable. The fixed production costs are absorbed based on budgeted output. X sets a transfer price at marginal cost plus 70%. Calculate the post tax profit generated by each subsidiary.

(4 marks) Workings 1.14 X Y ($) ($) Sales 10,000 x $800 8,000,000 12,000 x $612 7,344,000 12,000 x $1,200 14,400,000 Costs 22,000 x $360 -7,920,000 12,000 x $1,012 -12,144,000 Fixed costs Production 22,000 x $240 -5,280,000 Non production -1,500,000 -1,300,000 Profit 644,000 956,000 Tax -161,000 -286,800 Profit after tax 483,000 669,200





November 2006 Exam

Question 1.15

PP Ltd operates a standard absorption costing system. The following information has been extracted from the standard cost card for one of its products:

Budgeted production 1,500 units Direct material cost: 7 kg x £4·10 £28·70 per unit Actual results for the period were as follows: Production 1,600 units Direct material (purchased and used): 12,000 kg £52,200

It has subsequently been noted that due to a change in economic conditions the best price that the material could have been purchased for was £4·50 per kg during the period.

(i) Calculate the material price planning variance.

(ii) Calculate the operational material usage variance.

(4 marks) Workings Planning variance £ per kg Ex-ante standard 4·10 Ex-post standard 4·50 0·40 x 11,200 = £4,480 Adverse Usage variance kg Standard 7 x 1,600 11,200 Actual 12,000 800 x £4·50 = £3,600 Adverse





November 2006 Exam

Question 1.16 CJD Ltd manufactures plastic components for the car industry. The following budgeted information is available for three of their key plastic components:

W X Y £ per unit £ per unit £ per unit Selling price 200 183 175 Direct material 50 40 35 Direct labour 30 35 30 Units produced and sold 10,000 15,000 18,000 The total number of activities for each of the three products for the period is as follows: Number of purchase requisitions 1,200 1,800 2,000 Number of set ups 240 260 300

Overhead costs have been analysed as follows:

Receiving/inspecting quality assurance £1,400,000 Production scheduling/machine set up £1,200,000

Calculate the budgeted profit per unit for each of the three products using activity based budgeting.

(4 marks)

Workings W X Y £ per unit £ per unit £ per unit Selling price 200·00 183·00 175·00 Direct material 50·00 40·00 35·00 Direct labour 30·00 35·00 30·00 Overheads Receiving/inspecting etc 33·60 33·60 31·11 Production scheduling 36·00 26·00 25·00 Profit per unit 50·40 48·40 53·89 Cost driver rates Receiving/inspecting quality assurance £1,400,000/5,000 = £280 per requisition Production scheduling/machine set up £1,200,000/800 = £1,500 per set up





November 2006 Exam

Question 1.17

CW Ltd makes one product in a single process. The details of the process for period 2 were as follows: There were 800 units of opening work in progress valued as follows:


During the period 1,800 units were added to the process and the following costs were incurred:


There were 500 units of closing work in progress, which were 100% complete for material, 90% complete for labour and 40% complete for production overheads. A normal loss equal to 10% of new material input during the period was expected. The actual loss amounted to 180 units. Each unit of loss was sold for £10 per unit. CW Ltd uses weighted average costing. Calculate the cost of the output for the period.

(4 marks)

Workings Equivalent units table Description Units Materials Labour Overheads

% EU % EU % EU Output 1,920 100 1,920 100 1,920 100 1,920 CWIP 500 100 500 90 450 40 200 2,420 2,370 2,120 Costs £ £ £ OWIP 98,000 46,000 7,600 Process 387,800 276,320 149,280 485,800 322,320 156,880 Less normal loss – 180 x £10 1,800 484,000 EU cost £200 £136 £74 Value of Output – 1,920 units x (£200 + £136 + £74) = £787,200





November 2006 Exam

Question 1.18 SS Ltd operates a standard marginal costing system. An extract from the standard cost card for the labour costs of one of its products is as follows:

Labour cost 5 hours x £12 £60 Actual results for the period were as follows: Production 11,500 units Labour rate variance £45,000 adverse Labour efficiency variance £30,000 adverse

Calculate the actual rate paid per direct labour hour.

(4 marks)

Workings Efficiency variance Standard hours 57,500 Actual hours 60,000 2,500 x £12 = £30,000 Adverse Rate variance Standard rate £12·00 Actual rate £12·75 £0·75 x 60,000 hours = £45,000 Adverse





November 2006 Exam


Question 2(a) Prepare the following budgets for each quarter for X Plc:

(i) Production budget in units; (ii) Raw material purchases budget in kgs and value for Material B.

(5 Marks) Rationale Sub-question (a) covers learning outcome C(iii) – Calculate projected revenues and costs based on product/service volumes, pricing strategies and cost structures. Suggested Approach Draw up a pro-forma for each budget and insert the figures. Marking Guide

Marks

Production budget 2 Raw material purchases budget 3 Examiner’s Comments This was a relatively straightforward question, although a number of calculations were required. However a number of common errors were made. Common Errors • Adding opening inventory and deducting closing inventory i.e. reversing the required inventory

adjustment; • Ignoring either the opening or closing inventory in the adjustments; • Ignoring opening inventory at the start of Quarter 1; • Merging the two materials together; • Using sales quantities rather than production quantities in part (ii).





November 2006 Exam

Question 2(b) X Plc has just been informed that Material A may be in short supply during the year for which it is preparing budgets. Discuss the impact this will have on budget preparation and other areas of X Plc.

(5 Marks)

Rationale Sub-question (b) covers learning outcome C(iii) – Calculate projected revenues and costs based on product/service volumes, pricing strategies and cost structures. Suggested Approach Consider the question in the context of the scenario and focus on issues arising for X Plc as a result of a shortage of material A – key budget factor. Also broader answers considering other impacts on budget preparation are just as valid. Marking Guide

Marks

Reasonable impact on budget preparation and other areas – 1 mark each point 5 Examiner’s Comments A wide range of implications of a possible shortage of Material A, especially for other areas of X Plc, were accepted in candidates' answers. Common Errors • Failing to appreciate that Material A may be used in other products manufactured by X Plc and that,

as a consequence the allocation of Material A based on contribution per unit of the resource may be required;

• Not recognising that Material A becomes the key budget factor and/or the implications of this for budget preparation.





November 2006 Exam

Question 2(c)

Assuming that the budgeted production of Product W was 7,700 units and that the following actual results were incurred for labour and overheads in the year:

Actual production 7,250 units Actual overheads

Variable £185,000 Fixed £105,000

Actual labour costs Skilled - £16·25 per hour £568,750 Semi-skilled - £8 per hour £332,400

Prepare a flexible budget statement for X Plc showing the total variances that have occurred for the above four costs only.

(5 Marks)

Rationale Sub-question (c) covers learning outcome C(xi) – Evaluate performance using fixed and flexible budget reports. Suggested Approach Produce the operating statement pro-forma Insert the fixed and actual figures Calculate and insert the flexed budget figures – use the high low method Calculate the variances for each cost Total the columns in the statement Marking Guide

Marks

Format 1 Flexed budget Variances

2 2

Examiner’s Comments Full marks were gained by a reasonable number of candidates but there were also several common errors. Common Errors • Making no attempt to flex the budget and simply calculating the variances as the difference between

the actual costs and the fixed budget; • Basing the flexing on the actual cost figures (i.e. Actual × 7,700/7,250) to produce a flexed budget; • Flexing the fixed overhead which was clearly stated in the question to be 40% of £280,000; • Making errors in variance signing (adverse/favourable).





November 2006 Exam

Question 2(d) X Plc currently uses incremental budgeting. Explain how Zero Based Budgeting could overcome the problems that might be faced as a result of the continued use of the current system.

(5 Marks)

Rationale Sub-question (d) covers learning outcome C(vi) – Evaluate and apply alternative approaches to budgeting. Suggested Approach Explain the drawbacks of incremental budgeting Explain the benefits of zero based budgeting Ensure your answer is set in the context of the scenario Marking Guide

Marks

Incremental budgeting Zero based budgeting

2 3

Examiner’s Comments Most candidates were able to describe the basic characteristics of both incremental and zero-based budgeting but were often unable to develop this and/or apply it to the situation of X Plc. Common Errors • Demonstrating a lack of appreciation of the implications of a changing business environment.





November 2006 Exam

Question 2(e)

Explain how rolling budgets are used and why they would be suitable for X Plc.

(5 Marks)

Rationale Sub-question (e) covers learning outcome C(vi) – Evaluate and apply alternative approaches to budgeting. Suggested Approach Explain rolling budgets – candidates could make up their own example by way of explanation. Consider its appropriateness for X Plc, that is, the company is experiencing increasing competition and will need to be able to react, hence the fixed budget may not be appropriate etc. Marking Guide

Marks

Rolling budget system 3 Relate to X Plc – 1 mark for each point 2 Examiner’s Comments Candidates frequently seemed to confuse rolling budgets with revisions to budgets. Common Errors • Failing to clearly explain and/or illustrate the key characteristics of, and rationale for, rolling budgets

as opposed to, for example, budget revisions/outturn forecasts; • Demonstrating a lack of awareness of why rolling budgets would be suitable for X Plc.





November 2006 Exam

Question 2(f)

Briefly explain how linear regression analysis can be used to forecast sales and briefly discuss whether it would be a suitable method for X Plc to use.

(5 marks) Rationale Sub-question (f) covers learning outcome C(ii) – Calculate projected product/service volumes employing appropriate forecasting techniques. Suggested Approach Explain linear regression – candidates again could use their own examples to illustrate Consider the suitability for X Plc. Candidates may have a positive or negative view but this must be explained. Marking Guide

Marks

Linear regression explanation 3 Suitability for X Plc 2 Examiner’s Comments This part was generally answered poorly. Common Errors • Confusing the analysis with linear regression applied to costs. Many candidates

discussed/illustrated equations containing fixed and variable costs; • Failing to appreciate the limitations of extrapolation and the problems caused by variations e.g.

cyclical, seasonal; • Failing to appreciate the implications of the changing business environment.





November 2006 Exam


Question 3(a)

(a) Prepare an operating statement which reconciles the budgeted profit to the actual profit for the period. (The statement should include the material mix and material yield variances).

(12 marks)

Rationale Part (a) covers learning outcome B(iii) – Prepare and discuss a report which reconciles budget and actual profit using absorption and/or marginal costing principles. Suggested Approach Produce the operating statement pro-forma Insert the budgeted and actual profit figures Calculate the variances Reconcile the budgeted and actual profit figures Marking Guide

Marks

Format 1 Sales volume contribution variance 1 Selling price variance 1 Material price variances – A, B and C Material mix variances – A, B and C Material yield variance Fixed production overhead expenditure variance

3 3 2 1

Examiner’s Comments Many candidates made a reasonable attempt at variance calculation and reconciliation. Common Errors • Duplicating variances: in particular many candidates calculated the material usage variance and

included it in the reconciliation statement in addition to the material mix and yield variances; • Evaluating the sales volume variance at sales value rather than using the contribution rate; • Calculating the fixed overhead volume variance, which does not arise in marginal costing; • Making errors in variance signing (adverse/favourable).





November 2006 Exam

Question 3(b)

(b) The Production Manager of X Ltd is new to the job and has very little experience of

management information. Write a brief report to the Production Manager of X Ltd that

(i) interprets the material price, mix and yield variances; (ii) discusses the merits, or otherwise, of calculating the materials mix and yield

variances for X Ltd.

(8 marks)

Rationale Part (b) covers learning outcome B(ii) - Calculate and interpret material, labour, variable overhead, fixed overhead and sales variances. Suggested Approach Produce the report headings. Interpret the material price, mix and yield variances that have been calculated in part a). Discuss the merits or otherwise of these calculations for X Plc, that is, different aspects of the production process are highlighted to allow the managers to attain the optimum combination of materials input and so on. Marking Guide

Marks

Report format 1 Interpretation of material price, mix and yield variances Advantages of calculating mix and yield variances – 1 mark for each point

4 3

Examiner’s Comments Answers were often generic in nature, rather than related to the answers to part (a), and frequently merely stated how the different variances are calculated. Other candidates believed wrongly that simply stating the obvious was enough e.g. 'the material price variance is adverse'. Common Errors • Producing incorrect interpretations of variances (based on the candidate’s own figures).





November 2006 Exam

Question 4(a)

(a) If the transfer price of the component is set by the Manager of Division X at the current

market price (£20 per component), recalculate the budgeted performance measures for each division.

(8 marks)

Rationale Part (a) covers learning outcome D(iv) – Calculate and apply measures of performance for investment centres. Suggested Approach Calculate each of the four performance measures as a result of setting the transfer price at market price. Marking Guide

Marks

Income statement 3 Residual income 1 ROCE Operating profit margin Asset turnover

1 1.5 1.5

Examiner’s Comments An extremely unpopular question but the calculations were often well done where attempted. Common Errors • Not adjusting the sales value of Division X; • Not understanding the asset turnover calculation.





November 2006 Exam

Question 4(b)

(b) Discuss the changes to the performance measures of the divisions that would arise as a

result of altering the transfer price to £20 per component.

(6 marks)

Rationale Part (b) covers learning outcome D(vi) - Explain the typical consequences of a divisional structure for performance measurement as divisions compete or trade with each other. Suggested Approach Produce a table that compares each of the four performance measures. Discuss the differences for each performance measure. Consider the overall impact on the group.

Marking Guide

Marks

Changes to the performance measures of the divisions – 1 mark for each 4 Overall impact 2 Examiner’s Comments Often only very brief and basic comments, if any, were made on the changed performance measures..





November 2006 Exam

Question 4(c)

(c) (i) Explain the problems that could arise for each of the Divisional Managers and for

ZZ Group as a whole as a result of giving full autonomy to the Divisional Managers.

(ii) Discuss how the problems you have explained could be resolved without resorting to a policy of imposed transfer prices.

(6 marks)

Rationale Part (c) covers learning outcome D(vii) - Identify the likely consequences of different approaches to transfer pricing for divisional decision making, divisional and group profitability, the motivation of divisional management and the autonomy of individual divisions. Suggested Approach Discuss the problems of giving full autonomy to the divisional managers. Discuss how these problems could be overcome. Ensure that the answer is within the context of the scenario.

Marking Guide

Marks

Problems that could arise as a result of full autonomy – 1 mark for each point 3 Resolution of these problems – 1 mark for each point 3 Examiner’s Comments A flexible approach was taken to marking. For example, it was accepted that negotiation may be judged not to be involved in part (i) but instead could be viewed as a solution in part (ii). Common Errors • Failing to appreciate the potential problems and solutions arising from the scenario presented.








22 May 2007 – Tuesday Morning Session Instructions to candidates


You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, highlight and/or make notes on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during the reading time.


ALL answers must be written in the answer book. Answers or notes written on the question paper will not be submitted for marking.





The list of verbs as published in the syllabus is given for reference on the inside back cover of this question paper.

Write your candidate number, the paper number and examination subject title in the spaces provided on the front of the answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close.


P1 –

Per

form

ance

Eva

luat

ion

TURN OVER



P1 2 May 2007

SECTION A – 40 MARKS [the indicative time for answering this section is 72 minutes] ANSWER ALL FIFTEEN SUB-QUESTIONS

Question One 1.1 Which of the following best describes an investment centre? A A centre for which managers are accountable only for costs. B A centre for which managers are accountable only for financial outputs in the form of

generating sales revenue. C A centre for which managers are accountable for profit. D A centre for which managers are accountable for profit and current and non-current

assets.

(2 marks)

1.2 A flexible budget is A a budget which, by recognising different cost behaviour patterns, is designed to change

as volume of activity changes. B a budget for a twelve month period which includes planned revenues, expenses, assets

and liabilities. C a budget which is prepared for a rolling period which is reviewed monthly, and updated

accordingly. D a budget for semi-variable overhead costs only.

(2 marks)

Instructions for answering Section A: The answers to the fifteen sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answer option you have chosen. You do not need to start a new page for each sub-question. For sub-questions 1.11 to 1.15 you should show your workings as marks are available for the method you use to answer these sub-questions.



May 2007 3 P1

1.3 The term “budget slack” refers to the A lead time between the preparation of the master budget and the commencement of the

budget period. B difference between the budgeted output and the actual output achieved. C additional capacity available which is budgeted for even though it may not be used. D deliberate overestimation of costs and/or underestimation of revenues in a budget.

(2 marks)

1.4 PP Ltd is preparing the production and material purchases budgets for one of their

products, the SUPERX, for the forthcoming year.

The following information is available: SUPERX Sales demand (units) 30,000 Material usage per unit 7 kgs Estimated opening inventory 3,500 units Required closing inventory 35% higher than opening inventory

How many units of the SUPERX will need to be produced? A 28,775 B 30,000 C 31,225 D 38,225

(2 marks)


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P1 4 May 2007

The following data are given for sub-questions 1.5 and 1.6 below X Ltd operates a standard costing system and absorbs fixed overheads on the basis of machine hours. Details of budgeted and actual figures are as follows:

Budget Actual Fixed overheads £2,500,000 £2,010,000 Output 500,000 units 440,000 units Machine hours 1,000,000 hours 900,000 hours

1.5 The fixed overhead expenditure variance is A £190,000 favourable B £250,000 adverse C £300,000 adverse D £490,000 favourable

(2 marks) 1.6 The fixed overhead volume variance is A £190,000 favourable B £250,000 adverse C £300,000 adverse D £490,000 favourable

(2 marks) 1.7 A company operates a standard absorption costing system. The budgeted fixed

production overheads for the company for the latest year were £330,000 and budgeted output was 220,000 units. At the end of the company’s financial year the total of the fixed production overheads debited to the Fixed Production Overhead Control Account was £260,000 and the actual output achieved was 200,000 units.

The under / over absorption of overheads was

A £40,000 over absorbed

B £40,000 under absorbed

C £70,000 over absorbed

D £70,000 under absorbed (2 marks)



May 2007 5 P1

1.8 A company operates a standard absorption costing system. The following fixed production overhead data are available for the latest period:

Budgeted Output 300,000 units Budgeted Fixed Production Overhead £1,500,000 Actual Fixed Production Overhead £1,950,000 Fixed Production Overhead Total Variance £150,000 adverse

The actual level of production for the period was nearest to

A 277,000 units

B 324,000 units

C 360,000 units

D 420,000 units

(2 marks)

1.9 Which of the following best describes a basic standard? A A standard set at an ideal level, which makes no allowance for normal losses, waste and

machine downtime. B A standard which assumes an efficient level of operation, but which includes allowances

for factors such as normal loss, waste and machine downtime. C A standard which is kept unchanged over a period of time. D A standard which is based on current price levels.

(2 marks)

1.10 XYZ Ltd is preparing the production budget for the next period. The total costs of

production are a semi-variable cost. The following cost information has been collected in connection with production:

Volume (units) Cost

4,500 £29,000 6,500 £33,000

The estimated total production costs for a production volume of 5,750 units is nearest to A £29,200

B £30,000

C £31,500

D £32,500

(2 marks)

Section A continues on the next page TURN OVER



P1 6 May 2007

1.11 S Ltd manufactures three products, A, B and C. The products use a series of different machines but there is a common machine, P, that is a bottleneck.

The selling price and standard cost for each product for the forthcoming year is as follows:

A B C $ $ $ Selling price 200 150 150 Direct materials 41 20 30 Conversion costs 55 40 66 Machine P - minutes 12 10 7

Calculate the return per hour for each of the products.

(4 marks) 1.12 The following data have been extracted from a company’s year-end accounts:

£ Turnover 7,055,016Gross profit 4,938,511Operating profit 3,629,156Non-current assets 4,582,000Cash at bank 4,619,582Short term borrowings 949,339Trade receivables 442,443Trade payables 464,692

Calculate the following four performance measures: (i) Operating profit margin; (ii) Return on capital employed; (iii) Trade receivable days (debtors days); (iv) Current (Liquidity) ratio.

(4 marks)



May 2007 7 P1

1.13 PQR Ltd operates a standard absorption costing system. Details of budgeted and actual

figures are as follows:

Budget Actual Sales volume (units) 100,000 110,000 Selling price per unit £10 £9·50 Variable cost per unit £5 £5·25 Total cost per unit £8 £8·30

(i) Calculate the sales price variance. (2 marks)

(ii) Calculate the sales volume profit variance.

(2 marks)

1.14 WX has two divisions, Y and Z. The following budgeted information is available.

Division Y manufactures motors and budgets to transfer 60,000 motors to Division Z and to sell 40,000 motors to external customers.

Division Z assembles food mixers and uses one motor for each food mixer produced.

The standard cost information per motor for Division Y is as follows:

£ Direct materials 70 Direct labour 20 Variable production overhead 10 Fixed production overhead 40 Fixed selling and administration overhead 10 Total standard cost 150

In order to set the external selling price the company uses a 33·33% mark up on total standard cost.

(i) Calculate the budgeted profit/(loss) for Division Y if the transfer price is set at marginal cost.

(ii) Calculate the budgeted profit/(loss) for Division Y if the transfer price is set at

the total production cost. (4 marks)


TURN OVER



P1 8 May 2007

1.15 RF Ltd is about to launch a new product in June 2007. The company has commissioned

some market research to assist in sales forecasting. The resulting research and analysis established the following equation:

Y = Ax0·6 Where Y is the cumulative sales units, A is the sales units in month 1, x is the month number. June 2007 is Month 1. Sales in June 2007 will be 1,500 units.

Calculate the forecast sales volume for each of the months June, July and August 2007 and for that three month period in total.

(4 marks)


Reminder

All answers to Section A must be written in your answer book.

Answers to Section A written on the question paper will not be submitted for marking.

End of Section A

Section B starts on page 10



May 2007 9 P1




P1 10 May 2007


(a) A company uses variance analysis to monitor the performance of the team of workers which assembles Product M. Details of the budgeted and actual performance of the team for last period were as follows:

Budget Actual Output of product M 600 units 680 units Wage rate £30 per hour £32 per hour Labour hours 900 hours 1,070 hours

It has now been established that the standard wage rate should have been £31·20 per hour.

(i) Calculate the labour rate planning variance and calculate the operational labour efficiency

variance. (ii) Explain the major benefit of analysing variances into planning and operational

components.

(5 Marks)

(b) Briefly explain three limitations of standard costing in the modern business environment.

(5 Marks)

(c) Briefly explain three factors that should be considered before deciding to investigate a

variance.

(5 Marks)

(d) G Group consists of several autonomous divisions. Two of the divisions supply components and services to other divisions within the group as well as to external clients. The management of G Group is considering the introduction of a bonus scheme for managers that will be based on the profit generated by each division.

Briefly explain the factors that should be considered by the management of G Group when designing the bonus scheme for divisional managers.

(5 Marks)



May 2007 11 P1

(e) Briefly explain the role of a Manufacturing Resource Planning System in supporting a

standard costing system.

(5 Marks)

(f) Briefly explain the main differences between the traditional manufacturing environment and a just-in-time manufacturing environment.



End of Section B

Section C starts on page 12

TURN OVER



P1 12 May 2007


Question Three RJ produces and sells two high performance motor cars: Car X and Car Y. The company operates a standard absorption costing system. The company’s budgeted operating statement for the year ending 30 June 2008 and supporting information is given below: Operating statement year ending 30 June 2008

Car X Car Y Total $000 $000 $000 Sales 52,500 105,000 157,500 Production cost of sales 40,000 82,250 122,250 Gross profit 12,500 22,750 35,250 Administration costs

Variable 6,300 12,600 18,900 Fixed 7,000 9,000 16,000

Profit/(loss) (800) 1,150 350 The production cost of sales for each car was calculated using the following values:

Car X Car Y Units $000 Units $000 Opening inventory 200 8,000 250 11,750 Production 1,100 44,000 1,600 75,200 Closing inventory 300 12,000 100 4,700 Cost of sales 1,000 40,000 1,750 82,250

Production costs The production costs are made up of direct materials, direct labour, and fixed production overhead. The fixed production overhead is general production overhead (it is not product specific). The total budgeted fixed production overhead is $35,000,000 and is absorbed using a machine hour rate. It takes 200 machine hours to produce one Car X and 300 machine hours to produce one Car Y. Administration costs The fixed administration costs include the costs of specific marketing campaigns: $2,000,000 for Car X and $4,000,000 for Car Y.

Required:

(a) Produce the budgeted operating statement in a marginal costing format.

(7 marks)

(b) Reconcile the total budgeted absorption costing profit with the total budgeted

marginal costing profit as shown in the statement you produced in part (a).

(5 marks)



May 2007 13 P1

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

$000 Machining costs 7,000Set up costs 12,000Quality inspections 7,020Stores receiving 3,480Stores issues 5,500 35,000

The analysis also revealed the following information:

Car X Car Y Budgeted production (number of cars) 1,100 1,600 Cars per production run 10 40 Inspections per production run 20 80 Number of component deliveries during the year 492 900 Number of issues from stores 4,000 7,000

Required:

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

(10 marks)

(d) Prepare a report to the Production Director of RJ which explains the potential

benefits of using activity based budgeting for performance evaluation.

(8 marks) (Total for Question Three = 30 marks)


TURN OVER



P1 14 May 2007

Question Four

RF Ltd is a new company which plans to manufacture a specialist electrical component. The company founders will invest £16,250 on the first day of operations, that is, Month 1. They will also transfer fixed capital assets to the company. The following information is available: Sales The forecast sales for the first four months are as follows:

Month Number of components

1 1,500 2 1,750 3 2,000 4 2,100

The selling price has been set at £10 per component in the first four months. Sales receipts

Time of payment % of customers Month of sale 20* One month later 45 Two months later 25 Three months later 5

The balance represents anticipated bad debts. *A 2% discount is given to customers for payment received in the month of sale. Production There will be no opening inventory of finished goods in Month 1 but after that it will be policy for the closing inventory to be equal to 20% of the following month’s forecast sales. Variable production cost The variable production cost is expected to be £6·40 per component.

£ Direct materials 1·90 Direct wages 3·30 Variable production overheads 1·20 Total variable cost 6·40



May 2007 15 P1

Notes: Direct materials: 100% of the materials required for production will be purchased in the month of production. No inventory of materials will be held. Direct materials will be paid for in the month following purchase. Direct wages will be paid in the month in which production occurs. Variable production overheads: 60% will be paid in the month in which production occurs and the remainder will be paid one month later. Fixed overhead costs Fixed overhead costs are estimated at £75,000 per annum and are expected to be incurred in equal amounts each month. 60% of the fixed overhead costs will be paid in the month in which they are incurred and 30% in the following month. The balance represents depreciation of fixed assets. Calculations are to be made to the nearest £1. Ignore VAT and Tax.

Required:

(a) Prepare a cash budget for each of the first three months and in total. (15 marks)

(b) There is some uncertainty about the direct material cost. It is thought that the

direct material cost per component could range between £1·50 and £2·20. Calculate the budgeted total net cash flow for the three month period if the cost of the direct material is:

(i) £1.50 per component; or (ii) £2.20 per component.

(6 marks)

(c) Using your answers to part (a) and (b) above, prepare a report to the management of RF Ltd that discusses the benefits or otherwise of performing ‘what if’ analysis when preparing cash budgets.

(9 marks)




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P1 16 May 2007




May 2007 17 P1



P1 18 May 2007

PRESENT VALUE TABLE




(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026



May 2007 19 P1




(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514


(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870



P1 20 May 2007

Formulae


aacbbX

242 −±−

=


nxx ∑

= ffxx

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Standard Deviation

nxxSD

2)( −∑= 2

2x



Price: 100 x w

PP

wo

1

∑

∗∑

Quantity: 100 x

1

wQQw

o

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May 2007 21 P1



b = 22 )X(Xn



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∑ Y = na + b ∑ X ∑ XY = a ∑ X + b∑X2


})Y(Yn}{)X(Xn{


2222 ∑−∑∑−∑

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R(rank) = 1 - )1(

62

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PV =

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PV = r1



P1 22 May 2007




May 2007 23 P1

LIST OF VERBS USED IN THE QUESTION REQUIREMENTS A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for each question in this paper. It is important that you answer the question according to the definition of the verb.

LEARNING OBJECTIVE VERBS USED DEFINITION

1 KNOWLEDGE

What you are expected to know. List Make a list of State Express, fully or clearly, the details of/facts of Define Give the exact meaning of

2 COMPREHENSION What you are expected to understand. Describe Communicate the key features

Distinguish Highlight the differences between Explain Make clear or intelligible/State the meaning of Identify Recognise, establish or select after

consideration Illustrate Use an example to describe or explain

something

3 APPLICATION How you are expected to apply your knowledge. Apply

Calculate/compute To put to practical use To ascertain or reckon mathematically

Demonstrate To prove with certainty or to exhibit by practical means

Prepare To make or get ready for use Reconcile To make or prove consistent/compatible Solve Find an answer to Tabulate Arrange in a table

4 ANALYSIS How are you expected to analyse the detail of what you have learned.

Analyse Categorise

Examine in detail the structure of Place into a defined class or division

Compare and contrast Show the similarities and/or differences between

Construct To build up or compile Discuss To examine in detail by argument Interpret To translate into intelligible or familiar terms Produce To create or bring into existence

5 EVALUATION How are you expected to use your learning to evaluate, make decisions or recommendations.

Advise Evaluate Recommend

To counsel, inform or notify To appraise or assess the value of To advise on a course of action



P1 24 May 2007


Managerial Level


May 2007





May 2007 Exam General Comments The results achieved on this paper were a very significant improvement on any previous sitting. The improvement was seen in all sections of the paper although differences in performance were demonstrated between questions 3 and 4 in Section C. Overall, the results did not suffer from the change of question paper format, with a transfer of ten marks from the shorter-form questions in section A to the longer-form questions in Section C. Achievement on the ten multiple-choice questions and on the shorter-form calculation questions in Section A was particularly good (although it was once again the case that some candidates did not attempt all of the multiple-choice questions) and gave a large majority of candidates every opportunity for success. This was not always achieved due to weaker performance on the parts of questions requiring narrative answers in Sections B and C of the paper and on the calculations and statements required in question 3. Lack of preparation seemed once again to be a factor although there was much less evidence of time pressures and poor time management at this sitting. Narrative sections, for example, were invariably reasonably attempted, certainly in terms of length of answer. However the answers were at times lacking in depth of content and/or in relevance to the question. However, the improved performance in question 2 (compulsory Section B), seen over the last couple of sittings, was certainly maintained. The choice from the two questions in Section C of the examination paper was made last by the vast majority of candidates and there was an even split between the questions. There were some good attempts at both optional questions but there were also a worrying number of candidates making fundamental errors, particularly in question 3. Candidate must remember that, in order to gain maximum marks for Section C questions, they must relate their answers to the given scenario.

The Chartered Institute of Management Accountants Page 1�




May 2007 Exam Section A – 40 marks

Question 1.1 Which of the following best describes an investment centre? A A centre for which managers are accountable only for costs. B A centre for which managers are accountable only for financial outputs in the form of generating

sales revenue. C A centre for which managers are accountable for profit. D A centre for which managers are accountable for profit and current and non-current assets.

(2 marks)

The answer is D

Question 1.2 A flexible budget is A a budget which, by recognising different cost behaviour patterns, is designed to change as volume of

activity changes. B a budget for a twelve month period which includes planned revenues, expenses, assets and

liabilities. C a budget which is prepared for a rolling period which is reviewed monthly, and updated accordingly. D a budget for semi-variable overhead costs only.

(2 marks)

The answer is A





May 2007 Exam

Question 1.3 The term “budget slack” refers to the A lead time between the preparation of the master budget and the commencement of the budget

period. B difference between the budgeted output and the actual output achieved. C additional capacity available which is budgeted for even though it may not be used. D deliberate overestimation of costs and/or underestimation of revenues in a budget.

(2 marks)

The answer is D

Question 1.4 PP Ltd is preparing the production and material purchases budgets for one of their products, the SUPERX, for the forthcoming year. The following information is available:

How many units of the SUPERX will need to be produced?

A 28,775 B 30,000 C 31,225 D 38,225

(2 marks)

The answer is C

Workings

SUPERX Sales demand (units) 30,000 Material usage per unit 7 kgs Estimated opening inventory 3,500 units Required closing inventory 35% higher than opening inventory

Units Sales 30,000 Req'd closing inventory 4,725 Less opening inventory (3,500)Production

31 225





May 2007 Exam

The following data are given for sub-questions 1.5 and 1.6 below X Ltd operates a standard costing system and absorbs fixed overheads on the basis of machine hours. Details of budgeted and actual figures are as follows:

Budget Actual Fixed overheads £2,500,000 £2,010,000 Output 500,000 units 440,000 units Machine hours 1,000,000 hours 900,000 hours

Question 1.5 The fixed overhead expenditure variance is A £190,000 favourable B £250,000 adverse C £300,000 adverse D £490,000 favourable

(2 marks)

The answer is D

Workings

Question 1.6

The fixed overhead volume variance is A £190,000 favourable B £250,000 adverse C £300,000 adverse D £490,000 favourable

(2 marks)

The answer is C

Budget £2,500,000 Actual £2,010,000 Variance £490,000 favourable





May 2007 Exam

Workings Budgeted volume 500,000 units Actual volume 440,000 units 60,000 units OAR 2 hours x £2·50 x £5 per unit Volume variance £300,000 adverse

Question 1.7 A company operates a standard absorption costing system. The budgeted fixed production overheads for the company for the latest year were £330,000 and budgeted output was 220,000 units. At the end of the company’s financial year the total of the fixed production overheads debited to the Fixed Production Overhead Control Account was £260,000 and the actual output achieved was 200,000 units. The under / over absorption of overheads was A £40,000 over absorbed


C £70,000 over absorbed

D £70,000 under absorbed

(2 marks)

The answer is A

Workings

£ Absorbed (200,000 units x £1·50) 300,000Incurred 260,000Over absorbed 40,000





May 2007 Exam

Question 1.8 A company operates a standard absorption costing system. The following fixed production overhead data are available for the latest period:

The actual level of production for the period was nearest to

A 277,000 units

B 324,000 units

C 360,000 units

D 420,000 units

(2 marks)

Budgeted Output 300,000 units Budgeted Fixed Production Overhead £1,500,000 Actual Fixed Production Overhead £1,950,000 Fixed Production Overhead Total Variance £150,000 adverse

The answer is C

Workings

Actual fixed production overhead cost £1,950,000 Total variance £150,000 adverse Absorbed £1,800,000 OAR per unit £5 360,000 units

Question 1.9 Which of the following best describes a basic standard? A A standard set at an ideal level, which makes no allowance for normal losses, waste and machine

downtime. B A standard which assumes an efficient level of operation, but which includes allowances for factors

such as normal loss, waste and machine downtime. C A standard which is kept unchanged over a period of time. D A standard which is based on current price levels.

(2 marks)The answer is C





May 2007 Exam

Question 1.10 XYZ Ltd is preparing the production budget for the next period. The total costs of production are a semi-variable cost. The following cost information has been collected in connection with production:

The estimated total production costs for a production volume of 5,750 units is nearest to A £29,200

B £30,000

C £31,500

D £32,500

(2 marks)

The answer is C Workings

Question 1.11 S Ltd manufactures three products, A, B and C. The products use a series of different machines but there is a common machine, P, that is a bottleneck. The selling price and standard cost for each product for the forthcoming year is as follows:

Calculate the return per hour for each of the products.

(4 marks)

Volume (units) Cost 4,500 £29,000 6,500 £33,000

High Low Method Activity Cost Highest 6,500 £33,000 Lowest 4,500 £29,000 Difference 2,000 £4,000 Variable cost per unit £2 Substitute into highest activity

6,500 £33,000 Total cost

6,500 x £2 £13,000 Variable cost Difference £20,000 Fixed cost Therefore 5,750 x £2 £11,500 Variable cost £20,000 Fixed cost £31,500 Total cost

A B C $ $ $ Selling price 200 150 150 Direct materials 41 20 30 Conversion costs 55 40 66 Machine P - minutes 12 10 7





May 2007 Exam

Workings

A B C $ $ $

Selling price 200 150 150 Direct materials 41 20 30Throughput 159 130 120 Machine P – minutes per unit 12 10 7

Return per factory hour 159/12 130/10 120/7 $13·25 $13 $17·14

x 60 minutes $795 $780 $1,028

Question 1.12

The following data have been extracted from a company’s year-end accounts:

Calculate the following four performance measures: (i) Operating profit margin; (ii) Return on capital employed; (iii) Trade receivable days (debtors days); (iv) Current (Liquidity) ratio.

(4 marks)

£ Turnover 7,055,016 Gross profit 4,938,511 Operating profit 3,629,156 Non-current assets 4,582,000 Cash at bank 4,619,582 Short term borrowings 949,339 Trade receivables 442,443 Trade payables 464,692

Workings

Operating profit margin (3,629,156/7,055,016) x 100 = 51·44% Return on [3,629,156/(4,582,000 + 4,619,582 + 442,443 - 949,339 -

464,692)] x 100 = 44·10% capital employed Trade receivable days (442,443/7,055,016) x 365 days = 22·89 days Current/liquidity ratio (4,619,582 + 442,443)/(949,339 + 464,692) = 3·58 times





May 2007 Exam

Question 1.13 PQR Ltd operates a standard absorption costing system. Details of budgeted and actual figures are as follows:

(i) Calculate the sales price variance. (2 marks)

(ii) Calculate the sales volume profit variance. (2 marks)

Budget Actual Sales volume (units) 100,000 110,000 Selling price per unit £10 £9·50 Variable cost per unit £5 £5·25 Total cost per unit £8 £8·30

Workings

Sales price variance Budgeted selling price £10·00Actual selling price £9·50 £0·50 adverse Actual sales volume (units) 110,000 £55,000 adverse Sales volume profit variance Budgeted sales volume (units) 100,000Actual sales volume (units) 110,000 10,000 favourable Standard profit per unit £2 £20,000 favourable





May 2007 Exam

Question 1.14 WX has two divisions, Y and Z. The following budgeted information is available. Division Y manufactures motors and budgets to transfer 60,000 motors to Division Z and to sell 40,000 motors to external customers. Division Z assembles food mixers and uses one motor for each food mixer produced. The standard cost information per motor for Division Y is as follows:

In order to set the external selling price the company uses a 33·33% mark up on total standard cost.

(i) Calculate the budgeted profit/(loss) for Division Y if the transfer price is set at marginal cost.

(ii) Calculate the budgeted profit/(loss) for Division Y if the transfer price is set at the total production cost.

(4 marks)

Workings

£ Direct materials 70Direct labour 20Variable production overhead 10Fixed production overhead 40Fixed selling and administration overhead 10Total standard cost 150

(i) Budgeted loss – marginal cost transfer price Sales £000

Internal 60,000 x £100 6,000 External 40,000 x (£150 x 1·3333) 8,000 14,000 Variable cost 100,000 x £100 10,000 Contribution 4,000 Fixed costs Production 100,000 x £40 4,000 Administration 100,000 x £10 1,000 Loss (1,000)(ii) Budgeted profit – absorption cost transfer price Sales £000

Internal 60,000 x £140 8,400 External 40,000 x (£150 x 1·3333) 8,000 16,400 Variable cost 100,000 x £100 10,000 Contribution 6,400 Fixed costs Production 100,000 x £40 4,000 Administration 100,000 x £10 1,000 Profit 1,400





May 2007 Exam

Question 1.15

RF Ltd is about to launch a new product in June 2007. The company has commissioned some market research to assist in sales forecasting. The resulting research and analysis established the following equation:

Y = Ax0·6

Where Y is the cumulative sales units, A is the sales units in month 1, x is the month number. June 2007 is Month 1. Sales in June 2007 will be 1,500 units. Calculate the forecast sales volume for each of the months June, July and August 2007 and for that three month period in total.

(4 marks)

Workings Forecast sales volume for June, July and August is:

Month Cumulative sales Monthly sales (units) (units)

June 1,500 1,500 July 2,274 774 August 2,900 626





May 2007 Exam


Question 2(a) A company uses variance analysis to monitor the performance of the team of workers which assembles Product M. Details of the budgeted and actual performance of the team for last period were as follows:

It has now been established that the standard wage rate should have been £31·20 per hour. (i) Calculate the labour rate planning variance and calculate the operational labour efficiency variance. (ii) Explain the major benefit of analysing variances into planning and operational components.

(5 Marks) Rationale Sub-question (a) covers learning outcome B(iv) - Calculate and interpret planning and operational variances. Suggested Approach (i) Adjust the budget by multiplying the budgeted hours by the revised standard wage rate per hour. Calculate the standard hours of actual output and compare with the actual hours worked. (ii) Consider the benefit of further analysis of traditional variances. Marking Guide

Marks

(i) Planning variance (labour rate) 1 Standard hours of actual output 1 Operational variance (labour efficiency) (ii) Major benefit of planning and operational variance analysis

1 2

Examiner’s Comments A large variety of calculations were performed in both parts of (i)

Budget Actual Output of product M 600 units 680 units Wage rate £30 per hour £32 per hour Labour hours 900 hours 1,070 hours





May 2007 Exam

Common Errors Planning variance:

• Using product units (both actual and budget) instead of labour hours • Using the difference between the revised standard wage rate and the actual labour rate rather than the

original standard rate • Using the difference between the actual wage rate and the original standard rate i.e. calculating the total

rate variance • Using the actual hours rather than the budgeted/standard hours

Operational variance: • Multiplying the difference in hours by the actual wage rate, or the original standard rate, rather than the

revised standard rate • Comparing the actual labour hours with the budgeted hours • Multiplying the difference between the budgeted and the actual product units by one or other wage rate

Major benefit of analysis: • Describing what the variances are • Discussing the benefits of variance analysis generally • With reference to the specific illustration, some candidates stated that the operational variance would

have been larger if not for the change in standard – this was incorrect and not relevant to the answer anyway

Question 2(b) Briefly explain three limitations of standard costing in the modern business environment.

(5 Marks)

Rationale Sub-question (b) covers learning outcome B (i) - Explain why and how standards are set in manufacturing and in service industries with particular reference to the maximisation of efficiency and minimisation of waste and B(ii) - Calculate and interpret material, labour, variable overhead, fixed overhead and sales variances. Suggested Approach • Consider the key features of modern business – what has changed? • Relate the impact of those changes to the usefulness of standard costing Marking Guide Marks Up to 2 marks for each limitation 5 Examiner’s Comments This part was generally reasonably well answered Common Errors • Focussing on difficulties of applying standard costing generally without any reference to the modern

business environment • Discussing the use of different types of standard – ideal, basic etc





May 2007 Exam

Question 2(c)

Briefly explain three factors that should be considered before deciding to investigate a variance.

(5 Marks)

Rationale Sub-question (c) covers learning outcome B(ii) - Calculate and interpret material, labour, variable overhead, fixed overhead and sales variances. Suggested Approach • Consider situations where variance investigation may not yield benefits and the cost of investigation Marking Guide Marks Up to 2 marks for each factor 5

Examiner’s Comments Well answered by most candidates. Common Errors • Focussing on the seasonality of business – this is likely to be anticipated and is unlikely to affect

anything other than volume variances anyway • Providing a simple listing rather than a brief explanation

Question 2(d) G Group consists of several autonomous divisions. Two of the divisions supply components and services to other divisions within the group as well as to external clients. The management of G Group is considering the introduction of a bonus scheme for managers that will be based on the profit generated by each division. Briefly explain the factors that should be considered by the management of G Group when designing the bonus scheme for divisional managers.

(5 Marks)

Rationale Sub-question (d) covers learning outcome D(v) - Discuss the likely behavioural consequences of the use of performance metrics in managing cost, profit and investment centres. Suggested Approach • Consider what factors may affect the fairness of the scheme and the motivation and decision-making of

managers





May 2007 Exam

Marking Guide Marks Transfer pricing aspects (up to 3) Other aspects (up to 3) 5

Examiner’s Comments There was a general failure to link answers to a bonus scheme and to appreciate that only two of the divisions supply to other divisions Common Errors • Discussing generic aspects of transfer pricing (e.g. impact on decision-making and goal congruence)

without relating them to the design of a bonus scheme • Failing to consider aspects other than transfer pricing

Question 2(e) Briefly explain the role of a Manufacturing Resource Planning System in supporting a standard costing system.

(5 Marks)

Rationale Sub-question (e) covers learning outcome A(vii) - Explain the role of MRP and ERP systems in supporting standard costing systems. Suggested Approach • Explain what a manufacturing resource planning system is • Consider its link to a standard costing system Marking Guide Marks Manufacturing resource planning explained 3 Link to standard costing 2

Examiner’s Comments This part of question 2 was generally not well answered. Common Errors • Confusing the system with materials requirements planning • Demonstrating lack of knowledge of the features of a manufacturing resource planning system • Including non-manufacturing activities in the discussion • Failing to consider links to standard costing





May 2007 Exam

Question 2(f)

Briefly explain the main differences between the traditional manufacturing environment and a just-in-time manufacturing environment.

(5 marks) Rationale Sub-question (f) covers learning outcome A(viii) - Evaluate the impact of just-in-time manufacturing methods on cost accounting. Suggested Approach • Describe the distinguishing features of both environments • Explain the main differences between them Marking Guide Marks Traditional manufacturing – push system/inventory 1 Just-in-time manufacturing – pull system/no inventory 1 Other differences (1 for each) 3 Examiner’s Comments Reasonably well answered by many candidates. Common Errors • Failing to consider features/differences other than push/pull





May 2007 Exam


Question 3(a) Produce the budgeted operating statement in a marginal costing format.

(7 marks)

Rationale Part (a) covers learning outcome A(i) - Compare and contrast marginal and absorption costing methods in respect of profit reporting and stock valuation. Suggested Approach • Calculate the fixed production overhead absorption rate • Deduct fixed production overhead costs from total production costs in order to calculate the variable

production costs per unit for each type of car • Calculate the variable production cost of sales • Calculate contribution and complete the marginal costing operating statement

Marking Guide Marks Fixed production overhead per machine hour 1 Variable production cost per car 1 Variable production cost of sales 1 Variable contribution 1 Contribution to general fixed costs 1 General fixed costs 1 Profit 1

Examiner’s Comments Part (a) of question 3 was not answered well by most candidates who chose this optional question. Both the content and the format of the marginal costing operating statement caused problems. Many candidates introduced inventory adjustments into their calculations/statements which were not necessary and caused difficulty. Common Errors • Apportioning the fixed production overheads to products on the basis of machine hours per car (i.e.

200:300) • Calculating the fixed production overhead absorption rate based on the number of cars produced (i.e.

the same amount of overhead for each type of car) • Calculating the fixed production overhead absorption rate based on the number of machine hours to

produce the sales volume • Deducting the fixed production overheads absorbed into production units from the production cost of

sales • Deducting the variable costs of production from sales • Failing to deduct variable administration costs to arrive at contribution • Failing to separate the specific fixed costs • Apportioning the general fixed costs to products





May 2007 Exam

Question 3(b)

Reconcile the total budgeted absorption costing profit with the total budgeted marginal costing profit as shown in the statement you produced in part (a).

(5 marks)

Rationale Part (b) covers learning outcome A(i) - Compare and contrast marginal and absorption costing methods in respect of profit reporting and stock valuation. Suggested Approach • Calculate the fixed production overhead content of the opening and closing inventories (or of the

change in inventory) for each car • Reconcile the profits Marking Guide Marks Inventory differences ($) 2 Direction of adjustments 2 Reconciliation 1 Examiner’s Comments Some candidates understood that inventory valuation was the reason for the profit difference but few could provide the reconciliation. Common Errors • Making errors both of principle and of application in the calculation of inventory values • Indicating the incorrect direction of the adjustment

Question 3(c)

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

(10 marks)

Rationale Part (c) covers learning outcome A(vi) - Compare activity-based costing with traditional marginal and absorption costing methods and evaluate its potential as a system of cost accounting.





May 2007 Exam

Suggested Approach • Calculate the cost per driver for each activity • Apply each cost driver rate to each type of car • Sum the fixed production overhead costs for each type of car • Include the direct production costs and calculate the total production cost for each type of car

Marking Guide Marks Cost per driver (5 × ½) 2½ Application to each type of car (5 × ½ × 2) 5 Inclusion of direct costs (2 × ½) 1 Calculation of unit costs 1½ Examiner’s Comments Many candidates were able to calculate the cost of stores receiving and of stores issues for each type of car but few were able to correctly calculate costs of the other activities. Common Errors • Failing to identify appropriate cost drivers (e.g. for machining the number of cars was frequently used) • Failing to calculate and apply cost driver rates • Not including direct costs • Not calculating the cost per unit

Question 3(d)

Prepare a report to the Production Director of RJ which explains the potential benefits of using activity based budgeting for performance evaluation.

(8 marks)

Rationale Part (d) covers learning outcome C(vi) – Evaluate and apply alternative approaches to budgeting Suggested Approach • Explain the activity-based approach • Assess the general benefits of an activity-based approach • Apply to budgeting and performance evaluation Marking Guide Marks Activity-based approach 2 General benefits of activity-based approach 2 Application to budgeting and performance evaluation 4





May 2007 Exam

Examiner’s Comments Most candidates demonstrated that they had a reasonable idea of the activity-based approach (demonstrated in part (c)) and of some general benefits but were less able to apply this to budgeting and performance evaluation Common Errors • Providing little reference to budgeting and performance evaluation • Demonstrating lack of clarity about the activity-based costing process

Question 4(a)

Prepare a cash budget for each of the first three months and in total.

(15 marks)

Rationale Part (a) covers learning outcome C(iii) - Calculate projected revenues and costs based on product/service volumes, pricing strategies and cost structures. Suggested Approach • Calculate the value of sales for each month and adjust to reflect the timing of receipts from customers • Calculate the production units and apply to each of the costs • Complete the cash budget Marking Guide Marks Budget format (total receipts & payments, net cash flow, balances) 2 Capital injection 1 Sales receipts 3 Production units 3 Materials costs and phasing 2 Other costs 4 Examiner’s Comments Part (a) of this optional question was answered well by most candidates who chose it Common Errors • Including bad debts as a cash flow • Making errors on the sales discount • Making no attempt to calculate production units, instead basing all costs on sales volumes • Making errors in calculating inventory movements in the determination of production volumes • Incorrect phasing of materials costs • Including depreciation in fixed overheads





May 2007 Exam

Question 4(b)

There is some uncertainty about the direct material cost. It is thought that the direct material cost per component could range between £1·50 and £2·20. Calculate the budgeted total net cash flow for the three month period if the cost of the direct material is: (i) £1.50 per component; or (ii) £2.20 per component.

(6 marks)

Rationale Part (b) covers learning outcome C(vii) - Calculate the consequences of “what if” scenarios and evaluate their impact on master profit and loss account and balance sheet. Suggested Approach • Calculate the change in materials cost for each month at each of the revised prices • Adjust for phasing of materials payments • Calculate the revised net cash flow for the three month period

Marking Guide Marks Additional costs at £2.20 2 Cost savings at £1.50 2 Impact on cash budget 2 Examiner’s Comments This part was also generally answered well. Common Errors • Using inconsistent phasing compared with part (a) • Failing to calculate the cumulative effect when monthly adjustments were made to balances





May 2007 Exam

Question 4(c)

Using your answers to part (a) and (b) above, prepare a report to the management of RF Ltd that discusses the benefits or otherwise of performing ‘what if’ analysis when preparing cash budgets.

(9 marks)

Rationale Part (c) covers learning outcome C(vii)- Calculate the consequences of “what if” scenarios and evaluate their impact on master profit and loss account and balance sheet. Suggested Approach

• Describe 'what if' analysis • Relate 'what if' analysis to cash budgets and to the particular figures in this question

Marking Guide Marks 'What if' analysis 2 Usefulness in cash budgeting 4 Figures/analysis from the answers to parts (a) & (b) 3 Examiner’s Comments Few candidates made a reasonable attempt at this part of the question. For example, it was quite common to suggest that the company should choose to buy at £1.50. Where candidates had some idea about 'what if' analysis very few related it to cash budgeting or to the situation in the question. Common Errors

• Failing to read the question carefully • Demonstrating inability to apply the discussion to the specific question/scenario







20 November 2007 – Tuesday Morning Session Instructions to candidates












P1 –

Per

form

ance

Eva

luat

ion

TURN OVER

© The Chartered Institute of Management Accountants 2007



SECTION A – 40 MARKS [the indicative time for answering this section is 72 minutes] ANSWER ALL SIXTEEN SUB-QUESTIONS

Instructions for answering Section A: The answers to the sixteen sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answer option you have chosen. You do not need to start a new page for each sub-question. For sub-questions 1.11 to 1.16 you should show your workings as marks are available for the method you use to answer these sub-questions.

Question One 1.1 T Ltd uses a standard labour hour rate to charge its overheads to its clients’ work. During

the last annual reporting period production overheads were under-absorbed by £19,250. The anticipated standard labour hours for the period were 38,000 hours while the standard hours actually charged to clients were 38,500. The actual production overheads incurred in the period were £481,250.

The budgeted production overheads for the period were

A £456,000 B £462,000 C £475,000 D None of the above.

(2 marks)


P1 2 November 2007



1.2 Operation B, in a factory, has a standard time of 15 minutes. The standard rate of pay for operatives is £10 per hour. The budget for a period was based on carrying out the operation 350 times. It was subsequently realised that the standard time for Operation B included in the budget did not incorporate expected time savings from the use of new machinery from the start of the period. The standard time should have been reduced to 12 minutes.

Operation B was actually carried out 370 times in the period in a total of 80 hours. The operatives were paid £850.

The operational labour efficiency variance was

A £60 adverse B £75 favourable C £100 adverse D £125 adverse

(2 marks)

1.3 JP manufactures two joint products X and Y, and a by-product Z, in a single continuous

process. The following information is available for period 3:

Raw materials input 20,000 litres Raw material costs $52,000 Conversion costs $56,000 Outputs 10,000 litres of X, selling price $8 per litre 8,000 litres of Y, selling price $6 per litre 2,000 litres of Z, selling price $1 per litre

Process costs are apportioned on a sales value basis. There was no opening and closing inventory of raw materials. The revenue from the by-product is used to reduce the process costs. What was the cost per litre of joint product X?

A $5·889 B $6·523 C $6·625 D $6·646

(2 marks)


TURN OVER

November 2007 3 P1



1.4 A company has budgeted break-even sales revenue of £800,000 and fixed costs of £320,000 for the next period.

The sales revenue needed to achieve a profit of £50,000 in the period would be

A £850,000 B £925,000 C £1,120,000 D £1,200,000

(2 marks) 1.5 The production volume ratio in a period was 95%.

Which statement will always be true? A Actual hours worked exceeded the budgeted hours. B Actual hours worked exceeded the standard hours of output. C Budgeted hours exceeded the standard hours of output. D Budgeted output was less than the actual output.

(2 marks) 1.6 Two CIMA definitions follow:

1. A system that converts a production schedule into a listing of the materials and components required to meet that schedule so that adequate stock levels are maintained and items are available when needed.

2. An accounting oriented information system, generally software driven, which aids in

identifying and planning the enterprise-wide resources needed to resource, make, account for and deliver customer orders.

Which of the following pairs of terms matches the definitions?

Definition 1 Definition 2 A Material requirements planning Enterprise resource planning

B Manufacturing resource planning Material requirements planning

C Material requirements planning Manufacturing resource planning

D Manufacturing resource planning Enterprise resource planning

(2 marks)

P1 4 November 2007



1.7 The fixed overhead volume variance is defined as A the difference between the budgeted value of the fixed overheads and the standard fixed

overheads absorbed by actual production. B the difference between the standard fixed overhead cost specified for the production

achieved, and the actual fixed overhead cost incurred. C the difference between budgeted and actual fixed overhead expenditure. D the difference between the standard fixed overhead cost specified in the original budget

and the same volume of fixed overheads, but at the actual prices incurred. (2 marks)

1.8 Overheads will always be over-absorbed when A actual output is higher than budgeted output.




(2 marks)


TURN OVER

November 2007 5 P1



The following data are given for sub-questions 1.9 and1.10 below

A manufacturing company recorded the following costs in October for Product X:

$ Direct materials 20,000 Direct labour 6,300 Variable production overhead 4,700 Fixed production overhead 19,750 Variable selling costs 4,500 Fixed distribution costs 16,800Total costs incurred for Product X 72,050

During October 4,000 units of Product X were produced but only 3,600 units were sold. At the beginning of October there was no inventory.

1.9 The value of the inventory of Product X at the end of October using marginal costing was: A $3,080

B $3,100

C $3,550

D $5,075

(2 marks)

1.10 The value of the inventory of Product X at the end of October using throughput accounting

was A $630

B $1,080

C $1,100

D $2,000

(2 marks)

P1 6 November 2007



1.11 A company has the following budgeted sales figures:

Month 1 £90,000Month 2 £105,000Month 3 £120,000Month 4 £108,000

80% of sales are on credit and the remainder are paid in cash. Credit customers paying within one month are given a discount of 1·5%. Credit customers normally pay within the following time frame:

Within 1 month 40% of credit sales Within 2 months 70% of credit sales Within 3 months 98% of credit sales

There is an expectation that 2% of credit sales will become bad debts.

Outstanding receivables at the beginning of month 1 includes £6,000 expected to be received in month 4.

Calculate the total receipts expected in month 4.

(4 marks) 1.12 The budgeted total costs for two levels of output are as shown below:

Output 25,000 units 40,000 units Total cost £143,500 £194,000

Within this range of output it is known that the variable cost per unit is constant but fixed costs rise by £10,000 when output exceeds 35,000 units.

Calculate for a budgeted output of 36,000 units:

(i) the variable cost per unit; (ii) the total fixed costs.

(3 marks)

1.13 A company can produce many types of product but is currently restricted by the number

of labour hours available on a particular machine. At present this limitation is set at 12,000 hours per annum. One type of product requires materials costing $5 which are then converted to a final product which sells for $12. Each unit of this product takes 45 minutes to produce on the machine. The conversion costs for the factory are estimated to be $144,000 per annum.

Calculate the throughput accounting ratio for this product and state the significance of the result.

(3 marks)

TURN OVER

November 2007 7 P1



1.14 A company manufactures three joint products in a continuous single process. Normal losses are 10% of inputs and do not have any value. Budget data is available for the month of January as follows:

Opening and closing work in progress NIL Direct materials input 20,000 kg at a cost of £36,000 Direct labour costs 3,000 hours @ £6 per hour Variable production overheads 3,000 hours @ £1 per hour

Fixed production overheads are absorbed at a rate of £8 per direct labour hour.

Expected outputs Selling price per kg Joint product A 9,000 kg £8 Joint product B 6,000 kg £6 Joint product C 3,000 kg £4

Joint costs are apportioned on a physical unit basis.

Calculate the gross profit margin for each of the joint products.

(3 marks)

1.15 A company has the following balance sheet totals at the end of its most recent financial year:

£million

Non-current assets 3·64 Current assets 0·42 Share capital and reserves* 2·69 Long term debt 1·00 Current liabilities 0·37

* Includes retained profit for the year of £320,000 after deducting:

Ordinary share dividends £200,000 Interest on long term debt £100,000 Taxation £70,000

Calculate the Return on Investment (ROI) of the company for the year (using end year balance sheet values for investment).

(3 marks)

1.16 A division is considering the purchase of a new machine which costs $1,500,000 and is expected to generate cost savings of $450,000 a year. The asset is expected to have a useful life of five years with no residual value. Depreciation is charged on a straight line basis. Divisional performance is evaluated on Residual Income (RI). The division’s cost of capital is 10%.

Calculate for this machine for each of the five years:

(i) the Residual Income (RI); (ii) the Return on Investment (ROI).

Note: When calculating performance measures the division always uses capital values as at the start of the year.

(4 marks)


P1 8 November 2007



Reminder




TURN OVER

November 2007 9 P1




The following data are given for sub-questions 2(a) and 2(b) below

QBQ produces one type of product. Details of the budgeted sales and production are given below. Selling Price and Costs per unit

£ Selling price 40Material FX: 1·5kg @ £6 per kg 9Conversion costs (variable) 8Fixed production overheads 15

The fixed production overhead absorption rate is based on annual production overheads of £720,000 and budgeted annual output of 48,000 units. The fixed overheads will be incurred evenly throughout the year. The company also incurs fixed costs for administration of £200,000 per year. Budgeted Sales

Quarter Units 1 10,000 2 12,000 3 14,000 4 12,000

Inventory It has been decided that inventory levels are to be reduced. Details are as follows: Finished goods: 5,500 units are currently held but it has been decided that the closing

inventories for Quarters 1, 2 and 3 will be 45%, 40% and 35% of the following quarter’s sales respectively.

Raw materials: 4,500 kg are currently held but it has been decided that the closing

inventories for Quarters 1 and 2 will be 25% and 20% of the following quarter’s production requirements respectively.

(a) Prepare a materials purchase budget for Quarter 1.

(5 Marks)

P1 10 November 2007



(b) In Quarter 3 the opening and closing inventories of finished goods will be 5,600 units and 4,200 units respectively. QBQ adjusts for any under- or over-absorption of overheads at the end of each quarter.

Assume that production and sales volumes were as budgeted and that inventory levels were as planned. Also assume that all costs and revenues were as budgeted.

(i) Calculate using marginal costing the profit for Quarter 3; (ii) Calculate using absorption costing the profit for Quarter 3; (iii) Explain the difference, if any, in the profits you have calculated.

(5 Marks)

(c) Explain, giving examples, how budgets can be used for feedback control and feed-forward control.

(5 Marks)

(d) Briefly explain three reasons why budgetary planning and control might be inappropriate in a rapidly changing business environment.

(5 Marks)

(e) Briefly explain Just-in-Time (JIT) and two major requirements for the successful operation of a JIT system.

(5 Marks)

(f) A nursing home uses incremental budgeting. The previous period’s budget is adjusted by reference to a set of indices. It is adjusted firstly for ‘volume changes’ and then for changes in the cost of resources. The indices are referenced to the previous period’s budget by using that budget as the base index number of 100. The index numbers to be used to prepare Period 3’s budget from that of Period 2 are as follows:

Index

Patient days costs

90 House-keeping 106 Nursing costs Administration costs

105 104

The budget for Period 2 was:

riable)

£ House-keeping costs (all va 125,000Nursing costs (see below) Administration costs (all fixed)

324,000100,000

Nursing costs are semi-variable. The nursing costs for Period 2 were adjusted from the total nursing costs of £280,000 for Period 1 by using a Patient days index of 125 and a Nursing costs index of 108.

Prepare the budget for Period 3.



TURN OVER

November 2007 11 P1




Question Three WC is a company that installs kitchens and bathrooms for customers who are renovating their houses. The installations are either pre-designed ‘off the shelf’ packages or highly customised designs for specific jobs. The company operates with three divisions: Kitchens, Bathrooms and Central Services. The Kitchens and Bathrooms divisions are profit centres but the Central Services division is a cost centre. The costs of the Central Services division, which are thought to be predominantly fixed, include those incurred by the design, administration and finance departments. The Central Services costs are charged to the other divisions based on the budgeted Central Services costs and the budgeted number of jobs to be undertaken by the other two divisions. The budgeting and reporting system of WC is not very sophisticated and does not provide much detail for the Directors of the company. Budget details The budgeted details for last year were:

Kitchens Bathrooms Number of jobs 4,000 2,000 $ $ Average price per job 10,000 7,000 Average direct costs per job 5,500 3,000 Central Services recharge per job 2,500 2,500Average profit per job 2,000 1,500

Actual details The actual results were as follows:

Kitchens Bathrooms Number of jobs 2,600 2,500 $ $ Average price per job 13,000 6,100 Average direct costs per job 8,000 2,700 Central Services recharge per job 2,500 2,500Average profit per job 2,500 900

The actual costs for the Central Services division were $17·5 million.

The requirements for Question Three are on the opposite page

P1 12 November 2007



Required: (a) Calculate the budgeted and actual profits for each of the profit centres and for the

whole company for the year. (4 marks)

(b) Calculate the sales price variances and the sales mix profit and sales quantity profit

variances.

(6 marks)

(c) Prepare a statement that reconciles the budgeted and actual profits and shows appropriate variances in as much detail as possible.

(10 marks)

(d) Using the statement that you prepared in part (c) above, discuss

(i) the performance of the company for the year; and (ii) potential changes to the budgeting and reporting system that would

improve performance evaluation within the company.

(10 marks)



TURN OVER

November 2007 13 P1



Question Four

A multinational computer manufacturer has a number of autonomous subsidiaries throughout the world. Two of the group’s subsidiaries are in America and Europe. The American subsidiary assembles computers using chips that it purchases from local companies. The European subsidiary manufactures exactly the same chips that are used by the American subsidiary but currently only sells them to numerous external companies throughout Europe. Details of the two subsidiaries are given below. America The American subsidiary buys the chips that it needs from a local supplier. It has negotiated a price of $90 per chip. The production budget shows that 300,000 chips will be needed next year. Europe The chip production subsidiary in Europe has a capacity of 800,000 chips per year. Details of the budget for the forthcoming year are as follows:

Sales 600,000 chips $ per chip Selling price 105 Variable costs 60

The fixed costs of the subsidiary at the budgeted output of 600,000 chips are $20 million per year but they would rise to $26 million if output exceeds 625,000 chips. Note: The maximum external demand is 600,000 chips per year and the subsidiary has no other uses for the current spare capacity. Group Directive The Managing Director of the group has reviewed the budgets of the subsidiaries and has decided that in order to improve the profitability of the group the European subsidiary should supply chips to the American subsidiary. She is also thinking of linking the salaries of the subsidiary managers to the performance of their subsidiaries but is unsure which performance measure to use. Two measures that she is considering are “profit” and the “return on assets consumed” (where the annual fixed costs would be used as the “assets consumed”). The Manager of the European subsidiary has offered to supply the chips at a price of $95 each. He has offered this price because it would earn the same contribution per chip that would be earned on external sales (this is after adjusting for increased distribution costs and reduced customer servicing costs).

The requirements for Question Four are on the opposite page

P1 14 November 2007



Required: (a) Assume that the 300,000 chips are supplied by the European subsidiary at a

transfer price of $95 per chip. Calculate the impact of the profits on each of the subsidiaries and the group.

(5 marks) (b) Calculate the minimum unit price at which the European subsidiary would be willing

to transfer the 300,000 chips to the American subsidiary if the performance and salary of the Manager of the subsidiary is to be based on

(i) the profit of the subsidiary (currently $7 million) (ii) the return on assets consumed by the subsidiary (currently 35%).

(9 marks)

(c) Write a report to the Managing Director of the group that discusses issues raised by

the directive and the introduction of performance measures. (You should use your answers to parts (a) and (b), where appropriate, to illustrate points in your report).

(10 marks)

(d) Briefly explain how multi-national companies can use transfer pricing to reduce

their overall tax charge and the steps that national tax authorities have taken to discourage the manipulation of transfer prices.

(6 marks)




TURN OVER

November 2007 15 P1




P1 16 November 2007



November 2007 17 P1



PRESENT VALUE TABLE

Present value of $1, that is ( where r = interest rate; n = number of periods until payment or receipt.

) nr −+1


(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149


(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

P1 18 November 2007






(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514


(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

November 2007 19 P1



Formulae

PROBABILITY A B = A or B. A B = A and B (overlap). ∪ ∩

P(B A) = probability of B, given A. Rules of Addition If A and B are mutually exclusive: P(A ∪B) = P(A) + P(B) If A and B are not mutually exclusive: P(A B) = P(A) + P(B) – P(A ∪ ∩ B) Rules of Multiplication If A and B are independent: P(A B) = P(A) * P(B) ∩If A and B are not independent: P(A ∩B) = P(A) * P(B | A) E(X) = (probability * payoff) ∑ Quadratic Equations If aX2 + bX + c = 0 is the general quadratic equation, the two solutions (roots) are given by:

aacbbX

242 −±−

=


nxx ∑

= ffxx

∑∑


Standard Deviation

nxxSD

2)( −∑= 2

2x



Price: 100 x w

PP

wo

1

∑

⎟⎟⎠

⎞⎜⎜⎝

⎛∗∑

Quantity: 100 x

1

wQQw

o

∑

⎟⎟⎠

⎞⎜⎜⎝

⎛∗∑




P1 20 November 2007





b = 22 )X(Xn



∑∑−∑=


∑ Y = na + b ∑ X ∑ XY = a ∑ X + b∑X2


})Y(Yn}{)X(Xn{


2222 ∑−∑∑−∑

∑∑−∑==

R(rank) = 1 - )1(

62

2

−

∑

nnd



PV = ⎥⎥⎦

⎤

⎢⎢⎣

⎡

+−

nrr ]1[111


PV = r1

November 2007 21 P1




P1 22 November 2007





1 KNOWLEDGE





something





4 ANALYSIS How you are expected to analyse the detail of what you have learned.

Analyse Categorise




5 EVALUATION How you are expected to use your learning to evaluate, make decisions or recommendations.



November 2007 23 P1




Managerial Level


November 2007


P1 24 November 2007




November 2007 Exam General Comments Performance was very disappointing across the whole paper resulting in a pass rate that was not only much lower than that achieved in the May 2007 examination, but also lower than achieved in previous sittings of this paper. The results were disappointing on the ten multiple-choice questions in Section A, where a number of candidates still fail to answer all ten questions, and on the shorter-form computational questions in the remainder of that section, which have often been a springboard for success in previous examinations. Candidates then frequently showed themselves to be insufficiently prepared for the analysis and application required in the longer-form scenario based questions. The choice from the two questions in Section C of the examination paper was made last by the vast majority of candidates and question 3 was the most popular choice. Poor time management also seemed to adversely affect performance. A factor here was the often unnecessarily lengthy, detailed and at times repetitive workings that were provided in answer to the computational elements of all questions. Adequate workings are of course required for computational questions (apart from multiple-choice), for the benefit both of candidates and markers. However, time spent planning answers is time well spent if it reduces overall writing time. Candidates must also try to manage the time spent on each question in accordance with the marks available. The overriding impression was that candidates were simply poorly prepared for the examination. Those candidates who were well prepared gained high marks. Candidates who failed this examination must try to prepare themselves for future examinations with a good knowledge of topic areas. In the examination they must read questions carefully, take time to establish the specifics of what is required and plan their answers. Reading time is provided in the examination for that purpose. Where required, narrative answers should be related to the question scenario.






Question 1.1 T Ltd uses a standard labour hour rate to charge its overheads to its clients’ work. During the last annual reporting period production overheads were under-absorbed by £19,250. The anticipated standard labour hours for the period were 38,000 hours while the standard hours actually charged to clients were 38,500. The actual production overheads incurred in the period were £481,250. The budgeted production overheads for the period were A £456,000 B £462,000 C £475,000 D None of the above.

(2 marks)

The answer is A

Workings £ Underabsorbed -19,250 Actual 481,250Charged to clients 462,000 Overhead rate £462,000/38,500 = £12 per hour Budgeted overheads = 38,000 x £12 = £456,000

Question 1.2 Operation B, in a factory, has a standard time of 15 minutes. The standard rate of pay for operatives is £10 per hour. The budget for a period was based on carrying out the operation 350 times. It was subsequently realised that the standard time for Operation B included in the budget did not incorporate expected time savings from the use of new machinery from the start of the period. The standard time should have been reduced to 12 minutes. Operation B was actually carried out 370 times in the period in a total of 80 hours. The operatives were paid £850. The operational labour efficiency variance was

A £60 adverse B £75 favourable C £100 adverse D £125 adverse

(2 marks)





November 2007 Exam

The answer is A

Workings Actual time for 370 operations was 80 hours Revised standard time per operation = 12 minutes = 0·2 hours Revised expected time for actual operations = 370 x 0·2 = 74 hours Operational labour efficiency variance = (80 - 74) x £10 = £60 adverse

Question 1.3 JP manufactures two joint products X and Y, and a by-product Z, in a single continuous process. The following information is available for period 3:

Raw materials input 20,000 litres Raw material costs $52,000 Conversion costs $56,000 Outputs 10,000 litres of X, selling price $8 per litre 8,000 litres of Y, selling price $6 per litre 2,000 litres of Z, selling price $1 per litre

Process costs are apportioned on a sales value basis. There was no opening and closing inventory of raw materials. The revenue from the by-product is used to reduce the process costs. What was the cost per litre of joint product X?

A $5·889 B $6·523 C $6·625 D $6·646

(2 marks)

The answer is C

Workings

$52,000 + $56,000 - $2,000 = $106,000

Sales Value Costs X $80,000 62·5% $ 66,250 Y $48,000 37·5% $ 39,750

$128,000 $106,000

$66,250 / 10,000 = $6·625





November 2007 Exam

Question 1.4 A company has budgeted break-even sales revenue of £800,000 and fixed costs of £320,000 for the next period. The sales revenue needed to achieve a profit of £50,000 in the period would be A £850,000 B £925,000 C £1,120,000 D £1,200,000

(2 marks)

The answer is B

Workings At breakeven total contribution equals fixed costs which equal £320,000. C/S ratio = £320,000 ÷ £800,000 = 0·4 Revenue needed to earn £50,000 profit = £(320,000 + 50,000) ÷ 0.4 = £925,000 Question 1.5 The production volume ratio in a period was 95%. Which statement will always be true? A Actual hours worked exceeded the budgeted hours. B Actual hours worked exceeded the standard hours of output. C Budgeted hours exceeded the standard hours of output. D Budgeted output was less than the actual output.

(2 marks)

The answer is C





November 2007 Exam

Question 1.6 Two CIMA definitions follow:

1. A system that converts a production schedule into a listing of the materials and components required to meet that schedule so that adequate stock levels are maintained and items are available when needed.

2. An accounting oriented information system, generally software driven, which aids in identifying

and planning the enterprise-wide resources needed to resource, make, account for and deliver customer orders.

Which of the following pairs of terms matches the definitions?

Definition 1 Definition 2 A Material requirements planning Enterprise resource planning

B Manufacturing resource planning Material requirements planning

C Material requirements planning Manufacturing resource planning

D Manufacturing resource planning Enterprise resource planning

(2 marks)

The answer is A

Question 1.7

The fixed overhead volume variance is defined as A the difference between the budgeted value of the fixed overheads and the standard fixed overheads

absorbed by actual production.

B the difference between the standard fixed overhead cost specified for the production achieved, and the actual fixed overhead cost incurred.

C the difference between budgeted and actual fixed overhead expenditure. D the difference between the standard fixed overhead cost specified in the original budget and the

same volume of fixed overheads, but at the actual prices incurred.

(2 marks)

The answer is A





November 2007 Exam

Question 1.8

Overheads will always be over-absorbed when A actual output is higher than budgeted output.




(2 marks)

The answer is C


A manufacturing company recorded the following costs in October for Product X:

$

Direct materials 20,000 Direct labour 6,300 Variable production overhead 4,700 Fixed production overhead 19,750 Variable selling costs 4,500 Fixed distribution costs 16,800Total costs incurred for Product X 72,050

During October 4,000 units of Product X were produced but only 3,600 units were sold. At the beginning of October there was no inventory.

Question 1.9

The value of the inventory of Product X at the end of October using marginal costing was: A $3,080

B $3,100

C $3,550

D $5,075

(2 marks)

The answer is B





November 2007 Exam

Workings Marginal cost is the total of variable production costs. One tenth of the production is inventory at the end of the month and therefore the valuation is:

$(20,000 + 6,300 + 4,700)/10 = $3,100 Question 1.10 The value of the inventory of Product X at the end of October using throughput accounting was A $630

B $1,080

C $1,100

D $2,000

(2 marks)

The answer is D

Workings Throughput accounting values inventory at direct materials cost only:

$20,000/10 = $2,000 Question 1.11 A company has the following budgeted sales figures:

Month 1 £90,000Month 2 £105,000Month 3 £120,000Month 4 £108,000

80% of sales are on credit and the remainder are paid in cash. Credit customers paying within one month are given a discount of 1·5%. Credit customers normally pay within the following time frame:

Within 1 month 40% of credit sales Within 2 months 70% of credit sales Within 3 months 98% of credit sales

There is an expectation that 2% of credit sales will become bad debts. Outstanding receivables at the beginning of month 1 includes £6,000 expected to be received in month 4. Calculate the total receipts expected in month 4.

(4 marks)





November 2007 Exam

Workings

Month 4 £ Cash sales (108,000 x 0·2) 21,600 From month 3 (120,000 x 0·8 x 0·4 x 0·985) 37,824 From month 2 (105,000 x 0·8 x 0·3) 25,200 From month 1 (90,000 x 0·8 x 0·28) 20,160 From previous budget period 6,000 110,784

Question 1.12 The budgeted total costs for two levels of output are as shown below:

Output 25,000 units 40,000 units Total cost £143,500 £194,000

Within this range of output it is known that the variable cost per unit is constant but fixed costs rise by £10,000 when output exceeds 35,000 units. Calculate for a budgeted output of 36,000 units:

(i) the variable cost per unit; (ii) the total fixed costs.

(3 marks)

Workings (i) Variable cost per unit [(£194,000 – £10,000 – £143,500) ÷ (40,000 – 25,000 units)] = £2·70 per unit (ii) Total fixed costs [£194,000 – (40,000 units × £2.70 per unit)] = £86,000





November 2007 Exam

Question 1.13

A company can produce many types of product but is currently restricted by the number of labour hours available on a particular machine. At present this limitation is set at 12,000 hours per annum. One type of product requires materials costing $5 which are then converted to a final product which sells for $12. Each unit of this product takes 45 minutes to produce on the machine. The conversion costs for the factory are estimated to be $144,000 per annum. Calculate the throughput accounting ratio for this product and state the significance of the result.

(3 marks)

Workings

Where: Return per factory hour = Sales price - Material cost Total time on key resource = (12-5)/0·75 = $9·33 per hour And: Cost per factory hour = Total factory cost Total time on the key resource = 144,000/12,000 = $12 per hour Throughput accounting (TA) ratio = Return per factory hour Cost per factory hour

9·33/12 = 0·78 As the throughput accounting ratio is less than 1, the product should not be produced.

Question 1.14

A company manufactures three joint products in a continuous single process. Normal losses are 10% of inputs and do not have any value. Budget data is available for the month of January as follows:

Opening and closing work in progress NIL Direct materials input 20,000 kg at a cost of £36,000 Direct labour costs 3,000 hours @ £6 per hour Variable production overheads 3,000 hours @ £1 per hour

Fixed production overheads are absorbed at a rate of £8 per direct labour hour.

Expected outputs Selling price per kg Joint product A 9,000 kg £8 Joint product B 6,000 kg £6 Joint product C 3,000 kg £4

Joint costs are apportioned on a physical unit basis. Calculate the gross profit margin for each of the joint products.

(3 marks)





November 2007 Exam

Workings Total production costs:

Direct materials £36,000 Direct labour £18,000 Variable production overheads £3,000 Fixed production overheads £24,000 £81,000

Cost per unit of output £81,000 / 18,000 = £4·50

Product A Product B Product C Selling price £8 £6 £4 Production cost £4·50 £4·50 £4·50 Gross profit £3·50 £1·50 (£0·50) Gross profit % 43·75% 25% (12·5%)

Question 1.15 A company has the following balance sheet totals at the end of its most recent financial year:

£million Non-current assets 3·64 Current assets 0·42 Share capital and reserves* 2·69 Long term debt 1·00 Current liabilities 0·37

* Includes retained profit for the year of £320,000 after deducting:

Ordinary share dividends £200,000 Interest on long term debt £100,000 Taxation £70,000 Calculate the Return on Investment (ROI) of the company for the year (using end year balance sheet values for investment).

(3 marks) Workings Return = £320,000 + £200,000 + £100,000 + £70,000 = £690,000 Investment = £3·64 million + £0·42 million - £0·37 million = £3·69 million [(690,000 ÷ 3,690,000) × 100] = 18·7%





November 2007 Exam

Question 1.16 A division is considering the purchase of a new machine which costs $1,500,000 and is expected to generate cost savings of $450,000 a year. The asset is expected to have a useful life of five years with no residual value. Depreciation is charged on a straight line basis. Divisional performance is evaluated on Residual Income (RI). The division’s cost of capital is 10%. Calculate for this machine for each of the five years:

(i) the Residual Income (RI); (ii) the Return on Investment (ROI).

Note: When calculating performance measures the division always uses capital values as at the start of the year.

(4 marks)

Workings Year 1($) Year 2 ($) Year 3 ($) Year 4($) Year 5 ($) Cost savings 450,000 450,000 450,000 450,000 450,000 Depreciation 300,000 300,000 300,000 300,000 300,000Profit 150,000 150,000 150,000 150,000 150,000 Cost of capital 150,000 120,000 90,000 60,000 30,000RI nil 30,000 60,000 90,000 120,000 ROI 10% 12·5% 16·7% 25% 50% Capital value ($m)

1·5

1·2

0·9

0·6

0·3





November 2007 Exam Section B – 30 marks ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS

Question 2(a) Prepare a materials purchase budget for Quarter 1.

(5 Marks) Rationale Question 2(a) covers learning outcome C(iii) - Calculate projected revenues and costs based on product/service volumes, pricing strategies and cost structures. Suggested Approach • Calculate the closing inventory of finished goods both in Q1 and Q2 • Calculate the production units for both periods based on these inventory requirements • Calculate the closing inventory of raw materials in Q1 based on the production units in Q2 • Calculate the budgeted raw material usage (kg) and the budgeted raw material purchases (kg & £) Marking Guide

Marks

Inventory calculations Inventory adjustments Raw materials required for production Purchase value

2 2 ½ ½

Examiner’s Comments Most candidates scored fairly well on this part Common Errors • Failing to value the purchases or using £9 per kg • Reversing the inventory adjustments • Miscalculating the inventory requirements, especially raw materials





November 2007 Exam

Question 2(b) In Quarter 3 the opening and closing inventories of finished goods will be 5,600 units and 4,200 units respectively. QBQ adjusts for any under- or over-absorption of overheads at the end of each quarter. Assume that production and sales volumes were as budgeted and that inventory levels were as planned. Also assume that all costs and revenues were as budgeted.

(i) Calculate using marginal costing the profit for Quarter 3; (ii) Calculate using absorption costing the profit for Quarter 3; (iii) Explain the difference, if any, in the profits you have calculated.

(5 Marks)

Rationale Question 2(b) covers learning outcome A(i) - Compare and contrast marginal and absorption costing methods in respect of profit reporting and stock valuation. Suggested Approach • (i) Calculate unit contribution, total contribution and fixed costs • (ii) Calculate gross profit, fixed administration costs and over-absorbed fixed production overhead • (iii) Identify the reasons why absorption costing would report a lower profit Marking Guide

Marks

(i) Marginal costing profit (ii) Absorption costing profit (before adjustment)

Over-absorbed fixed production overhead (iii) Inventory change

Fixed production overheads in inventory

1 1 1 1 1

Examiner’s Comments Very few candidates successfully calculated the marginal and absorption costing profits. In answer to (ii), a number of candidates calculated the absorption costing profit from the marginal costing profit by means of the inventory difference. This gained full marks if the inventory difference was correct and if the profit was adjusted in the right direction i.e. this part of the answer was marked on the basis of the candidate’s own figure for marginal costing profit Common Errors • Basing the cost of sales on production units • Calculating the fixed costs incorrectly • Omitting or miscalculating the over-absorbed fixed production overhead in (ii) • Providing an erroneous or unclear explanation in (iii): for example, many candidates seemed to think

that fixed overheads are included in the calculation of absorption costing profit but not in the calculation of marginal costing profit





November 2007 Exam

Question 2(c) Explain, giving examples, how budgets can be used for feedback control and feed-forward control.

(5 Marks) Rationale Question 2(c) covers learning outcome C(x) - Explain the ideas of feedback and feed-forward control and their application in the use of budgets for control. Suggested Approach • Describe feedback control • Identify an example of feedback control • Describe feedforward control • Identify an example of feedforward control Marking Guide

Marks

Descriptions (up to 2 each) Examples

4 2

5 max

Examiner’s Comments There were many very lengthy answers particularly from candidates who did not know what feedback and feedforward controls are. Common Errors • Not knowing what feedback and feedforward controls are • Failing to distinguish clearly between feedback and feedforward • In particular, demonstrating a lack of understanding as to how feedforward control might operate, often

thinking that it was simply action taken as a consequence of feedback control





November 2007 Exam

Question 2(d) Briefly explain three reasons why budgetary planning and control might be inappropriate in a rapidly changing business environment.

(5 Marks) Rationale Question 2(d) covers learning outcome C(xiv) – Evaluate the criticisms of budgeting particularly from the advocates of techniques that are ‘beyond budgeting’ Suggested Approach • Consider the key aspects of budgetary planning and control • Consider the features of a rapidly changing business environment • Explain three reasons why rapid change may adversely affect key aspects of budgetary planning and

control Marking Guide

Marks

Up to 2 marks for each justified reason

5 max

Examiner’s Comments A lot of repetition was evidenced in candidates’ answers. Common Errors • Failing to link answers to a rapidly changing business environment • Focussing on standard costing alone (the subject of Q2(b) May 2007) or simply on features of

budgetary planning and control





November 2007 Exam

Question 2(e) Briefly explain Just-in-Time (JIT) and two major requirements for the successful operation of a JIT system.

(5 Marks) Rationale Question 2(e) covers learning outcome A(viii) - Evaluate the impact of just-in-time manufacturing methods on cost accounting and the use of ‘back-flush accounting’ when work-in-progress stock is minimal. Suggested Approach • Explain what JIT is • Describe two key operational features of a successful JIT system Marking Guide

Marks

JIT Major requirements for successful operation (up to 2 for each)

2 max

4 5 max

Examiner’s Comments This part was generally answered well. There were no common errors.





November 2007 Exam

Question 2(f) A nursing home uses incremental budgeting. The previous period’s budget is adjusted by reference to a set of indices. It is adjusted firstly for ‘volume changes’ and then for changes in the cost of resources. The indices are referenced to the previous period’s budget by using that budget as the base index number of 100. The index numbers to be used to prepare Period 3’s budget from that of Period 2 are as follows:

Index Patient days 90 House-keeping costs 106 Nursing costs 105 Administration costs 104

The budget for Period 2 was:

£ House-keeping costs (all variable) 125,000 Nursing costs (see below) 324,000 Administration costs (all fixed) 100,000

Nursing costs are semi-variable. The nursing costs for Period 2 were adjusted from the total nursing costs of £280,000 for Period 1 by using a Patient days index of 125 and a Nursing costs index of 108. Prepare the budget for Period 3.

(5 marks) Rationale Question 2(f) covers learning outcome C(ii) - Calculate projected product/service volumes employing appropriate forecasting techniques. Suggested Approach • Apply relevant indices to P2 house-keeping and administration costs in order to calculate the P3

budget • Analyse the nursing costs into variable and fixed elements for P1 • Use the indices provided for P2 & P3 to calculate separately the budgeted variable and the budgeted

fixed nursing costs in P3 Marking Guide

Marks

House-keeping costs Variable nursing costs Fixed nursing costs Administration costs

1 2.5 1

0.5

Examiner’s Comments This part was answered poorly, especially the calculation of nursing costs. Common Errors • Failing to adjust costs using the indices provided in the question • Failing to analyse the nursing costs correctly, if at all, into variable and fixed elements





November 2007 Exam


Question 3(a) Calculate the budgeted and actual profits for each of the profit centres and for the whole company for the year.

(4 marks) Rationale Question 3(a) covers learning outcome A(v) - Apply standard costing methods within costing systems and demonstrate the reconciliation of budgeted and actual profit margins. Suggested Approach • Use budgeted average profit per job and budgeted number of jobs to calculate the budgeted profit • Use actual average profit per job and actual number of jobs to calculate the actual profit (before

adjustment for under-absorption of central services costs) • Calculate and adjust for the under-absorbed central services costs Marking Guide

Marks

Budgeted profit Actual profit (before central services cost adjustment) Central services cost adjustment

1 1 2

Examiner’s Comments This was a straightforward question that led to the award of between two and four marks for most candidates. A variety of treatments were accepted for the under-absorbed Central Services Division costs. Common Errors • Not appreciating that the actual costs of the Central Services Division were not fully recovered in the

recharge per job and as a result calculating the actual profit as $8.75m • Failing to provide totals for the company as well as totals for each profit centre





November 2007 Exam

Question 3(b) Calculate the sales price variances and the sales mix profit and sales quantity profit variances.

(6 marks) Rationale Question 3(b) covers learning outcome B(ii) - Calculate and interpret material, labour, variable overhead, fixed overhead and sales variances. Suggested Approach • Calculate the sales price variance for each profit centre by comparing the actual sales revenue with

the sales revenue that would have been received at budgeted selling prices • Split the actual total number of jobs for WC between the two profit centres in budgeted proportions • Calculate the sales mix profit variance for each profit centre based on the differences between actual

and budgeted mix of jobs at the budgeted profit per job • Calculate the sales quantity profit variance based on the difference between the budgeted and actual

number of jobs, valued at the budgeted average profit per job for the budgeted sales mix Marking Guide

Marks

Sales price variances Sales mix profit variances Sales quantity profit variances

2 2 2

Examiner’s Comments The sales price variances were frequently correct but candidates were generally unable to calculate mix and quantity variances correctly (if attempted). Common Errors • Calculating the average sales price variances per job only • Valuing sales mix and quantity variances at standard sales value rather than at standard profit • Demonstrating inability to calculate mix quantities • Attempting to calculate the sales volume profit variance (not asked for and often not labelled as such)

either instead of, or as well as, attempting to calculate the mix and quantity variances • Making errors with the signage of the variances (adverse or favourable)





November 2007 Exam

Question 3(c) Prepare a statement that reconciles the budgeted and actual profits and shows appropriate variances in as much detail as possible.

(10 marks) Rationale Question 3(c) covers learning outcome B(iii) - Prepare and discuss a report which reconciles budget and actual profit using absorption and/or marginal costing principles. Suggested Approach • Calculate the cost variances (not required in answer to part (b)) • Consider the format of the required reconciliation statement • Set out a statement containing the results of the calculations in parts (a) and (b), as well as the cost

variances Marking Guide

Marks

Actual and budgeted profit Expected profit on actual sales Direct cost variances calculation Central services expenditure variance calculation Central services volume variance calculation Variances in statement Format/layout of statement

1 1 2 2 2 1 1

Examiner’s Comments Most candidates were able to construct a reconciliation statement of the correct general form. Common Errors • Not calculating, and/or labelling, the expected profit on actual sales • Making no attempt to calculate, or include in the statement, the cost variances • Calculating direct cost volume variances (already taken account of in the sales profit variances) as

well as the variances arising from differences between budget and actual average costs • Failing to deal with the Central Services Division costs • Poor labelling of cost variances • Making errors with the signage of the variances (adverse and favourable) • Using a poor layout for the statement





November 2007 Exam

Question 3(d) Using the statement that you prepared in part (c) above, discuss

(i) the performance of the company for the year; and (ii) potential changes to the budgeting and reporting system that would improve

performance evaluation within the company.

(10 marks)

(Total for Question Three = 30 marks) Rationale Question 3(d) covers learning outcome C(ix) – Identify controllable and uncontrollable costs in the context of responsibility accounting and explain why 'uncontrollable' costs may or may not be allocated to responsibility centres. Suggested Approach • Assess the overall performance of WC • Discuss the likely causes/implications of each of the variances • Consider deficiencies in the current reporting/performance evaluation system indicated by the question

scenario • Suggest changes and explain why they would improve the system Marking Guide

Marks

1 mark available per relevant point

10 max

Examiner’s Comments Most candidates were able to put into words the figures calculated in parts (a), (b) and (c) but answers were often limited in terms of further analysis and suggestions for improved performance evaluation. Common Errors • Failing generally to apply the analysis to the particular scenario: highly customised designs and

different off-the-shelf packages will have implications for average sales prices and average costs. The sales mix (both between types of jobs within each profit centre and between profit centres) will be a significant factor influencing both sales price and costs

• Failing generally to appreciate the limitations of high level ‘average’ data • Making reference to ABC but frequently failing to develop further its possible application





November 2007 Exam

Question 4(a)

Assume that the 300,000 chips are supplied by the European subsidiary at a transfer price of $95 per chip. Calculate the impact on the profits of each of the subsidiaries and the group.

(5 marks)

Rationale Question 4(a) covers learning outcome D(iii) - Prepare revenue and cost information in appropriate formats for profit and investment centre managers, taking due account of cost variability, attributable costs, controllable costs and identification of appropriate measures of profit centre 'contribution'. Suggested Approach • Calculate the incremental impact on Europe (increased volume, contribution and fixed costs) or

calculate revised total sales, costs and profit to compare with the current situation • Calculate the extra cost, and thus reduced profit, in America • Calculate the effect on the Group profit Marking Guide

Marks

Europe: Increased volume Increased contribution Increased fixed costs America: Profit reduction Group: Profit increase

1 1 1 1 1

Examiner’s Comments Reasonable attempts were made by the candidates who chose to answer this question. Common Errors • Missing the fact that the variable costs would reduce to $50 per chip on transfers from the European

subsidiary to the American subsidiary • Not appreciating that the effect on the group profit would be the sum of the effects on the two

subsidiaries’ profits





November 2007 Exam

Question 4(b) Calculate the minimum unit price at which the European subsidiary would be willing to transfer the 300,000 chips to the American subsidiary if the performance and salary of the Manager of the subsidiary is to be based on

(i) the profit of the subsidiary (currently $7 million) (ii) the return on assets consumed by the subsidiary (currently 35%).

(9 marks)

Rationale Question 4(b) covers learning outcome D(iv) - Calculate and apply measures of performance for investment centres (often 'strategic business units' or divisions of larger groups). Suggested Approach Various approaches were possible for both sub-parts. The most direct approaches were to: • (i) Calculate the reduction in transfer price per unit that would negate the incremental profit for Europe

calculated in part (a) • (ii) Calculate the reduction in transfer price per unit that would result in a reduction in the incremental

profit from (a) to a level representing a return of 35% on assets consumed

Marking Guide

Marks

(i) Profit required Reduction in transfer price Revised transfer price (ii) Profit required Reduction in transfer price Revised transfer price

1 2 2 1 2 1

Examiner’s Comments The calculations in answer to part (i) were very straightforward for those candidates who had identified no profit change for the European subsidiary in answer to part (a). This resulted from a failure, in part (a), to include the reduction in variable costs to $50 per chip on the transfers to America. This was nevertheless awarded full marks in (b)(i) where appropriate on an ‘own figure basis’. However, there was a general failure by candidates to appreciate what was required, especially in answer to (b)(ii), although a variety of valid approaches to each of the calculations were possible, and accepted where used correctly.





November 2007 Exam

Question 4(c) Write a report to the Managing Director of the group that discusses issues raised by the directive and the introduction of performance measures. (You should use your answers to parts (a) and (b), where appropriate, to illustrate points in your report).

(10 marks)

Rationale Question 4(c) covers learning outcome D(v)- Discuss the likely behavioural consequences of the use of performance metrics in managing cost, profit and investment centres. Suggested Approach • Identify potential issues arising from the directive and from the introduction of performance measures • Consider their implications for each subsidiary in the light of the answers to parts (a) and (b)

Marking Guide

Marks

1 mark available per relevant point

10 max

Examiner’s Comments The general failure by candidates to answer part (b) impacted on the answers to part (c) which were frequently very brief. There were no common errors in this part. Common Errors • Failing to appreciate the implications of the directive for subsidiary autonomy • Failing to appreciate the implications of the possible transfer prices for performance and motivation of

subsidiaries, especially in the context of the proposed new performance measures





November 2007 Exam

Question 4(d) Briefly explain how multi-national companies can use transfer pricing to reduce their overall tax charge and the steps that national tax authorities have taken to discourage the manipulation of transfer prices.

(6 marks)

(Total for Question Four = 30 marks) Rationale Question 4(d) covers learning outcome D(vii) -Identify the likely consequences of different approaches to transfer pricing for divisional decision making, divisional and group profitability, the motivation of divisional management and the autonomy of individual divisions. Suggested Approach • Discuss the implications for transfer pricing of different tax rates applying in different countries • Identify the need for high transfer prices for goods and services provided from low tax countries and

vice versa • Identify steps taken by authorities to prevent abuse/manipulation

Marking Guide

Marks

1 mark available for each relevant point

6 max

Examiner’s Comments The candidates who answered question 4 generally handled this part fairly well. They were able to describe and demonstrate the potential implications for transfer pricing where taxation rates differ between countries, and to show some appreciation of the steps taken by authorities to prevent abuse. There were no common errors in this part.







20 May 2008 – Tuesday Morning Session Instructions to candidates








Maths Tables and Formulae are provided on pages 17 to 21.




P1 –

Per

form

ance

Eva

luat

ion

TURN OVER




SECTION A – 40 MARKS [the indicative time for answering this section is 72 minutes] ANSWER ALL SEVENTEEN SUB-QUESTIONS

Instructions for answering Section A: The answers to the seventeen sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answer option you have chosen. You do not need to start a new page for each sub-question. For sub-questions 1.11 to 1.17 you should show your workings as marks are available for the method you use to answer these sub-questions.

Question One 1.1 If inventory levels have increased during the period, the profit calculated using marginal

costing when compared with that calculated using absorption costing will be A higher.

B lower.

C equal.

D impossible to answer without further information.(2 marks)

1.2 Fixed production overheads will always be under-absorbed when A actual output is lower than budgeted output.

B actual overheads incurred are lower than budgeted overheads.

C overheads absorbed are lower than those budgeted.

D overheads absorbed are lower than those incurred.

(2 marks)

P1 2 May 2008



The following scenario is to be used for questions 1.3 and 1.4 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 30Direct labour 30 20 50Variable production overheads 24 16 20Fixed production overheads 36 24 30Profit 49 70 20Time (minutes) on bottleneck machine 7 10 7 The company is trying to plan the best use of its resources. 1.3 Using a traditional limiting factor approach, the rank order (best first) of the products

would be

A W, X, Y

B W, Y, X

C X, W, Y

D Y, X, W (2 marks)

1.4 Using a throughput accounting approach, the rank order (best first) of the products would

be

A W, X, Y

B W, Y, X

C X, W, Y

D Y, X, W

(2 marks)


TURN OVER

May 2008 3 P1



1.5 A company’s summary budgeted operating statement is as follows:

$000 Revenue 400Variable costs 240Fixed costs 100Profit 60

Assuming that the sales mix does not change, the percentage increase in sales volume that would be needed to increase the profit to $100,000 is A 10%

B 15%

C 25%

D 40% (2 marks)

1.6 Which of the following statements are true?

(i) Enterprise Resource Planning (ERP) systems are accounting oriented information systems which aid in identifying and planning the enterprise wide resources needed to resource, make, account for and deliver customer orders.

(ii) Flexible Manufacturing Systems (FMS) are integrated, computer-controlled production systems, capable of producing any of a range of parts and of switching quickly and economically between them.

(iii) Just-In-Time (JIT) is a system whose objective is to produce, or to procure, products or components as they are required.

A (i) and (ii) only

B (i) and (iii) only

C (ii) and (iii) only

D (i), (ii) and (iii) (2 marks)

1.7 Flexed budgets for the cost of medical supplies in a hospital, based on a percentage of

maximum bed occupancy, are shown below:

Bed occupancy 82% 94% Medical supplies cost $410,000 $429,200

During the period, the actual bed occupancy was 87% and the total cost of the medical supplies was $430,000.

The medical supplies expenditure variance was A $5,000 adverse

B $12,000 adverse

C $5,000 favourable

D $12,000 favourable

(2 marks)

P1 4 May 2008



1.8 A company uses a standard absorption costing system. The fixed overhead absorption rate is based on labour hours.

Extracts from the company’s records for last year were as follows:

Budget Actual Fixed production overhead $450,000 $475,000 Output 50,000 units 60,000 units Labour hours 900,000 930,000

The under- or over-absorbed fixed production overheads for the year were A $10,000 under-absorbed

B $10,000 over-absorbed

C $15,000 over-absorbed

D $65,000 over-absorbed

(2 marks) 1.9 A flexible budget is a budget that A is changed during the budget period according to changed circumstances.

B is continuously updated by adding a further accounting period when the earliest accounting period has expired.

C results from the participation of budget holders.

D recognises different cost behaviour patterns and is designed to change as the volume of activity changes.

(2 marks) 1.10 A company will forecast its quarterly sales units for a new product by using a formula to

predict the base sales units and then adjusting the figure by a seasonal index.

The formula is BU = 4000 + 80Q

Where BU = Base sales units and Q is the quarterly period number

The seasonal index values are:

Quarter 1 105%Quarter 2 80%Quarter 3 95%Quarter 4 120%

The forecast increase in sales units from Quarter 3 to Quarter 4 is A 25%

B 80 units

C 100 units

D 1,156 units (2 marks)


TURN OVER

May 2008 5 P1



1.11 Product XYZ is made by mixing three materials (X, Y and Z). There is an expected loss of 20% of the total input. The budgeted and actual results for Period 1 are shown below. There were no opening or closing inventories of any materials or of the finished product.

Budget Actual Output of XYZ 800 kg 960 kg Material X 500 kg @ $5⋅00 per kg 600 kg @ $4⋅70 per kg Y 300 kg @ $6⋅00 per kg 380 kg @ $6⋅50 per kg Z 200 kg @ $7⋅00 per kg 300 kg @ $7⋅10 per kg Total input 1,000 kg 1,280 kg Calculate for Period 1: (i) the total materials mix variance;

(2 marks) (ii) the total materials yield variance.

(2 marks)

(Total for sub-question 1.11 = 4 marks) 1.12 Extracts from a company’s year-end accounts are shown below: $000 Revenue 9,456 Gross profit 5,872 Operating profit 2,981 Non-current assets 17,850 Inventory 950 Cash at bank 1,750 Short-term borrowings 1,225 Trade receivables 731 Trade payables 813 Calculate the following performance measures: (i) Operating profit margin;

(ii) Return on capital employed;

(iii) Trade receivable days (debtors days);

(iv) Current ratio. (4 marks)

P1 6 May 2008



The following data are given for sub questions 1.13, 1.14 and 1.15 Premier Cycles has two divisions: the Frame Division and the Assembly Division. The Frame Division produces bike frames. The frames can be sold directly to external customers as “frame only” or the frames can be transferred to the Assembly Division where they are built up into complete bikes by adding other components, such as wheels and handlebars. Frame Division Budgeted details for the forthcoming year for the Frame Division are: Selling price per frame $852 Variable cost per frame $420 Annual fixed cost $4,000,000 Annual capacity 12,000 frames The Division has orders for 5,000 frames from external customers for the forthcoming year. Assembly Division The Manager of the Assembly Division has just signed a contract to supply 8,000 bikes to a sporting goods retailer next year. This will mean that the Division will be operating at full capacity. Budgeted details are as follows: Selling price per bike $1,600 Variable cost of assembly and components $500 (excluding frame) Annual fixed cost $2,400,000 Annual capacity 8,000 bikes Company Policy It has been announced that Premier Cycles will be introducing a new performance appraisal system. The Divisional Managers’ bonuses will only be payable if they earn a minimum annual contribution of 108% of fixed costs. 1.13 Calculate the minimum number of frames the Frame Division must sell next year in order

for the Divisional Manager to earn a bonus if frames are sold for $852 each. (2 marks)

1.14 Calculate the maximum price per frame that the Manager of the Assembly Division could

pay and still earn a bonus next year. (2 marks)

1.15 Ignoring Premier Cycles’ performance appraisal system, explain how the Manager of the

Frame Division should calculate the transfer price of frames it supplies to the Assembly division in order to maximise profits for Premier Cycles.

Note: NO calculations are required.

(2 marks)


TURN OVER

May 2008 7 P1



1.16 State FOUR aims of a transfer-pricing system. (2 marks)

1.17 Product GH passes through two consecutive processes: the output from Process 1 is

transferred to Process 2. Details of Process 1 for Period 3 were as follows: There were 5,000 units of opening work-in-progress, which were valued as follows:

Materials $77,080 Labour $33,480 Production overheads $8,825

During the period, 14,000 units were added to the process and the following costs were incurred:


At the end of Period 3, there were 6,000 units of closing work-in-progress. The degree of completion for these units was:

Materials 100%Labour 80%Production overheads 65%

The expected normal loss is 10% of new units added to the process during the period. These units and any other losses can be sold for $5 per unit. 11,000 units were transferred to Process 2 and there were losses of 2,000 units. All losses occur at the end of the process. Weighted average costing is used.

Calculate the total cost of the 11,000 units that were transferred to Process 2.

(4 marks)


Reminder



P1 8 May 2008




TURN OVER

May 2008 9 P1



SECTION B – 30 MARKS [the indicative time for answering this section is 54 minutes] ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS Question Two (a) Describe THREE key features that are present in any organisation that is successfully

focused on Total Quality Management (TQM). (5 marks)

(b) Explain THREE behavioural consequences that may result after the introduction of

participative budgeting. (5 marks)

(c) Discuss the advantages and disadvantages of rolling budgets.

(5 marks)

P1 10 May 2008



The following data relate to sub-questions (d), (e) and (f) A multi-national company manufactures and sells a wide range of digital equipment. The company is structured into three Divisions: Computers, Audio-visual and Photographic. The Divisions operate as investment centres and the performance of the Divisional Managers is evaluated by using Return on Investment (ROI). The Manager of the Photographic Division was concerned that the Division was falling behind its competitors in terms of financial returns and market share, and has implemented strategies to improve the situation. An external benchmarking exercise was undertaken to try to establish the position of the Division in relation to its competitors in a number of key areas. It has now been suggested that the Division should also carry out an internal benchmarking exercise. (d) The manager of the Photographic Division is considering introducing a Balanced

Scorecard to measure the success of the strategies. He has identified two perspectives and two associated goals. They are:

Perspective Goal Innovation Technology Leadership Customer Support (i) For the “Innovation Perspective” of the Division, recommend a performance measure and

briefly explain how the measure will reflect the achievement of the stated goal. (3 marks)

(ii) For the “Customer Perspective” of the Division, state which data should be collected and

explain how this could be used to ensure the goal of “support’’ is met. (2 marks)

(Total for (d) = 5 marks)

(e) Explain THREE reasons why internal benchmarking may provide information that is more

useful to the Manager of the Photographic Division, in terms of monitoring and improving performance, than that provided by external benchmarking.

(5 marks) (f) Explain THREE reasons why ROI may not be a good performance measure.

(5 marks)



End of Section B


TURN OVER

May 2008 11 P1



SECTION C – 30 MARKS [the indicative time for answering this section is 54 minutes] ANSWER ONE OF THE TWO QUESTIONS Question Three The newly-appointed Managing Director of FX has received the variance report for Month 6, which is shown below: Month 6 Variance Report Output and Sales for Month 6. Budget: 1,000 units. Actual: 1,200 units.

£ £ £ Budgeted contribution 90,000 Budgeted fixed costs 70,000Budgeted profit 20,000 Volume variance 18,000Expected profit on actual sales 38,000 Sales price variance 12,000 Production variances Favourable Adverse Materials price 6,300 Materials usage 6,000 Labour rate 5,040 Labour efficiency 2,400 Variable overhead expenditure - - Variable overhead efficiency 1,200 Fixed overhead _____ 4,000 5,040 19,900 14,860Actual profit 11,140

Background information (not seen by the Managing Director) The report did not include any other information. Details relating to the company and the product that it makes are given below: FX produces one type of product. It operates a standard marginal costing system. The standard unit cost and price of the product is as follows: £ £ Selling price 250Direct material (5 kg at £20) 100Direct labour (4 hours at £10) 40Variable overheads (4 hours at £5) 20 160Contribution 90 The variable overhead absorption rate is based on direct labour hours. The company has budgeted fixed overheads of £70,000 per month. Budgeted sales and production levels are 1,000 units per month.

P1 12 May 2008



Month 6 The company has just completed Month 6 of its operations. Extracts from its records show: 1. 1,200 units were produced and sold.

2. The actual direct materials purchased and used was 6,300 kg costing £132,300

3. The actual direct labour hours worked were 5,040 hours.

Required: (a) Prepare a report for the Managing Director of FX that explains and interprets the

Month 6 variance report. The Managing Director has recently joined the company and has very little previous financial experience.

(17 marks) The Managing Director was concerned about the Material Price variance and its cause. He discovered that a shortage of materials had caused the market price to rise to £23 per kg.

Required:

(b) In view of this additional information, calculate for Direct Materials:

• The total variance;

• The planning variance;

• The two operational variances. (7 marks)

(c) Discuss the advantages and disadvantages of reporting planning and operational

variances. Your answer should refer, where appropriate, to the variances you calculated in (b) above.

(6 marks)



TURN OVER

May 2008 13 P1



Question Four Q, a new company, is being established to manufacture and sell an electronic tracking device: the Trackit. The owners are excited about the future profits that the business will generate. They have forecast that sales will grow to 2,600 Trackits per month within five months and will be at that level for the remainder of the first year. The owners will invest a total of $250,000 in cash on the first day of operations (that is the first day of Month 1). They will also transfer non-current assets into the company. Extracts from the company’s business plan are shown below. Sales The forecast sales for the first five months are:

Month Trackits (units)

1 1,000 2 1,500 3 2,000 4 2,400 5 2,600

The selling price has been set at $140 per Trackit. Sales receipts Sales will be mainly through large retail outlets. The pattern for the receipt of payment is expected to be as follows:

Time of payment % of sales value Immediately 15 * One month later 25 Two months later 40 Three months later 15

The balance represents anticipated bad debts. * A 4% discount will be given for immediate payment. Production The budget production volumes in units are:

Month 1 Month 2 Month 3 Month 4 1,450 1,650 2,120 2,460

Variable production cost The budgeted variable production cost is $90 per unit, comprising:

$ Direct materials 60 Direct wages 10 Variable production overheads 20Total variable cost 90

Direct materials: Payment for purchases will be made in the month following receipt. There will be no opening inventory of materials in Month 1. It will be company policy to hold inventory at the end of each month equal to 20% at of the following month’s production requirements. The direct materials cost includes the cost of an essential component that will be bought in from a specialist manufacturer.

P1 14 May 2008



Direct wages will be paid in the month in which the production occurs. Variable production overheads: 65% will be paid in the month in which production occurs and the remainder will be paid one month later. Fixed overhead costs Fixed overheads are estimated at $840,000 per annum and are expected to be incurred in equal amounts each month. 60% of the fixed overhead costs will be paid in the month in which they are incurred and 15% in the following month. The balance represents depreciation of non-current assets. Ignore VAT and Tax

Required

(a) Prepare a cash budget for each of the first three months and for that three-month period in total.

(14 marks)

(b) There is some uncertainty about the cost of the specialist component (this is included in the direct material cost). It is thought that the cost of the component could range between $32 and $50 per Trackit. It is currently included in the cost estimates at $40 per Trackit.

Calculate the budgeted total net cash flow for the three-month period in total if the

cost of the component was (i) $32

(ii) $50 (6 marks)

(c) Prepare a report for the owners of Q that offers advice about the profitability of their

business and the situation revealed by the extracts from the business plan and your answers to (a) and (b) above.

(10 marks)

Total for Question Four = 30 marks




May 2008 15 P1



[This page is blank]

P1 16 May 2008



May 2008 17 P1



PRESENT VALUE TABLE




(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

P1 18 May 2008






(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514


(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

May 2008 19 P1



Formulae

PROBABILITY A B = A or B. A B = A and B (overlap). ∪ ∩

P(B A) = probability of B, given A. Rules of Addition If A and B are mutually exclusive: P(A B) = P(A) + P(B) ∪If A and B are not mutually exclusive: P(A ∪B) = P(A) + P(B) – P(A ∩ B) Rules of Multiplication If A and B are independent: P(A ∩B) = P(A) * P(B) If A and B are not independent: P(A ∩B) = P(A) * P(B | A) E(X) = (probability * payoff) ∑ Quadratic Equations If aX2 + bX + c = 0 is the general quadratic equation, the two solutions (roots) are given by:

aacbbX

242 −±−

=


nxx ∑

= ffxx

∑∑


Standard Deviation

nxxSD

2)( −∑= 2

2x



Price: 100 x w

PP

wo

1

∑

⎟⎟⎠

⎞⎜⎜⎝

⎛∗∑

Quantity: 100 x

1

wQQw

o

∑

⎟⎟⎠

⎞⎜⎜⎝

⎛∗∑




P1 20 May 2008





b = 22 )X(Xn



∑∑−∑=


∑ Y = na + b ∑ X ∑ XY = a ∑ X + b∑X2


})Y(Yn}{)X(Xn{


2222 ∑−∑∑−∑

∑∑−∑==

R(rank) = 1 - )1(

62

2

−

∑

nnd



PV = ⎥⎥⎦

⎤

⎢⎢⎣

⎡

+−

nrr ]1[111


PV = r1

May 2008 21 P1




P1 22 May 2008





1 KNOWLEDGE





something






Analyse Categorise







May 2008 23 P1




Managerial Level


May 2008


P1 24 May 2008




May 2008 Exam General Comments The results achieved on this paper were a significant improvement on those seen in the November 2007 examination. The improvement was seen in all sections of the paper although differences in performance were demonstrated between the optional questions 3 and 4 in Section C. Question 4 on the subject of cash budgeting, and with a greater weighting of marks available for calculations, was more popular and was better answered. Marks gained on the ten multiple-choice questions and on the shorter-form calculations in question 1 (Section A) were particularly good thus providing a good foundation for success in this examination. However, it is still the case that a number of candidates fail to attempt all of the multiple-choice questions. Some candidates were unable to build sufficiently upon their achievements in question 1. This was due to weaker performance in Sections B and C of the paper where the focus was much more on narrative especially if question 3 was chosen in Section C. There was little evidence, in this P1 examination, of time pressures and of poor time management. However, workings in answer to calculation questions were often unnecessarily lengthy, detailed and at times repetitive. Adequate workings are always required to computational questions (apart from multiple-choice), for the benefit both of candidates and of markers, but time spent planning answers is time well spent if it reduces overall writing time. Lack of preparation seemed to be the primary reason for candidate failure. Candidates who failed this exam must try to prepare themselves for future exams with a good knowledge of topic areas. In the exam they must read questions carefully and then answer the specific question asked rather than write all they know on a broader topic. Candidates must be prepared to apply their knowledge to particular practical situations.





May 2008 Exam Section A – 50 marks

Question 1.1 If inventory levels have increased during the period, the profit calculated using marginal costing when compared with that calculated using absorption costing will be A higher.

B lower.

C equal.

D impossible to answer without further information.(2 marks)

The answer is B

Question 1.2 Fixed production overheads will always be under-absorbed when A actual output is lower than budgeted output.

B actual overheads incurred are lower than budgeted overheads.

C overheads absorbed are lower than those budgeted.

D overheads absorbed are lower than those incurred.

(2 marks)

The answer is D

The following scenario is to be used for questions 1.3 and 1.4

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 30Profit 49 70 20Time (minutes) on bottleneck machine 7 10 7

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





May 2008 Exam

Question 1.3 Using a traditional limiting factor approach, the rank order (best first) of the products would be

A W, X, Y

B W, Y, X

C X, W, Y

D Y, X, W (2 marks)

The answer is A

Workings The traditional limiting factor approach would view contribution per unit as the selling price minus all variable costs.

W X YContribution per unit £ 85 94 50Bottleneck minutes 7 10 7Contribution per minute £ 12·1 9·4 7·1Rank 1 2 3





May 2008 Exam

Question 1.4 Using a throughput accounting approach, the rank order (best first) of the products would be

A W, X, Y

B W, Y, X

C X, W, Y

D Y, X, W

(2 marks)

The answer is B

Workings A throughput accounting approach assumes that materials are the only variable costs. Consequently the contribution is different from that calculated using the traditional method.

W X Y Contribution per unit £ 139 130 120 Bottleneck minutes 7 10 7 Contribution per minute £ 19·9 13 17·1 Rank 1 3 2





May 2008 Exam

Question 1.5 A company’s summary budgeted operating statement is as follows:

$000 Revenue 400Variable costs 240Fixed costs 100Profit 60

Assuming that the sales mix does not change, the percentage increase in sales volume that would be needed to increase the profit to $100,000 is A 10%

B 15%

C 25%

D 40% (2 marks)

The answer is C

Workings Contribution to sales ratio = 160/400 = 40% Extra profit required = $40,000. Fixed costs are constant and therefore extra contribution will generate extra profit. The revenue needed to generate contribution of $40,000 is $40,000/40% = $100,000. The current revenue is $400,000 and therefore $100,000 is 25% of this.





May 2008 Exam

Question 1.6 Which of the following statements are true?

(i) Enterprise Resource Planning (ERP) systems are accounting oriented information systems which aid in identifying and planning the enterprise wide resources needed to resource, make, account for and deliver customer orders.

(ii) Flexible Manufacturing Systems (FMS) are integrated, computer-controlled production systems, capable of producing any of a range of parts and of switching quickly and economically between them.

(iii) Just-In-Time (JIT) is a system whose objective is to produce, or to procure, products or components as they are required.

A (i) and (ii) only

B (i) and (iii) only

C (ii) and (iii) only

D (i), (ii) and (iii) (2 marks)

The answer is D





May 2008 Exam

Question 1.7 Flexed budgets for the cost of medical supplies in a hospital, based on a percentage of maximum bed occupancy, are shown below:

Bed occupancy 82% 94% Medical supplies cost $410,000 $429,200

During the period, the actual bed occupancy was 87% and the total cost of the medical supplies was $430,000.

The medical supplies expenditure variance was A $5,000 adverse

B $12,000 adverse

C $5,000 favourable

D $12,000 favourable

(2 marks)

The answer is B

Workings

% $ High 94 429,200Low 82 410,000Difference 12 19,200

Variable cost per % = $19,200/12 = $1,600 87% is 5% more than 82% and therefore the total cost for the flexed budget for a bed occupancy of 87% is $410,000 + (1,600 * 5) = $418,000 The expenditure variance is $418,000 - $430,000 = $12,000 adverse





May 2008 Exam

Question 1.8

A company uses a standard absorption costing system. The fixed overhead absorption rate is based on labour hours. Extracts from the company’s records for last year were as follows:

Budget Actual Fixed production overhead $450,000 $475,000 Output 50,000 units 60,000 units Labour hours 900,000 930,000

The under- or over-absorbed fixed production overheads for the year were A $10,000 under-absorbed

B $10,000 over-absorbed

C $15,000 over-absorbed

D $65,000 over-absorbed

(2 marks)

The answer is D

Workings The under or over absorbed overhead is the difference between the actual overhead spent and the overheads absorbed. Overheads are absorbed based on the standard content of the actual output. Here we are told that the absorption rate is based on labour hours. The overhead absorption rate is $450,000/900,000 hours = $0·50 per labour hour Standard labour hours per unit = 900,000/50,000 = 18 hours per unit The output was 60,000 units. This is 60,000 * 18 = 1,080,000 standard hours. Overhead absorbed = 1,080,000 * $0·50 = $540,000 The actual overheads were $475,000 and therefore overheads were over absorbed by $65,000.





May 2008 Exam

Question 1.9 A flexible budget is a budget that A is changed during the budget period according to changed circumstances.

B is continuously updated by adding a further accounting period when the earliest accounting period has expired.

C results from the participation of budget holders.

D recognises different cost behaviour patterns and is designed to change as the volume of activity changes.

(2 marks)

The answer is D

Question 1.10 A company will forecast its quarterly sales units for a new product by using a formula to predict the base sales units and then adjusting the figure by a seasonal index.

The formula is BU = 4000 + 80Q

Where BU = Base sales units and Q is the quarterly period number

The seasonal index values are:

Quarter 1 105% Quarter 2 80% Quarter 3 95% Quarter 4 120%

The forecast increase in sales units from Quarter 3 to Quarter 4 is A 25%

B 80 units

C 100 units

D 1,156 units (2 marks)

The answer is D

Workings Forecast for Q3 = {4,000 + (80 * 3)} * 95% = 4,028 Forecast for Q4 = {4,000 + (80 * 4)} * 120% = 5,184 This is an increase of 1,156 units.





May 2008 Exam

Question 1.11 Product XYZ is made by mixing three materials (X, Y and Z). There is an expected loss of 20% of the total input. The budgeted and actual results for Period 1 are shown below. There were no opening or closing inventories of any materials or of the finished product.

Budget Actual Output of XYZ 800 kg 960 kg Material X 500 kg @ $5⋅00 per kg 600 kg @ $4⋅70 per kg Y 300 kg @ $6⋅00 per kg 380 kg @ $6⋅50 per kg Z 200 kg @ $7⋅00 per kg 300 kg @ $7⋅10 per kg Total input 1,000 kg 1,280 kg

Calculate for Period 1: (i) the total materials mix variance;

(2 marks)(ii) the total materials yield variance.

(2 marks)

(Total for sub-question 1.11 = 4 marks)

Workings (i) Mix variance = (actual inputs in the actual mix at standard prices) v (actual inputs in standardised

mix at standard prices)

Actual mix Standard mix kg $ per kg $ kg $ per kg $ X 600 5 3,000 640 5 3,200Y 380 6 2,280 384 6 2,304Z 300 7 2,100 256 7 1,792 1,280 7,380 1,280 7,296

Mix variance = $7,380 v $7,296 = $84 adverse

(ii) Yield variance = (actual inputs in standardised mix at standard prices) v (standard input in

standardised mix at standard prices for the actual output). The actual output of XYZ was 960 kg. The input required to achieve an output of 960 kg is 1,200 kg (there is a 20% loss, therefore the input = 960/0⋅8).

Standardised input Standard input needed kg $ per kg $ kg $ per kg $ X 640 5 3,200 600 5 3,000Y 384 6 2,304 360 6 2,160Z 256 7 1,792 240 7 1,680 1,280 7,296 1,200 6,840

Yield variance = $7,296 v $6,840 = $456 adverse





May 2008 Exam

Question 1.12 Extracts from a company’s year-end accounts are shown below: $000 Revenue 9,456 Gross profit 5,872 Operating profit 2,981 Non-current assets 17,850 Inventory 950 Cash at bank 1,750 Short-term borrowings 1,225 Trade receivables 731 Trade payables 813

Calculate the following performance measures: (i) Operating profit margin;

(ii) Return on capital employed;

(iii) Trade receivable days (debtors days);

(iv) Current ratio. (4 marks)

Workings (i) Operating profit margin = 2,981,000/9,456,000 = 31⋅53%

(ii) Return on capital employed = 2,981 /(17,850 + 950 + 1,750 – 1,225 + 731 – 813) = 15·49%

(iii) Trade receivable days = (731,000/9,456,000) x 365 = 28⋅22 days

(iv) Current ratio = (950 + 1,750 + 731)/(1,225 + 813) = 1⋅68





May 2008 Exam

The following data are given for sub questions 1.13, 1.14 and 1.15

Premier Cycles has two divisions: the Frame Division and the Assembly Division. The Frame Division produces bike frames. The frames can be sold directly to external customers as “frame only” or the frames can be transferred to the Assembly Division where they are built up into complete bikes by adding other components, such as wheels and handlebars.

Frame Division

Budgeted details for the forthcoming year for the Frame Division are:

Selling price per frame $852 Variable cost per frame $420 Annual fixed cost $4,000,000 Annual capacity 12,000 frames The Division has orders for 5,000 frames from external customers for the forthcoming year. Assembly Division The Manager of the Assembly Division has just signed a contract to supply 8,000 bikes to a sporting goods retailer next year. This will mean that the Division will be operating at full capacity. Budgeted details are as follows:

Selling price per bike $1,600 Variable cost of assembly and components $500 (excluding frame) Annual fixed cost $2,400,000 Annual capacity 8,000 bikes

Company Policy

It has been announced that Premier Cycles will be introducing a new performance appraisal system. The Divisional Managers’ bonuses will only be payable if they earn a minimum annual contribution of 108% of fixed costs.

Question 1.13 Calculate the minimum number of frames the Frame Division must sell next year in order for the Divisional Manager to earn a bonus if frames are sold for $852 each.

(2 marks)

Workings Contribution per frame = $432

Return required = $4m x 1⋅08 = $4⋅32m

Minimum number of frames = $4⋅32m/$432 = 10,000 frames





May 2008 Exam

Question 1.14 Calculate the maximum price per frame that the Manager of the Assembly Division could pay and still earn a bonus next year.

(2 marks)

Workings Return required = $2⋅4m x 1⋅08 = $2⋅592m

Minimum contribution per frame = $2.592m/8,000 = $324

Contribution before charging for frame = $1,600 - $500 = $1,100

Therefore the maximum payment would be $1,100 - $324 = $776

Question 1.15 Ignoring Premier Cycles’ performance appraisal system, explain how the Manager of the Frame Division should calculate the transfer price of frames it supplies to the Assembly division in order to maximise profits for Premier Cycles. Note: NO calculations are required.

(2 marks)

Workings The transfer price should be based on opportunity cost. If there is an external market for the frames then the market price should be used. If there is not an external market, the transfer price should be the marginal cost incurred.





May 2008 Exam

Question 1.16 State FOUR aims of a transfer-pricing system.

(2 marks)

Workings The aims of a transfer-pricing system include: • Promote goal congruence; • Motivate managers; • Facilitate performance evaluation; • Retain divisional autonomy; • Ensure optimal allocation of resources. (Candidates only needed to state four aims)

Question 1.17 Product GH passes through two consecutive processes: the output from Process 1 is transferred to

Process 2. Details of Process 1 for Period 3 were as follows: There were 5,000 units of opening work-in-progress, which were valued as follows:


During the period, 14,000 units were added to the process and the following costs were incurred:


At the end of Period 3, there were 6,000 units of closing work-in-progress. The degree of completion for these units was:

Materials 100%Labour 80%Production overheads 65%

The expected normal loss is 10% of new units added to the process during the period. These units and any other losses can be sold for $5 per unit. 11,000 units were transferred to Process 2 and there were losses of 2,000 units. All losses occur at the end of the process. Weighted average costing is used.

Calculate the total cost of the 11,000 units that were transferred to Process 2.

(4 marks)





May 2008 Exam

Workings

Units Units Opening W-i-P 5,000 Closing W-i-P 6,000 Input 14,000 Output 11,000 19,000 Normal loss 1,400 Abnormal loss 600 Total 19,000

The income from the sale of the normal loss (1,400 x $5) is used to reduce the cost of materials. Costs Equivalent units Opening

W-i-P $

Period $

Total $

Output

Closing W-i-P

Abn Loss

Total

Cost per EU $

Materials 77,080 223,000 300,080 11,000 6,000 600 17,600 17⋅05Labour 33,480 101,000 134,480 11,000 4,800 600 16,400 8⋅20Prod o/h 8,825 40,000 48,825 11,000 3,900 600 15,500 3⋅15 28⋅40

Value of output = 11,000 units x $28⋅40 = $312,400





May 2008 Exam Section B – 30 marks ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS

Question 2(a) Describe THREE key features that are present in any organisation that is successfully focused on Total Quality Management (TQM).

(5 marks)

Rationale Question 2(a) covers learning outcome A(vii) - Explain the role of MRP and ERP systems in supporting standard costing systems, calculating variances and facilitating the posting of ledger entries. Suggested Approach • consider what TQM is • describe three key features of TQM Marking Guide

Marks

up to 2 marks for each feature max 5 Examiner’s Comments This part was generally well answered. Common Errors • lack of focus on customers, people and organisation structure





May 2008 Exam

Question 2(b) Explain THREE behavioural consequences that may result after the introduction of participative budgeting.

(5 Marks)

Rationale Question 2(b) covers learning outcome C(xiii) - Evaluate the impact of budgetary control systems on human behaviour. Suggested Approach • briefly describe what participative budgeting is • explain three behavioural consequences of participative budgeting Marking Guide

Marks

up to 2 marks for each behavioural consequence max 5 Examiner’s Comments This part was generally reasonably well answered Common Errors • inclusion of aspects of participative budgeting that are non-behavioural e.g. time and cost, accuracy of

figures • inclusion of aspects of budgeting generally • failure to recognise the possibility, and behavioural implications, of pseudo-participation





May 2008 Exam

Question 2(c) Discuss the advantages and disadvantages of rolling budgets.

(5 Marks) Rationale Question 2(c) covers learning outcome C(vi) - Evaluate and apply alternative approaches to budgeting. Suggested Approach • briefly describe what rolling budgets are • discuss the advantages of rolling budgets • discuss the disadvantages of rolling budgets Marking Guide

Marks

1 mark for each advantage or disadvantage max 5 Examiner’s Comments Performance was mixed with a significant number of candidates not knowing what rolling budgets are. Common Errors • believing that rolling budgets are easy, quick and low cost • believing that rolling budgets are budgets that are retained, with minimal adjustment, for a subsequent

period • believing that rolling budgets are for more than a year ahead (e.g. capital expenditure budgets) and/or

are useful for strategic planning





May 2008 Exam

Question 2(d) The manager of the Photographic Division is considering introducing a Balanced Scorecard to measure the success of the strategies. He has identified two perspectives and two associated goals. They are: Perspective Goal Innovation Technology Leadership Customer Support

(i) For the “Innovation Perspective” of the Division, recommend a performance measure and briefly

explain how the measure will reflect the achievement of the stated goal. (3 marks)

(ii) For the “Customer Perspective” of the Division, state which data should be collected and explain

how this could be used to ensure the goal of “support’’ is met. (2 marks)

(Total for (d) = 5 marks)

Rationale Question 2(d) covers learning outcome B(v) – Prepare reports using a range of internal and external benchmarks and interpret the results. Suggested Approach • identify an appropriate performance measure for the Innovation Perspective in the situation

described • explain how the measure will reflect achievement of the goal of technology leadership • identify data relevant to the goal of customer support • explain how the customer support data could be used Marking Guide

Marks

innovation perspective measure explanation of how measure will reflect goal achievement relevant data relating to customer support how data used

1 2 1 1

Examiner’s Comments Performance on this part was mixed. Common Errors • in (i), recommending financial measures, especially sales • in (ii), focusing on customer complaints and product faults rather than on customer support





May 2008 Exam

Question 2(e) Explain THREE reasons why internal benchmarking may provide information that is more useful to the Manager of the Photographic Division, in terms of monitoring and improving performance, than that provided by external benchmarking.

(5 Marks) Rationale Question 2(e) covers learning outcome D(iv) - Calculate and apply measures of performance for investment centres (often ‘strategic business units’ or divisions of larger groups). Suggested Approach • briefly explain internal and external benchmarking • identify three benefits of internal rather than external benchmarking Marking Guide

Marks

up to 2 marks for each relative benefit max 5 Examiner’s Comments This part was generally not well answered with a significant number of candidates not understanding what internal benchmarking is. Common Errors • considering benefits of internal benchmarking per se rather than in comparison with external

benchmarking • focusing solely on reviewing operations within the photographic division without reference to other

divisions • believing that benchmarking was simply about setting standards/targets and/or measuring efficiency

within the photographic division





May 2008 Exam

Question 2(f) Explain THREE reasons why ROI may not be a good performance measure.

Rationale Question 2(f) covers learning outcome D(iv) - Calculate and apply measures of performance for investment centres (often ‘strategic business units’ or divisions of larger groups). Suggested Approach • briefly explain ROI • explain three problems with the use of ROI as a performance measure Marking Guide

Marks

up to 2 marks for each problem max 5 Examiner’s Comments Many candidates recognised the potential for dysfunctional behaviour arising from the use of a relative measure, from the measure itself and/or from the focus on the short term. Common Errors • irrelevant discussion resulting from a lack of knowledge of how ROI is calculated • failure to appreciate the benefits of using a portfolio of measures • not recognising the problems relating to asset valuation over time • not fully explaining what the dysfunctional behaviour may be





May 2008 Exam


Question 3(a) Prepare a report for the Managing Director of FX that explains and interprets the Month 6 variance report. The Managing Director has recently joined the company and has very little previous financial experience.

(17 marks)

Rationale Question 3(a) covers learning outcome B(iii) - Prepare and discuss a report which reconciles budget and actual profit using absorption and/or marginal costing principles Suggested Approach • taking each variance in turn (sales as well as production):

- identify the direction of the variance - describe, for the benefit of the MD, how it has been calculated - set the variance in context e.g. resources consumed per unit versus standard - explain what may have caused the variance

• considering relevant variances together, explain possible relationships between them • provide a summary of, and draw conclusions about, the month 6 performance

Marking Guide

Marks

layout, summary and conclusions 3 up to 2 marks for each variance max 14 Examiner’s Comments Candidates should have realised that, with 17 marks available for part (a) and in a situation where the MD had very little previous financial experience, extensive explanation and interpretation of the variance report was required,. Many candidates unfortunately, provided answers that lacked depth and interpretation and often did little more than put into words the figures in the variance report. Common Errors • failing to include sales variances and thus concentrating only on the cost variances in the report • not explaining the general basis for each variance • not explaining each specific variance in terms of its relative size e.g. unit price/cost, resource usage

per unit of output • failing to suggest possible causes of variances and how variances may be interrelated as a

consequence • suggesting that the sales price variance was favourable with an above standard price • not understanding causes of the overhead variances





May 2008 Exam

Question 3(b)

The Managing Director was concerned about the Material Price variance and its cause. He discovered that a shortage of materials had caused the market price to rise to £23 per kg.

Required:

In view of this additional information, calculate for Direct Materials:

• The total variance;

• The planning variance;

• The two operational variances. (7 marks)

Rationale Question 3(b) covers learning outcome B(iv) - Calculate and explain planning and operational variances. Suggested Approach • calculate the standard direct materials cost of actual output using both the original and the revised

standard raw material prices • calculate the planning variance for direct materials as the difference between the above two figures • calculate the total direct materials variance as the difference between the actual cost and the

original standard cost of actual output • calculate the operational variances (direct materials price and usage) using the revised standard

price Marking Guide

Marks

total variance planning variance operational price variance operational usage variance

1 2 2 2

Examiner’s Comments A reasonable number of candidates were able to calculate some of the variances correctly but relatively few candidates were able to calculate them all. For the planning variance, a figure of £15,000 adverse (calculated before the volume variance) as well as £18,000 adverse (calculated after the volume variance) was accepted for the 2 marks. Common Errors • not understanding what planning and operational variances are • calculating only the price variances (planning and operational) rather than all of the direct materials

variances • calculating a planning variance of £18,900 adverse, based on actual purchases • calculating the operational usage variance based on the original standard price i.e. the same variance

as was given in the question • not indicating whether operational variances were 'price' or 'usage' • providing incorrect variance signs or no signs





May 2008 Exam

Question 3(c) Discuss the advantages and disadvantages of reporting planning and operational variances. Your answer should refer, where appropriate, to the variances you calculated in (b) above.

(6 marks)

Rationale Question 3(c) covers learning outcome B(iv) - Calculate and explain planning and operational variances. Suggested Approach • discuss the advantages of reporting planning and operational variances • discuss the disadvantages of reporting planning and operational variances Marking Guide

Marks

1 mark for each advantage or disadvantage linkage to variances in part (b)

max 4 2

Examiner’s Comments Many candidates did not know what planning and operational variances are, or in the event that they did, were unable to discuss advantages and disadvantages of reporting them. Common Errors • providing little reference to any variances calculated in part (b) • discussing advantages and disadvantages of variance analysis generally rather than with specific

reference to planning and operational variances





May 2008 Exam

Question 4(a) Prepare a cash budget for each of the first three months and for that three-month period in total.

(14 marks)

Rationale Question 4(a) covers learning outcome C(iii) - Calculate projected revenues and costs based on product/service volumes, pricing strategies and cost structures. Suggested Approach • calculate the value of sales for each month and adjust to reflect the timing of customer payments and

the cash discount • calculate the materials required for production and adjust for the changes in inventory and for the

timing of payments • calculate the remaining variable production costs using the production volumes and costs per unit

given in the question scenario and adjust (variable overheads only) for payment timing • calculate the monthly fixed overhead costs, before depreciation, and adjust for payment timing • complete the cash budget for each month, and in total, by calculating receipts and payments totals,

net cash flows and cash balances Marking Guide

Marks

budget format (total monthly receipts/payments & net cash flows, balances, total column) sales receipts payments for materials wages variable production overheads fixed overheads

3 3 3 1 2 2

Examiner’s Comments Candidates generally scored well on the preparation of the cash budget. Receipts from sales were invariably correct. Common Errors • calculating, and using, production volumes other than those already provided in the question

scenario • failing to adjust direct materials usage for inventory changes in the calculation of purchases • failing to phase the direct material payments • including depreciation as a cash outflow • not calculating the net cash flow for each month in addition to the balances remaining • not including, or at least not completing, a total column as well as a column for each month





May 2008 Exam

Question 4(b) There is some uncertainty about the cost of the specialist component (this is included in the direct material cost). It is thought that the cost of the component could range between $32 and $50 per Trackit. It is currently included in the cost estimates at $40 per Trackit. Calculate the budgeted total net cash flow for the three-month period in total if the cost of the component was

(i) $32

(ii) $50 (6 marks)

Rationale Question 4(b) covers learning outcome C(vii) - Calculate the consequences of “what if” scenarios and evaluate their impact on master profit and loss account and balance sheet. Suggested Approach • calculate the change in the total cash flow for the three-month period at each of the revised direct

materials costs • calculate the revised total net cash flow for the three-month period

Marking Guide

Marks

change in total cash flow @ $32 for the component change in total cash flow @ $50 for the component revised total net cash flow for the three months

2 2 2

Examiner’s Comments Common Errors • calculating the direct materials costs as being $32 & $50 per Trackit rather than $52 & $70. It should

have been obvious to candidates that this was wrong when the revised total costs at the increased price for the specialist component turned out to be less than the total direct materials costs in part (a)

• calculating the change in costs using production/purchase quantities that were different from those used in answer to part (a)

• using inconsistent phasing of payments for purchases between parts (a) & (b) • not calculating the revised total net cash flow for the whole three-month period





May 2008 Exam

Question 4(c) Prepare a report for the owners of Q that offers advice about the profitability of their business and the situation revealed by the extracts from the business plan and your answers to (a) and (b) above.

(10 marks)

Rationale Question 4(c) covers learning outcome C(iv)- Evaluate projected performance by calculating key metrics including profitability, liquidity and asset turnover ratios. Suggested Approach • calculate the estimated profitability based on the sales projections for the first year of business • comment on the profitability • comment on the shorter-term cash position • comment on the uncertainty regarding the component cost Marking Guide

Marks

contribution, profit, break-even, margin of safety comments: profitability cash flow component cost uncertainty

4 2 2 2

Examiner’s Comments The answers to this part were disappointing with many candidates only making reference to the cash flows revealed by their answers to parts (a) & (b). In many cases this was confined to the cash budget figures from part (a). Common Errors • undertaking no calculations and providing no reference to the aspect of the business that required

advice about its profitability • believing that short-term cash flow (months 1 to 3) was equal to profit







18 November 2008 – Tuesday Morning Session Instructions to candidates








Maths Tables and Formulae are provided on pages 15 to 19.




P1 –

Per

form

ance

Eva

luat

ion

TURN OVER




SECTION A – 40 MARKS [the indicative time for answering this section is 72 minutes] ANSWER ALL FIFTEEN SUB-QUESTIONS

Instructions for answering Section A: The answers to the fifteen sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answer option you have chosen. You do not need to start a new page for each sub-question. For sub-questions 1.11 to 1.14 you should show your workings as marks are available for the method you use to answer these sub-questions.

Question One 1.1 What is the name given to a budget that has been prepared by re-evaluating activities and

comparing the incremental costs of those activities with their incremental benefits? A Incremental budget

B Rolling budget

C Zero base budget

D Flexible budget

(2 marks) 1.2 Which ONE of the following would NOT explain a favourable direct materials usage

variance? A Using a higher quality of materials than that specified in the standard.

B A reduction in materials wastage rates.

C An increase in suppliers’ quality control checks.

D Achieving a lower output volume than budgeted. (2 marks)

P1 2 November 2008



1.3 A manufacturing company pays its employees a constant salary for working 35 hours each week. The production process is highly specialised and the quality of output is a critical factor. All completed units are inspected. Currently about 10% of output fails to meet the expected specification.

The Managing Director has forecast increasing sales and is keen to reduce the labour cost per unit of production. He has suggested three possible ways of achieving this:

1. Improve direct labour productivity 2. Increase the number of hours worked 3. Reduce the rate of rejections

Which of the above suggestions would enable the company to reduce the labour cost per unit? A Suggestion 2 only

B Suggestions 1 and 2 only

C Suggestions 1 and 3 only

D Suggestions 2 and 3 only (2 marks)

1.4 The following table shows the number of patients treated and the total costs for a hospital

for each of the past four months:

Patients Total Cost Month $

1 5,000 37,500 2 8,400 45,660 3 8,300 45,050 4 5,900 39,420

Applying the high low method to the above information, an equation that could be used to forecast total cost ($) from the number of patients to be treated (where x = number of patients to be treated) is: A 22,900 + 2·40x

B 24,300 + 2·50x

C 25,000 + 2·50x

D 25,500 + 2·40x

(2 marks)


TURN OVER

November 2008 3 P1



1.5 Which of the following is the best description of “management by exception”? A Using management reports to highlight exceptionally good performance, so that

favourable results can be built upon to improve future outcomes.

B Sending management reports only to those managers who are able to act on the information contained within the reports.

C Focusing management reports on areas which require attention and ignoring those which appear to be performing within acceptable limits.

D Appointing and promoting only exceptional managers to areas of responsibility within the organisation.

(2 marks) 1.6 Which of the following would be the most appropriate measure to monitor the

performance of the manager of a profit centre? A Gross profit margin

B Revenue minus all costs

C Revenue minus controllable costs

D Return on capital employed (2 marks)

1.7 The sales volume profit variance is defined as the difference between the A actual and budgeted sales volumes valued at the actual profit per unit.

B actual and budgeted sales volumes valued at the standard profit per unit.

C actual and budgeted sales volumes valued at the difference between the actual and standard profit margins.

D actual and standard profit per unit multiplied by the budgeted sales volume.

(2 marks) 1.8 A company operates a standard absorption costing system and absorbs fixed production

overheads based on machine hours. The budgeted fixed production overheads for the company for the previous year were £660,000 and budgeted output was 220,000 units using 44,000 machine hours. During that year, the total of the fixed production overheads debited to the Fixed Production Overhead Control Account was £590,000, and the actual output of 200,000 units used 38,000 machine hours.

Fixed production overheads for that year were: A £90,000 under absorbed


C £20,000 under absorbed

D £10,000 over absorbed (2 marks)

P1 4 November 2008



The following information is for sub-questions 1.9 and 1.10 A company manufactures a fruit flavoured drink concentrate by mixing two liquids (X and Y). The standard cost card for ten litres of the drink concentrate is:

$Liquid X 5 litres @ $16 per litre 80Liquid Y 6 litres @ $25 per litre 150 11 litres 230

The company does not hold any inventory. During the last period the company produced 4,800 litres of the drink concentrate. This was 200 litres below the budgeted output. The company purchased 2,200 litres of X for $18 per litre and 2,750 litres of Y for $21 per litre. 1.9 The materials mix variance for the period was: A $150 adverse

B $450 adverse

C $6,480 favourable

D $6,900 favourable

(2 marks) 1.10 The materials yield variance for the period was:

A $150 adverse

B $450 adverse

C $6,480 favourable

D $6,900 favourable (2 marks)

1.11 A company has the following total cost data available for two levels of production of one

type of product:

4,000 units 8,000 units Purchasing costs £112,000 £140,000 Supervision £25,000 £41,000 Power £12,000 £15,500

The current supervisor can cover production levels up to and including 5,000 units. For higher levels of production, an assistant supervisor costing £16,000 is also required. For power, a flat fee is payable that will cover all power costs sufficient to produce up to and including 6,000 units. For production above this level there is an additional variable charge per unit.

Calculate the total flexed budget cost allowance for the production of 7,500 units.

(4 marks)

Section A continues on the next page TURN OVER

November 2008 5 P1



1.12 Extracts from the draft budgets of a company are listed below:

$m Operating profit 43·7Sales revenue 910·4Share capital and reserves 182·3Long-term borrowing 77·9Inventory 46·2Receivables 97·8Payables 51·3

Calculate the following: (i) Return on Capital Employed (ii) Asset turnover (iii) Current ratio (iv) Acid test (quick) ratio

(4 marks) 1.13 A company manufactures paint from two sequential processes (P1 and P2). Details for P1

for a period were as follows:

Input materials 20,000 litres costing £114,000 Conversion costs £176,000 Opening work in progress nil Transferred to P2 15,000 litres Normal loss 5% of input Abnormal loss 500 litres Closing work in progress 3,500 litres (complete in respect of materials, 60%

converted)

The company uses the weighted average method of process costing. All losses occur at the end of the process.

Prepare the P1 Process Account for the period.

(4 marks)


P1 6 November 2008



1.14 A company produces and sells one type of product. The details for last year were as follows:

Production and Sales

Budget Actual Production (units) 25,000 22,000Sales (units) 23,000 20,000

There was no inventory at the start of the year.

Selling price and costs

Budget Actual $ $

Selling price per unit 70 70Variable costs per unit 55 55Fixed production overhead 130,000 118,000Fixed selling costs 75,000 75,000

Calculate the actual profit for the year that would be reported using: (i) marginal costing; (ii) absorption costing.

(4 marks) 1.15 State four factors that should be considered before the cause of a variance is

investigated. (4 marks)


Reminder




TURN OVER

November 2008 7 P1



SECTION B – 30 MARKS [the indicative time for answering this section is 54 minutes] ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS Question Two (a) The following information relates to the budget for the year ahead.

Production overhead cost budget £

Machinery costs 285,000Set-up costs 235,000Purchasing costs 300,000Total production overheads 820,000

The following table shows the total budgeted activities of the company (it manufactures many different types of products) and the details relating to the manufacture of two product lines: S and T.

Data Total Product S Product T Machine hours 95,000 2 per unit 1 per unit Number of production runs 235 20 5 Purchase orders 5,000 100 100 Production quantities of S & T 5,000 units 20,000 units

Calculate, using activity based costing, the production overhead costs that would be attributed to one unit of Product S and one unit of Product T.

(5 marks) (b) Explain how “backflush accounting” differs from a traditional absorption costing system.

(5 marks) (c) “Not for profit” organisations do not have the objective of profit as a means of measuring

performance and therefore many choose to pursue “value for money” by managing “efficiency” and “effectiveness”.

Explain, using an example of your choice, how “Not for profit” organisations may have difficulties in managing “efficiency” and “effectiveness”.

(5 marks) (d) Compare and contrast “Economic Value Added®” and “Residual Income”, and briefly

discuss their merits as divisional performance measures. (5 marks)

P1 8 November 2008



The following information is for sub-questions (e) and (f) Two of the products that are manufactured by a company use the same machines. The products (P1 and P2) are manufactured using two machines (M1 and M2). During the next period the time available on the machines are 126 hours for M1 and 195 hours for M2. The company uses throughput accounting. Unit details of the two products are: P1 P2 $ $Selling price 36·00 39·00Materials 14·20 16·75Labour 6·00 7·50Variable production overheads 1·00 1·25Fixed production overheads 2·00 2·50Profit 12·80 11·00 Any mix of output can be sold at the above prices and there is unlimited demand for each of the products. The machine time needed to make one unit of the products is:

P1 P2 M1 0·35 hours 0·40 hoursM2 0·60 hours 0·65 hours

(e)

(i) Calculate the maximum production that is possible from each machine for each of the two products and state the bottleneck.

(ii) Calculate the throughput accounting ratio for each product.

(5 marks) (f) Identify, using a throughput approach, the production plan for the next period that would

result in the most profitable use of the machines. (All workings must be shown). (5 marks)



End of Section B


TURN OVER

November 2008 9 P1



SECTION C – 30 MARKS

[the indicative time for answering this section is 54 minutes] ANSWER ONE OF THE TWO QUESTIONS Question Three The G Group has a divisionalised structure. One of the divisions manufactures engines and one of the other divisions assembles motor cycles. The performance of the Divisional Managers, and consequently their bonuses, is based on the return on capital employed (ROCE) of their individual divisions. Both of these divisions operate in highly competitive markets. Motor Cycle Division A key component in a motor cycle is the engine. Engines are readily available on the open market but the division currently buys 3,600 engines each year internally from the Engines Division for £1,375 per engine. The Manager has just received the following message from the Manager of the Engines Division. Engine Prices: due to recent cost increases the price per engine will now be £1,600. On receiving the message the Manager of the Motor Cycle division contacted several external manufacturers and found one that would supply the required engines at £1,375 per engine. However she has since received a directive from the Managing Director of the Group that states that she must buy the engines internally. Engines Division Following the recent cost increases, the full absorption cost of a motor cycle engine is £1,450. This includes £400 for fixed production overheads. This type of motor cycle engine is one of many different engines produced by the division. The Manager of the Engines Division is aware of the competitive external market that he faces and knows that it will be difficult for him to charge external customers more than £1,375 per engine. However, he is also aware that the rising costs will have an impact on his bonus. He is trying to protect his bonus by passing these costs on to the Motor Cycle Division. He is keen to make as much profit as he can from these internal sales because the division is currently working below capacity.

Required:

(a) Calculate the impact on the annual profits of each of the two divisions and the G Group as a whole, of the directive that the engines must be purchased internally for £1,600 per engine instead of from the external supplier.

(6 marks)

(b) Write a report to the Managing Director of the Group that explains the

disadvantages and behavioural implications of using ROCE as a divisional performance measure. Your answer must be based on the above scenario and include an explanation of “responsibility accounting”.

(12 marks)

P1 10 November 2008



(c) The Engines Division has now developed a new ‘lean burn’ car engine that is

sold exclusively to external customers. The production of this engine will utilise the spare capacity of the division and will earn the division a contribution of £40 per machine hour. The demand is so high for the car engines that their production could also use 9,000 machine hours that are currently used to make 1,000 of the motor cycle engines that are transferred to the Motor Cycle Division.

Required: Explain, with supporting calculations, the minimum and maximum transfer prices that could now be charged for the motor cycle engines.

(7 marks)

(d) Briefly explain three aims of a transfer pricing system. (5 marks)



TURN OVER

November 2008 11 P1



Question Four A company manufactures two types of fertilizer (FA and FB). The company uses a standard costing system for planning and control purposes. Standards are set annually but budgets and variance reports are prepared each period. Chemicals Three chemicals (C1, C2 and C3) are used to make the fertilizers. C2 and C3 can be input directly to the manufacturing process but C1 has to be treated before it can be used. The treatment results in a loss of 30% of the chemicals treated. There are no further losses in the manufacturing process. Details of the standards for the chemicals are as follows:

C1 C2 C3Price per kg $8 $15 $12Treatment loss 30%Content of finished product: per unit of FA 0·20kg 0·15kg Nil per unit of FB 0·20kg Nil 0·25kg

Inventory Policies Chemicals: end of period holdings must be equal to 50% of the following period’s requirements. Treated C1 is used immediately. There are never any inventories of treated C1 at the start or end of any period. Fertilizers: no finished products are to be held. Period 1 Output and Sales

Budget ActualFA 40,000 units 38,000 unitsFB 24,000 units 25,000 units

Periods 2 and 3 Sales Budgets

Period 2 Period 3FA 40,000 units 44,000 unitsFB 24,000 units 33,000 units

P1 12 November 2008



Required

(a) During Period 1, the quantity of C1 used was 17,740 kg. Calculate for Period 1

for C1:

(i) the materials usage variance for the whole process (ii) the treatment loss percentage

(6 marks)

(b) In Period 1, the company purchased and used 6,450 kg of C3. The cost of this purchase was $94,000. It has now been realised that the standard price of C3 should have been $14·50 per kg for Period 1.

(i) Calculate the planning variance, and the operational price and usage

variances for C3 for Period 1. (7 marks)

(ii) Explain two problems associated with the reporting of planning variances.

(3 marks)

(c) Prepare the Purchases Budget for C2 for Period 2.

(5 marks)

(d) “Variance analysis presents results after the actual events have taken place and therefore it is of little use to management for planning and control purposes, particularly in a modern manufacturing environment”.

Discuss the above statement.

(9 marks)





November 2008 13 P1




P1 14 November 2008



November 2008 15 P1 November 2008 15 P1



PRESENT VALUE TABLE




(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

P1 16 November 2008






(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514


(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

November 2008 17 P1



Formulae

PROBABILITY A ∪B = A or B. A B = A and B (overlap). ∩

P(B A) = probability of B, given A. Rules of Addition If A and B are mutually exclusive: P(A B) = P(A) + P(B) ∪If A and B are not mutually exclusive: P(A ∪B) = P(A) + P(B) – P(A ∩ B) Rules of Multiplication If A and B are independent: P(A ∩B) = P(A) * P(B) If A and B are not independent: P(A ∩B) = P(A) * P(B | A) E(X) = (probability * payoff) ∑ Quadratic Equations If aX2 + bX + c = 0 is the general quadratic equation, the two solutions (roots) are given by:

aacbbX

242 −±−

=


nxx ∑

= ffxx

∑∑


Standard Deviation

nxxSD

2)( −∑= 2

2x



Price: 100 x w

PP

wo

1

∑

⎟⎟⎠

⎞⎜⎜⎝

⎛∗∑

Quantity: 100 x

1

wQQw

o

∑

⎟⎟⎠

⎞⎜⎜⎝

⎛∗∑




P1 18 November 2008





b = 22 )X(Xn)Y)(X(XYn

)X( Variance)XY( Covariance

∑−∑

∑∑−∑=


∑ Y = na + b ∑ X ∑ XY = a ∑ X + b∑X2


})Y(Yn}{)X(Xn{


2222 ∑−∑∑−∑

∑∑−∑==

R(rank) = 1 - )1(

62

2

−

∑

nnd



PV = ⎥⎥⎦

⎤

⎢⎢⎣

⎡

+−

nrr ]1[111


PV = r1

November 2008 19 P1




P1 20 November 2008




November 2008 21 P1




P1 22 November 2008





1 KNOWLEDGE





something






Analyse Categorise







November 2008 23 P1




Managerial Level


November 2008


P1 24 November 2008




November 2008 Exam General Comments The overall result on this paper was reasonable and, while performance was well below the level seen in May 2008, there was a small improvement on the previous November sitting. Marks gained in Section A were once again particularly good. This provided a firm foundation for many candidates to go on and achieve a pass on this paper. However, a number of candidates still do not attempt all of the multiple-choice questions. Some candidates were unable to build sufficiently upon their performance in Section A. This was frequently due to relatively weaker performance in both Section B and Section C where the focus was more on narrative answers, especially if candidates chose question 3 in Section C. This may have been a factor in the relative unpopularity of question 3. Candidates often demonstrated some difficulty in focusing on the specific requirements in those questions requiring narrative answers. There was little evidence of time pressures or poor time management. However, workings in answer to calculation questions were at times unnecessarily lengthy, detailed and/or repetitive. Adequate workings to calculation questions are always required (apart from the multiple-choice questions), for the benefit of markers and candidates alike Also time spent planning answers is time well spent if it reduces the overall time taken to answer the question. Lack of preparation once again seemed to be the primary reason for candidate failure. Candidates who failed this exam must try to prepare themselves for future exams with a good knowledge of all topic areas. In the exam they must read questions carefully and then answer the specific question asked rather than write all they know on a broader topic. They must be prepared to apply their knowledge to particular practical scenarios.






Question 1.1 What is the name given to a budget that has been prepared by re-evaluating activities and comparing the incremental costs of those activities with their incremental benefits? A Incremental budget

B Rolling budget

C Zero base budget

D Flexible budget

(2 marks)

The answer is C

Question 1.2 Which ONE of the following would NOT explain a favourable direct materials usage variance?

A Using a higher quality of materials than that specified in the standard.

B A reduction in materials wastage rates.

C An increase in suppliers’ quality control checks.

D Achieving a lower output volume than budgeted.

(2 marks)

The answer is D





November 2008 Exam

Question 1.3 A manufacturing company pays its employees a constant salary for working 35 hours each week. The production process is highly specialised and the quality of output is a critical factor. All completed units are inspected. Currently about 10% of output fails to meet the expected specification. The Managing Director has forecast increasing sales and is keen to reduce the labour cost per unit of production. He has suggested three possible ways of achieving this:

1. Improve direct labour productivity 2. Increase the number of hours worked 3. Reduce the rate of rejections

Which of the above suggestions would enable the company to reduce the labour cost per unit? A Suggestion 2 only

B Suggestions 1 and 2 only

C Suggestions 1 and 3 only

D Suggestions 2 and 3 only

(2 marks)

The answer is C





November 2008 Exam

Question 1.4 The following table shows the number of patients treated and the total costs for a hospital for each of the past four months:

Applying the high low method to the above information, an equation that could be used to forecast total cost ($) from the number of patients to be treated (where x = number of patients to be treated) is: A 22,900 + 2·40x

B 24,300 + 2·50x

C 25,000 + 2·50x

D 25,500 + 2·40x (2 marks)

The answer is D

Workings

($45,660 - $37,500)/(8,400 - 5,000) = $2⋅40 variable cost Fixed cost: $45,660 - (8,400 x $2⋅40) = $25,500 25,500 + 2⋅40x

Patients Total Cost Month $

1 5,000 37,500 2 8,400 45,660 3 8,300 45,050 4 5,900 39,420





November 2008 Exam

Question 1.5 Which of the following is the best description of “management by exception”? A Using management reports to highlight exceptionally good performance, so that favourable results

can be built upon to improve future outcomes.

B Sending management reports only to those managers who are able to act on the information contained within the reports.

C Focusing management reports on areas which require attention and ignoring those which appear to be performing within acceptable limits.

D Appointing and promoting only exceptional managers to areas of responsibility within the organisation.

(2 marks)

The answer is C

Question 1.6 Which of the following would be the most appropriate measure to monitor the performance of the manager of a profit centre? A Gross profit margin

B Revenue minus all costs

C Revenue minus controllable costs

D Return on capital employed (2 marks)

The answer is C

Question 1.7 The sales volume profit variance is defined as the difference between the A actual and budgeted sales volumes valued at the actual profit per unit.

B actual and budgeted sales volumes valued at the standard profit per unit.

C actual and budgeted sales volumes valued at the difference between the actual and standard profit margins.

D actual and standard profit per unit multiplied by the budgeted sales volume.

(2 marks)

The answer is B





November 2008 Exam

Question 1.8

A company operates a standard absorption costing system and absorbs fixed production overheads based on machine hours. The budgeted fixed production overheads for the company for the previous year were £660,000 and budgeted output was 220,000 units using 44,000 machine hours. During that year, the total of the fixed production overheads debited to the Fixed Production Overhead Control Account was £590,000, and the actual output of 200,000 units used 38,000 machine hours.

Fixed production overheads for that year were:

A £90,000 under absorbed


C £20,000 under absorbed

D £10,000 over absorbed (2 marks)

The answer is D

Workings Overheads are absorbed by the standard content of the actual production. Overhead absorption rate = £660,000/44,000 = £15 per machine hour. The standard is 0⋅2 hours per unit. Overheads absorbed = 200,000 x 0⋅2 x 15 = £600,000 The actual overheads were £590,000 and therefore were over-absorbed by £10,000

The following information is for sub-questions 1.9 and 1.10

A company manufactures a fruit flavoured drink concentrate by mixing two liquids (X and Y). The standard cost card for ten litres of the drink concentrate is:

$Liquid X 5 litres @ $16 per litre 80Liquid Y 6 litres @ $25 per litre 150 11 litres 230

The company does not hold any inventory. During the last period the company produced 4,800 litres of the drink concentrate. This was 200 litres below the budgeted output. The company purchased 2,200 litres of X for $18 per litre and 2,750 litres of Y for $21 per litre.





November 2008 Exam Workings for 1.9 and 1.10 litres $ 2,200 @$16 35,200 2,750 @$25 68,750Actual quantity input at the actual mix 4,950 103,950 2,250 @$16 36,000 2,700 @$25 67,500Actual quantity input in standard proportion 4,950 103,500 2,400 @$16 38,400 2,880 @$25 72,000Standard mix needed for the actual output 5,280 110,400

Question 1.9 The materials mix variance for the period was: A $150 adverse

B $450 adverse

C $6,480 favourable


The answer is B

Workings Mix variance = $103,500 - $103,950 = $450 adverse

Question 1.10 The materials yield variance for the period was:

A $150 adverse

B $450 adverse

C $6,480 favourable


The answer is D

Workings Yield variance = $110,400 - $103,500 = $6,900 favourable





November 2008 Exam

Question 1.11 A company has the following total cost data available for two levels of production of one type of product:

The current supervisor can cover production levels up to and including 5,000 units. For higher levels of production, an assistant supervisor costing £16,000 is also required. For power, a flat fee is payable that will cover all power costs sufficient to produce up to and including 6,000 units. For production above this level there is an additional variable charge per unit. Calculate the total flexed budget cost allowance for the production of 7,500 units.

(4 marks)

Workings

4,000 units 8,000 units Purchasing costs £112,000 £140,000Supervision £25,000 £41,000Power £12,000 £15,500

Fixed Variable Total £ £ Purchasing costs 84,000 (7,500 x £7) 136,500 Supervision 41,000 41,000 Power 12,000 (1,500 x £1·75) 14,625 Total 192,125





November 2008 Exam

Question 1.12 Extracts from the draft budgets of a company are listed below:

Calculate the following: (i) Return on Capital Employed (ii) Asset turnover (iii) Current ratio (iv) Acid test (quick) ratio

(4 marks)

$m Operating profit 43·7Sales revenue 910·4Share capital and reserves 182·3Long-term borrowing 77·9Inventory 46·2Receivables 97·8Payables 51·3

Workings

(i) Return on capital employed 16⋅8% [(43⋅7 × 100) ÷ (182⋅3 + 77⋅9)] (ii) Asset turnover 3⋅5 times [910⋅4 ÷ (182⋅3 + 77⋅9)] (iii) Current ratio 2⋅8 : 1 [(46⋅2 + 97⋅8) ÷ 51⋅3] (iv) Acid test 1⋅9 : 1 (97⋅8 ÷ 51⋅3)





November 2008 Exam

Question 1.13 A company manufactures paint from two sequential processes (P1 and P2). Details for P1 for a period were as follows:

The company uses the weighted average method of process costing. All losses occur at the end of the process. Prepare the P1 Process Account for the period.

(4 marks)

Input materials 20,000 litres costing £114,000 Conversion costs £176,000 Opening work in progress nil Transferred to P2 15,000 litres Normal loss 5% of input Abnormal loss 500 litres Closing work in progress 3,500 litres (complete in respect of materials, 60%

converted)

Workings

Units Cost element £ Transfer

outClosing

WIPAbnormal

loss Total E.U.

Cost per E.U. £

Input materials

114,000 15,000 3,500 500 19,000 6.00

Conversion 176,000 15,000 2,100 500 17,600 10.00

Process 1 Litres £ Litres £ Input materials 20,000 114,000 Process 2 15,000 240,000 Conversion costs 176,000 Normal loss 1,000 Abnormal loss 500 8,000 WIP 3,500 42,000 20,000 290,000 20,000 290,000





November 2008 Exam

Question 1.14 A company produces and sells one type of product. The details for last year were as follows:

Production and Sales

There was no inventory at the start of the year.

Selling price and costs

Calculate the actual profit for the year that would be reported using: (i) marginal costing; (ii) absorption costing.

(4 marks)

Workings Marginal costing Contribution per unit = $70 - $55 = $15

Inventory has increased during the period and therefore the profit calculated using absorption costing will be higher than the marginal costing profit by the amount of overheads absorbed by the closing inventory. Fixed production overhead absorption rate = $130,000/25,000 = $5⋅20 per unit Additional fixed production overhead absorbed by increased inventory = 2,000 x $5⋅20 = $10,400 Absorption costing profit = $107,000 + $10,400 = $117,400

Budget Actual Production (units) 25,000 22,000Sales (units) 23,000 20,000

Budget Actual $ $

Selling price per unit 70 70Variable costs per unit 55 55Fixed production overhead 130,000 118,000Fixed selling costs 75,000 75,000

$ Total contribution 20,000 x $15 300,000Fixed production overheads 118,000Fixed selling costs 75,000Profit (using marginal costing) 107,000





November 2008 Exam

Question 1.15 State four factors that should be considered before the cause of a variance is investigated.

(4 marks)

Workings Factors to be considered include: • Size;

• The possibility of the variance being uncontrollable;

• The cost of the investigation;

• The interrelationship with other variances;

• The relevance of the standard used. (Note: Candidates were required to state four factors)





November 2008 Exam Section B – 30 marks ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS

Question 2(a) The following information relates to the budget for the year ahead.

The following table shows the total budgeted activities of the company (it manufactures many different types of products) and the details relating to the manufacture of two product lines: S and T.

Calculate, using activity based costing, the production overhead costs that would be attributed to one unit of Product S and one unit of Product T.

(5 marks)

Rationale 2(a) covers learning outcome A(vi): Compare activity-based costing with traditional marginal and absorption

costing methods and evaluate its potential as a system of cost accounting. Suggested Approach • Calculate each cost driver rate using the cost and activity data for the company as a whole • Apply the cost driver rates to the data relating to each of the two products to calculate overhead

costs per unit of product Marking Guide

Marks

Cost driver rates (½ for each) 1½ Machinery costs per unit Set-up costs per unit Purchasing costs per unit

½ 1½ 1½

Examiner’s Comments This part was generally well answered with many candidates gaining full marks. Common Errors • apportioning all of the overheads i.e. assuming that there were only two products in the business • calculating the total overheads apportioned to each product rather than the overhead cost per unit

Production overhead cost budget £

Machinery costs 285,000Set-up costs 235,000Purchasing costs 300,000Total production overheads 820,000

Data Total Product S Product T Machine hours 95,000 2 per unit 1 per unit Number of production runs 235 20 5 Purchase orders 5,000 100 100 Production quantities of S & T 5,000 units 20,000 units





November 2008 Exam

Question 2(b) Explain how “backflush accounting” differs from a traditional absorption costing system.

(5 Marks) Rationale 2(b) covers learning outcome A(viii): Evaluate the impact of just-in-time manufacturing methods on cost

accounting and the use of ‘back-flush accounting’ when work-in-progress stock is minimal. Suggested Approach • Describe backflush accounting • Contrast backflush accounting with traditional absorption costing Marking Guide Marks Description of backflush accounting 2 Differences between the two systems (1 for each) 3 Examiner’s Comments Most candidates had some idea about backflush accounting but often failed to explain it adequately. Common Errors • lack of clarity in explaining how costs are backflushed • confusing backflush accounting with either marginal, throughput, target or activity-based costing • not explaining the main differences between backflush accounting and traditional absorption costing





November 2008 Exam

Question 2(c) “Not for profit” organisations do not have the objective of profit as a means of measuring performance and therefore many choose to pursue “value for money” by managing “efficiency” and “effectiveness”. Explain, using an example of your choice, how “Not for profit” organisations may have difficulties in managing “efficiency” and “effectiveness”.

(5 Marks) Rationale 2(c) covers learning outcome D(iv): Calculate and apply measures of performance for investment centres (often

‘strategic business units’ or divisions of larger groups). Suggested Approach • Define efficiency and effectiveness • Give an example of a suitable measure of each in a not for profit organisation • Explain why difficult to manage Marking Guide Marks Efficiency and effectiveness definitions (1 for each) 2 Examples of measures (1 for each) 2 Difficulty of managing (1 for each) 2

max 5 Examiner’s Comments This part was not well answered. Common Errors • focusing on managing not for profit organisations generally • focusing on why not for profit organisations may be less efficient and/or less effective • failing to define and deal with each of efficiency and effectiveness separately • suggesting that not for profit organisations would not spend time managing efficiency or effectiveness





November 2008 Exam

Question 2(d)

®Compare and contrast “Economic Value Added ” and “Residual Income”, and briefly discuss their merits as divisional performance measures.

(5 marks) Rationale 2 (d) covers learning outcome D(iv): Calculate and apply measures of performance for investment centres (often ‘strategic business units’ or divisions of larger groups). Suggested Approach • Define economic value added and residual income • Compare and contrast the two measures • Discuss the merits of the two measures Marking Guide Marks Definitions of economic value added and residual income 1 Similarities and differences (1 for each) 2 Merits of the two measures (1 for each) 2 Examiner’s Comments This part was reasonably well answered. Most candidates had a fair idea of the general basis for the measures and that they were expressed in absolute terms. Common Errors • failing to discuss the merits of the two measures and instead focusing entirely on their similarities

and differences • identifying only part of the adjustments required to determine economic profit (often only what to add

back) • demonstrating an inability to clearly distinguish between the two measures • focusing on the use of the measures for making capital investment decisions





November 2008 Exam

The following information is for sub-questions (e) and (f) Two of the products that are manufactured by a company use the same machines. The products (P1 and P2) are manufactured using two machines (M1 and M2). During the next period the time available on the machines are 126 hours for M1 and 195 hours for M2. The company uses throughput accounting. Unit details of the two products are: P1 P2

$ $ Selling price 36·00 39·00Materials 14·20 16·75Labour 6·00 7·50Variable production overheads 1·00 1·25Fixed production overheads 2·00 2·50Profit 12·80 11·00 Any mix of output can be sold at the above prices and there is unlimited demand for each of the products. The machine time needed to make one unit of the products is:

P1 P2 M1 0·35 hours 0·40 hoursM2 0·60 hours 0·65 hours





November 2008 Exam

Question 2(e)

(i) Calculate the maximum production that is possible from each machine for each of the two products and state the bottleneck.

(ii) Calculate the throughput accounting ratio for each product.

(5 Marks)

Rationale 2(e) covers learning outcome A(iv): Explain the origins of throughput accounting as ‘super variable costing’ and

its application as a variant of marginal or variable cost accounting. Suggested Approach • Calculate the production possibilities for each product on each machine • Identify the bottleneck machine • Calculate the throughput accounting ratio for each product by dividing the throughput contribution

per unit by the conversion cost per unit. Marking Guide Marks (i) Production possibilities on each machine (½ for each) 2 (ii) Bottleneck machine 1 (iii) Throughput accounting ratios (1 for each) 2 Examiner’s Comments Part (i) was reasonably well answered but part (ii) much less so because relatively few candidates calculated the throughput accounting ratios correctly. Common Errors • in (i) calculating the total units from each machine (P1 + P2) or for each product (M1 + M2) • in (i) believing that the limiting factor was product P2 on machine M2 rather than machine M2 overall • in (ii) calculating the numerator correctly but having different combinations of less than full conversion

cost in the denominator • in (ii) calculating the throughput contributions per machine hour instead of per unit • in (ii) attempting to calculate the required ratios using contribution and costs per hour but using

different hours in the numerator and denominator





November 2008 Exam

Question 2(f) Identify, using a throughput approach, the production plan for the next period that would result in the most profitable use of the machines. (All workings must be shown).

(5 marks) Rationale 2(f) covers learning outcome A(iv): Explain the origins of throughput accounting as ‘super variable costing’ and

its application as a variant of marginal or variable cost accounting. Suggested Approach • Calculate the throughput contribution per hour for each product on the bottleneck machine • Identify the priority for production • Determine the production plan Marking Guide Marks Throughput contributions per unit of product (½ for each) 1 Time on bottleneck machine (½ for each) 1 Throughput contributions per bottleneck hour (1 for each) 2 Production plan 1 Examiner’s Comments This part was not well answered. Many candidates made little or no attempt at this part or suggested a variety of incorrect approaches. Common Errors • calculating throughput contributions per hour for both machines and not just for the machine

previously identified as the bottleneck • using the throughput accounting ratios • basing the calculations and ranking on marginal costing contribution or on gross profit • ranking on the basis of throughput contributions per unit • failing to specify units in the production plan or proposing a plan to produce P2 as well as P1





November 2008 Exam


Question 3(a) Calculate the impact on the annual profits of each of the two divisions and the G Group as a whole, of the directive that the engines must be purchased internally for £1,600 per engine instead of from the external supplier.

(6 marks)

Rationale 3(a) covers learning outcome C(iii): Calculate projected revenues and costs based on product/service volumes,

pricing strategies and cost structures. Suggested Approach • Calculate the contribution for the Engines Division from the sale of engines to the Motor Cycle

Division • Calculate the extra cost to the Motor Cycle Division resulting from a purchase price of £1,600 per

engine rather than £1,375 • Calculate the group profit impact of the Engines Division supplying the 3,600 engines rather than

the Motor Cycle Division buying from the external supplier Marking Guide Marks Engines Division contribution 3 Motor Cycle Division extra cost 2 Impact on group profit 1 Examiner’s Comments Most candidates gained some marks but frequently answered a different question from that asked. Common Errors • calculating the difference between using a transfer price of £1,600 per engine and a transfer price of

£1,375 per engine (i.e. with no impact on group profit) rather than answering the question asked • treating the Engines Division fixed costs as variable costs





November 2008 Exam

Question 3(b) Write a report to the Managing Director of the Group that explains the disadvantages and behavioural implications of using ROCE as a divisional performance measure. Your answer must be based on the above scenario and include an explanation of “responsibility accounting”.

(12 marks)

Rationale 3(b) covers learning outcome C(viii): Explain the concept of responsibility accounting and its importance in the

construction of functional budgets that support the overall master budget. Suggested Approach • Explain responsibility accounting and define the ROCE performance measure used in investment

centres • Identify the performance measurement issues in the question scenario • Explain/discuss the disadvantages and behavioural implications of using ROCE with particular

reference to the question scenario Marking Guide Marks Report format 1 Definition of ROCE 1 Definition of responsibility accounting 2 Deficiencies of ROCE and behavioural implications (up to 2 marks for each point made) 8 Examiner’s Comments This part was reasonably well answered with candidates often demonstrating awareness of potential problems of using ROCE as a divisional performance measure. Common Errors • failing to apply knowledge to the specific scenario • failing to explain responsibility accounting despite the clear instruction in the question to do so • confusing responsibility accounting with goal congruence • believing that the imposed transfer price would affect goal congruence rather than autonomy and

motivation





November 2008 Exam

Question 3(c)

Explain, with supporting calculations, the minimum and maximum transfer prices that could now be charged for the motor cycle engines.

(7 marks)

Rationale 3(c) covers learning outcome D(vii): Identify the likely consequences of different approaches to transfer pricing

for divisional decision making, divisional and group profitability, the motivation of divisional management and the autonomy of individual divisions.

Suggested Approach • Explain the basis for establishing a minimum transfer price • Establish the minimum transfer price for the first 2,600 engines • Establish the minimum transfer price for the remaining 1,000 engines • Establish the maximum transfer price Marking Guide Marks Basis for minimum transfer price 1 Minimum transfer price for 2,600 engines 2 Minimum transfer price for 1,000 engines 3 Maximum transfer price 1 Examiner’s Comments This part was not well answered; answers featured a general lack of explanation. Common Errors • failing to differentiate between the first 2,600 engines and the remaining 1,000 engines • believing that the opportunity cost of the lean burn car engine was £40 per motor cycle engine rather

than £360 • failing to use marginal costs





November 2008 Exam

Question 3(d) Briefly explain three aims of a transfer pricing system.

(5 marks) Rationale 3(d) covers learning outcome D(vii): Identify the likely consequences of different approaches to transfer pricing for

divisional decision making, divisional and group profitability, the motivation of divisional management and the autonomy of individual divisions.

Suggested Approach • List three aims of a transfer pricing system • Explain each of the aims Marking Guide Marks Aims (1 for each) 3 Explanation of aims (1 for each) 3

max 5 Examiner’s Comments This part was answered fairly well. Common Errors • demonstrating ability to list three aims but failing to explain the aims adequately.





November 2008 Exam

Question 4(a) During Period 1, the quantity of C1 used was 17,740 kg. Calculate for Period 1 for C1:

(i) the materials usage variance for the whole process (ii) the treatment loss percentage

(6 marks) Rationale 4(a) covers learning outcome B(ii): Calculate and interpret material, labour, variable overhead, fixed overhead

and sales variances. Suggested Approach • Calculate the standard usage of C1 for the actual output in Period 1 • Compare the standard and actual usage of C1 to determine the usage variance and evaluate it at

standard price • Calculate the treatment loss percentage Marking Guide Marks (i) Standard content before treatment loss 1 Standard input after allowing for treatment loss 1 Usage variance 2 (ii) Treatment loss percentage 2 Examiner’s Comments This part, especially (i), was reasonably well answered. Many candidates were awarded marks in (i) for the correct use of their own figures due to an inability to deal correctly with the treatment loss. Common Errors • calculating the standard usage by multiplying by 1.3 rather than dividing by 0.7 to account for the

treatment loss • failing to allow for the treatment loss at all • calculating the budgeted quantity rather than the standard quantity for the actual output • multiplying the actual output by 0.4 rather than by 0.2 kg per unit • not knowing how to calculate the treatment loss percentage in (ii)





November 2008 Exam

Question 4(b) In Period 1, the company purchased and used 6,450 kg of C3. The cost of this purchase was $94,000. It has now been realised that the standard price of C3 should have been $14·50 per kg for Period 1.

(i) Calculate the planning variance, and the operational price and usage variances for

C3 for Period 1. (7 marks)

(ii) Explain two problems associated with the reporting of planning variances.

(3 marks)

Rationale 4(b) covers learning outcome B(iv): Calculate and explain planning and operational variances. Suggested Approach • Calculate the planning variance in Period 1 as the difference between the two standard prices per

kg of C3 (original and revised) multiplied by the standard usage for the actual output • Calculate the operational price variance as the difference between the revised standard price and

the actual price per kg of C3 multiplied by the actual usage • Calculate the operational usage variance as the difference between the actual usage of C3 and the

standard usage for the actual output multiplied by the revised standard price per kg • Explain two problems associated with the reporting of planning variances Marking Guide Marks (i) Planning variance 3 Operational price variance 2 Operational usage variance 2 (ii) Problems of reporting planning variances (up to 2 for each) max 3 Examiner’s Comments Part (i) was generally well answered but part (ii) much less so. Common Errors • calculating the planning price variance based on the budgeted or actual quantity • calculating a planning usage variance as well as a planning price variance • failing to value the operational usage variance • valuing the operational usage variance at $12.00 per kg • providing incorrect variance signs • demonstrating a lack of understanding of the nature of planning variances in (ii)





November 2008 Exam

Question 4(c) Prepare the Purchases Budget for C2 for Period 2.

(5 marks) Rationale 4(c) covers learning outcome C(vi): Evaluate and apply alternative approaches to budgeting. Suggested Approach • Calculate the amount of C2 required for production in Period 2 • Calculate the increase in inventory of C2 required for the following period • Calculate the purchase quantity and value of C2 in Period 2 by adding the production quantity and

the increase in inventory and multiplying by the standard cost per kg. Marking Guide Marks Production requirement 1 Inventory requirement 1 Add requirements for production and inventory to determine purchase quantity 2 Value of purchases 1 Examiner’s Comments This part was reasonably well answered with many candidates gaining full marks. Common Errors • failing to adjust, or adjusting incorrectly, for opening and closing inventories • failing to calculate value, as well as quantity, for the purchases budget





November 2008 Exam

Question 4(d) “Variance analysis presents results after the actual events have taken place and therefore it is of little use to management for planning and control purposes, particularly in a modern manufacturing environment”.

Discuss the above statement.

(9 marks) Rationale 4(d) covers learning outcome B(v): Prepare reports using a range of internal and external benchmarks

and interpret the results. Suggested Approach • Describe the concepts of planning and control in the context of standard setting and variance

analysis • Describe the features of modern manufacturing environments • Discuss the relevance of variance analysis in relation to the above concepts and environment Marking Guide Marks Planning and control concepts 2 Features of modern manufacturing environments 2 Relevance of variance analysis (up to 1½ for each) max 6

max 9 Examiner’s Comments This part was often not answered well because many candidates made little or no reference to a modern manufacturing environment. Common Errors • taking the view that the statement was incorrect and simply describing the advantages of variance

analysis for planning and control purposes • referring only to a rapidly changing environment and standards becoming rapidly out of date




cima | p1 - management accounting performance evaluation solved past papers

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