f5 mock 1 june 13

7/30/2019 F5 Mock 1 June 13

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Paper F5

Performance Management

First Mock Exam

June 2013 Session

Time allowed:

Reading and Planning: 15 minutes

Writing: 3 hours

All five questions are compulsory and must be attempted

Total Marks: 100

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This is a blank page.The question paper begins on page 3

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Question # 1

Mango Inc. is a profit seeking hi-tech company that is located in Technoland. Mango was founded 20years ago by John Robertson; a creative, scholar and renowned person in that industry. The companyhas expanded rapidly and now sells a range of products both in its domestic market as well as foreignmarkets. Mango has established itself as a small but profitable player in its chosen market. The emphasisof the organization has always been on product innovation backed up by a small but dynamic sales team.

The company uses full cost plus pricing. In the words of one of the directors to the bookkeeper- “tell ushow much it costs and we‟ll add a bit, sometimes a small bit and sometimes a large bit, to make sure wemake some money.”

One of the products that Mango sells is Product “Uphone”. Last quarter the company sold each Uphonefor $20 and sold 45,000 units. This quarter the company reduced the price to $15 and 50,000 units weresold.

Mango is now considering the launch of a new generation of product Uphone, the Uphone 3D. Theproduct will have a short life cycle and has incurred a huge research and development cost in the pre-production stage.

An opportunity has arisen for the company to buy from a leading market research company a consumer list costing $20,000. The directors estimate that if the list were bought, resulting sales could be high,average or low with equal probability. If no list were bought, it is estimated that sales could be average or low, with the odds 4:1 in favour of low sales.

Whenever sales turn out to be low, the directors have a contingency plan, in which they could decidewhether or not to place advertisements in newspaper, at a cost of $9,000, offering „special purchases‟.The changes of high, average or low sales of „special purchases‟ are estimated to be 50%, 25% and 25%respectively.

The contribution from the various sales levels ($‟000) are shown below.

Sales levels High Average Low

Normal business 200 160 110Special purchases 40 16 -20

Required:

a) Given that cost plus pricing has limited theoretical benefits, briefly reasons why it is widelyused in practice. (3 marks)

(b) Assuming demand is linear and that price is the only factor affecting demands determine thedemand equation for Uphone. (3 marks)

(c) Calculate the price elasticity of demand (PED) for the Uphone and comment on whether therevenue will increase or decrease if the price is increased. (3 marks)

(d) Recommend with reasons an appropriate pricing strategy for Uphone 3D. (2 marks)

(e) Draw a decision tree for the Uphone 3D including all probabilities and payoffs. (4 marks)

(f) Analyse the tree and recommend a course of action with reasons. (5 marks)

(Total 20 marks)

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Question # 2

A pharmaceuticals company has recently developed a new drug called Bellerophon, which is made usinga continuous microbiological process. The process manager is responsible for material procurement.Four material ingredients (A, B, C and D) are used in the processing of Bellerophon, all of which areobtainable from variety of sources. The standard material requirements of 1 unit of Bellerophon are asfollows.

Kg $ A 0.33 @$104.00 per kg 34.32B 0.28 @$49.00 per kg 13.72C 0.23 @$186.00 per kg 42.78D 0.24 @$72.50 per kg 30.45Total 1.26 121.27

Process losses occur at even rate throughout the processing operation and tend to rise if impurities arepresent in the ingredients. The effectiveness of Bellerophon depends on the quality of the ingredientsbeing used and the maintenance of the ingredient mixture within close limits of that specified above.

The results from the first two periods were as follows:

Period 1 Period 2

Price Variance $1,225 F $1,105 FUsage Variance $4,805 F $4,307 FMix Variance $936 F $842 FYield Variance $3,869 F $3,465 F

Required:

(a) Critically comment upon the following statement made by the company’s finance director inresponse to the results.

‘This is an excellent report which tells us all we need t o know for both financial and quality controlpurposes. We should pay the process manager a monthly performance bonus on the costvariances that are reported’ (5 marks)

The following materials were acquired and input to the process in period 3.

A 291.6kg at a cost of $30,006B 242.6kg at a cost of $12,421C 198.2kg at a cost of $37,262D 392.0kg at a cost of $26,719

During recent period, 930fully processed units of Bellerophon were transferred from the division to stores.

The existing management information system was purchased at the time that the company commencedtrading. The directors are now considering investing in an enterprise resource planning system (ERPS).

Required:

As management accountant to the pharmaceuticals company:

(b) in regard the material input in period 3, calculate the following variances:(i) the material price variances(ii) the material usage variances(iii) the material mix variances(iv) the material yield variances (11 marks)

(c) Explain how the introduction of ERPS could impact on the role of management accountants.(4 marks)

(Total 20 marks)

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Question # 3

Hometown is a rapidly expanding coastal town of about one million people. It has a wide number of busservices across the city including The Torongo bus service and a new BRTC bus service. Both of theservices connect Hometown with the nearest city called Watertown within the country.

The Torongo is a profit oriented and privately owned firm. The BRTC is publicly funded and managed,and is non-profit seeking. The BRTC was launched after considerable delays caused by opposition fromlocal tax payer groups with a mission statement of „to provide efficient, reliable and affordable publictransport to all the citizens of the country‟ by the city corporation. Attempting to achieve its mission ofteninvolves operating services that would be considered uneconomic by private sector bus companies, dueeither to the small number of passengers travelling on the route or the low fares charged. The majority of the city corporation members are happy with this situation as they wish to reduce traffic congestion andair pollution on Hometown‟s road by encouraging people to travel by bus rather than by car.

However, one member of the corporation has recently criticised the performance of the BRTC ascompared to the Torongo bus service. She produced the following information.

Income and Expenditure accounts for the last year were as follows:

BRTC Torongo

2012 2012 2011$‟000 $‟000 $‟000

Income:Govt. Grants 800 0 0Ticket Sales 1800 3200 2600

Total 2600 3200 2600

Less:Staff Cost 1000 1200 900Maintenance and repairs 800 500 300Fuel cost 500 600 450

Operating Costs 500 600 400

Total Costs (2800) (2900) (2050)

Operating surplus / deficit (200) 300 550

Other information of last year:

BRTC Torongo

2012 2012 2011

Number of staffs 250 175 120

Number of passengers carried 1.5m 1.2m 1.0mTotal passenger miles travelled 5m 4m 3.5mNumber of customer complain 1200 600 800Total number of buses 40 30 20Number of new services launched 0 4 1Number of accidents per year 6 4 7Number of delaying in departure 0 12 22 Average bus occupancy 60% 85% 95% Average number of days in use 350 days 320 days 300 days

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Required:

(a) Prepare a detail analysis of Torongo’s performance using the balanced scorecard format. Your answer should include two performance measures relating to each of the four perspectives of thebalanced scorecard. (10 marks)

(b) What are the problems faced by the BRTC when measuring its performance? (4 marks)

(c) Comment on how the BRTC could measure the ‘Value for money’ of its service provision for the year. Calculate appropriate performance measures that the BRTC could use and contrast withTorongo. (6 marks)

(Total: 20 marks)

Question # 4

NN manufactures and markets a range of electronic office equipment. The company currently has $40million revenue per annum. The company has a functional structure that is currently operates anincremental budgeting system. The company has a budget committee that is compromised entirely of members of the senior management team. No other personnel are involved in the budget-setting process.

Each member of the senior management team has enjoyed an annual bonus of between 10% and 20% of their annual salary for each of the past five years. The annual bonuses are calculated by comparing theactual costs attributed to a particular function with budgeted costs for that function during the twelve-month period ended 31 December in each year.

A new finance director, who previously held a senior management position in a not for profit organization,has recently been appointed. Whilst employed by the health service organization, the new financedirector had been the manager responsible for the implementation of a zero-based budgeting system

which proved highly successful.

Required:

(a) Discuss the factors to be considered when implementing a system of zero-based budgetingwithin NN. (10 marks)

(b) Explain the behavioural problems that the management of NN might encounter inimplementing a system of zero-based budgeting, recommending how best to address suchproblems in order that they are overcome. (6 marks)

(c) Explain how the implementation of zero-based budgeting system in NN may differ from theimplementation of such system in a ‘not for profit‘ organization. (4 marks)

(Total 20 marks)

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Question # 5

Caterpillar makes three products P, L and R. All three products must be offered for sale each month inorder to be able to provide a complete market service. The products are fragile and their qualitydeteriorates rapidly once they are manufactured.

The products are produced on two types of machine and worked on by a single grade of direct labour.Five direct employees are paid $8 per hour for a guaranteed minimum of 160 hours each per month. Allof the products are first moulded on a machine type 1 and then finished and sealed on a machine type 2.

The machine hour requirements for each of the products are as follows.

Product P Product L Product RHours per unit Hours per unit Hours per unit

Machine type 1 1.5 4.5 3.0Machine type 2 1.0 2.5 2.0

The capacity of the available machines type 1 and 2 are 600 hours and 500 hours per month respectively.

Details of the selling prices, unit costs and monthly demand for the three products are as follows.

Product P Product L Product R$ per unit $ per unit $ per unit

Selling price 91 174 140

Component cost 22 19 16Other direct material cost 23 11 14Direct labour cost at $8 per hour 6 48 36Overheads 24 62 52

---- ---- ----Profit 16 34 22

Max. monthly demand (units) 120 70 60

Although Caterpillar uses marginal costing and contribution analysis as the basis for its decision makingactivities, profits are reported in the monthly management accounts using the absorption costing basis.Finished goods inventories are valued in the monthly management accounts at full absorption cost.

Required

(a) Calculate the machine utilisation rate for each machine each month and explain which of themachines is the bottleneck/limiting factor. (4 marks)

(b) Using the current system of marginal costing and contribution analysis, calculate the profitmaximising monthly output of the three products. (4 marks)

(c) Explain why throughput accounting might provide more relevant information in Caterpillar ’scircumstances. (4 marks)

(d) Using a throughput approach, calculate the throughput-maximising monthly output of thethree products. (4 marks)

(e) Explain the throughput accounting approach to optimising the level of inventory and itsvaluation. Contrast this approach to the current system employed by Caterpillar. (4 marks)

(Total 20 marks)

f5 mock 1 june 13

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