ACCA LSBF f5 revision kit

Cost Pool Cost Cost Driver Number of Drivers Production set-ups $105,000 Set-ups 300Product testing $300,000 Tests 1,500Component supply and storage $25,000 Component orders 500Customer

Performance Management

ACCA

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British LibraryPublished by InterActive World Wide Limited

Westgate House, 8-9 HolbornLondon EC1N 2LL

www.iaww.com www.studyinteractive.org

ISBN 978-1-907217-20-3First Edition 2009Printed in Romania

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We are grateful to the Association of Chartered Certified Accountants (ACCA), the Chartered Institute ofManagement Accountants (CIMA) and the Institute of Chartered Accountants of England and Wales (ICAEW)for their permission to reproduce past examination questions All the solutions to these questions have beenprepared by InterActive World Wide Limited

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Foreword

Contents

Number Name of Question

How to use this LSBF Revision Kit

How to use this LSBF Revision Kit

So, you have a nice big revision kit packed with questions, but do not know where to start? And when to start?

And how to start?!

Where and When to Start

This rather depends on where you have reached in your studies:

• If you have not yet started your class, online program, or self-study plan, then it is a bit early to be attemptingexam-standard questions! However, it would be useful to pick out some questions at random and readthem through Get a feel for the requirements, as these tend to be examined over and over again – and thiswill help you when you start your studying Your brain will link what you read and hear with the examquestion requirements you have already seen, and this should help to strengthen your overall understanding

of how the knowledge gets tested

• If you have started your class, online program, or self-study plan, you will probably have a tutor, or studyplanner, which directs you to practise specific questions, based on what you have covered so far

• Try to keep up with the suggested questions – as the real exam approaches there are likely to be plentymore exam questions that you are told to attempt, so do not fall behind! The more questions you havepractised, the more likely you are to be successful

• As the real exam approaches, do not be afraid to repeat questions you have practised before Any goodquestion is worth doing at least twice!

• Don’t fall into the trap of starting with Q1, then Q2, Q3 etc as this tends to result in lots of practice of thefirst syllabus area and virtually no practice of anything else! Pick questions at random from throughout thebook, and keep a record of what you have attempted so far, by ticking the Question List after every attempt

How to Start – Attempting Questions

There are in fact several ways to attempt a question Some are better methods than others, but it all ratherdepends on how close you are to the exams and how your brain works

THE FULL QUESTION ATTEMPT

• To start, read ONLY the requirements:

o Break each requirement down as much as you can – for example, the following requirement has three

separate things to do to earn marks:

“Discuss the ethical issues in the scenario and how the directors and auditors should manage them.”

Your answer would need to discuss issues, explain what the directors should do, and then explain whatthe auditors should do – three separate tasks, each of them carrying part of the total mark

o Note how many marks are available It varies by exam, but the most common allocation is one mark

• If there is a story/scenario supporting the requirements, then clearly you should read it But:

o Simply copying parts of the story into your answer is unlikely to earn marks – unless you ADDsomething yourself Typically this means using the story to illustrate the technical point that therequirement has forced you to discuss

o Try to put any relevant information straight into your answer plan – it is easy to highlight dozens ofinteresting things, then have to read the whole story again to remember why you highlighted them!

• When writing your full answer, use the requirement to structure your answer and provide any headings youmay need

• Keep your presentation neat Most exam questions requiring written answers do NOT want a longdiscursive essay Most answers need a series of relatively short paragraphs explaining a series of pointsbriefly, but with enough detail to make it obvious what you are trying to explain For more guidance onthis, look at the Answers in the back of this book

• When you have finished your attempt, take a couple of minutes to rest – then review the suggested solution

in the Revision Kit Make a note of those elements of the answer that you got wrong or missed out Thebrain tends to be a logical thing – if you miss a point or make a mistake this time, there is every chance youwill make the same mistake again!

THE QUICK QUESTION ATTEMPT

Of course, in the real exam you have to provide full answers – so you MUST make plenty of full attempts, asdescribed above

However, especially with written questions, it is often possible to spend only 10-15 minutes on a question andstill get some real benefit

o Simply read the requirements, and plan an answer as described above in “The Full Question Attempt”.Now go and look at the answer, especially the headings and layout If your plan is similarly structured,then you were clearly on the right path and understood the tasks set by the examiner

o Now go back and read the scenario You know your plan is ok, so try to put things from the scenariointo your planned structure, wherever they seem to be most relevant Just expand your plan – but donot write out a full answer

This is a useful exercise as you get closer to the real exam, as it allows you to gain confidence in the examiner’srequirements and also see a large number of different questions relatively quickly

However, for questions with numbers and calculations, only a full attempt is likely to work

The Last 4 Exam Papers

The most recent exam papers, together with the examiner’s own suggested solutions, can be found, for free, on

the ACCA’s website at www.accaglobal.com/students/acca/exams

In our Revision Kits, additional questions have been included to ensure that you can practise things similar torecent exam questions Examiners tend to be very repetitive in style, but clearly they are not going to setexactly the same story and numbers again!

About ACCA Paper F5 – Performance Management

Aim of the paper

To develop knowledge and skills in the application of management accounting techniques to quantitative andqualitative information for planning, decision-making, performance evaluation and control

Outline of the syllabus

1 Cost accounting techniques

2 Decision-making techniques including risk and uncertainty

3 Budgeting techniques and methods

4 Standard costing systems

5 Performance appraisal including financial and non-financial measures

Format of the exam paper

The syllabus is assessed by a three hour paper-based examination The examination consists of five questions

of 20 marks each All questions are compulsory

FAQs - How does the new syllabus relate to the papers in the

previous syllabus?

The paper is materially based on part of the previous paper 2.4 FMC but with additional material from papers1.2 and 3.3 It covers the management accounting topics from the first paper but drops financial managementtopics To balance against that it now incorporates new topics on performance appraisal and more business maths

Questions

1 Linacre Co

Linacre Co operates an activity-based costing system and has forecast the following information for next year

Cost Pool Cost Cost Driver Number of Drivers

Production set-ups $105,000 Set-ups 300Product testing $300,000 Tests 1,500Component supply and storage $25,000 Component orders 500Customer orders and delivery $112,500 Customer orders 1,000General fixed overheads such as lighting and heating, which cannot be linked to any specific activity, areexpected to be $900,000 and these overheads are absorbed on a direct labour hour basis Total direct labourhours for next year are expected to be 300,000 hours

Linacre Co expects orders for Product ZT3 next year to be 100 orders of 60 units per order and 60 orders of

50 units per order The company holds no inventories of Product ZT3 and will need to produce the orderrequirement in production runs of 900 units One order for components is placed prior to each productionrun Four tests are made during each production run to ensure that quality standards are maintained Thefollowing additional cost and profit information relates to product ZT3:

Component cost: $1.00 per unitDirect labour: 10 minutes per unit at $7.80 per hourProfit mark up: 40% of total unit cost

Required

(a) Calculate the activity-based recovery rates for each cost pool (4 marks) (b) Calculate the total unit cost and selling price of Product ZT3 (9 marks)

(c) Discuss the reasons why activity-based costing may be preferred to traditional absorption costing in the

modern manufacturing environment (12 marks)

(Total = 25 marks)

2 Triple

Triple Limited makes three types of gold watch – the Diva (D), the Classic (C) and the Poser (P).A traditionalproduct costing system is used at present; although an activity based costing (ABC) system is being considered

Details of the three products for a typical period are:

Hours per unit Materials ProductionLabour hours Machine hours Cost per unit units

$Product D 0.5 1.5 20 750Product C 1.5 1 12 1,250Product P 1 3 25 7,000

Total production overheads are $654,500 and further analysis shows that the total production overheads can

be divided as follows:

%Costs relating to set-ups 35Costs relating to machinery 20Costs relating to materials handling 15Costs relating to inspection 30Total production overhead 100The following total activity volumes are associated with each product line for the period as a whole:

Number of Number of movements Number of Set ups of materials inspections

Product D 75 12 150Product C 115 21 180Product P 480 87 670

670 120 1,000

Required

(b) Calculate the cost per unit for each product using ABC principles (work to two decimal places)

(12 marks)

(c) Explain why costs per unit calculated under ABC are often very different to costs per unit calculated under

more traditional methods Use the information from Triple Limited to illustrate (4 marks) (d) Discuss the implications of a switch to ABC on pricing and profitability (6 marks)

(Total = 25 marks)

3 F plc

F plc supplies pharmaceutical drugs to drug stores Although the company makes a satisfactory return, thedirectors are concerned that some orders are profitable and others are not The management has decided toinvestigate a new budgeting system using activity based costing principles to ensure that all orders they acceptare making a profit

Each customer order is charged as follows Customers are charged the list price of the drugs ordered plus acharge for selling and distribution costs (overheads) A profit margin is also added, but that does not form part

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

Selling and Distribution Costs £000 Cost driver

Invoice processing 280 See Note 2Packing 220 Size of package – see Note 3Delivery 180 Number of deliveries – see Note 4Other overheads 200 Number of orders

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 sixlarge 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 toloading the delivery vehicles, and the remainder of these costs are related to specific delivery distance tocustomers

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

Order A Order B

Lines on invoice 2 8Package size small largeSpecific delivery distance 8 miles 40 milesList 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 = 20 marks)

4 ZZ Ltd

ZZ Ltd make and sell cameras They wish to extend their product range to include digital camcorders Thesecamcorders will be easier to use, have a better picture resolution and lots of features not available withprevious technologies

A selling price of £240 has been set by ZZ Ltd to compete with other similar products The company wouldlike a 40% profit margin.

Cost information for the new camcorder is as follows:

Component 1 (Circuit board) – cost £50 each and are bought in batches of 5,000 Delivery costs for each

batch are £7,500

Component 2 (Wiring) – each camcorder needs 50cm of wiring ZZ Ltd estimates that of the wire

purchased, 10% is lost in the production process Wire costs £3.00 per metre to buy

Other materials – cost £12.50 per camcorder Assembly labour – it takes 2 hour to assemble each camcorder and it pays £10 per hour to its workers.

The factory operates on a 16 hour day, six days a week, 50 weeks of the year ZZ Ltd have 100 skilled assemblyworkers available for this task

Production overheads – historical data shows the following:

Total Production Overhead Total Assembly Hours

Month 1 £880,000 25,000Month 2 £790,000 22,000Month 3 £850,000 24,000

Traditionally SY Ltd has priced its games based on standard manufacturing cost plus selling and administrationcost plus a profit margin However, the management team of SY Ltd has recently attended a computer gamesconference where everyone was talking about life cycle costing, target costing and market-based pricingapproaches The team has returned from the conference and would like more details on the topics they heardabout and how they could have been applied to the MANPAC

Required:

As management accountant of SY Ltd,(a) discuss how the following techniques could have been applied to the MANPAC:

• life cycle costing,

• target costing; (9 marks)

(b) explain each stage in the life cycle of the MANPAC and the issues that the management team will need to

consider at each stage (11 marks)

(Total = 20 marks)

6 Chloe’s Cakes

Chloe’s Cakes make three different types of cake, Birthday, Christmas and Wedding Each cake goes throughthree processes, mixing, baking and icing Like many businesses Chloe’s faces tough competition from a maturemarket place

The cake factory has 20 production lines which cover the three process The processing capacity varies foreach process and the manager has provided the following details:

Processing time per cake in hours Birthday Christmas Wedding

Due to the perishable nature, Chloe’s carries very little inventory

Required

(a) Identify the bottleneck process and explain why this process is described as a bottleneck (3 marks)

(b) Calculate the throughput accounting ratio (TPAR) for each product (assuming the bottleneck is fully

utilised) (8 marks) (c) Explain how Chloe’s could improve their TPAR (4 marks) (d) Should Chloe’s discontinue to make Christmas cakes? (5 marks)

Fixed overheads for the year are £250,000 and are absorbed based on labour time available in department 1.

(f) Explain backflush accounting and when it is appropriate to use (4 marks)

(20 marks)

8 CS Group (36 mins)

a) Explain what a relevant cost is, using examples (7 marks)

The CS group is planning its annual marketing conference for its sales executives and has approached theVBJHoliday company (VBJ) to obtain a quotation

VBJ has been trying to win the business of the CS group for some time and is keen to provide a quotationwhich the CS group will find acceptable in the hope that this will lead to future contracts

The manager ofVBJ has produced the following cost estimate for the conference:

This contract earns a contribution of $250 per day A replacement coach could be hired for $180 per day

Driver costs represent the salary and related employment costs of one driver for 10 days If the driver is used

on this contract the company will need to replace the driver so thatVBJ can complete its existing work Thereplacement driver would be hired from a recruitment agency that charges $400 per day for a suitably qualifieddriver

Hotel costs are the expected costs of hiring the hotel for the conference

General overheads are based upon the overhead absorption rate ofVBJ and are set annually when thecompany prepares its budgets The only general overhead cost that can be specifically identified with theconference is the time that has been spent in considering the costs of the conference and preparing thequotation This amounted to $250

Required:

b) Prepare a statement showing the total relevant cost of the contract Explain clearly the reasons for each of

the values in your quotation and for excluding any of the costs (if appropriate) (10 marks)

9 Walters Water

Walters Water produces, amongst other products, 1 litre bottles of water The company is considering addingextra ingredients to the bottled water to make two more limited edition products aimed at the youth market.Walters plans to add flavourings and guarana to the bottled water for the first new product “GG” and thenmultivitamins to the bottled water to make “water plus”, the company’s second new product

These two added ingredients have been chosen due to market research completed by Walters Water at a cost

of £1,000

The budgeted costs and revenues for the next month for the new products are detailed below

The output selected for further processing is 10,000 litres This represents 20% of the usual production atWalters This water costs £0.10 per litre to produce As the company is dealing with water, it must cope withevaporation The water evaporates 10% during the process prior to further processing

It takes 100 hours of skilled labour to make the GG per month and 220 hours of semi skilled labour to makethe water plus per month The skilled labour is currently employed by the company and paid £12 per hour If

GG is made, it will be necessary for the skilled workers to work 100 hours overtime which would be paid attime and a half or reduce production on another product that earns contribution at £8 per hour

The semi skilled labour is paid at £6.50 per hour They currently have 300 hours idle time per month

Two supervisors will be required to work on the two new products The supervisors will spend 25% of theirtime on the new products and are each currently paid £25,000 pa

Of the water selected for further processing, 60 % will be for the GG 50ml of guarana will be added per litre

of water Guarana costs £2 per litre to purchase 10g of vitamins will be dissolved per litre of water toproduce the water plus Vitamins cost £40 per kilo These items are added once the evaporation has takenplace

The overhead absorption rate is absorbed using a litres produced basis of £0.25 per litre produced Thecompany will also have to increase the factory floor space by 10% increasing the rent from £1,500 per month

to £2,055.55 per month

The company policy is to have a 20% profit margin

Required:

a) Prepare on a relevant cost basis, the lowest selling price for each product Explain the reasons for each of

the values in your quotation and for excluding any of the costs (if appropriate) (14 marks)

b) Briefly explain 3 other appropriate methods Walters Water could have used to set his selling price

(6 marks)

10 Simon Ltd (36 mins)

Simon Ltd is run by Simon Leather who makes leather belts for designers He uses the finest Argentineanleather and needs highly trained machinists to make the belts up to the quality designers expect

His belts usually sell for £50 per item and use 0.2m2 of leather and 30 minutes of labour

Simon Ltd has 5 staff They work a standard 8 hour day, 5 days a week, 48 weeks of the year They earn

£15 per hour

Leather costs £20 per metre Simon also has some variable overheads of £6 per unit Fixed overheads are

a) Calculate the number of belts Simon will have to sell to break even (3 marks)

Simon decides to branch out and start to also sell handbags to the same market The handbags sell for £250each and use 1.5m2of leather with 1 hour of labour being required Variable overheads are £20 per handbag

There has been a bad case of foot and mouth in Argentina Simon can only use the leather he has currentlybeing shipped to him for the next month The leather which is due to arrive imminently measures 100m2.Simon has an order for 50 handbags for London fashion week that he must supply or face a large fine

b) Calculate the optimal production plan for Simon (8 marks)

c) What is the maximum Simon would be willing to pay as a fine for not delivering the 50 ordered handbags?

(4 marks)

d) Simon Ltd is considering outsourcing the machining to a 3rd party Outline issues Simon should consider

before going ahead (5 marks)

BMBD has just had a customer delay their order and so has some spare capacity for the next three months

The figures above also include a special contract of 50 batches of the BM and the MB which must be fulfilled

Two of the parts used in the production process, the C and the R are in short supply over the next 3 months

BMBD do not carry stocks of these items Part C will be limited to 7,000 units and part R to 3,500 units

There are 100 units in each batch

The costs and selling prices per batch as as follows:

BM MB BD

£/batch £/batch £/batch

BMBD is trying to decide whether to manufacture part P rather than buy it in for the next 3 months In order

to manufacture P the company will need to buy a machine which costs £35,000 It will then cost £15 per unit

to manufacture

b) Advise whether BMBD should manufacture part P in house (your advise should include calculations)

(8 marks)

(Total = 20 marks)

12 Benson Company (36 mins)

Benson Company is a dog grooming service They provide two services, the Scottie and the Labrador TheScottie is a short service which just involves a wash and comb and the all over Labrador includes a wash,condition, comb, nail clip and blow dry Both services involve the same resources, just in different quantities.The cost cards for both services are listed below:

Scottie Labrador

£ per service £ per service

Specialised cleaning materials (£5 per litre) 0.50 0.75

Benson Company budgets to sell 240 Scotties and 226 Labradors per month However, Benson Company isfacing a shortage of resources over the next month The maximum amount of specialized cleaning materialavailable is 60 litres, the total amount of labour available is 300 hours and the total machine time available is

150 hours

Crufts will be on in the next month and Benson company has a contract to provide 25 Scotties and 50Labradors in 2nd week of the month If Benson Company does not honour this contract it will be fined a heftyamount and be left shame faced in the dog world

13 Tims Raquets (36 mins)

Tims Rackets (TR) manufacture and sell both tennis rackets and badminton rackets The rackets are bothmade from the same high performance lightweight alloy which can be difficult to source in sufficient quantity.The alloy is currently restricted to 3,000kgs per quarter and costs £25 per kg

The rackets are made and strung by machines and highly trained employees who are difficult to recruit Thesehighly skilled workers are available to work 4,000 hours per period and are paid £20 per hour

TR sells to a large market and has a high demand for their products During a quarter up to 5,000 tennis

Manufacturing details are as follows

Tennis rackets Badminton rackets

Required:

a) Calculate the contribution earned from each racket (2 marks) b) Using linear programming, determine the optimal production plan for a quarter (12 marks)

The staff have offered to work some overtime

c) Explain the meaning of a shadow price (dual price) and calculate the maximum amount TR should pay the

workers for the overtime (5 marks)

Month Number of batches Labour efficiency

Assembled and sold variance

The finance director has agreed that the long run unit variable cost of the CB45 circuit board is £672.72 perbatch She has suggested that the price charged should be based on an analysis of market demand She hasdiscovered that at a price of £1,200 the demand is 16 batches per month, for every £20 reduction in sellingprice there is an increase in demand of 1 batch of CB45 circuit boards, and for every £20 increase in sellingprice there is a reduction in demand of 1 batch.

Required:

b) Calculate the profit maximizing selling price per batch using the date supplied by the Finance Director

Note: If Price (P) = a-bx then marginal revenue (MR) = a-2bx (8 marks)

(Total = 20 marks)

15 Envico (PM 12/05, amended) (36 mins)

Envico Ltd is well established and provides seminars on various aspects of current and recently announcedchanges in employment legislation Envico Ltd has decided to enter into a one-year renewable contract withMieras Business Associates, which owns large premises that are suitable for holding educational seminars ineach of eight cities Envico Ltd has had similar dealings with Mieras Business Associates during recent years.Mieras Business Associates has offered a choice of four different contracts, each of which relates to seminarrooms of differing sizes These are known as room types A, B, C and D, which are capable of accommodating

100, 200, 300 and 400 delegates respectively Envico Ltd will charge an all-inclusive fee of £80 per delegate atevery seminar throughout the year The cost incurred by Envico Ltd varies according to room type, as shown

in the following table:

Room type No of attendees Cost per seminar (£)

Due to the rapid growth in interest regarding environmental issues and corporate social responsibility, and thelarge amount of forthcoming legislative changes, Envico Ltd has decided to hold one seminar in every week ofthe year in each city Sometimes a regional government representative will attend and speak at such seminars

On other occasions a national government representative will attend and speak at such seminars The rest ofthe time the speakers at seminars are representatives from within Envico Ltd

Envico has estimated the following frequency regarding seminars to be held during the forthcoming year:

Category of speaker: %

Market research has indicated that where a national government representative is in attendance, Envico Ltd can

be reasonably assured of selling 400 seminar places and where a regional government representative is inattendance 200 seminar places can be sold Envico Ltd expects to sell only 100 seminar places when there is

no attendance by a government representative

a) Explain the difference between risk and uncertainty and illustrate with brief examples (4 marks)

b) Advise Envico Ltd on the size of seminar room that should be contracted from Mieras Business Associates,using the criterion of expected value Your answer should show the expected annual contribution from

each decision option (10 marks)

c) Determine whether your decision in (a) would change if you were to use the Maximin and Minimax regret

decision criteria Your answer should be supported by relevant workings (6 marks)

(Total = 20 marks)

16 Beatrice Buggy

Beatrice Buggy is a revolutionary new car seat for babies Not only does the buggy clip onto conventional pushchair frames and clip into most types of cars, but it also turns into a mini pull along chair The pull along chair isdesigned to help mum when the car seat gets that little bit too heavy and she gets caught short It usesrevolutionary technology and has been patented

The proprietor of Beatrice Buggy is inexperienced in the business world and has come to you for advise

a) Advise Beatrice Buggy on the choice of 3 appropriate pricing strategies for their new product (9 marks)

b) Explain the difference between elastic and inelastic demand giving examples to illustrate your answer

Advise on whether the new car seat is elastic or inelastic (7 marks) c) Briefly explain the factors which affect the elasticity of demand (4 marks)

(Total = 20 marks)

17 Berties Burger Company

Berties Burger (BB) is considering changing some of their mobile burger vans for new models The new burgervan can come in 3 sizes which different burger cooking capacities The burger capacity for the small is 150, 250for the medium and 500 for the large

Daily demand for the burgers can be either 220 or 420 burgers The probability of 220 burgers being demand

is 0.6

Each burger can be sold for £1.50 and the variable cost of production are £0.50

BB is concerned about which size van to order If demand exceeds the number of burgers the van can cook,customers would have to be turned away It’s unlikely these customers will return to eat Burgers from BB so ithas been decided £15 per day will be charged against the profits, of that day, to allow for lost future sales,

a) Prepare a profits table showing the six possible profit figures per day (9 marks)

b) Using your profit table from (b) above, discuss which type of burger van SH should buy taking into

consideration the possible risk attitude of the managers (5 marks)

c) Describe THREE methods which businesses can use to analyse and assess the risk that exists in its decision

making (excluding maximax, maximin and expected values) (6 marks)

18 J Limited (36 mins)

J Limited has recently been taken over by a much larger company For many years the budgets have been set

by adding an inflation adjustment to the previous year’s budget The new owners of J are insisting on a base” approach when the next budget is set, as they believe many of the indirect costs in J are much higherthan in other companies under their control

“zero-a) Explain the main features of incremental budgeting and outline the problems that can occur when using it

(5 marks)

b) Explain the main features of zero-based budgeting and outline the problems that can occur when using it

(5 marks)

c) Explain how the use of zero-based budgeting can motivate employees (4 marks)

d) Explain THREE behavioural consequences that may result after the introduction of participative budgeting

(6 marks)

(Total = 20 marks)

19 SRP Limited (36 mins)

SRP Limited is a highly successful manufacturing company However, SRP Limited have been adversely affected

by the recession and needs to keep a tight control on costs They are reviewing the way they prepare theiraccounts They currently prepare accounts for a fixed period and are considering a switch to rolling budgets

SRP Ltd can only purchase 200kg of material A They use 2kgs of this material to produce each unit of product

Z The company currently carries stock of 100kg of material A and needs to carry a closing stock of 80% ofthe opening stock SRP Ltd also already has an opening stock of 50 units of product Z which will increase 20%

for closing stock

d) Find the sales level of product Z for the next period (4 marks)

(Total = 20 marks)

The fixed production overhead of £750,000 is absorbed based on annual output.

It has been decided that inventory is too high and must be decreased

Finished goods: 6,000 units are held and the closing inventories for quarters 1, 2 and 3 will be 50%, 30%

and 25% of the following quarters salesRaw materials: 4,000kg are currently held and it has been decided that the closing inventories for quarters

1 and 2 will be 30 % and 25% of the following quarters production requirements

The budgeted sales are:

c) Briefly explain THREE reasons why budgetary planning and control may be inappropriate in a rapidly

changing business environment (6 marks)

(Total = 20 marks)

21 Grape Vines of Fire Company

GrapeVines of Fire make wine The company needs to understand their costs better and so have taken data toanalyse from the last few months

Month Production Total Cost

a) Derive a formula for the total cost model for 1 month using the high low method (5 marks) b) Identify why the high low method is not always appropriate for finding the total costs (3 marks) c) Using regression analysis find the regression equation for the above data (9 marks)

d) Using the regression equation, calculate cost if production is 850,000 bottles (3 marks)

(Total = 20 marks)

22 Bobs Biscuits

The management accountant of Bobs Biscuits has found the trend for digestive biscuit sales against time to be:

Y = 200,000 + 160,000XWhere X is the quarter (X increases by 1 for each new quarter) andY is sales of digestivesThe seasonal variations are:

Q1 Q2 Q3 Q4

Required:

a) Forecast sales for quarters 15 to 18, assuming these seasonal variations continue (5 marks)

The management accountant has been trying to establish the seasonal variation for cookies He hascollated the following data:

Spring Summer Autumn Winter

c) Explain the term cyclical variations and illustrate with an example (3 marks)

d) Time series analysis extrapolates past performance into the future Discuss the drawbacks of extrapolation

for Bobs Biscuits (8 marks)

(Total = 20 marks)

23 Veloracer (PM 6/03)

Velo Racers has designed a radically new concept in racing bikes with the intention of selling them toprofessional racing teams The estimated cost and selling price of the first bike to be manufactured andassembled is as follows:

A racing team has approached the company and asked for the following quotations:

1 If we were to purchase the first bike assembled, and immediately put in an order for the second, whatwould be the price of the second bike?

2 If we waited until you had sold two bikes to another team, and then ordered the third and fourth bikes to

be assembled, what would be the average price of the third and fourth bikes?

3 If we decided to immediately equip our entire team with the new bike, what would be the price per bike if

we placed an order for the first eight to be assembled?

Required:

a) Explain Learning Curve Theory and in particular the concept of cumulative average time (4 marks) b) Provide detailed price quotations for each of the three enquiries outlined above (6 marks)

c) Identify the major areas within management accounting where learning curve theory is likely to have

consequences and suggest potential limitations of this theory (10 marks)

(Total = 20 marks)

24 BFG (Pilot paper, amended) (36 mins)

BFG Limited is investigating the financial viability of a new product the S-pro The S-pro is a short-life productfor which a market has been identified at an agreed design specification The product will only have a life of 12months

The following estimated information is available in respect of S-pro:

1 Sales should be 120,000 in the year in batches of 100 units An average selling price of $1,050 per batch of

100 units is expected All sales are for cash

2 An 80% learning curve will apply for the first 700 batches after which a steady state production time willapply, with the labour time per batch after the first 700 batches being equal to the time for the 700th batch.The cost of the first batch was measured at $2,500 This was for 500 hours at $5 per hour

3 Variable overhead is estimated at $2 per labour hour.

4 Direct material will be $500 per batch of S-pro for the first 200 batches produced The second 200 batcheswill cost 90% of the cost per batch of the first 200 batches All batches from then on will cost 90% of thebatch cost for each of the second 200 batches All purchases are made for cash

5 S-pro will require additional space to be rented These directly attributable fixed costs will be $15,000 permonth

A target net cash flow of $130,000 is required in order for this project to be acceptable

Note:The learning curve formula is given on the formulae sheet At the learning rate of 0.8 (80%), the learningfactor (b) is equal to -0.3219

25 Mermus (FMC 12/04, amended) (36 mins)

Mermus is comparing budget and actual data for the last three months

Required:

a) Prepare a revised budget at the new level of activity using a flexible budgeting approach (4 marks)

b) Calculate the following:

i) Raw material total cost variance;

ii) Direct labour total cost variance;

iii) Fixed overhead efficiency variance;

iv) Fixed overhead capacity variance;

v) Fixed overhead expenditure variance (10 marks)

c) Suggest possible explanations for the following variances

i) Raw materials total cost variance;

ii) Fixed overhead efficiency variance;

iii) Fixed overhead expenditure variance (6 marks)

(Total = 20 marks)

26 Ash (FMC 6/06, amended) (36 mins)

Standard selling price and cost data for one unit of Product RS8 is as follows.

Direct labour 14 minutes at $7.20 per direct labour hourVariable production overhead $2.10 per direct labour hour

Fixed production overhead $9.00 per direct labour hour

At the start of the last month, 497 standard labour hours were budgeted for production of Product RS8 Noinventories of raw materials are held All production of Product RS8 is sold immediately to a single customerunder a just-in-time agreement

Required:

a) Prepare an operating statement that reconciles budgeted profit with actual profit for Product RS8 for thelast month You should calculate variances in as much detail as allowed by the information provided

(16 marks)

b) Discuss how the operating statement you have produced can assist managers in:

i) Controlling variable costs

ii) Controlling fixed production overhead costs (4 marks)

(Total = 20 marks)

27 Woodeezer (FMC 12/02, amended) (36 mins)

Woodeezer makes quality wooden benches for both indoor and outdoor use Results have been disappointing

in recent years and a new managing director, Peter Beech, was appointed to raise production volumes After aninitial assessment Peter Beech considered that budgets had been set at levels which made it easy for employees

to achieve He argued that employees would be better motivated by setting budgets which challenged themmore in terms of higher expected output

Other than changing the overall budgeted output, Mr Beech has not yet altered any part of the standard costcard Thus, the budgeted output and sales for November 20X2 was 4,000 benches and the standard cost cardbelow was calculated on this basis:

$