ACCA
Paper F5
Performance Management
Revision Mock Examination
December 2014
Answer Guide
Health Warning!
How to pass
Attempt the examination under exam conditions
BEFORE looking at these suggested answers.
Then constructively compare your answer,
identifying the points you made well and
identifying those not so well made.
If you got basic definitions and rules wrong:
re-revise by re-writing them out until you get them
correct.
How to fail
Simply read or audit the answers congratulating
yourself that you would have answered the
questions as per the suggested answers.
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Section A
1. A
2. C
3. C
4. D
5. A
6. B
7. C
8. B
9. D
10. A
11. A
12. B
14. B
15. C
16. C
17. A
18. D
19. $683,761
20. $4.30
Section B
Question 1
Tutorial help and key points
This is a fairly straightforward performance evaluation question, similar to questions that have been asked many times in past F5 exams. Although the calculations required are simple, make sure you show how you have performed them. The emphasis on this type of question is on interpretation – key to the role of the management accountant is the ability to interpret the information they produce for other managers, and this is what the examiner is testing here. You can make life easier for your marker by using headings for the points you make.
Although not mentioned in the question, you should recognise the non-financial headings required in part (b) as those of the balanced scorecard. This is a key model for performance management – make sure you are adept at using it!
Marking scheme
(a) One mark per reasonable point, 1 mark for a relevant correct ratio, 2 max per heading, up to 9 marks.
(b) 1 mark per sensible point, 2 max per heading, up to 6 marks.
(max 15 marks)
(a)
The financial performance of the office manager: Sales revenue
Sales revenue has increased by 10.5% [(420 − 380)/380] over the previous year's figure. Given that inflation was running at only 5% for the period, this represents a real-terms increase in revenue. This indicates good marketing performance by the office.
Net profit
The net profit has increased by 5.3% during 2010, which initially seems to be a good performance. However, closer examination of the figures show that net profit margin fell from 25% in 2009 to only 23.8% in 2010. This indicates a slight worsening in control over operating costs by the office during 2010.
Cash balance
The average cash balance has increased by 20% during 2010, which indicates good and improving liquidity for the office. Again, since this is higher than the inflation rate of 5%, there has been a real-terms increase in liquidity.
Trade receivables
Trade receivables days have remained below the industry average for the office, which suggests good performance by the credit collection department of the office. However, care should be taken to ensure that in reducing the amount of trade credit offered by 12% over the year, the office does not damage its competitiveness by alienating customers that prefer to take all trade credit offered to them.
(b)
The non-financial performance of the office manager: (i) Customer satisfaction
The number of customers has fallen alarmingly during the year, down by over 26%. This is particularly worrying as the consultancy market is expanding for the office. In 2009 the total market size was 475 clients [190/40%]; in 2010 the total market size was 560 clients [140/25%]. The office manager needs to quickly establish and address the reasons for this loss of competitiveness if the office market share is to be restored.
(ii) Internal process efficiency
The client error rate may look low at only 4%, but this represents a 100% increase (ie a doubling) of the error rate from 2009. Coupled with the fact that the average time taken to complete client assignments has risen by 25%, this seems to indicate a deterioration in the internal process efficiency of the office. This could also account for some of the fall in competitiveness of the office indicated above.
(iii) Learning and growth
The average level of experience of consultants in the office has declined during 2010, as indicated both by the average amount of training offered to office employees which has fallen by 25% during the period and also by the rise of 25% in staff turnover at the office. These may help to account for the increase in error rate mentioned above.
Question 2
Tutorial help and key points
Part (a) now discusses the basic features of another budgeting type ZBB, detailing the process, key advantages and some limitations, all to be written in a memo format.
Part (b) requires basic application of the high–low method to forecast expenditure for the next year.
Marking scheme
(a) See within the answer (b)
(a) Memo:
[1 mark for presentation] To: Manager of OPD
From: Management Accountant Date: aa/bb/cccc
Subject: Zero-based budgeting (ZBB)
Zero-based budgeting is an approach to modern budgeting in service organisations where a budget is prepared from scratch. Every item of expenditure has to be justified in its entirety before approval is granted in the budget.
ZBB ignores the assumption that next year’s activities will remain the same as the last year with the same level or with same volume.
If we look at the last five years’ results of OPD it is obvious that activities were widely fluctuating in the past.
Therefore every aspect of the budget is to be examined in terms of its costs and benefits associated, and focus is always to select any alternative better than the current one.
Steps involved in ZBB: [1/2 mark for each step]
1. Prepare decision packages.
2. Rank decision packages in order of importance, starting with mandatory requirements.
3. Consider funding.
4. Utilise funds in order of the ranking until exhausted. Advantages of ZBB:
[2 marks]
1. Emphasis on future need, not past actions.
2. ZBB eliminates past errors that may be perpetuated in an incremental analysis.
3. A positive disincentive for management to introduce slack into their budget. 4. A considered allocation of resources in order of priority.
5. It encourages cost reduction and control. Limitations of ZBB:
[2 marks]
1. ZBB can be costly and time consuming.
2. It may lead to increased stress for management. 3. It may re-invent the whole wheel each year. 4. It may lead to short term planning.
I hope that this has been a helpful summary of ZBB. If you have any questions on this or any other matters please don’t hesitate to contact me.
(b)
Patient numbers Expenditure ($)
Highest 72,000 82,000
Lowest 48,000 80,000
Difference 24,000 2,000
Variable cost per patient = $2,000/24,000 = $0.0833 [1 mark] Fixed cost = $82,000 – ($0.0833 x 72,000)
= $76,000 (approx.)
Forecast expenditure for 65,000 patients:
Fixed cost $76,000
Variable cost ($0.0833 x 65,000) $5,417
Question 3
Tutorial help and key points
A very likely exam question in decision making under uncertainty as it has not been examined yet under revised syllabus.
First of all you have to draw up a decision tree, clearly showing the decision point and all possible courses of actions and outcomes.
Then you have to calculate the expected values of each outcome under all courses of actions, using joint probabilities.
Then you will select the highest expected value to go with, as recommendation to the management.
Marking scheme
Drawing of decision tree with complete possibilities
and proper labelling 6 marks Calculation of expected values of all possible outcomes 4 marks (10 marks)
Analysis:
Point Tickets Profit (x)
$000 p $000 px A 7,000 20 0.42 8.4 B 5,000 (35) 0.28 (9.8) C 13,000 135 0.075 10.125 D 10,000 75 0.225 16.875 EV of Advertise ∑px = 25.6 E 5,000 (20) 0.7 (14) F 10,000 90 0.3 27 EV of Don’t Advertise ∑px = 13
Therefore the company should advertise as it generates the highest expected value. Further demand 60% A No more demand 40% Adverse Good 30% No more demand 75% Don’t advertise Poor 70% Good 30% C B F E D Further demand 25% Poor 70%
Question 4
Tutorial help and key points
Target costing questions appear in F5 exams on a semi-variable basis, mainly to test basic management accounting knowledge and skills.
In this question we have to apply basic steps on target costing along with some adjustments of losses, idle time, high–low method, etc. which are fundamental management accounting skills.
Marking scheme
Raw materials:Part 1 ½ mark
Part 2 ½ mark Delivery charge ½ mark Other materials ½ mark Labour 1½ marks Production overheads:
Variable 1½ marks Fixed 1½ marks Total current expected cost 1 mark Calculation of target cost
Target selling price ½ mark Target profit required 1 mark Target cost 1 mark
(10 marks)
Expected current cost per stereo: $ $
Raw materials:
Part 1 10.00
Part 2 15.00
Delivery charge 1.50
Other materials 5.00 31.50
Labour(2 hours /0.8 x $8 per hour) 20.00
Production overheads (see W1)
Fixed($1.00 x 2 hours) 2.00 6.00
Total current expected cost 57.50
Calculation of target cost
Target selling price $50.00
Target profit required ($50 x 10%) ($5.00)
Target cost $45.00
As we can see that our current expected cost per unit is greater than the target cost, so cost gap of $12.50 exists and the business needs to investigate as to how this cost gap maybe closed. Cost control is a continuous process, therefore management should review the production process and apply various steps involved in closing the cost gap so as to further reduce the cost if possible, without any deterioration in quality.
W1
High–low method: Variable rate per hour:
hrs 900 , 1 hrs 300 , 2 200 , 6 $ 000 , 7 $ = $2.00 per hour.
Fixed overheads = Total overheads − Variable overheads.
At 1,900 hours = $6,200 - $3,800 ($2.00 x 1,900 hours) = $2,400. Fixed overheads absorption rate:
hours 400 , 2 400 , 2 $ = $1.00 per hour.
Question 5
Tutorial help and key points
This question addresses two key topics, namely performance management and standard costing mix and yield calculations. It is important that you can calculate mix and yield variances for the F5 exam, and also comment upon their implications for performance management.
In part (a) of the question, make sure you bear in mind the controllability of each of the variances in the question. There are also marks available for questioning the suitability of using a standard costing system of control for Just-Cheez-Spud, due to the variability of each potato served to the customers. Some students find calculations such as those in part (b) of the question difficult; if this applies to you, then practice these questions, thinking through what you are doing, until you can do them confidently. Also keep going – there are marks available throughout the answer, so even if you make a mistake or two you can still pick up enough marks to pass the question.
Marking scheme
(a)
(i) 1 mark per point, 2 max per variance, up to 4 (ii) 1 mark per point, 1.5 max per variance, up to 3
max 7 marks (b)
(i) Mix variance: 4 marks (ii) Yield variance: 4 marks
8 marks (15 marks)
(a)
(i) The performance of the kiosk operator in managing product cost:
The food material cost variances are getting more and more favourable each month, which suggests the kiosk operator is improving control over food product cost:
The mix variance is favourable, and getting more so. A mix variance is caused by substituting one material for another. This is controllable by the kiosk operator as he assembles the product for the customer from the three food ingredients used.
The yield variance is also favourable, and getting more so. A favourable yield variance suggests that more products are being produced from a given level of food input than expected. This could be due to the operator being more careful with the food he uses, wasting less of it than expected, which would be a good thing.
The price variance has become favourable. A favourable price variance suggests that less is being paid to suppliers for food ingredients than expected. This could be due to keen price negotiation taking place between the kiosk operator and the supplier of food.
(ii) The performance of the kiosk operator in managing product quality:
Mr Khan has experienced customer complaints regarding the quality of the potatoes served from the kiosk. This could be linked to the reported variances in the following ways:
A favourable mix variance is caused by substituting cheaper materials for more expensive ones in the product served to the customer. Cheese and butter is more expensive per kilogram than potato, therefore by using more potato and less cheese and butter per unit a favourable mix variance is caused. However, cheese and butter are the ingredients that make bland baked potato taste good - therefore the favourable mix variance is likely to be at the expense of product quality.
A favourable yield variance is caused by achieving more units of sold product to customers for a given level of food materials than expected. This could be due to the kiosk operator 'shorting' the portions of potato, cheese and butter in each unit sold to a customer, therefore leaving the customer feel upset that they have not gotten the product size that they have paid for.
A favourable price variance could be achieved by buying cheaper types of raw material than expected from suppliers. This is particularly important in the cheese used in the baked potatoes. Cheese which is cheaper per kilogram than that expected in the standard cost card is likely to not taste as good as that expected by the customer.
(b) Material variances
P B C Total
SQ(SM) x SP 454.4 213 2456.6 3124
P:1420 x 0.32
B:1420 x 0.15 Yield variance = 3124 – 2990.57 = 133.43Fav C: 1420 x 1.73
AQ(SM) x SP 434.99 203.9 2351.67 2990.57
P:836 x .4/.615 x 0.8
B:836 x .015/.615 x 10 Mix variance = 2990.57 – 2718.4 = 272.17Fav C:836 x .2/.615 x 8.65
AQ(AM) x SP 462.4 180 2076 2718.4
P:578 x 0.8
B:18 x 10 Price variance = 2718.4 – 2682.8 = 35.6Fav C: 240 x 8.65
AQ(AM) x AP 491.3 175.5 2016 2682.8
Price variances 28.9 A 4.5 F 60 F 35.6 F
Note: Material price variance is only calculated to fill in the whole proforma of variances, it was not required in the question.
