Mock-F5-Dec-09
Content
Final Assessment
ACCA FINAL ASSESSMENT
Performance Management
DECEMBER 2009
QUESTION PAPER Time allowed Reading time: 15 minutes Writing time: 3 hours
Answer all questions
Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall
Kaplan Publishing/Kaplan Financial
KAPLAN PUBLISHING Page 1 of 10
ACCA F5 Performance Management
© Kaplan Financial Limited, 2009
All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.
Page 2 of 10
KAPLAN PUBLISHING
Final Assessment
Answer all questions
QUESTION 1
F company 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 activitybased 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 an additional charge for overheads. A profit margin is also added, but that does not form part of this analysis and can therefore be ignored. Currently F company uses a simple absorption rate to absorb these overheads. The rate is calculated based on the budgeted annual overhead costs divided by 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 company has examined more carefully the nature of its overhead costs, and the following data have been prepared for the budget for next year: Total list price of drugs supplied Number of customer orders Overhead costs Invoice processing Packing Delivery Other overheads Total overheads 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). 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. Packing costs are $32 for a large package, and $25 for a small package. 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. $8m 8,000 $000 280 220 180 200 ___ 880 ___ Cost driver See Note 2 Size of package – see Note 3 Number of deliveries – see Note 4 Number of orders
2
3 4
KAPLAN PUBLISHING
Page 3 of 10
ACCA F5 Performance Management 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 2 Small 8 miles $1,200 Order B 8 Large 40 miles $900
Lines on invoice Package size Specific delivery distance List price of drugs supplied Required: (a)
Calculate the charge for overheads for Order A and Order B using: (i) (ii) the current system; and the activity-based costing approach. (3 marks) (12 marks)
(b)
Write a report to the management of F company in which you assess the strengths and weaknesses of the proposed activity-based costing approach for F company; and (5 marks) (Total: 20 marks)
Page 4 of 10
KAPLAN PUBLISHING
Final Assessment
QUESTION 2
Windermere operates a divisional organisation structure. The performance of each division is assessed on the basis of the Return on Investment (ROI) that it generates. For this purpose the ROI of a division is calculated by dividing its ‘trading profit’ for the year by the ‘book value of net assets’ that it is using at the end of the year. Trading profit is the profit earned excluding non-recurring items. Book value of net assets excludes any cash, bank account balance or overdraft because Windermere uses a common bank account (under the control of its head office) for all divisions. At the start of every year each division is given a target ROI. If the target is achieved or exceeded than the divisional executives are given a large salary bonus at the end of the year. In 20X1, Windermere’s division A was given a target ROI of 15%. On 15 December 20X1 A’s divisional manager receives a forecast that trading profit for 20X1 would be $120,000 and net assets employed at the end of 20X1 would be $820,000. This would give an ROI of 14.6% which is slightly below A’s target. The divisional manager immediately circulates a memorandum to his fellow executives inviting proposals to deal with the problem. By the end of the day he has received the following proposals from those executives (all of whom will lose their salary bonus if the ROI target is not achieved): (1) from the Works Manager: that $100,000 should be invested in new equipment at the end of the year resulting in cost savings, starting the following year, of $18,000 per year over the next fifteen years. Depreciation is on a straight line basis; from the Chief Accountant: that payment of a $42,000 trade debt owed to a supplier due on 16 December 20X1 be deferred until 1 January 20X2. This would result in a $1,000 default penalty becoming immediately due; from the Sales Manager: that $1,500 additional production expenses be incurred and paid in order to bring completion of an order forward to 29 December 20X1 from its previous scheduled date of 3 January 20X2. This would allow the customer to be invoiced in December, thereby boosting 20X1 profits by $6,000, but would not accelerate customer payment due on 1 February 20X2. From the Head of Internal Audit: That a regional plant producing a particular product be closed allowing immediate sale for $120,000 of premises having a book value of $90,000. This would result in $50,000 immediate redundancy payments and a reduction in profit of $12,600 per year over the next fifteen years.
(2)
(3)
(4)
Required: (a) Assess each of the above four proposals having regard to: (i) their effect on divisional performance in 20X1 and 20X2 as measured by Windermere’s existing criteria, (ii) their intrinsic commercial merits, (iii) any ethical matters that you consider relevant. You should ignore taxation and inflation. (16 marks) (b) Discuss FOUR possible actions Windermere’s Finance Director should take when the situation at division A and the above four proposals are brought to his attention. (4 marks) (Total: 20 marks)
KAPLAN PUBLISHING
Page 5 of 10
ACCA F5 Performance Management
QUESTION 3
County Preserves produce jams, marmalade and preserves. All products are produced in a similar fashion: the fruits are low temperature cooked in a vacuum process and then blended with glucose syrup with added citric acid and pectin to help setting. Margins are tight and the firm operates a system of standard costing for each batch of jam. The standard material cost data for a batch of raspberry jam are: Fruit extract Glucose syrup Pectin Citric acid Standard processing loss 400 kg @ $0.16 per kg 700 kg @ $0.10 per kg 99 kg @ $0.332 per kg 1 kg @ $2.00 per kg 3%
The summer of 20X7 proved disastrous for the raspberry crop with a late frost and cool, cloudy conditions at the ripening period, resulting in a low national yield. As a consequence, normal prices in the trade were $0.19 per kg for fruit extract although good buying could achieve some savings. The impact of exchange rates on imports of sugar has caused the price of syrup to increase by 20%. The actual results for the batch were: Fruit extract Glucose syrup Pectin Citric acid 428 kg @ $0.18 per kg 742 kg @ $0.12 per kg 125 kg @ $0.328 per kg 1 kg @ $0.95 per kg
Actual output was 1,164 kg of raspberry jam. Required: (a) (b) (c) Calculate the ingredient planning variances that are deemed uncontrollable. (6 marks) Calculate the ingredients operating variances that are deemed controllable. (4 marks) Comment on ONE advantage and ONE disadvantage of variance analysis using planning and operating variances. (2 marks) Calculate the mixture and yield operating variances. Suggest possible reasons for the mix and yield variances. (6 marks) (2 marks) (Total: 20 marks)
(d) (e)
Page 6 of 10
KAPLAN PUBLISHING
Final Assessment
QUESTION 4
The following monthly budgeted cost values have been taken from the budget working papers of MZ Limited for the year ended 30 September 20X8. Activity level Direct materials Direct labour Production overhead Selling overhead Administration overhead 60% $ 30,000 40,500 46,000 15,000 28,000 _______ 159,500 _______ 70% $ 35,000 47,250 52,000 17,000 28,000 _______ 179,250 _______ 80% $ 40,000 54,000 58,000 19,000 28,000 _______ 199,000 _______
During September 20X8, actual activity was 1,292 units (which was equal to 68% activity) and actual costs were: $ Direct materials Direct labour Production overhead Selling overhead Administration overhead 33,500 44,000 46,250 16,150 27,800 _______ 167,700 _______ Required: (a) Prepare a budgetary control statement for MZ Limited on a flexible budget basis for the month of September 20X8. The statement should include the flexed budget, the actual results and the variance for each of the five costs. (12 marks) Explain the difference between fixed and flexible budgets, and state when each should be used to control costs. (4 marks) The preparation of budgets is an important task that relies on the identification of the principal budget factor. Explain the term ‘principal budget factor’ and state its importance in the budget preparation process. (4 marks) (Total: 20 marks)
(b)
(c)
KAPLAN PUBLISHING
Page 7 of 10
ACCA F5 Performance Management
QUESTION 5
BLA Ltd is a design consultancy that provides advice to clients regarding property maintenance and improvements. BLA Ltd does not undertake building work on behalf of its clients but will recommend contractors that undertake the type of work requested. The following information is also relevant: (i) (ii) Each chargeable consultation is charged at a rate of $150 per consultation. The consultants are each paid a fixed annual salary of $45,000. In addition they receive a bonus of 40% of the fee income generated in excess of budget. In an attempt to gain new business, consultants may undertake consultations on a ‘no-fee’ basis. Such consultations are regarded as Business Development Activity by the management of BLA Ltd. Consultants will sometimes undertake remedial consultations with clients who experience problems at the time when work commences on each client’s site. Remedial consultations are also provided on a non-chargeable, i.e. ‘no fee’ basis. BLA Ltd has a policy of maintaining staff at a level of 45 consultants on an ongoing basis, irrespective of fluctuations in the level of demand. Also, BLA Ltd has retained links with retired consultants and will occasionally subcontract work to them, if current full-time consultants within a particular category are fully utilised. During the year subcontractors only undertook non chargeable client consultations. BLA Ltd pays these subcontractors $150 per consultation. In November 20X2, BLA Ltd purchased ‘state of the art’ business software for use by its consultants in simulating design improvements. The software was used throughout the year by consultants who specialise in landscape and garden design. It is now planned to introduce the use of the software by the other categories of consultant within BLA Ltd. Other operating expenses (excluding the salaries of the consultants) were budgeted at $2,550,000 for the year to 31 October 20X3. The actual amount incurred in respect of the year to 31 October 20X3 was $2,805,000, which excludes payments to subcontractors.
(iii)
(iv)
(v)
(vi)
(vii)
Page 8 of 10
KAPLAN PUBLISHING
Final Assessment BLA Ltd: Sundry statistics for year ended 31 October 20X3 Budget Total client enquiries: New business Repeat business Number of chargeable client consultations: New business Repeat business Number of non-chargeable client consultations undertaken by BLA consultants: Number of business development consultations Number of remedial consultations Number of non-chargeable client consultations undertaken by subcontractors: Other statistics: Number of complaints Required: Fitzgerald and Moon have suggested that business performance should be measured in a number of ways. Assess the performance of BLA with respect to the following dimensions: (a) (b) (c) (d) (e) Financial performance Service quality Flexibility Resource utilisation Innovation (5 marks) (4 marks) (3 marks) (4 marks) (4 marks) (Total: 20 marks) 324 630 1,035 45 1,200 405 120 24,300 16,200 22,400 19,600 67,500 32,400 84,000 28,000 Actual
KAPLAN PUBLISHING
Page 9 of 10
ACCA F5 Performance Management
Page 10 of 10
KAPLAN PUBLISHING
Final Assessment
ACCA Paper F5 Performance Management December 2009
Final Assessment – Answers
To gain maximum benefit, do not refer to these answers until you have completed the final assessment questions and submitted them for marking.
KAPLAN PUBLISHING
Page 1 of 16
ACCA F5 Performance Management
© Kaplan Financial Limited, 2009
All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.
Page 2 of 16
KAPLAN PUBLISHING
Final Assessment
ANSWER 1
(a) (i) OAR =
Budgeted overheads $880,000 = = 11% of list price $8m Budgeted level of activity
Overhead charge for Order A = 11% of $1,200 Overhead charge for Order B = 11% of $900 (ii) Cost driver rates Invoice processing
= $132 = $99
Cost per invoice =
25% × $280,000 = $8.75 per invoice 8,000 invoices 75% × $280,000 = $7.50 per invoice line 28,000 invoice lines
Cost per invoice line =
Packing $32 for large packages and $25 for small packages. Delivery
$40,000 = $40 per journey 1,000 journeys
Loading costs =
There are 12 small packages to a lorry and so the loading costs are $40/12 = $3.33 per small package. There are 6 large packages to a lorry and so the loading costs are $6.67 per large package.
$180,00 − $40,000 = $0.40 per mile 350,000 miles
Mileage costs =
Other overheads
$200,000 = $25 per order 8,000 orders
Cost per order =
KAPLAN PUBLISHING
Page 3 of 16
ACCA F5 Performance Management
A $ Invoice processing $7.50 × 2 $7.50 × 8 Packing Delivery $0.40 × 8 $0.40 × 40 Other overheads Charge for overhead (b) Strengths and weaknesses of proposed system 25.00 _____ 80.28 _____ 25.00 3.33 3.20 8.75 15.00
B $ 8.75 60.00 32.00 6.67 16.00 25.00 ______ 148.42 ______
The present system is very simple but makes no attempt to link the overhead costs to the factors which cause those costs. The present system simply charges all orders a blanket rate of 11% on list price. The proposed ABC system is still very simple but makes some effort to determine the cost drivers, i.e. those factors which are most closely related to the way in which the costs of an activity are incurred. For instance, it has been found for the invoice processing costs that the costs are affected by the number of invoices issued, but also by how complicated the invoices are, i.e. how many different lines there are on the invoice. Charging out the invoice processing costs on the basis of the two cost drivers above will result in more accurate costs and will give more information about the cost structure and the cost drivers in order to improve cost control. Once the cost structure is known, efforts can be made to reduce the volume of activity of the cost driver (e.g. the 28,000 invoice lines) and/or the cost of the cost driver (e.g. the $7.50 per invoice line). It is argued by ABC supporters that the better costs calculated under ABC can then be used as the basis for fixing selling prices and that these selling prices relate to the true cost of the order and thus will prevent loss-making orders. F Company can also compare the true costs of the different elements of the system against the costs of outsourcing. The more accurate costs determined under an ABC system can be used to justify selling prices or selling price increases to customers. Whilst it is undoubtedly true that ABC gives more accurate costs, it is also true that it will be more expensive to implement and the benefit may not exceed the cost. The proposed system, here, is still very simple and it is possible that a more detailed analysis would provide further useful information. ABC attempts to find the cost driver for each type of cost and thus avoid the arbitrariness of absorption costing but, here, some costs are still charged on an arbitrary basis, e.g. the other overheads.
Page 4 of 16
KAPLAN PUBLISHING
Final Assessment
MARKING GUIDE Marks (a) (i) OAR Order A costs Order B costs Total (ii) Invoice processing Packing Delivery Other Order A costs (0.5 per cost element) Order B costs (0.5 per cost element) Total (b) Total 1 mark for each point made, to a maximum of 5 Cost driver rates 2 1 2 1 3 3 _ 12 5 __ 20 __ 1 1 1 _ 3
KAPLAN PUBLISHING
Page 5 of 16
ACCA F5 Performance Management
ANSWER 2
(a) Assessment of four year-end proposals Two general comments are of relevance to all four proposals: • With ROI based on NBV of assets employed, there is an incentive to underinvest, to improve ROI by ‘reducing the bottom line’ rather than ‘increasing the top line’ in the ratio. When ROI-based assessment is linked to a bonus scheme, there is a greater incentive to make ROI appear satisfactory irrespective of the true commercial merit of an operation of project.
•
Proposal 1: The works manager – new equipment An investment at the end of the year will increase capital employed without providing the opportunity to earn any of the savings forecast. ROI is likely to fall from 14.6% to:
$120,000 × 100 = 13.0% $820,000 + $100,000
However, the project itself may well be viable and may actually increase shareholder wealth. The ROI at the end of the first year would be:
18,000 − $6,667 × 100 = 12.1% $100,000 − $6,667
This is less than the target, but that is a failure of the ROI method and the method of depreciation used. (The ROI would increase each year as the NBV reduces and in the final year the project’s ROI would be $11,333 ÷ $0 = infinity). There are no ethical issues at stake, but a number of management issues as introduced above and discussed in (b). Proposal 2: The chief accountant – delay payments to payables The effect of non-payment of payables at the year end is to decrease assets by $42,000 (the creditor appears in the division’s books, but cash does not) and reduce profit by $1,000. ROI will move from 14.6% to:
$120,000 − $1,000 × 100 = 15.3% $820,000 − $42,000
The required target has been achieved. This proposal will have no effect on 20X2 ROI. The longer term effect is that the company has lost $1,000 and kept $42,000 cash for another month. The company does not want to get a reputation for being a poor payer, as suppliers may withhold goods and it may become difficult to obtain further credit. The ethics of deferring payment of debt, which is commercially non-viable, in order to earn a bonus, needs to be questioned. Proposal 3: The sales manager – bring forward completion of order The effect of this transaction would be to increase profit by $6,000. As work in progress changes to receivables in the accounting records, capital employed would increase by $6,000 (since receivables includes profit, but work in progress includes cost only). ROI would change from 14.6% to:
Page 6 of 16
KAPLAN PUBLISHING
Final Assessment
($120,000 + $6,000)/($820,000 + $6,000) = $126,000/$826,000 = 0.153 or 15.3%. This proposal achieves the desired ROI. This proposal will reduce 20X2 profit by $6,000, because it has the effect of bringing profit forward from 20X2 to 20X1. Looking at the transaction without regard to year-end performance, $1,500 has been spent with no benefit to total cash inflows, although the balance sheet will look more impressive. This is another example of dysfunctional decisions based on a form of assessment and related remuneration scheme that encourages manipulation of year end accounts. As with the previous proposal, the ethics of taking a commercially unsound decision, in order to secure a bonus, should be challenged. Proposal 4: The head of internal audit – closing a regional plant This proposal would have a dramatic effect on capital employed, immediately reducing it by $90,000. The effect on profit would be a fall of $50,000 through redundancy and a rise of $30,000 profit on sale of assets. However, none of these would be included in trading profit (since they are presumably non-recurring) and so ROI would increase to:
$120,000 × 100 = 16.4% $820,000 − £90,000
This easily achieves the required standard. Without knowing the depreciation policy, or the life of the assets, the effect of this proposal on 20X2 ROI cannot be determined. The loss of $12,600 p.a. for 15 years comes from a net disinvestment of $120,000 − $50,000 = $70,000. The present value of the lost profit of $12,600 p.a. may be greater than $70,000 and, if this is the case, the proposal should not be implemented. Sacking people to improve ROI despite the move being against the long-term benefit of the business is unethical. The analysis has also excluded any possible loss of business in other parts of the division from customers inconvenienced by this particular closure. (b) Remedial action by company finance director Many of the problems above come from the use of return on investment (ROI) based on year end figures which encourages under-investment and manipulation. Possible solutions include: • • Change to Residual Income (RI) so that divisions will be rewarded for making wise long-term investment decisions If there is an insistence on the use of ROI, it can be improved by: – using average capital employed figures rather than year-end ones; – using gross book values rather than net-book values; – changing depreciation methods to ensure that ROI does not improve just by retaining assets whose book value steadily falls Ensure central approval of investment (and disinvestment) budgets and controls to check that commitments are met Central control of payments to payables and collection of receivables If the above is too ‘interventionist’ lay down guidelines for payments and collection periods
• • •
KAPLAN PUBLISHING
Page 7 of 16
ACCA F5 Performance Management • The Divisional Manager deserves a reprimand for ‘window dressing’ although he is trying to make his accounts look better in a way that will not only boost his bonus but will also appeal to outside analysts The importance of ethical considerations in decision-making should be emphasised to Divisional management Change the bonus scheme and pay each manager a fair day’s salary for doing a fair day’s work without the troublesome complication of a bonus scheme.
• •
Note : only four actions are required. MARKING GUIDE Marks (a) Effect on divisional performance – 2 marks for each proposal Commercial merits – 1 mark for each proposal Ethical matters – 1 mark for each proposal 1 mark for each action Total 8 4 4 16 4 20 __
(b)
Page 8 of 16
KAPLAN PUBLISHING
Final Assessment
ANSWER 3
Working Original standard Fruit Syrup Pectin Citric Acid Price Quantity Price Quantity Price Quantity Price Quantity $0.16 400 kg $0.10 700 kg $0.332 99 kg $2.00 1 kg Revised standard $0.19 400 kg $0.12 700 kg $0.332 99 kg $2.00 1 kg Actual $0.18 428 kg $0.12 742 kg $0.328 125 kg $0.95 1 kg
(a)
The planning variances relate only to fruit and syrup prices. Fruit $ RSQ × RSP RSQ × SP 76 64 __ 12 A __ Syrup $ 84 70 __ 14 A __
Total planning variance = $12 + $14 = $26 A (b) Fruit $ AQ × AP AQ × SP SQ × SP Price variance Usage variance Total price variance Total usage variance Total ingredients variance (c) 77.04 81.32 76.00 4.28 F 5.32 A Syrup $ 89.04 89.04 84.00 0 5.04 A Pectin $ 41.00 41.50 32.87 0.50 F 8.63 A Citric Acid $ 0.95 2.00 2.00 1.05 F 0
= $5.83 F = $18.99 A = $13.16 A
The main problem with conventional variance analysis for budgetary control reporting purposes is that its emphasis on comparison between actual and planned performances results in a disregard for changes in these planned results. Because standards become out of date and unrealistic, the traditional accounting model does not serve as an opportunity cost system. The operational variance measures management's operating efficiency by comparing actual results with revised standard. This variance reflects opportunity costs. That is, the gain or loss as a result of actual performance differing from a realistic standard.
KAPLAN PUBLISHING
Page 9 of 16
ACCA F5 Performance Management Hence operational variances tend to be controllable. The planning variance compares the original budget with the revised budget. This variance reflects planning error. However, it may not be practical to find all possible perfect substitutes for the resources actually used. It may also be difficult to obtain accurate revised standard costs for the resources actually used and their substitutes. In general, there is a resistance to change. Most companies still use the traditional approach. (d) Workings AQ × AM AQ × SM SQ × SM SP ($) Variances Mix variance ($) Yield variance ($) Fruit 428 432 400 0.19 Syrup 742 756 700 0.12 Pectin 125 106.92 99 0.332 Citric Acid 1 1.08 1 2 Total 1,296 1,296 1,164/0.97 = 1,200
0.76 F 6.08 A
1.68 F 6.72 A
6.00 A 2.68 A
0.16 F 0.16 F
3.40 A 15.59 A
Check: Mix + Yield = $3.40 A + $15.59 A = $18.99 A = Usage variance (e) The mix has been changed so that more of the expensive ingredient pectin has been used, and less of the cheaper ingredients, fruit and syrup, have been used. This has caused the overall adverse mix variance. The yield variance means that more input was required for the given output. This means there was an abnormal loss, causing the adverse variance. MARKING GUIDE Marks (a) Choosing only fruit and syrup prices Identification of the original and revised standard prices Fruit variance Syrup variance 1 1 2 2 _ 6 (b) (c) (d) Each ingredient, 1 mark for the variances × 4 1 mark for each advantage and disadvantage Mix variance Yield variance 3 3 _ 6 (e) Total 1 mark for each reason, to a maximum of 3 __ 20 __ 4 2
Page 10 of 16
KAPLAN PUBLISHING
Final Assessment
ANSWER 4
(a) Budgetary control statement Flexed budget $ Direct materials (W1) Direct labour (W2) Production overhead(W3) Selling overhead (W4) Administration overhead 34,000 45,900 50,800 16,600 28,000 _______ 175,300 _______ Workings (W1) (W2) (W3) (30000/60) × 68 = 34,000 (40,500/60) × 68 = 45,900 Variable cost = (58,000 – 46,000)/20 = 600 per percentage 68% is an extra 8% above 60%, making overhead cost − $46,000 + 8 × 600 = $50,800 (W4) Variable cost = (19,000 – 15,000)/20 = 200 per percentage Selling overhead = 15,000 + 8 × 200 = 16,600 (b) A fixed budget is a budget which shows the costs and revenues for a single level of activity. A flexible budget shows costs and revenues for more than one level of activity so that costs etc. can be predicted for other activity levels. Fixed budgets are useful for controlling costs where the objective is to limit (cap) the level of expenditure – for example in the public sector ore in charities. Flexible budgets are used to control costs where the objectives are the efficient procurement and utilisation of resources. (c) The principle budget factor is the factor which limits the activities of the organisation during the budget period. It is important that the principal budget factor is identified at the outset of the budget preparation process. If this is not done any budgets which are prepared will be impossible to achieve. If budgets are impossible to achieve, any subsequent performance evaluation will be meaningless. Actual $ 33,500 44,000 46,250 16,150 27,800 _______ 167,700 _______ Variance $ 500 F 1,900 F 4,550 F 450 F 200 F _____ 7,600 _____ F
KAPLAN PUBLISHING
Page 11 of 16
ACCA F5 Performance Management (d) The role of the budget committee is to communicate with budget holders and coordinate the budget setting process. The committee will produce a budget manual which provides detailed guidance for managers in preparing their budgets. The committee will communicate with the Board of Directors, advising them of the progress being made. MARKING GUIDE Marks (a) Flexed budget Materials Labour Production overhead Selling overhead Admin overhead Variances, 1 mark each variance 1 1 2 2 1 _ 7 5 _ 12 (b) (c) Total 1 mark each point, to a maximum of 1 mark for each valid point, to a maximum 4 4 20 ___
Page 12 of 16
KAPLAN PUBLISHING
Final Assessment
ANSWER 5
(a) Financial performance Summary Income Statement Budget $000 Fee income (W1) Costs: Consultants’ salaries (W2) Bonus (W3) Other operating costs Subcontract payments (W4) 6,075 _____ 2,025 _____ 2,025 2,550 0 _____ 4,575 _____ Net profit (W1) Fee income Budget Actual (W2) 40,500 chargeable consultations × $150 42,000 chargeable consultations × $150 1,500 _____ Actual $000 6,300 _____ 2,025 90 _____ 2,115 2,805 18 _____ 4,938 _____ 1,362 _____
Consultants’ salaries 45 consultants × $45,000
(W3)
Bonus 40% of $(6,300,000 – 6,075,000) Sub-contract payments 120 consultations × $150
(W4)
It is clear that BLA has not performed as well as expected during the year to 31 October 20X3. Whilst client income is above budget, other operating expenses reached a level which is more than 10% higher than the budget for the year, and thus it would be extremely useful to have a more detailed breakdown of other operating expenses for the year. Consultants have earned an aggregate bonus of $90,000 in respect of activity above budgeted levels. Payments to subcontractors amounted to $18,000. Actual profit amounts to $1,362,000 against a budget of $1,500,000. It would be extremely useful to see the results of the previous two years in order to assess whether there are any discernible trends in revenues and costs. The budget for the following year should be reviewed in the light of the actual performance of this year with particular reference to checking the footing of the assumptions upon which it has been prepared.
KAPLAN PUBLISHING
Page 13 of 16
ACCA F5 Performance Management (b) Service quality Quality of service is the totality of features and characteristics of the service package that bear upon its ability to satisfy client needs. To some extent the increase in the number of complaints and non-chargeable consultations associated with the remedying of those complaints is indicative of a quality problem that must be addressed. • • Client complaints received during the year were nearly double the budgeted level. Also the number of remedial consultations was 405 against a budgeted level of only 45, which is exactly nine times higher than budget.
Perhaps BLA Ltd should review and, if necessary, limit the amount of remedial consultancy provided to any one particular client. (c) Flexibility Flexibility may relate to the company being able to cope with flexibility of volume, delivery speed or job specification. It is a deliberate policy of BLA Ltd to retain 45 consultants thereby maintaining flexibility to meet increasing demand. The delivery speed will be increased as a consequence of the retention of consultants. The fact that links have been retained with retired consultants will give an added dimension of flexibility in times of very heavy demand upon its consultants. (d) Resource utilisation Resource utilisation measures the ratio of output achieved from those resources input. In this scenario the mean number of consultations per consultant may be used as a guide. Average consultations per consultant Budget 900 24 Actual 933 36 Increase/(decrease) 3.7% 50%
Chargeable consultations Non-chargeable
It is interesting to note that consultants are being utilised above budgeted levels for both chargeable and non-chargeable consultations. These figures would also suggest that the proportion of chargeable consultations has decreased indicating a fall in utilisation. BLA Ltd has adopted an innovative approach that requires consultants to undertake non-chargeable business development consultations which have at their heart the intention of generating new business. Hence in the immediate sense there is a trade-off between resource utilisation and innovation.
Page 14 of 16
KAPLAN PUBLISHING
Final Assessment (e) Innovation Innovation should be viewed in terms of its impact on financial performance, competitiveness, service-quality, flexibility and resource utilisation in the short, medium and long term. Certainly the non-chargeable activity in terms of ‘business development’ is an innovative feature within the business of BLA Ltd, as is the nonchargeable remedial consultancy provided to clients who experience problems at the commencement of building works. The acquisition of ‘state of the art’ business software is by its very nature innovative. This has probably enabled BLA Ltd to differentiate its services from those of its competitors and enhance its reputation. The management should ensure the introduction of the software has not caused the increase in the number of complaints received.
MARKING GUIDE Marks (a) (b) (c) (d) (e) Total One mark for each relevant point, up to a maximum of One mark for each relevant point, up to a maximum of One mark for each relevant point, up to a maximum of One mark for each relevant point, up to a maximum of One mark for each relevant point, up to a maximum of 5 4 3 4 4 __ 20 __
KAPLAN PUBLISHING
Page 15 of 16
ACCA F5 Performance Management
Page 16 of 16
KAPLAN PUBLISHING
ACCA FINAL ASSESSMENT
Performance Management
DECEMBER 2009
QUESTION PAPER Time allowed Reading time: 15 minutes Writing time: 3 hours
Answer all questions
Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall
Kaplan Publishing/Kaplan Financial
KAPLAN PUBLISHING Page 1 of 10
ACCA F5 Performance Management
© Kaplan Financial Limited, 2009
All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.
Page 2 of 10
KAPLAN PUBLISHING
Final Assessment
Answer all questions
QUESTION 1
F company 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 activitybased 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 an additional charge for overheads. A profit margin is also added, but that does not form part of this analysis and can therefore be ignored. Currently F company uses a simple absorption rate to absorb these overheads. The rate is calculated based on the budgeted annual overhead costs divided by 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 company has examined more carefully the nature of its overhead costs, and the following data have been prepared for the budget for next year: Total list price of drugs supplied Number of customer orders Overhead costs Invoice processing Packing Delivery Other overheads Total overheads 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). 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. Packing costs are $32 for a large package, and $25 for a small package. 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. $8m 8,000 $000 280 220 180 200 ___ 880 ___ Cost driver See Note 2 Size of package – see Note 3 Number of deliveries – see Note 4 Number of orders
2
3 4
KAPLAN PUBLISHING
Page 3 of 10
ACCA F5 Performance Management 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 2 Small 8 miles $1,200 Order B 8 Large 40 miles $900
Lines on invoice Package size Specific delivery distance List price of drugs supplied Required: (a)
Calculate the charge for overheads for Order A and Order B using: (i) (ii) the current system; and the activity-based costing approach. (3 marks) (12 marks)
(b)
Write a report to the management of F company in which you assess the strengths and weaknesses of the proposed activity-based costing approach for F company; and (5 marks) (Total: 20 marks)
Page 4 of 10
KAPLAN PUBLISHING
Final Assessment
QUESTION 2
Windermere operates a divisional organisation structure. The performance of each division is assessed on the basis of the Return on Investment (ROI) that it generates. For this purpose the ROI of a division is calculated by dividing its ‘trading profit’ for the year by the ‘book value of net assets’ that it is using at the end of the year. Trading profit is the profit earned excluding non-recurring items. Book value of net assets excludes any cash, bank account balance or overdraft because Windermere uses a common bank account (under the control of its head office) for all divisions. At the start of every year each division is given a target ROI. If the target is achieved or exceeded than the divisional executives are given a large salary bonus at the end of the year. In 20X1, Windermere’s division A was given a target ROI of 15%. On 15 December 20X1 A’s divisional manager receives a forecast that trading profit for 20X1 would be $120,000 and net assets employed at the end of 20X1 would be $820,000. This would give an ROI of 14.6% which is slightly below A’s target. The divisional manager immediately circulates a memorandum to his fellow executives inviting proposals to deal with the problem. By the end of the day he has received the following proposals from those executives (all of whom will lose their salary bonus if the ROI target is not achieved): (1) from the Works Manager: that $100,000 should be invested in new equipment at the end of the year resulting in cost savings, starting the following year, of $18,000 per year over the next fifteen years. Depreciation is on a straight line basis; from the Chief Accountant: that payment of a $42,000 trade debt owed to a supplier due on 16 December 20X1 be deferred until 1 January 20X2. This would result in a $1,000 default penalty becoming immediately due; from the Sales Manager: that $1,500 additional production expenses be incurred and paid in order to bring completion of an order forward to 29 December 20X1 from its previous scheduled date of 3 January 20X2. This would allow the customer to be invoiced in December, thereby boosting 20X1 profits by $6,000, but would not accelerate customer payment due on 1 February 20X2. From the Head of Internal Audit: That a regional plant producing a particular product be closed allowing immediate sale for $120,000 of premises having a book value of $90,000. This would result in $50,000 immediate redundancy payments and a reduction in profit of $12,600 per year over the next fifteen years.
(2)
(3)
(4)
Required: (a) Assess each of the above four proposals having regard to: (i) their effect on divisional performance in 20X1 and 20X2 as measured by Windermere’s existing criteria, (ii) their intrinsic commercial merits, (iii) any ethical matters that you consider relevant. You should ignore taxation and inflation. (16 marks) (b) Discuss FOUR possible actions Windermere’s Finance Director should take when the situation at division A and the above four proposals are brought to his attention. (4 marks) (Total: 20 marks)
KAPLAN PUBLISHING
Page 5 of 10
ACCA F5 Performance Management
QUESTION 3
County Preserves produce jams, marmalade and preserves. All products are produced in a similar fashion: the fruits are low temperature cooked in a vacuum process and then blended with glucose syrup with added citric acid and pectin to help setting. Margins are tight and the firm operates a system of standard costing for each batch of jam. The standard material cost data for a batch of raspberry jam are: Fruit extract Glucose syrup Pectin Citric acid Standard processing loss 400 kg @ $0.16 per kg 700 kg @ $0.10 per kg 99 kg @ $0.332 per kg 1 kg @ $2.00 per kg 3%
The summer of 20X7 proved disastrous for the raspberry crop with a late frost and cool, cloudy conditions at the ripening period, resulting in a low national yield. As a consequence, normal prices in the trade were $0.19 per kg for fruit extract although good buying could achieve some savings. The impact of exchange rates on imports of sugar has caused the price of syrup to increase by 20%. The actual results for the batch were: Fruit extract Glucose syrup Pectin Citric acid 428 kg @ $0.18 per kg 742 kg @ $0.12 per kg 125 kg @ $0.328 per kg 1 kg @ $0.95 per kg
Actual output was 1,164 kg of raspberry jam. Required: (a) (b) (c) Calculate the ingredient planning variances that are deemed uncontrollable. (6 marks) Calculate the ingredients operating variances that are deemed controllable. (4 marks) Comment on ONE advantage and ONE disadvantage of variance analysis using planning and operating variances. (2 marks) Calculate the mixture and yield operating variances. Suggest possible reasons for the mix and yield variances. (6 marks) (2 marks) (Total: 20 marks)
(d) (e)
Page 6 of 10
KAPLAN PUBLISHING
Final Assessment
QUESTION 4
The following monthly budgeted cost values have been taken from the budget working papers of MZ Limited for the year ended 30 September 20X8. Activity level Direct materials Direct labour Production overhead Selling overhead Administration overhead 60% $ 30,000 40,500 46,000 15,000 28,000 _______ 159,500 _______ 70% $ 35,000 47,250 52,000 17,000 28,000 _______ 179,250 _______ 80% $ 40,000 54,000 58,000 19,000 28,000 _______ 199,000 _______
During September 20X8, actual activity was 1,292 units (which was equal to 68% activity) and actual costs were: $ Direct materials Direct labour Production overhead Selling overhead Administration overhead 33,500 44,000 46,250 16,150 27,800 _______ 167,700 _______ Required: (a) Prepare a budgetary control statement for MZ Limited on a flexible budget basis for the month of September 20X8. The statement should include the flexed budget, the actual results and the variance for each of the five costs. (12 marks) Explain the difference between fixed and flexible budgets, and state when each should be used to control costs. (4 marks) The preparation of budgets is an important task that relies on the identification of the principal budget factor. Explain the term ‘principal budget factor’ and state its importance in the budget preparation process. (4 marks) (Total: 20 marks)
(b)
(c)
KAPLAN PUBLISHING
Page 7 of 10
ACCA F5 Performance Management
QUESTION 5
BLA Ltd is a design consultancy that provides advice to clients regarding property maintenance and improvements. BLA Ltd does not undertake building work on behalf of its clients but will recommend contractors that undertake the type of work requested. The following information is also relevant: (i) (ii) Each chargeable consultation is charged at a rate of $150 per consultation. The consultants are each paid a fixed annual salary of $45,000. In addition they receive a bonus of 40% of the fee income generated in excess of budget. In an attempt to gain new business, consultants may undertake consultations on a ‘no-fee’ basis. Such consultations are regarded as Business Development Activity by the management of BLA Ltd. Consultants will sometimes undertake remedial consultations with clients who experience problems at the time when work commences on each client’s site. Remedial consultations are also provided on a non-chargeable, i.e. ‘no fee’ basis. BLA Ltd has a policy of maintaining staff at a level of 45 consultants on an ongoing basis, irrespective of fluctuations in the level of demand. Also, BLA Ltd has retained links with retired consultants and will occasionally subcontract work to them, if current full-time consultants within a particular category are fully utilised. During the year subcontractors only undertook non chargeable client consultations. BLA Ltd pays these subcontractors $150 per consultation. In November 20X2, BLA Ltd purchased ‘state of the art’ business software for use by its consultants in simulating design improvements. The software was used throughout the year by consultants who specialise in landscape and garden design. It is now planned to introduce the use of the software by the other categories of consultant within BLA Ltd. Other operating expenses (excluding the salaries of the consultants) were budgeted at $2,550,000 for the year to 31 October 20X3. The actual amount incurred in respect of the year to 31 October 20X3 was $2,805,000, which excludes payments to subcontractors.
(iii)
(iv)
(v)
(vi)
(vii)
Page 8 of 10
KAPLAN PUBLISHING
Final Assessment BLA Ltd: Sundry statistics for year ended 31 October 20X3 Budget Total client enquiries: New business Repeat business Number of chargeable client consultations: New business Repeat business Number of non-chargeable client consultations undertaken by BLA consultants: Number of business development consultations Number of remedial consultations Number of non-chargeable client consultations undertaken by subcontractors: Other statistics: Number of complaints Required: Fitzgerald and Moon have suggested that business performance should be measured in a number of ways. Assess the performance of BLA with respect to the following dimensions: (a) (b) (c) (d) (e) Financial performance Service quality Flexibility Resource utilisation Innovation (5 marks) (4 marks) (3 marks) (4 marks) (4 marks) (Total: 20 marks) 324 630 1,035 45 1,200 405 120 24,300 16,200 22,400 19,600 67,500 32,400 84,000 28,000 Actual
KAPLAN PUBLISHING
Page 9 of 10
ACCA F5 Performance Management
Page 10 of 10
KAPLAN PUBLISHING
Final Assessment
ACCA Paper F5 Performance Management December 2009
Final Assessment – Answers
To gain maximum benefit, do not refer to these answers until you have completed the final assessment questions and submitted them for marking.
KAPLAN PUBLISHING
Page 1 of 16
ACCA F5 Performance Management
© Kaplan Financial Limited, 2009
All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.
Page 2 of 16
KAPLAN PUBLISHING
Final Assessment
ANSWER 1
(a) (i) OAR =
Budgeted overheads $880,000 = = 11% of list price $8m Budgeted level of activity
Overhead charge for Order A = 11% of $1,200 Overhead charge for Order B = 11% of $900 (ii) Cost driver rates Invoice processing
= $132 = $99
Cost per invoice =
25% × $280,000 = $8.75 per invoice 8,000 invoices 75% × $280,000 = $7.50 per invoice line 28,000 invoice lines
Cost per invoice line =
Packing $32 for large packages and $25 for small packages. Delivery
$40,000 = $40 per journey 1,000 journeys
Loading costs =
There are 12 small packages to a lorry and so the loading costs are $40/12 = $3.33 per small package. There are 6 large packages to a lorry and so the loading costs are $6.67 per large package.
$180,00 − $40,000 = $0.40 per mile 350,000 miles
Mileage costs =
Other overheads
$200,000 = $25 per order 8,000 orders
Cost per order =
KAPLAN PUBLISHING
Page 3 of 16
ACCA F5 Performance Management
A $ Invoice processing $7.50 × 2 $7.50 × 8 Packing Delivery $0.40 × 8 $0.40 × 40 Other overheads Charge for overhead (b) Strengths and weaknesses of proposed system 25.00 _____ 80.28 _____ 25.00 3.33 3.20 8.75 15.00
B $ 8.75 60.00 32.00 6.67 16.00 25.00 ______ 148.42 ______
The present system is very simple but makes no attempt to link the overhead costs to the factors which cause those costs. The present system simply charges all orders a blanket rate of 11% on list price. The proposed ABC system is still very simple but makes some effort to determine the cost drivers, i.e. those factors which are most closely related to the way in which the costs of an activity are incurred. For instance, it has been found for the invoice processing costs that the costs are affected by the number of invoices issued, but also by how complicated the invoices are, i.e. how many different lines there are on the invoice. Charging out the invoice processing costs on the basis of the two cost drivers above will result in more accurate costs and will give more information about the cost structure and the cost drivers in order to improve cost control. Once the cost structure is known, efforts can be made to reduce the volume of activity of the cost driver (e.g. the 28,000 invoice lines) and/or the cost of the cost driver (e.g. the $7.50 per invoice line). It is argued by ABC supporters that the better costs calculated under ABC can then be used as the basis for fixing selling prices and that these selling prices relate to the true cost of the order and thus will prevent loss-making orders. F Company can also compare the true costs of the different elements of the system against the costs of outsourcing. The more accurate costs determined under an ABC system can be used to justify selling prices or selling price increases to customers. Whilst it is undoubtedly true that ABC gives more accurate costs, it is also true that it will be more expensive to implement and the benefit may not exceed the cost. The proposed system, here, is still very simple and it is possible that a more detailed analysis would provide further useful information. ABC attempts to find the cost driver for each type of cost and thus avoid the arbitrariness of absorption costing but, here, some costs are still charged on an arbitrary basis, e.g. the other overheads.
Page 4 of 16
KAPLAN PUBLISHING
Final Assessment
MARKING GUIDE Marks (a) (i) OAR Order A costs Order B costs Total (ii) Invoice processing Packing Delivery Other Order A costs (0.5 per cost element) Order B costs (0.5 per cost element) Total (b) Total 1 mark for each point made, to a maximum of 5 Cost driver rates 2 1 2 1 3 3 _ 12 5 __ 20 __ 1 1 1 _ 3
KAPLAN PUBLISHING
Page 5 of 16
ACCA F5 Performance Management
ANSWER 2
(a) Assessment of four year-end proposals Two general comments are of relevance to all four proposals: • With ROI based on NBV of assets employed, there is an incentive to underinvest, to improve ROI by ‘reducing the bottom line’ rather than ‘increasing the top line’ in the ratio. When ROI-based assessment is linked to a bonus scheme, there is a greater incentive to make ROI appear satisfactory irrespective of the true commercial merit of an operation of project.
•
Proposal 1: The works manager – new equipment An investment at the end of the year will increase capital employed without providing the opportunity to earn any of the savings forecast. ROI is likely to fall from 14.6% to:
$120,000 × 100 = 13.0% $820,000 + $100,000
However, the project itself may well be viable and may actually increase shareholder wealth. The ROI at the end of the first year would be:
18,000 − $6,667 × 100 = 12.1% $100,000 − $6,667
This is less than the target, but that is a failure of the ROI method and the method of depreciation used. (The ROI would increase each year as the NBV reduces and in the final year the project’s ROI would be $11,333 ÷ $0 = infinity). There are no ethical issues at stake, but a number of management issues as introduced above and discussed in (b). Proposal 2: The chief accountant – delay payments to payables The effect of non-payment of payables at the year end is to decrease assets by $42,000 (the creditor appears in the division’s books, but cash does not) and reduce profit by $1,000. ROI will move from 14.6% to:
$120,000 − $1,000 × 100 = 15.3% $820,000 − $42,000
The required target has been achieved. This proposal will have no effect on 20X2 ROI. The longer term effect is that the company has lost $1,000 and kept $42,000 cash for another month. The company does not want to get a reputation for being a poor payer, as suppliers may withhold goods and it may become difficult to obtain further credit. The ethics of deferring payment of debt, which is commercially non-viable, in order to earn a bonus, needs to be questioned. Proposal 3: The sales manager – bring forward completion of order The effect of this transaction would be to increase profit by $6,000. As work in progress changes to receivables in the accounting records, capital employed would increase by $6,000 (since receivables includes profit, but work in progress includes cost only). ROI would change from 14.6% to:
Page 6 of 16
KAPLAN PUBLISHING
Final Assessment
($120,000 + $6,000)/($820,000 + $6,000) = $126,000/$826,000 = 0.153 or 15.3%. This proposal achieves the desired ROI. This proposal will reduce 20X2 profit by $6,000, because it has the effect of bringing profit forward from 20X2 to 20X1. Looking at the transaction without regard to year-end performance, $1,500 has been spent with no benefit to total cash inflows, although the balance sheet will look more impressive. This is another example of dysfunctional decisions based on a form of assessment and related remuneration scheme that encourages manipulation of year end accounts. As with the previous proposal, the ethics of taking a commercially unsound decision, in order to secure a bonus, should be challenged. Proposal 4: The head of internal audit – closing a regional plant This proposal would have a dramatic effect on capital employed, immediately reducing it by $90,000. The effect on profit would be a fall of $50,000 through redundancy and a rise of $30,000 profit on sale of assets. However, none of these would be included in trading profit (since they are presumably non-recurring) and so ROI would increase to:
$120,000 × 100 = 16.4% $820,000 − £90,000
This easily achieves the required standard. Without knowing the depreciation policy, or the life of the assets, the effect of this proposal on 20X2 ROI cannot be determined. The loss of $12,600 p.a. for 15 years comes from a net disinvestment of $120,000 − $50,000 = $70,000. The present value of the lost profit of $12,600 p.a. may be greater than $70,000 and, if this is the case, the proposal should not be implemented. Sacking people to improve ROI despite the move being against the long-term benefit of the business is unethical. The analysis has also excluded any possible loss of business in other parts of the division from customers inconvenienced by this particular closure. (b) Remedial action by company finance director Many of the problems above come from the use of return on investment (ROI) based on year end figures which encourages under-investment and manipulation. Possible solutions include: • • Change to Residual Income (RI) so that divisions will be rewarded for making wise long-term investment decisions If there is an insistence on the use of ROI, it can be improved by: – using average capital employed figures rather than year-end ones; – using gross book values rather than net-book values; – changing depreciation methods to ensure that ROI does not improve just by retaining assets whose book value steadily falls Ensure central approval of investment (and disinvestment) budgets and controls to check that commitments are met Central control of payments to payables and collection of receivables If the above is too ‘interventionist’ lay down guidelines for payments and collection periods
• • •
KAPLAN PUBLISHING
Page 7 of 16
ACCA F5 Performance Management • The Divisional Manager deserves a reprimand for ‘window dressing’ although he is trying to make his accounts look better in a way that will not only boost his bonus but will also appeal to outside analysts The importance of ethical considerations in decision-making should be emphasised to Divisional management Change the bonus scheme and pay each manager a fair day’s salary for doing a fair day’s work without the troublesome complication of a bonus scheme.
• •
Note : only four actions are required. MARKING GUIDE Marks (a) Effect on divisional performance – 2 marks for each proposal Commercial merits – 1 mark for each proposal Ethical matters – 1 mark for each proposal 1 mark for each action Total 8 4 4 16 4 20 __
(b)
Page 8 of 16
KAPLAN PUBLISHING
Final Assessment
ANSWER 3
Working Original standard Fruit Syrup Pectin Citric Acid Price Quantity Price Quantity Price Quantity Price Quantity $0.16 400 kg $0.10 700 kg $0.332 99 kg $2.00 1 kg Revised standard $0.19 400 kg $0.12 700 kg $0.332 99 kg $2.00 1 kg Actual $0.18 428 kg $0.12 742 kg $0.328 125 kg $0.95 1 kg
(a)
The planning variances relate only to fruit and syrup prices. Fruit $ RSQ × RSP RSQ × SP 76 64 __ 12 A __ Syrup $ 84 70 __ 14 A __
Total planning variance = $12 + $14 = $26 A (b) Fruit $ AQ × AP AQ × SP SQ × SP Price variance Usage variance Total price variance Total usage variance Total ingredients variance (c) 77.04 81.32 76.00 4.28 F 5.32 A Syrup $ 89.04 89.04 84.00 0 5.04 A Pectin $ 41.00 41.50 32.87 0.50 F 8.63 A Citric Acid $ 0.95 2.00 2.00 1.05 F 0
= $5.83 F = $18.99 A = $13.16 A
The main problem with conventional variance analysis for budgetary control reporting purposes is that its emphasis on comparison between actual and planned performances results in a disregard for changes in these planned results. Because standards become out of date and unrealistic, the traditional accounting model does not serve as an opportunity cost system. The operational variance measures management's operating efficiency by comparing actual results with revised standard. This variance reflects opportunity costs. That is, the gain or loss as a result of actual performance differing from a realistic standard.
KAPLAN PUBLISHING
Page 9 of 16
ACCA F5 Performance Management Hence operational variances tend to be controllable. The planning variance compares the original budget with the revised budget. This variance reflects planning error. However, it may not be practical to find all possible perfect substitutes for the resources actually used. It may also be difficult to obtain accurate revised standard costs for the resources actually used and their substitutes. In general, there is a resistance to change. Most companies still use the traditional approach. (d) Workings AQ × AM AQ × SM SQ × SM SP ($) Variances Mix variance ($) Yield variance ($) Fruit 428 432 400 0.19 Syrup 742 756 700 0.12 Pectin 125 106.92 99 0.332 Citric Acid 1 1.08 1 2 Total 1,296 1,296 1,164/0.97 = 1,200
0.76 F 6.08 A
1.68 F 6.72 A
6.00 A 2.68 A
0.16 F 0.16 F
3.40 A 15.59 A
Check: Mix + Yield = $3.40 A + $15.59 A = $18.99 A = Usage variance (e) The mix has been changed so that more of the expensive ingredient pectin has been used, and less of the cheaper ingredients, fruit and syrup, have been used. This has caused the overall adverse mix variance. The yield variance means that more input was required for the given output. This means there was an abnormal loss, causing the adverse variance. MARKING GUIDE Marks (a) Choosing only fruit and syrup prices Identification of the original and revised standard prices Fruit variance Syrup variance 1 1 2 2 _ 6 (b) (c) (d) Each ingredient, 1 mark for the variances × 4 1 mark for each advantage and disadvantage Mix variance Yield variance 3 3 _ 6 (e) Total 1 mark for each reason, to a maximum of 3 __ 20 __ 4 2
Page 10 of 16
KAPLAN PUBLISHING
Final Assessment
ANSWER 4
(a) Budgetary control statement Flexed budget $ Direct materials (W1) Direct labour (W2) Production overhead(W3) Selling overhead (W4) Administration overhead 34,000 45,900 50,800 16,600 28,000 _______ 175,300 _______ Workings (W1) (W2) (W3) (30000/60) × 68 = 34,000 (40,500/60) × 68 = 45,900 Variable cost = (58,000 – 46,000)/20 = 600 per percentage 68% is an extra 8% above 60%, making overhead cost − $46,000 + 8 × 600 = $50,800 (W4) Variable cost = (19,000 – 15,000)/20 = 200 per percentage Selling overhead = 15,000 + 8 × 200 = 16,600 (b) A fixed budget is a budget which shows the costs and revenues for a single level of activity. A flexible budget shows costs and revenues for more than one level of activity so that costs etc. can be predicted for other activity levels. Fixed budgets are useful for controlling costs where the objective is to limit (cap) the level of expenditure – for example in the public sector ore in charities. Flexible budgets are used to control costs where the objectives are the efficient procurement and utilisation of resources. (c) The principle budget factor is the factor which limits the activities of the organisation during the budget period. It is important that the principal budget factor is identified at the outset of the budget preparation process. If this is not done any budgets which are prepared will be impossible to achieve. If budgets are impossible to achieve, any subsequent performance evaluation will be meaningless. Actual $ 33,500 44,000 46,250 16,150 27,800 _______ 167,700 _______ Variance $ 500 F 1,900 F 4,550 F 450 F 200 F _____ 7,600 _____ F
KAPLAN PUBLISHING
Page 11 of 16
ACCA F5 Performance Management (d) The role of the budget committee is to communicate with budget holders and coordinate the budget setting process. The committee will produce a budget manual which provides detailed guidance for managers in preparing their budgets. The committee will communicate with the Board of Directors, advising them of the progress being made. MARKING GUIDE Marks (a) Flexed budget Materials Labour Production overhead Selling overhead Admin overhead Variances, 1 mark each variance 1 1 2 2 1 _ 7 5 _ 12 (b) (c) Total 1 mark each point, to a maximum of 1 mark for each valid point, to a maximum 4 4 20 ___
Page 12 of 16
KAPLAN PUBLISHING
Final Assessment
ANSWER 5
(a) Financial performance Summary Income Statement Budget $000 Fee income (W1) Costs: Consultants’ salaries (W2) Bonus (W3) Other operating costs Subcontract payments (W4) 6,075 _____ 2,025 _____ 2,025 2,550 0 _____ 4,575 _____ Net profit (W1) Fee income Budget Actual (W2) 40,500 chargeable consultations × $150 42,000 chargeable consultations × $150 1,500 _____ Actual $000 6,300 _____ 2,025 90 _____ 2,115 2,805 18 _____ 4,938 _____ 1,362 _____
Consultants’ salaries 45 consultants × $45,000
(W3)
Bonus 40% of $(6,300,000 – 6,075,000) Sub-contract payments 120 consultations × $150
(W4)
It is clear that BLA has not performed as well as expected during the year to 31 October 20X3. Whilst client income is above budget, other operating expenses reached a level which is more than 10% higher than the budget for the year, and thus it would be extremely useful to have a more detailed breakdown of other operating expenses for the year. Consultants have earned an aggregate bonus of $90,000 in respect of activity above budgeted levels. Payments to subcontractors amounted to $18,000. Actual profit amounts to $1,362,000 against a budget of $1,500,000. It would be extremely useful to see the results of the previous two years in order to assess whether there are any discernible trends in revenues and costs. The budget for the following year should be reviewed in the light of the actual performance of this year with particular reference to checking the footing of the assumptions upon which it has been prepared.
KAPLAN PUBLISHING
Page 13 of 16
ACCA F5 Performance Management (b) Service quality Quality of service is the totality of features and characteristics of the service package that bear upon its ability to satisfy client needs. To some extent the increase in the number of complaints and non-chargeable consultations associated with the remedying of those complaints is indicative of a quality problem that must be addressed. • • Client complaints received during the year were nearly double the budgeted level. Also the number of remedial consultations was 405 against a budgeted level of only 45, which is exactly nine times higher than budget.
Perhaps BLA Ltd should review and, if necessary, limit the amount of remedial consultancy provided to any one particular client. (c) Flexibility Flexibility may relate to the company being able to cope with flexibility of volume, delivery speed or job specification. It is a deliberate policy of BLA Ltd to retain 45 consultants thereby maintaining flexibility to meet increasing demand. The delivery speed will be increased as a consequence of the retention of consultants. The fact that links have been retained with retired consultants will give an added dimension of flexibility in times of very heavy demand upon its consultants. (d) Resource utilisation Resource utilisation measures the ratio of output achieved from those resources input. In this scenario the mean number of consultations per consultant may be used as a guide. Average consultations per consultant Budget 900 24 Actual 933 36 Increase/(decrease) 3.7% 50%
Chargeable consultations Non-chargeable
It is interesting to note that consultants are being utilised above budgeted levels for both chargeable and non-chargeable consultations. These figures would also suggest that the proportion of chargeable consultations has decreased indicating a fall in utilisation. BLA Ltd has adopted an innovative approach that requires consultants to undertake non-chargeable business development consultations which have at their heart the intention of generating new business. Hence in the immediate sense there is a trade-off between resource utilisation and innovation.
Page 14 of 16
KAPLAN PUBLISHING
Final Assessment (e) Innovation Innovation should be viewed in terms of its impact on financial performance, competitiveness, service-quality, flexibility and resource utilisation in the short, medium and long term. Certainly the non-chargeable activity in terms of ‘business development’ is an innovative feature within the business of BLA Ltd, as is the nonchargeable remedial consultancy provided to clients who experience problems at the commencement of building works. The acquisition of ‘state of the art’ business software is by its very nature innovative. This has probably enabled BLA Ltd to differentiate its services from those of its competitors and enhance its reputation. The management should ensure the introduction of the software has not caused the increase in the number of complaints received.
MARKING GUIDE Marks (a) (b) (c) (d) (e) Total One mark for each relevant point, up to a maximum of One mark for each relevant point, up to a maximum of One mark for each relevant point, up to a maximum of One mark for each relevant point, up to a maximum of One mark for each relevant point, up to a maximum of 5 4 3 4 4 __ 20 __
KAPLAN PUBLISHING
Page 15 of 16
ACCA F5 Performance Management
Page 16 of 16
KAPLAN PUBLISHING
Sponsor Documents
Recommended
No recommend documents