ACCA Paper F5 Performance Management

Final Mock Examination

Question Paper Time allowed Reading and planning: Writing: 15 minutes 3 hours

Instructions:
Take a few moments to review the notes on the inside of this page titled, 'Get into good exam habits now!' before attempting this exam.

DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS

ACF5PM11(D) EFM Questions The examination has been prepared for the December 2011 sitting

Get into good exam habits now!

Take a moment to focus on the right approach for this exam.

Effective time management

Watch the clock, allow 1.8 minutes per mark. Work out how long you can spend on each question and do not exceed that time. Take a few moments to think what the requirements are asking for and how you are going to answer them.

Effective planning
This paper is in exactly the same format as the real exam. You should read through the paper and plan the order in which you will tackle the questions. Always start with the one you feel most confident about and take time to choose the questions you will answer in sections with choice. Read the requirements carefully: focus on mark allocation, question words (see below) and potential overlap between requirements. Identify and make sure you pick up the easy marks available in each question.

Effective layout
Present your numerical solutions using the standard layouts you have seen. Show and reference your workings clearly. With written elements try and make a number of distinct points using headings and short paragraphs. You should aim to make a separate point for each mark. Ensure that you explain the points you are making ie. why is the point a strength, criticism or opportunity? Give yourself plenty of space to add extra lines as necessary, it will also make it easier for the examiner to mark.

Common terminology
Identify Discuss Describe Summarise Recommend Analyse Explain Illustrate Appraise/assess/ evaluate List relevant points Explain the opposing arguments Present the characteristics of State briefly the essential points Present information to enable the recipient to take action Determine and explain the constituent parts of Set out in detail the meaning of Use an example to explain something Judge the importance or value of

2 ACF5PM11(D) EFM Questions The examination has been prepared for the December 2011 sitting

ALL FIVE questions are compulsory 1 Larsson

Larsson is a manufacturer of childrens toys. Larsson is considering launching a new product which is a wooden train set. The company has carried out some market research and has estimated that the demand curve for its new product is P1 = 100 0.5X1, where P1 is the price of the new product and X1 is the annual demand for the new product in thousands. Larsson has estimated manufacturing costs of $33.23 per unit and non-manufacturing costs of $1.56 per unit. The new product will require an investment of $15.6 million and the company has a required return on new investment of 11%. Required (a) (b) (c) (d) Explain the main steps in implementing target costing, describe full cost-plus pricing and discuss the differences between the two methods. (8 marks) Calculate the target cost of the new product and the target cost gap if Larsson wishes to sell 100,000 units a year. (5 marks) List the ways in which Larsson might close the cost gap between estimated cost and the target cost. (4 marks) What are the possible adverse effects of target costing on Larsson? (3 marks) (Total = 20 marks)

ACF5PM11(D) EFM Questions 3 The examination has been prepared for the December 2011 sitting

Francis
Francis is a family business that produces bakery products and sells them at farmers markets throughout the country in which it operates. The business has had a rather unsuccessful year so far. Francis is planning for its busiest period over Christmas and New Year. The following information relating to Francis is available: Francis only produces two products a savoury product, the pasty and a cake product. Francis bakes both products in hired kitchens. They have a maximum time that the kitchen is available during the season of 1000 hours. It takes 15 minutes to bake a batch of pasties or 30 minutes to bake a batch of cakes. Batch of pasties Selling price Variable costs per tonne Suet needed per batch of output Space required per batch $45 $15 35g 0.3m2 Batch of cakes $75 $15 100g 0.4m2

Francis is proud of its traditional ingredients and uses beef suet in both products. Poor planning has meant that the amount of suet available for production is limited to 140 kgs and no more can be bought. Francis has limited space at the markets. The total space available over the whole season is 960 m2. Francis believes that it should sell both products, pasties and cakes, as customers who buy one product will, on impulse, buy the other. For this reason, Francis wants to produce a minimum of 500 batches of each product. Required (a) Determine the optimal production plan for Francis, assuming that it is seeking to maximise contribution earned. You should use a linear programming graph, identify the feasible region, the optimal point and accurately calculate the maximum contribution that could be earned using whichever equations you need. (14 marks) What are the practical problems to Francis of using linear programming for making its decision on what to bake? (6 marks) (Total = 20 marks)

(b)

4 ACF5PM11(D) EFM Questions The examination has been prepared for the December 2011 sitting

ACCA Paper F5 Performance Management

Final Mock Examination

Commentary, Marking scheme and Suggested solutions

ACF5PM11(D) EFM: Solutions The examination has been prepared for the December 2011 sitting

Commentary
Tutor guidance on improving performance on the exam paper.

General
Your script is the only evidence you will provide to convince an ACCA marker that you should pass this paper and therefore progress through your qualification. Even very talented students can fall down at this paper because of poor examination technique. The first question should be the question you feel most comfortable with. Give the marker the impression that you are comfortable with the syllabus as early as possible. Make it clear which question it is you are answering too! Make sure you answer ALL questions even if you have to guess. It is amazing how a stab in the dark can generate the 50th mark the one you need to pass again it shows the marker that you can think about the question (albeit in simple terms).

Q1 Larsson
This is a relatively straightforward question that requires regurgitation and then application of knowledge. The well prepared student should do very well indeed here. If you are not one, then note the gaps in your knowledge, and learn it!

Q2 Francis
This question has all the hallmarks of a standard linear programming model question. Get the easy marks in part (a) and make sure that you manage your time between the various requirements. Also note that part (b) is a standalone requirement and could be tackled first.

Q3 Forssell
A big sprawling question covering more than one syllabus area. Candidates in the real exam often run out of time. Exam technique is important here. Work out the time for each part of the question and then stick to it. Note that there are actually two separate requirements in part (c) and that part (d) is only 5 marks. Stick to the allocated time on part (d) even if you could write for hours on it - you must not over run.

Q4 Bowyer
A pure number crunching question. If you are not sure about a particular number make an assumption and move on. The markers will give follow on marks.

Q5 Big Heath School

The final question is an application question. Make sure that you relate your answers to the scenario set. If you are searching for relevant points to make, you have four sources the scenario, your text book knowledge, your general business knowledge and your personal experiences.

2 ACF5PM11(D) EFM: Solutions The examination has been prepared for the December 2011 sitting

Larsson
Marking scheme
Marks (a) Steps in target costing Full cost-plus pricing Discussion of differences Step 2 Step 3 Step 4 Step 6 Any valid technique (not limited to model answer below) 1 mark per point 4 1 3 8 (b) 1.5 1.5 1 1 5 (c) (d) 0.5 (Max) 4 (Max) 3 20

Suggested solution
(a) Target costing involves the following stages. First the company needs to determine a product specification of which an adequate sales volume is estimated. Next it should set a selling price at which the organisation will be able to achieve a desired market share. Then it needs to estimate the required profit based on return on sales or return on investment. This can be used to calculate the target cost = target selling price - target profit. The next step is to compile an estimated cost of the product based on the anticipated design specification and current cost levels. This is then used to calculate target cost gap = estimated cost - target cost. If the target cost is higher than the estimated cost then production of the product can commence. If, however the target cost is below the estimated cost then the company should make efforts to close the gap. If the gap cannot be closed then production should not start and the product may have to be abandoned. Full cost-plus pricing is a method of determining a sales price by calculating the full cost of a product and then adding a percentage mark-up. The main differences between target costing and full-cost pricing are as follows: Target costing is used to decide whether a product can be produced for a set cost given a selling price and a profit margin, whereas full cost-plus pricing is used to set a selling price given a set cost and a profit margin. With full cost-plus pricing the company has more control over setting a selling price, but with target costing the company will be faced with a set price:demand relationship and cannot control the selling price. Full cost-plus pricing is suitable for businesses that carry out a large amount of contract work or jobbing work, for which individual job or contract prices must be quoted regularly. Target costing is more suitable for products that are likely to be sold in the market for a relatively long time.

ACF5PM11(D) EFM: Solutions 3 The examination has been prepared for the December 2011 sitting

(b)

Step 2 (from Steps in part a) Calculate the selling price if Larsson want to sell 100,000 units: P1 = 100 0.5X1 P1 = 100 (0.5 x 100) P1 = 50 Target selling price = $50 Step 3 Required return on investment = $15.6 million x 11% = $1,716,000 Required profit per unit = $1,716,000 / 100,000 = $17.16 per unit Target profit = $17.16 Step 4 Target cost = target selling price target profit Target cost = $50 $17.16 = $32.84 Step 6 Target cost gap = estimated cost target cost Target cost gap = ($33.23 + $1.56) $32.84 = $1.95

(c)

Steps to reduce target cost Larsson could reduce the number of parts in the train set. Alternatively they could use standard components whenever possible. For example, by using the same wheels that they might use for toy cars. Another method could be to change the production process to manufacture the product more efficiently. Larsson may also wish to look into using cheaper materials or employing less expensive unskilled staff for parts of the production process. They may also want to train existing staff to be more efficient if they feel staff are likely to work for them for the long term. This could be done alongside acquiring new more efficient production techniques. If any non-value adding activities can be identified then these could be removed. If possible, try to reduce the investment required so as to reduce the required profit and therefore the target cost will also be lower. If the required return of investors can be reduced then this will, in turn, reduce the target cost.

(d)

Possible adverse effects of target costing on Larsson Longer product development times because of the numerous changes to designs and costings. This may be very significant to a children's toy manufacturer, as fashions may change quickly. Employee demotivation as a result of pressure to meet targets. Organisational conflict between different individuals within the organisation striving for different objectives. For example, some designers seeking to design out costs, while others may be more concerned with aesthetics.

4 ACF5PM11(D) EFM: Solutions The examination has been prepared for the December 2011 sitting

Francis
Marking scheme
Marks (a) Define variables Maximise contribution Constraints (0.5 each) Graph Each constraint plotted correctly (0.5 each) Identify optimal point Identify feasible region General layout, title, presentation, etc. Conclusion on optimal production Calculation of maximum contribution Conclusion on maximum contribution 3 1 1 1 1 1 1 14 1 1 3

(b)

1 mark per valid point NB must relate to scenario Max 6 20

Suggested solution
(a) Let p = batches of pasties c = batches of cakes Maximise contribution 30p + 60c Subject to: 0.25p + 0.5c 1000 35p + 100c 140,000 0.3p + 0.4c 960 p 500 c 500 p,c 0 (Kitchen time) (Suet) (Market space) (Minimum amount of pasties) (Minimum amount of cakes) (Non negativity constraint)

ACF5PM11(D) EFM: Solutions 5 The examination has been prepared for the December 2011 sitting

Plot graph: 0.25p + 0.5c = 1,000 ; p= 0 c= 0 35p + 100c = 140,000; p= 0 c= 0 0.3p + 0. 4c = 960 p=0 c= 0 Z (contribution) = 30p + 60c Let Z = 30,000 p= 0 c= 0 c = 500 p = 1,000 c = 2000 p = 4000 c = 1,400 p = 4,000 c = 2,400 p= 3,200

Suet

Optimal point is where market space and suet constraints intersect: 0.3p + 0.4c = 960 (1) 35p + 100c = 140,000 (2)

6 ACF5PM11(D) EFM: Solutions The examination has been prepared for the December 2011 sitting

(1) x 250

75p + 100c = 240,000 35p + 100c = 140,000 40p = 100,000

Less (2) p = 2,500

Sub in (1) (0.3 x 2,500) +0. 4c = 960 0.4c = 210 c= 525 (Check: Substitute into (2), (35 x 2,500) + (100 x 525) = 140,000) To maximise contribution Francis should produce 2,500 batches of pasties and 525 batches of cakes. Z = (2,500 x 30 ) + (525 x 60) = $106,500 The maximum contribution that Francis can earn is $106,500 (c) There are numerous difficulties with applying the linear programming technique in practice for Francis: Francis has assumed that he will be able to sell all of his output and the price he will receive. In practice, given that baked products may deteriorate after a short time, he may be forced to discount towards the end of a market day. The model assumes that Francis is interested in maximising contribution. The technique takes no account of other non financial objectives. For example, pride in producing a traditional product. The model takes no account of any other products that Francis could produce. There are obviously more than two bakery products! The model assumes certainty in estimates of time taken to produce a batch of output. This may be unrealistic. The variable costs of production are assumed not to change and to be known with certainty. Again, this is unrealistic in practice. The constraints on Francis may be artificial. For example, it might be possible to hire additional commercial kitchen space. In conclusion, the linear programming model provides a theoretical solution, but in practice it would appear to have limited value.

ACF5PM11(D) EFM: Solutions 7 The examination has been prepared for the December 2011 sitting