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Paper F5

Performance Management

Final Mock Exam

June 2013 Session








Time allowed:

Reading and Planning: 15 minutes

Writing: 3 hours











All five questions are compulsory and must be attempted

Total Marks: 100









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Question # 1

Scotswood Ltd is an engineering company which is organised for management purposes in the form of
several autonomous divisions. The performance of each division is currently measured by calculation of
its return on investment (ROI).

Scotswood Ltd's current performance management policy is to calculate ROI by dividing the profit before
interest and tax by the book value of net assets (Total assets less current liabilities and excluding cash).
Depreciation is on a straight-line basis and is charged in full in the year the asset is acquired.

The divisional management teams are paid a performance-related bonus conditional upon achievement
of a 15% ROI target. On 15 December 20X9 the divisional managers were provided with performance
forecasts for 20X9 which included the following.

Divisional investment at 20X9 Profit before
Forecast 31 December 20X9 interest and tax ROI

Division Aye 5,500,000 816,750 14.85%
Division Bee 925,000 203,500 22.00%

In order to achieve the 15% target the Divisional Director of Division Aye held a meeting with his
management team on 15 December.

Logistics Manager: 'We can achieve our 20X9 target by deferring payment of a 90,000 trade debt
payable tomorrow until 1 January. I should add that we will thereby immediately incur a 2,000 late
payment penalty.'

Production Manager: 'We should replace a number of our oldest machines (which are fully written down
in the accounts) at a cost of 300,000. The new equipment will have a life of ten years and generate cost
savings of 29,000 per year. The new equipment can be on site and operational by 31 December 20X9.'

Divisional Accountant: 'The existing method of performance appraisal is unfair. We should ask head
office to adopt residual income (RI) as the key performance indicator, using the company's cost of capital
of 10% to calculate the imputed finance charge.'

Required:

(a) Comment on the suggestions put forward by each of the three managers. Indicate what impact
the suggestions will have on the annual bonus award and the division as a whole. Your answer
should be supported by appropriate calculations (15 marks)

(b) Explain, with the use of examples, the value and purpose of non-financial performance
measures. (5 marks)

(Total: 20 marks)











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Question # 2

Faith Co is a business services company which provides seminars on various aspects of current and
recently announced changes in employment legislation. Faith Co has decided to enter into a one-year
renewable contract with Peace Business Associates, which owns large premises that are suitable for
holding educational seminars in each of eight cities.

Peace Business Associates has offered a choice of four different contracts, each of which relates to
seminar rooms of differing sizes. These are known as room types A, B, C and D, which are capable of
accommodating 100, 200, 300 and 400 delegates respectively.

Faith Co will charge an all-inclusive fee of $80 per delegate at every seminar throughout the year.

Faith Co must decide in advance of the forthcoming year which size of conference room to contract for. It
is not possible to contract for a different size conference room in different cities, ie only one size of room
can be the subject of the contract with Piece Business Associates.

Due to the rapid growth in interest regarding environmental issues and corporate social responsibility, and
the large amount of forthcoming legislative changes, Faith Co has decided to hold one seminar in every
week of the year in each city. Sometimes a regional government representative will attend and speak at
such seminars. On other occasions a national government representative will attend and speak at such
seminars. The rest of the time the speakers at seminars are representatives from within Faith Co.

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

Category of speaker: %
Faith representive 20
Regional govt. representative 50
National govt. representative 30

Market research has indicated that where a national government representative is in attendance, Faith Co
can be reasonably assured of selling 400 seminar places and where a regional government
representative is in attendance 200 seminar places can be sold. Faith Co expects to sell only 100
seminar places when there is no attendance by a government representative.

The following contribution table has been devised to calculate the expected annual contribution from each
decision option.

Contribution if 100 Contribution if 200 Contribution if 300 Contribution if 400
Places sold places available places available places available places available
$ $ $ $
100 832,000 (1,164,800) (2,662,400) (3,328,000)
200 832,000 2,163,200 665,600 0
400 832,000 2,163,200 3,993,600 6,656,000

Required

(a) Calculate the cost incurred by Faith Co for each type of room per seminar. (4 marks)

(b) (i) Advise Faith Co on the size of seminar room that should be contracted from Peace Business
Associates, using the criterion of expected value. Your answer should use the expected annual
contribution from each decision option.

(ii) Explain the limitations of the expected value approach. (6 marks)

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(c) Determine whether your decision in (a) would change if you were to use the maximin and
minimax regret decision criteria. Your answer should be supported by relevant workings.
(5 marks)

(d) Explain possible sources of information and information systems that will be required to
reduce uncertainty for Faith Co. (5 marks)

(Total 20 marks)



Question # 3

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

Scottie Labrador
$ per service $ per service

Selling price 13.25 24.00
Specialised cleaning material ($5 per litre) 0.50 0.75
Direct labour ($7.5 per hour) 3.75 7.50
Variable machine time ($3 per hour) 1.50 0.75
Fixed overhead ($3 per labour hour) 1.50 3.00
------ -------
Profit 6.00 12.00

Puppycare Company budgets to sell 240 Scotties and 226 Labrador per month. However, the company is
facing a shortage of resources over the next month. The maximum amount of specialized cleaning
material available is 60 litres, the total labour available is 300 hours and the total machine time available
is 150 hours.

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

Required:

(a) Using linear programming advice Puppycare of the best mix of services to provide maximum
contribution. (10 marks)

(b) Find the shadow price for machine hours and specialized cleaning material. (5 marks)

(c) Historically, the company has used solely financial performance measures to assess the performance
of the company as a whole. The companys Managing Director has recently heard of the building block
model and is keen to learn more.

Required:

Briefly describe the building block model approach to performance measurement. (5 marks)

(Total 20 marks)


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Question # 4

Piyano Ltd makes and sells three types of home appliances for which the following budget/standard
information is available for the previous period:

Sales Revenue Costs Profit
Units $ $ $
TV 800 16,000 12,000 4,000
DVD 600 24,000 22,200 1,800
AC 300 18,000 16,800 1,200

Actual sales were 560 units of TV, 1,260 units of DVD and 250 units of AC. Company managements are
able to control the relative sales of each product through the allocation of sales effort, advertising and
sales promotion expenses.

Required

(a) Calculate the sales volume variances, the sales mix variances and the sales quantity variances
for the three products. (6 marks)

(b) Comment on the likely reasons for the variances in part (a). (4 marks)

(c) The company is also considering the launch of a new product, Microwave Oven, and has provided you
with the following information:

Microwave Oven Standard cost per box
$
Variable cost 6.20
Fixed cost 1.60
------
Total cost 7.80


Market research forecast of demand

Selling price ($) 12 11 10 9
Demand (boxes) 6,000 7,200 11,200 13,400

The company only has enough production capacity to make 7,000 boxes. However, it would be possible
to purchase Microwave Oven from a sub-contractor at $7.75 per box for orders up to 5,000 boxes, and $7
per box if the orders exceed 5,000 boxes.

Required:

Prepare and present a computation that illustrates which price should be selected in order to
maximise profits. (5 marks)

(d) Explain the meaning of the term environmental management accounting, and illustrate how it
can help managers to manage environmental costs more effectively. (5 marks)

(Total 20 marks)





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Question # 5

Metallica Ltd manufactures and sells computers. It is investigating the financial viability of a new product
the Leaf. The Leaf is a laptop computer and, if launched, it will be the thinnest laptop available on the
market. Initial design, development, production set-up and marketing costs have been significant.
However, if the product is launched, direct labour costs will decrease over time. The product is only
expected to have a life of 18 months, due to the highly competitive and fast moving nature of the industry.

The following estimated information is available for the Leaf:

1. Sales should be 1,400 units in the 18 month period. The company establishes the selling price by
calculating the cost per unit and adding a 25% mark-up.

2. A 75% learning curve will apply for the first 900 units after which a steady state production time will
apply. The labour time per unit after the first 900 units will be equal to the time for the 900th unit. The cost
of the first unit was measured at $5,000. This was for 500 hours at $10 per hour.

3. The variable overhead is estimated at $3 per labour hour.

4. Direct material will be $600 per unit for the first 300 units produced. The second 300 units will cost 80%
of the cost per unit of the first 300 units. All units from then on will cost 80% of the unit cost for each of the
second 300 units.

5. The Leaf will require additional machines and factory space to be rented, at a fixed cost of $11,000 per
month.

Note: The learning curve formula is given on the formulae sheet. At the learning rate of 0.75
(75%), the learning factor (b) is equal to -0.4150.

Required:

(a) Explain the impact of the learning effect on budgeting in Metallica Ltd. (2 marks)

(b) What is the minimum price per unit that the company should quote for each Leaf?
Ignore any design, development, set-up and marketing costs. (10 marks)

(c) Discuss the relevance of the learning curve in a modern manufacturing environment, such as
that found in Metallica Ltd. (4 marks)

(d) Discuss how life cycle costing could be applied to Metallica Ltd. (4 marks)

(Total: 20 marks)