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Performance Management F5PM-MK1-Z16-A Answers & Marking Scheme

©2016 DeVry/Becker Educational Development Corp.

®

Mock One

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©2016 DeVry/Becker Educational Development Corp. All rights reserved. 2

Question Answer Mark Question Answer Mark

Section A Section B

1 D 16 A

2 C 17 A

3 C 18 A

4 A 19 C

5 D 20 C

6 D 21 D

7 C 22 B

8 D 23 D

9 B 24 B

10 B 25 A

11 A 26 A

12 A 27 C

13 A 28 A

14 B 29 D

15 C 30 B

TOTAL

× 2 = %

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Section A

Item Answer Justification

1 D Selling price $23·50 Estimated costs: Less 20% margin $4·70 Materials $10·45 ––––––– Target cost $18·80 Labour ($64 ÷ 20) $3·20 Variable overheads ($82 ÷ 20) $4·10 Fixed costs ($680,000 ÷ 200,000) $3·40 –––––– Reduction required $2·35 Total cost $21·15 ––––––

2 C (3) and (4) are the categories where the metal is wasted irrecoverably. The company would be happy to increase (2) by recycling more of the waste metal.

3 C $80 – ($10,000,000 × 15% ÷ 100,000) = $65

4 A The opportunity cost is the benefit foregone by choosing a particular option, instead of the next best option. (B = differential cost; C = committed cost; D = notional cost.)

5 D Margin of safety = Budgeted sales – breakeven sales

Breakeven sales = Fixed cost ÷ contribution per unit Contribution per unit = Profit per unit + fixed cost per unit Fixed cost per unit = 65,000 ÷ 20,000 = 3.25 ⇒ contribution per unit = 8.6 ⇒ Breakeven point = 65,000 ÷ 8.6 = 7,558 units

⇒ Margin of safety = 20,000 – 7558 = 12,442

6 D Placing a ruler on the dotted line and moving it parallel to the right shows that the last point in the feasible region is where the line for constraint (1) meets the x-axis.

7 C The maximin decision rule seeks to maximise the minimum payoff from the possible outcomes. In this case the minimum outcome for each project arises if market demand is weak. The highest outcome in the event of weak demand is the $47,000 result from project C.

8 D Total time for the first 16 items 200.45 Total time for the first15 items 190.79 ––––– Time for the sixteenth unit 9.66 _____

WORKING

Using formula y =axb with a = 24 and b= −0.2344653 When x = 16, y = 12.528. This is the cumulative average time for the first 16 ⇒ total time for first 16 = 200.45 When x = 15, y = 12.719 ⇒ total time for first 15 = 190.79

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9 B 10,000 litres of input should yield (90%) 9,000 litres Actual output 9,100 litres –––––– Surplus 100 litres Standard cost of 1 litre (58.5 ÷ 9) $6.5 –––––– Yield variance (favourable) $650 ––––––

10 B The “3Es” are economy, efficiency and effectiveness.

11 A Head office costs are not deducted because they do not relate directly to the division.

12 A ROI – the manager would accept the project if ROI is greater than the target of 18%. The ROI of the project is 19% (153,900 ÷ 810,000) so would be accepted.

Residual income – the project will be accepted as this is positive:

Profit of the project 153,900 Imputed interest (810,000 × 16%) 129,600 ––––––– Residual income 24,300 –––––––

13 A

14 B A throughput accounting approach assumes that materials are the only variable costs. Consequently the contribution is different to that calculated using the traditional method.

W X Y Contribution per unit $ 139 130 120 Bottleneck minutes 7 10 7 Contribution per minute 19·9 13 17·1 Rank

15 C Fixed cost per unit ($33) × volume (50,000) = Total fixed costs ($1·65m)

Contribution per unit = $80 Thus, breakeven volume = $1·65m ÷ $80 = 20,625 units

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Section B

Item Answer Justification

16 A Total cost of Car X using absorption costing:

$ Variable cost per unit 30,000 Absorbed fixed costs: (200 hours 37.17) 7,434 –––––– Total absorption cost 37,434 –––––– WORKING Hours $ Budgeted fixed production overhead 26,020,000 Budgeted machine hours: Car X: 220,000 Car Y: 480,000 ––––––– 700,000 –––––––––– Fixed overhead per machine hour 37.17 ––––––––––

17 A Car X Car Y Production (units) 1,100 1,600 Number of cars per production run 10 40 ––––– ––––– Number of production runs 110 40 Inspections per production run 20 80 ––––– ––––– Number of inspections 2,200 3,200

⇒ Cost per inspection = 3,200 2,200

000,020,7

= $1,300

18 A Setup cost per unit = $3,200,000 (W) ÷ 1,600 = $2,000.

WORKING Car X Car Y Production (units) 1,100 1,600 Number of cars per setup 10 40 –––– –––– Number of production runs 110 40

⇒ Setup costs per production run = 40110

000,000,12

= 80,000

Apportioned to Car Y = 40 Setups × 80,000 = $3,200,000.

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19 C Statements (2), (3) and (4) are correct.

When using absorption costing, all overhead costs were apportioned between the two products based on machine hours. The portion of overheads apportioned to Car Y was 480,000 ÷ 700,000 = 68.6%. Although absorption costing does not split the overhead costs into the three activities, in effect, 68.6% of the costs of all activities are apportioned to Car Y.

In using activity based costing:

(1) Machine costs are apportioned using machine hours; therefore the same portion of machine costs are apportioned to Car Y using activity based costing. Statement (1) is NOT true.

(2) Car Y uses 40 setups from a total of 150. This represents 26.7% of total setup costs, so is lower than the costs apportioned under absorption costing. Statement (2) is true.

(3) Car Y uses 3,200 inspections from a total of 5,400, being 59.2%. This is lower than the 68.6% apportioned under absorption costing.

(4) Statement (4) is correct. Generally activity based costing better reflects the costs of the activities used to make a product than absorption costing.

20 C Actions (2), (4) and (5) would reduce the cost per unit.

(1) reducing the number of cars per production run would increase the number of setups, thus increasing the setup costs. (3) would increase the cost per unit.

21 D Actual sales at actual price 385,000 Actual sales at standard price (13,000 × 30(W)) 390,000 ––––––– Sales price variance 5,000 (adverse) –––––––

WORKING

Standard price based on budget is 000,12

000,360 = $30 per unit

22 B Flexed budgeted contribution:

Budgeted selling price = 000,12

000,360 $30 per unit.

Budgeted variable production costs = 000,14

42,000+140,000+70,000 = $18 per unit

⇒ Budgeted contribution per unit $12 per unit. ⇒ Flexed budget contribution = 13,000 × 12 = 156,000.

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23 D (1) is incorrect. The difference between the flexed budget and actual would give a variance that is the sum of the material price and usage.

(2) is incorrect. The standard material cost per unit is $5, so the standard cost of actual production is 67,500. Actual material costs were $69,000, so some of the difference between budget and actual is due to either price or usage (or both).

(3) and (4) are correct.

24 B Incremental budgeting means starting with previous years budgets and adjusting them with incremental items such as inflation.

25 A (3) If there is not a high level of trust, bottom up budgeting would be less appropriate as managers might attempt to make budgets easier to achieve (e.g. by adding budgetary slack).

(5) If there is a high degree of dependency, the departments’ budgets will need to be coordinated with each other. This is more easily achieved with top down budgeting.

26 A Tutorial note: The approach to maximising profit, in the situation of limited factors is to maximise contribution per unit of limited factor. In this case, the limited factor is labour hours, so the approach is to maximise contribution per hour of labour:

PN BE $ per batch $ per batch Selling price 450 270 Materials 190 177 Labour 90 30 Variable overheads 30 10 ––––– ––––– Contribution per batch 140 53 Labour hours per batch 3 1 ––––– ––––– Contribution per labour hour 46.7 53 ––––– –––––

Therefore the preferred product, BE, will be produced to the maximum weekly demand (400); followed by PN.

Tutorial note: The optimal production plan with 1,000 labour hours is to produce 400 batches of BE in 400 hours and 200 batches of PN (i.e. 600 ÷ 3) in the remaining 600 hours.

27 C Normal hourly rate + shadow price = $30 + $46.7 = $76.70

Tutorial note: The shadow price of a scarce resource is the amount by which contribution would increase if one additional unit of scarce resource becomes available. Thus it is the maximum amount above the normal price that a business would be prepared to pay for additional units of the resource.

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28 A TPAR = (W2)hour factory per Cost

(W1)hour factory per Return =

2.60

7.46= 0.78

WORKINGS

(1) Return per factory hour per batch of PN $ Selling price 450 Materials 190 –––– Throughput contribution per batch 140 Labour hours per batch 3 –––– Return per factory hour 46.7 –––– (2) Cost per factory hour $ Total labour cost (1,000 × 30) 30,000 Variable overheads (1,000 × 10) 10,000 Fixed costs (Based on budgeted quantities) (40 × 250) + (30 × 340) 20,200 –––––– Total fixed costs per week 60,200 ––––––

⇒ Fixed cost per factory hour (60,200 ÷ 1,000) 60.20

29 D (3), (4) and (5) could improve TPAR.

(1) Would most likely lead to higher cost of materials, so would reduce the throughput return per hour and therefore TPAR.

(2) Would reduce the throughput return per unit. The number of units sold could not be increased because output is constrained by the bottleneck – in this case labour hours.

(3) Would increase throughput as labour is the bottleneck, so this would lead to better use of the bottleneck.

(4) Reducing fixed costs would reduce the factory costs per hour, thus increasing TPAR.

(5) Automating some tasks would increase output of labour thereby reducing the labour time per unit. Since labour is the bottleneck, this would increase throughput return per unit (by reducing labour time per unit).

30 B This is the meaning of slack.

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Section C

31 BORO

(a) Maximum price acceptable to Boro

Tutorial note: The maximum transfer price that Boro would be prepared to accept for 2 kg of special ingredient Z is the “net revenue” from sales of the Madison (i.e. revenues less costs before deducting the transfer price). This is calculated as follows:

$ Selling price per unit (per Q) 115 Less: Raw material costs (2 × 8.5) (17) Other variable costs (60% × 115) (69) –––– Net revenue 29 ––––

This net revenue applies to 2 kg of special ingredient Z. So the maximum price that Boro would be prepared to pay for 1 kg of special ingredient Z would be $14.50 (i.e. ½ × $29).

(b) Minimum transfer price acceptable to Magpie

(i) Magpie has unused capacity to make 4,000 kg of Z

The basic rule that applies in all cases is that the minimum transfer price acceptable to the selling division is the marginal cost of making the transfer plus the opportunity cost.

In this situation Magpie has no alternative opportunity for 4,000 kg of its production of special ingredient Z, so there is no opportunity cost. It should, therefore, offer to transfer this quantity at marginal cost.

Based on the information given in the question about the external price charged by Magpie for ingredient X, we can work backwards to find the marginal cost as follows:

$ External market price 15 Total cost (15 × 100/125) 12 Variable portion (75% × 12) 9 Less savings on internal transfers (1.5) –––– Marginal cost of internal transfers 7.5 –––– The minimum transfer price applicable in this case would be the marginal cost of $7.5 per kg of material Z.

Marks

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(ii) Magpie has an external market for all of its output of special ingredient Z

Where Magpie has an external market, the opportunity cost equals the lost contribution from selling externally. This is as follows: $ Selling price 15 Less variable costs 9 –––– Contribution per unit 6 ––––

The minimum transfer price = marginal cost plus opportunity cost. Marginal cost is $7.5 per kilo (see part (i))

= $7.5 + 6 = $13.5.

Tutorial comment: This can be looked at in a different way: Since Magpie has an external market which is the opportunity foregone, the relevant transfer price would be the external selling price of $15 per kg. This will be adjusted to allow for the $1.50 per kg avoided on internal transfers due to packing costs not required:

The minimum transfer price would be $15 – $ 1.50 = $13.50 per kg.

(iii) Magpie has an alternative use for 2,000 kg of capacity

Magpie has an alternative use for the first 2,000 kg of special ingredient Z production capacity which will yield a contribution of $6,000.

The balance of its spare capacity (2,000 kg) has no opportunity cost and should still be offered at marginal cost.

Magpie should therefore offer to transfer:

2,000 kg at $7.50 + $3 = $10.50 per kg 2,000 kg at $7.50 per kg.

(c) Behavioural implications if Magpie insists on a transfer price of $15

(i) How decision will be affected

If Magpie were to charge more than $14.5 per kg, Boro would make a loss on producing the Madison therefore Boro will not accept a price greater than $14.5 per kilo. If Magpie insists of a price of $15 therefore, Boro will not buy the ingredient and will not be able to make the new product.

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(ii) Impact on group profit

In this case the managers are acting in a manner which is not beneficial to the organisation as a whole. There will be a cost to the business of this decision as follows:

$ Lost revenue from sales of new product (2,000 units × $115) (230,000) Saved costs: Boro – variable costs (2000 × $86) 172,000 Magpie – marginal cost of 4,000 kg of Z (4,000 × 7.5) 30,000

__________

Lost contribution to the group (28,000)

__________

Tutorial note: Boro’s management decided not to make the new product as the transfer price proposed by Magpie was too high. The impact on group profits is calculated by determining the relevant cash flows of that decision. These are:

1. The revenue that Boro would have made from selling the product – this is lost.

2. The variable costs that will be saved by Boro since it will not make the product.

3. The marginal costs that will be saved by Magpie not producing the 4,000 kg of Z which would have been needed for the new product.

4. The opportunity cost that will be saved by Magpie since it will be able to use all its capacity to meet external demand for its products. However, in this case there would have been no opportunity cost since Magpie has spare capacity so could have supplied Boro in full without losing any external sales.

32 GTK CO

(a) Calculation of selling price variance and sales volume variance

Sales price variance = (12.48 – 12.36) 32,000 = $3,840 (A)

Sales volume variance = (30,000 – 32,000) 8.28 = $16,560 (F)

Reconciliation of actual to budgeted contribution

$ Budgeted contribution (30,000 8.28) 248,400 Less sales price variance (3,840) Add sales volume variance 16,560 ––––––– Actual contribution (32,000 12.36 – 4.2) 261,120 –––––––

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(b) Planning and operational variances

Planning selling price variance

$ Actual quantity × original standard price (32,000 12.48) 399,360 Actual quantity × revised standard price (32,000 12.18) 389,760 ––––––– Planning price variance (adverse) 9,600 –––––––

Operational price variance $ Actual quantity actual price (32,000 × 12.36) 395,520 Actual quantity (revised) standard price (32,000 12.18) 389,760 ––––––– Operational price variance (favourable) 5,760 –––––––

Tutorial note: The sum of the operational and planning price variances is $3,840 adverse. This is the same as the price variance calculated in part (a).

(c) Performance of the sales department

The sales volume variance is favourable. This is because the sales department sold more headphones than budgeted, which results in higher contribution.

The price variance was adverse which implies that the higher volume was achieved by selling at a lower price than standard. However, the effect on contribution of the two variances was favourable.

The planning sales price variance simply shows the impact on budgeted profit of revising the standard selling price. In this case the selling price was revised downwards, which would result in a lower contribution.

The operating price variance compares the actual price achieved with the revised standard price. Since the standard price was revised, it should provide a more relevant target than the original standard. The operating price variance is therefore a better measure of performance of the sales team than the price variance based on the original standard. The operating price variance is favourable, showing that the price achieved was higher than expected.

Overall, the sales department appears to have performed well. It has achieved a higher sales volume than expected, as reflected in the sales volume variance, and has also managed to obtain higher prices than expected.

Before reaching any conclusions, it would be useful to know the basis used to plan the budgeted output. The scenario indicates that the market for headphones is growing rapidly. Given this fact, it would be useful to know if the actual market for headphones grew by more than expected. If this is the case, it may not be entirely fair to congratulate the sales team on doing a good job if the market was better than expected. Budgeted market share and actual market share achieved would provide better information to assess this.

Tutorial note: Other relevant comments would also gain credit.

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(d) Principles in deciding whether to revise a standard

The purpose of having a standard cost is so that actual performance can be compared against an appropriate target and any deviations from the target can be investigated by means of variances to identify where performance has not been as expected.

Variances should reflect only factors within the control of the person whose performance is being judged. If factors occurred outside of the control of these persons that meant the standard could not be achieved, then the standard should be revised to take account of these. Examples include changes in market price of inputs and changes in operating environment that are outside the scope of the manager.

Standards may also be revised when it turns out that the original standard was unrealistic. For example, when a standard is set for a new process and the assumptions on which the standard was based turn out to be incorrect.

Standards should not be revised to change the reported variances, for example to hide inefficiencies. There is a danger that when standards are revised “because the original standard was unrealistic” that in reality the standard was fine; the actual performance was poor and the manager is trying to pass this off as a planning issue. In practice, judgement will often be required to decide whether or not a proposed revision of a standard should be allowed.

Revisions to standards should be subject to appropriate procedures relating to authorisation. A senior member of the management team should authorise any proposed changes.

Tutorial note: Marks would be given for other relevant comments.

(e) Request of production manager

The production manager has requested that the standard be revised to take into account a pay rise given to the workers above the expected pay rise when the standard was set.

It could be argued that the standard provided a guide to the production manager about the acceptable level of pay rises. The higher than expected pay rise was a decision of the production manager. Since this was within his control (he chose to ignore the standard, rather than being forced to do so), the standard should not be revised. The higher pay rise was an operational decision and should be reflected in the operational variance.

On the other hand, the production manager argued that the staff were demotivated. Perhaps the original pay rise was unrealistic. As such, there is an argument that the standard should be revised to a more realistic level.

In my opinion, the standard should not be revised. The pay rise was an operational decision. If staff really have been motivated by the pay rise, this may be reflected in the labour efficiency variance, which would be favourable.

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Marking Scheme

Marks Marks

31 BORO

See marking guide against the solution 20 ––– 32 GTK CO

(a) Calculation of sales price variance 1 Calculation of volume variance 1 Reconciliation of actual tobudgeted contribution 1 Actual contribution 1 ––– 4 (b) Calculation of planning price variance 2 Calculation of operational price variance 2 ––– 4 (c) Comments on performance 1 mark per valid comment max 4 (d) Principles of revision to standard Up to 2 marks per principle max 4 (e) Arguments for and against revision to standard Up to 2 marks for valid argument in favour 2 Up to 2 marks for valid argument against 2 Justified conclusion 1 ––– max 4 ––– 20 –––

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oolMOCK EXAM FEEDBACK SUMMARY – PAPER F5 MOCK 1 SECTION C


Q Part Topic Study Text ref

RQB coverage

Commentary

31 (a) Transfer pricing

17 Q81 Business Solutions

This question required the calculation of the maximum price that would be acceptable to a buying division. Few candidates were aware that the maximum price should be the lower of the external market price (none in this question) and the net revenue of the buying division.

(b) This required the calculation of the minimum transfer price from the perspective of the supplying division under three situations. This required candidates to apply the rule that the minimum price is the marginal cost of production plus the opportunity cost. Candidates performed well in the first two situations, where the opportunity cost related to sales of the same product externally, but found the third situation more challenging, where opportunity cost related to sales of a different product. Students need to just apply the same principle, which is to calculate the opportunity cost.

(c) This required candidates to explain the decisions that would be made by the buying division manager and the effect on group profits if the selling division insisted on a selling price higher than the net revenue of the selling division. Most candidates could identify that the buying division would not trade, but few candidates could calculate the impact this would have on profits. A good piece of advice is to remember that this is really a relevant costing question, where candidates are required to compare the relevant costs and benefits of not trading with those of trading.

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oolMOCK EXAM FEEDBACK SUMMARY – PAPER F5 MOCK 1 SECTION C


Q Part Topic Study Text ref

RQB coverage

Commentary

32 (a) & (b) Planning variances relating to sales price

13 61 Spike Co

The first two parts required calculation of basic sales variances and then analysing the sales price variance into planning and operational. The majority of students were able to calculate these variances correctly. While the preferred approach is to value the price variances using actual sales, credit would be given for candidates who used budgeted sales.

(c) Planning variances

This required and explanation of the variances. This part was done poorly by many candidates, who simply described the calculation of the variances. A good answer should look at the factors behind the numbers, such as the volume variance reflecting higher demand than expected, probably due to the actual sales price being lower than budget.

(d) & (e) Revision of budgets and standards

This required a discussion of the principles that should be applied when deciding whether to revise a standard (part (d)) and then a discussion of whether a particular standard should be revised. Answers to these two parts were very thin, reflecting students’ dislike of discussion questions. This was a shame because part (d) provided four easy marks for simply reciting theory. A good answer to part (e) would have mentioned both arguments in favour of, and arguments against a revision before reaching a final conclusion. Many candidates preferred to merely write a conclusion with no justification.

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