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F5 Performance Management Mock 1 Session: Dec 2012

Time allowed: Reading and Planning: Writing: 15 minutes 3 hours

All five questions are compulsory and must be attempted Total Marks: 100

1. Montreal Ltd Montreal Ltd. manufactures firelighters under contract for a major supermarket chain. Under the contract Montreal receives a price of $1.70 per kilogram. The company normally produces 30,000 kilograms of firelighters for the supermarket chain each month, but it occasionally varies this quantity slightly if asked to do so. Montreal operates a standard absorption costing system. Fixed production overheads are budgeted at $9,600 per month. The standards for the direct materials required to produce a kilogram of firelighters are as follows: Direct Material Type A 0.6 kg @ $0.25 per kilogram Direct Material Type B 0.45 kg @ $0.40 per kilogram Direct Material Type C 0.15 kg @ $0.80 per kilogram The only other cost is a cardboard packaging box, which Montreal purchases from a subcontractor at an agreed price of $0.05 per kilogram of firelighters sold. During January 2007 actual activity was as follows: Montreal Ltd. produced 31,000 kilograms of firelighters and supplied them to the supermarket chain at the agreed price of $1.70 per kilogram. Fixed overheads amounted to $11,520. Direct materials purchased and used in production were: Direct Material Type A: 16,700 kg @ $0.25 per kilogram Direct Material Type B: 11,900 kg @ $0.42 per kilogram Direct Material Type C: 3,800 kg @ $0.80 per kilogram Cardboard packaging boxes were purchased at standard cost. REQUIRED: (a) Calculate the standard profit per kilogram of firelighters, and the companys total budget and actual profits for January 2007. (3 marks) (b) Calculate the following variances and use them to reconcile the companys total budget and actual profits for January: (i) (ii) (iii) Direct materials price, mix and yield variances. Fixed overhead volume and expenditure variances. Sales volume variance. (12 marks)

(c) The management accountant of Montreal Ltd. has stated: In interpreting these variances, we need to bear in mind that we carried out major preventive maintenance work on our production equipment at the beginning of January, and this greatly improved its efficiency in converting direct materials into finished product. (i) (ii) Discuss whether the variances which you have calculated in answer to part (b) support this view. (3 marks) Briefly explain any changes which may be required to the company's standard costing system in consequence. (2 marks) (20 marks)

2. PHARAOH Pharaoh Ltd manufactures and sells three products with the following selling prices and variable costs: Sphinx /unit 3.00 1.20 Pyramid /unit 2.45 1.67 Mummy /unit 4.00 2.60

Selling price Variable cost

The company is considering expenditure on advertising and promotion of the Sphinx. It is hoped that such expenditure, together with a reduction in the selling price of the product, would increase sales. Existing annual sales volume of the three products is: Sphinx 460,000 units Pyramid 1,000,000 units Mummy 380,000 units If 60,000 per annum was to be invested in advertising and sales promotion, sales of Sphinx at reduced selling prices would be expected to be: 590,000 units at 2.75 per unit or 650,000 units at 2.55 per unit Annual fixed costs are currently 1,710,000 per annum. Required: (a) Calculate the current breakeven sales revenue of the business. (4 mark) (b) Draw a multi-product profit/volume graph assuming that the advertising and sales promotion does not go ahead. (10 marks) (c) Advise the management of Pharaoh Ltd as to whether the expenditure onadvertising and promotion, together with selling price reduction, should be introduced on Sphinx. (6 marks) (Total: 20 marks)

3. Culture Centre Tauranga is a rapidly expanding coastal town of about 100,000 people. The city has a wide number of leisure facilities including a multiplex cinema and a new culture centre which combines a museum and an art gallery. The multiplex cinema (Big Screen) is a profit oriented and privately owned firm. The culture centre is publicly funded and managed, and is non-profit seeking. The culture centre was built after considerable delays caused by opposition from local tax payer groups. Income and Expenditure accounts for the last year were as follows: Culture Centre $000 Income: Grants Ticket Sales Sponsorship Sales of refreshments Total Less: Staff Cost Maintenance and repairs Fees to artists/film distributions 125 Operating Costs Net Interest Total Costs Operating surplus Other information of last year: Culture Centre Visit per year Average visits per local resident Artists shown/ films shown Opening times Open days 125,000 0.6 15 9am to 5pm Monday Saturday 255 days Big Screen 200,000 1.5 65 10am to midnight Everyday 363 days 1000 0 200 126 1326 532 50 350 384 135 (1226) 100 65 412 (1156) 258 312 15 $000 Big Screen $000 0 700 58 654 1412 $000

Number of Staff Annual Salary ($000) 100 80 60 40 20 Culture Centre 1 1 1 20 5 Big Screen 1 1 0 0 20

Required: (a) What are the problems faced by the Culture Centre when measuring its performance? (10 marks) (b) Comment on how the Culture Centre could measure the Value for money of its service provision for the year. Calculate appropriate performance measures that the Culture Centre could use and contrast with Big Screen. (10 marks) (Total: 20 marks)

4. MOC MOC makes and sells two types of executive games, Metropolis and Hedge Your Bets. The company currently has a monopoly for both games. This factor combined with the high quality of the games and the luxury brand image has resulted in MOC being able to charge high prices for each of the games. The management accountant is considering increasing the price for the Metropolis game and has produced the following information: At the current selling price of $55 per game, weekly sales of the Metropolis are 900 units. If the price is increased to $70 per game, weekly demand for the Metropolis will fall to750 units. The Hedge Your Bets game is sold in two distinct markets. The management accountant believes that there should be price discrimination. The price is currently $80 per game in either market. Required: (a) Explain the term price-discrimination and discuss the conditions that are necessary for the successful operation of this pricing strategy. (4 marks) (b) Find the linear relationship between price (P) and quantity demanded (Q) for the Metropolis game. (3 marks) (c) Calculate the price elasticity of demand (PED) for the Metropolis and comment onwhether the revenue will increase or decrease if the price is increased from $55 to $70 per game. (3 marks) (d) Explain how the pricing strategy may change if new competitors enter the market. Include, as part of your answer, a discussion of the different pricing strategies that may be implemented by MOC or its competitors. (10 marks) (Total: 20 marks)

5. AME AME has three product lines P1, P2 and P3. Since its creation the company has been using a single direct labour cost percentage to assign overhead costs to products. Despite P3, a relatively new line, attracting additional business, increasing overheads costs and a loss of market share, particularly for P2, a major product, have convinced management that the costing system is in need of some development. A team spent several weeks collecting data (see table below) for the different activities and products. For accounting period in question, given in the tables below is data on AME's three products lines and overhead costs: P1 Production volume Direct labour cost per unit Material cost per unit Selling price per unit Materials movements (in total) Machine hour per unit Set ups (in total) Proportion of engineering work Orders packed (in total) Activities Material handling and receiving Machine maintenance and depreciation Set up labour Engineering Packing Total Required (a) Calculate the overhead rate and the product unit costs under existing costing system.(4 marks) (b) Identify for each overhead activity, an appropriate cost driver from the information supplied and then calculate the product unit costs using a system that assigns overheads on the basis of the use of activities. (9 marks) (c) Comment on the results of the two costing systems in (a) and (b). (7 marks) 7500 units $4 $18 $47 4 0.5 1 30% 1 P2 12,500 units $8 $25 $80 25 0.5 5 20% 7 Overhead cost ($) 150,000 390,000 18,688 100,000 60,000 718,688 P3 4,000 units $6.4 $16 $68 50 0.2 10 50% 22

(Total 20 marks)

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