First Intuition - MA - PM Q&A - Final PDF

Course Notes 2015
ACCA
Paper F2
Management Accounting
Tutor details
2 Introduction AC C A F2
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© First Intuition Publishing Ltd, 2015

AC C A F 2 Introduction 3
Contents
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Introduction 1
1 Course structure 5
2 Course materials 5
3 Qualification structure 6
4 The exam 6
5 Question types 7
6 Exam tips 7
7 How to study F2 8
8 Study planner 9
1: Nature, source and purpose of management information 11
1 Accounting for management 11

2 Sources of data 13
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3 Cost classification 15
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4 Presenting information 24
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2: Cost accounting techniques 31
1 Accounting for material, labour and overheads

2 Absorption and marginal costing ntu ght 31
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3 Cost accounting methods
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4 Alternative cost accounting 67
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3: Budgeting 71
1 Nature and purpose of budgeting 71

2 Statistical techniques 73
3 Budget preparation 86
4 Flexible budgets 93
5 Capital budgeting and discounted cash flows 94
6 Budgetary control and reporting 106
7 Behavioural aspects of budgeting 109
4: Standard costing 113
1 Standard costing systems 113

2 Variance calculations and analysis 114
3 Reconciliation of budgeted and actual profit 121
5: Performance measurement 125
1 Performance measurement overview 125

2 Performance measurement – application 127
3 Cost reductions and value enhancement 137
4 Monitoring performance and reporting 138
Solutions to lecture examples 141
Chapter 1 141
Chapter 2 142
Chapter 3 152
Chapter 4 160
Chapter 5 163
Formulae sheets 165
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1 Course structure
Home Study Introduction – How to Study F2
To get off to the best possible start, we recommend you contact your tutor once you have received
your study materials. Your tutor will explain how to tackle your studies and get you started on your
first Study Session.
If you prefer to get started straight away you should read “How to Study F2” below.
Study sessions
This study guide breaks down the syllabus into manageable study sessions, following the syllabus, and
numbered in accordance with the chapters in the Study notes. We tell you which chapters to read, and
then which questions to attempt from the Question Bank.
It is not enough just to read the study notes. You must practise questions from the Question Bank as
recommended in each study session. The questions in the Question Bank are the same style as those
in the real exam and will give you exposure to all the possible pitfalls.
It is better to attempt them as you go along, when the subject matter is fresh in your mind. You should
check your answers with the answers and make sure you understand the suggested answer for any
questions you get wrong.
Revision sessions
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When you have completed all the study sessions you should spend some time revising the core topics
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When you are getting most of these right you are ready to attempt the Mock exam. If at all possible
you should attempt this under real exam conditions, i.e. to the correct time and with no distractions.
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You can always come and sit your exam at First Intuition – just call your tutor to arrange a convenient
time.
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When you have completed the Mock you should check your answers. Make a note of any you get
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wrong and look at the model solution where given. If you still have any problems call your tutor or
come and see us for some final advice. If you score at least 60% in the Mock then you should be ready
to take the real exam.
2 Course materials
You will receive the following:
 First Intuition study notes
 First Intuition Question Bank
 Passcards*
 Online Study Text (in conjunction with Kaplan EN-Gage)
*produced by BPP Learning Media
3 Qualification structure
The ACCA qualification is structured as follows.
Fundamentals Level Knowledge F1 AB The Accountant in Business

Module F2 MA Management Accounting
F3 FA Financial Accounting
Fundamentals Level Skills Module F4 CL Corporate Law
F5 PM Performance Management
F6 TX Taxation
F7 FR Financial Reporting
F8 AA Audit & Assurance
F9 FM Financial Management
Professional Level Essentials Module P1 PA Professional Accountant
P2 CR Corporate Reporting
P3 BA Business Analysis
Professional Level Options Module P4 AFM Advanced Financial Management
(any two of these papers) P5 APM Advanced Performance Management
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P6 ATX Advanced Taxation
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All papers are compulsory unless you gain exemptions from a relevant qualification. The modules must
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be attempted in the correct order, though you can sit the papers in any order. A maximum of four
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papers can be taken in any one exam sitting. Exams are in June and December each year. The
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Knowledge Module subjects are examined by computer-based assessment and can be attempted at
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any time.
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4 The exam
F2 is a two-hour computer-based or paper based examination.
The paper is in two sections
 Section A contains 35 objective test questions. Each question is worth 2 marks (70 marks in
total)
 Section B contains 3 multi-task questions. Each question is worth 10 marks (30 marks in total).
Multi task questions are a new question type which is being introduced in 2014. This new
question type is explained more fully below.
All questions are compulsory.
The paper has a pass mark of 50%.
5 Question types
The F2 exam consists of the following types of question:
 Objective test (OT) –These are single, short, automatically marked questions.
 Multiple task questions (MTQ) – These questions contain a series of tasks which relate to one
or more scenarios.
The types of question that may be included are as follows:
OT MTQ
Multiple Choice You are required to choose one answer from a list of options  
by clicking on the appropriate radio button
Multiple Response You are required to select more than one response from the  
options provided by clicking the appropriate tick boxes
Multiple Response You are required to select a response to a number of related  
Matching statements by clicking on the radio button which
corresponds to the appropriate response for each statement
Number Entry You are required to key in a numerical response to the  
question
Gapfill You are required to enter answers into blank areas  
Hot Spot
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You are required to choose one or more answers by clicking  
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on the appropriate hotspot area/ areas on an image
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Each of the above types of question are included in the companion Question Bank. Examples of each
of the question types and how they are marked can also be found on the ACCA’s website at
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http://prezi.com/fcaqlmls7xm6/acca-f1-f3-exam-format-and-question-types-
showcase/?utm_campaign=share&utm_medium=copy.
Specimen exam
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The ACCA’s specimen exam reflecting the new exam formats and incorporating all question types, is
included in this Question Bank.
6 Exam tips
 Read the requirement very carefully. With calculation questions there are many opportunities
for your examiner to confuse you or try and catch you out. It will be very easy to arrive at a
result that is one of the options available.
 Manage your time. You have an average of 2 minutes and 24 seconds per question. Some will
take longer than others, particularly those that involve calculating a numerical answer. So if you
get stuck on a question, make a note of the question number and move on. If you have time at
the end of the exam you can go back and tackle the tricky questions
 You may be asked to choose one or more correct statements from a given list. Read each
statement carefully. If you are unsure about one or more of them, move on and deal with the
statements you do agree with. You may find the correct answer by process of elimination
without needing to revisit the statements you are unsure about. In any event you should
certainly be able to narrow down your choices.
 If you think you will run out of time, stop five minutes before the end and guess any remaining
answers – remember you have a one in four chance of getting those questions right which could
make the difference between a pass and a fail.
7 How to study F2
Plan your study time
Get your diary out and decide when, where and how often you want to study. If you followed a First
Intuition course you would receive a minimum of five full days tuition, and be expected to do
additional work at home. Studying on your own is harder and will take longer. You should expect to
spend at least 3 hours studying per week. On this basis it should take approximately two months to
learn the study material, then you should allow additional time for revision and final question practice.
Most students should be ready to take the exam 3 months after commencing their studies.
Set a target date for the exam

This is very important with computer-based exams. If you don’t set a target there is a danger that you
will spread your study time over too long a period, will lose momentum or simply not get around to
taking the exam. When you set your target bear in mind how you wish to progress through the
syllabus, as from paper F4 onwards you are tied to the paper-based exam sittings in June and
December. For example, if you wish to progress to the Skills level papers for a December sitting you
should complete your computer-based exams by 31 July.
Make the most out of your study sessions
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Try and complete each study session in one go so that you learn each topic in turn. Some sessions are
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longer than others, but make sure you take a break between sessions.
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Read the ACCA study guide at the start of each session so you know the learning outcomes for that
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particular session. Check the tutor tips for advice on how to tackle questions or which areas focus on.
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Then read the relevant chapter of the course notes.
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It is essential that you try the questions from the Question Bank where indicated. You will not pass
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the exam if you don’t attempt the questions. Check your answers and make sure you understand the
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workings for any that you get wrong. Often you will find that you got the wrong answer because you
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didn’t read the question properly – the examiner does like to try and catch you out! If you get stuck
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give your tutor a call and ask for advice.
Revision
You should attempt the additional question banks for each of the revision sessions as well as re-
reading the study notes. When you are getting at least half of the questions right you are ready to
attempt the Mock Exam. If you achieve at least 60% in the Mocks then you should be ready to attempt
the real exam.
The real exam

When are ready to attempt the real exam give us a call to arrange your CBE (or contact your nearest
CBE centre). We hold weekly exam sessions but will do our best to be flexible so you can sit the exam
at a time that suits you.
8 Study planner
Time (excluding Questions
No Subject questions) (Question Bank) Complete
Ch 1.1 Accounting for management 30mins Ch1 (Q1-Q9)
Overview only but some important
terminology
Ch 1.2 Sources of data 30mins Ch1 (Q10-Q17)
Basic section but be careful to distinguish
between the different types of sampling
Ch 1.3 Cost classification 120mins Ch1 (Q18-Q45)
Important section and pay particular attention
to cost behaviour and the high low technique
Ch 1.4 Presenting information 45mins Ch1 (Q46-Q71)
At this stage the different types of graph/chart
are the most important part of the section.
Ch 2.1 Accounting for materials, labour and
overheads
Materials – take care here with the EOQ 120mins Ch2 (Q1-Q36)
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model and inventory valuation techniques.
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Labour – the labour accounting entries are 45mins Ch2 (Q37-Q52)
quite popular for exams so go through
carefully.
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Overheads – A very important section and you
must take your time to understand this. The 120mins Ch2 (Q53-Q84)
steps of absorption costing are a must for
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exams.
Ch 2.2 Absorption and marginal costing 75mins Ch2 (Q85-Q103)
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Important concepts in here and take your
time with the reconciliation between
absorption costing and marginal costing
profits.
Ch 2.3 Cost accounting methods 180mins Ch2 (Q104-Q164)
The mechanics of process costing is the key to
this section so try to follow the examples
through one at a time as they generally build
up.
Ch 2.4 Alternative cost accounting principles 30mins Ch2 (Q165-Q170)
Nothing too much to worry about in this
section. Just read and absorb.
Ch 3.1 Nature and purpose of budgeting 20mins Ch3 (Q1-Q10)
A brief overview introducing some terms that
you will see later on in the course.
Ch 3.2 Statistical techniques 120mins Ch3 (Q11-Q38)
There are a few numerical concepts that are Long form
important in this section (regression, time questions (Ch3
series and index numbers) so go through the Q3)
examples with care.
Time (excluding Questions

No Subject questions) (Question Bank) Complete
Ch 3.3 Budget preparation 90mins Ch3 (Q39-Q55)
All important stuff in here, very popular in Long form
exams (particularly the functional budgets). questions (Ch3
Q2)
Ch 3.4 Flexible budgets 45mins Ch3 (Q56-Q64)
Fairly basic budget adjustment in here. Long form
questions (Ch3
Q6)
Ch 3.5 Capital budgeting and discounted cash flow 150mins Ch3 (Q65-Q110)
A critical section and the concepts of Long form
compounding and discounting are very questions (Ch3
relevant for the rest of your studies. Q4,Q5)
Ch 3.6 Budgetary control and reporting 60mins Ch3 (Q111-Q112)
A gentle introduction to basic variances.
Ch 3.7 Behavioural aspects of budgeting 20mins Ch3 (Q113-Q119)
Read and understand the terminology.
Ch 4.1 Standard costing system 20mins Ch4 (Q1-Q11)
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Learn the 4 main types of standard.
Ch 4.2
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Variance calculations and analysis
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120mins
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Very important to get the structure of the Ch4 (Q12-Q83)
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basic variances clear so spend a good amount Long form
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of time here. questions (Ch4
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Q2-Q6)
Ch 4.3
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Reconciliation of budgeted and actual profit 20mins Ch4 (Q84-Q85)
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Just brings together the variance calcs.
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Ch 5.1 Performance measurement – overview
Try to understand the basic framework for
objective setting from mission through to
20mins Ch5 (Q1-Q9)
detailed objectives.
Ch 5.2 Performance measurement – application 150mins Ch5 (Q10-Q67)
The financial and non-financial performance Long form
measures need to be known well and their questions (Ch5
uses clear. Lots of useful concepts in here and Q2-Q6)
although not difficult do require attention. ROI
and RI measures are useful for divisionalised
businesses.
Ch 5.3 Cost reductions and value enhancement 20mins Ch5 (Q68-Q69)
Fairly basic section.
Ch 5.4 Monitoring performance and reporting 20mins Ch5 (Q70-Q71)
A general clearing up section, nothing difficult
to worry about.
11
Nature, source and purpose

of management information
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1 Accounting for management
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(a)
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Describe the purpose and role of cost and management accounting within an organisation.
(b)
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Compare and contrast financial accounting with cost and management accounting.
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The purpose of cost and management accounting is to assist the management in running their
business to achieve its overall plans, make the correct decisions and to control the business.
Financial Accounting Management and Cost Accounting

 Required by law  Optional, organisations do not have to use
 Accurate (audited to prove accounts are it (although most do in some form)
accurate)  Information may be approximate
 More important to be accurate than  More important to be timely than accurate
timely  Can be produced for any segment of an
 Deals with a whole company/ organisation
organisation  There are no prescribed rules
 Has to comply with SSAPs, FRSs, etc i.e.  Can be for periods in the past, present or
items must be treated in certain ways future
 Historic i.e. all figures show what has  Produced when required
happened in the past  Prepared for management – INTERNAL
 Must be produced annually
 Prepared for many different
stakeholders, mostly EXTERNAL
12 1: Nature, source and purpose of management information AC C A F2
(c) Outline the managerial processes of planning, decision-making and control.

Planning
Identifying where the business would like to be, at some future point (often by setting
objectives or targets. Financial targets are known as budgets).
Decision-making
Making decisions to get the business from where it is now, to where it wants to be i.e. deciding
how to achieve the plan. Decisions on products and markets are key in this respect.
Control
Ensuring the decisions are implemented correctly and that the plan is actually fulfilled.
(d) Explain the difference between strategic, tactical and operational planning.
(Definitions produced by R N Anthony)
Strategic Planning
The process of deciding on objectives of the organisation, on changes in these objectives, on the
resources used to attain these objectives, and on the policies that are to govern the acquisition,
use and disposition of these resources i.e. setting long-term objectives.
Tactical Planning
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The process by which managers assure that resources are obtained and used effectively and
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efficiently in the accomplishment of the organisation’s objectives i.e. setting medium-term
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objectives.
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Operational Planning
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The process of assuring that specific tasks are carried out effectively and efficiently i.e. setting
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short-term objectives.
(e)
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Distinguish between data and information.
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Data is the raw unprocessed figures that have been collected about an activity or procedure e.g.
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the number of units made each day.
Information is processed data that is now in a form that makes it valuable to the user e.g. the
percentage increase in daily production.
There are a few other terms that you may come across in relation to data, as follows:
 Quantitative data – data that can be measured (how old are you?)
 Qualitative data – data that can’t be measured (how blue are your eyes?)
 Discrete data – values / observations are distinct and separate, i.e. they can be counted
(1,2,3,....). Examples might include the number of kittens in a litter; the number of
patients in a doctors’ surgery.
 Continuous data – values / observations belonging to it may take on any value within a
finite or infinite interval. You can count, order and measure continuous data. For
example, height, weight, temperature, the amount of sugar in an orange, the time
required to run a mile.
 Primary data – data that has been gathered for the specific purpose by yourself
(interviews, questionnaires etc).
 Secondary data – data gathered by someone else for another purpose that you are using
for your purpose. Examples include financial statements that you are using to base a
share investment decision on or government inflation statistics you are using to decide
on product price rises.
AC C A F 2 1 : Na t u r e , s o u r c e a n d p u r p o s e o f m a n a g e m e n t i n f o r m a t i o n 13
(f) Identify and explain the attributes of good information.

 Accurate = information should be precise enough to allow the appropriate decision to be
made;
 Complete = nothing important should be missing;
 Clear = the intended user must understand the information they have been given;
 User friendly = there should not be too much information, with all information being
relevant;
 Reliable = users must have confidence in the information;
 Accessible = the decision makers must be able to access the information they require;
 Timely = the availability of information should coincide with the decision being made;
 Effective = the information must be cost effective i.e. it must be more valuable than the
cost of producing it.
(g) Explain the limitations of management information in providing guidance for managerial
decision-making.
Management information will often be based on what has already happened (i.e. historic
information) and will often be internally generated. For decision making it is much more useful
to have information on what might happen in the future and part of this will depend on what is
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likely to happen in the external environment as well as internally.
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While it is possible for a management accountant to source relevant information it is unlikely to
be perfect and complete for decision-making purposes. This is where judgement of senior
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managers becomes important in decision making.
2 Sources of data
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(a) Describe sources of information from within and outside the organisation (including
government statistics, financial press, professional or trade associations, quotations and price
lists).
Internal sources
The main internal sources of information will be:
 Accounting system (sales, purchases, staff costs ...)
 HR records (staff pay levels)
 Marketing department (potential customers, advertising proposed...)
 Production department (output per machine, maintenance required per machine)
External sources
 Government statistics (employment levels, national imports and exports {Pink Book},
demographic trends {age, wealth etc}, financial data {inflation, interest rates, exchange
rates...})
 Financial press (daily information available on company and economic activity including
up to date exchange rates, interest rates, share prices etc)
 Trade publications (detailed data and information on an individual industry including
price levels and cost behaviour potentially)
 The internet (just about any information if you search well!!)
(b) Explain the uses and limitations of published information/data (including information from
the internet).
Published information can be very quick and relatively cheap to acquire however, one drawback
is that it has not been produced for the specific purpose that your company might need (i.e. it is
not tailored information). With the internet there is so much information available that there is
a danger of information overload.
Also, when gathering information from the internet care is needed to check the source of the
information as there is almost as much misinformation out there as there is information.
(c) Describe the impact of general economic environment on costs/revenue.
The general economic environment can have many impacts on a business’s costs and revenues
such as:
 Interest rates – These will impact the financing costs that companies face when
borrowing money.
 Exchange rates – These affect the relative prices of goods in two or more countries and this
can have a direct impact on sales revenues and costs if a business exports and imports.
 Fiscal policy – Government spending and taxation systems will impact the amount of
money that people have to spend so can affect company revenues.
 Inflation – If inflation is high then businesses are likely to see a rise in their cost base.
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(d) Explain sampling techniques (random, systematic, stratified, multistage, cluster and quota).
(e)
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Choose an appropriate sampling method in a specific situation. (Note: Derivation of random
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samples will not be examined.)
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Data may be gathered using sampling techniques, based on a sampling frame (numbered list of
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all items in the population). Approaches to sampling can be:
(i) Random – As the name suggests items are picked at random from the sampling frame
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(ii) Stratified random – In a stratified sample the sampling frame is divided into non-
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overlapping groups or strata, e.g. geographical areas, age-groups, genders. A random
sample is taken from each stratum.
(iii) Systematic – Every nth item in the sampling frame is taken for the sample.
(iv) Cluster – Cluster sampling divides the population into groups, or clusters. A number of
clusters are selected randomly to represent the population, and then all units within
selected clusters are included in the sample. No units from non-selected clusters are
included in the sample. For example, 10 schools from around the country may be taken
as representative of all schools. All students from within those schools are then sampled.
(v) Multistage – Multi-stage sampling is like cluster sampling, but involves selecting a sample
within each chosen cluster, rather than including all units in the cluster. Thus, multi-stage
sampling involves selecting a sample in at least two stages. In the first stage, large groups
or clusters are selected. These clusters are designed to contain more population units
than are required for the final sample.
In the second stage, population units are chosen from selected clusters to derive a final
sample. If more than two stages are used, the process of choosing population units
within clusters continues until the final sample is achieved. For example, initially you
might choose 10 schools in the first stage, then you decide for stage 2 to pick just girls
and finally for the third stage you pick 11-year olds to sample.
(vi) Quota – Sample of ‘x’ items is taken. There may be bias in the sample (e.g. consider the
street interviewer’s position).
3 Cost classification
(a) Explain and illustrate production and non-production costs.
Production costs are all costs incurred in actually producing the product or service e.g.
materials, labour, factory rent, warehousing.
Non-production costs are any cost which is not a production cost e.g. administrative, selling,
distribution and finance.
(b) Describe the different elements of production cost ─ materials, labour and overheads.
Production costs will potentially consist of the following:
 Materials costs e.g. motor, metal, any other material used in the production process
 Labour costs e.g. pay to the production line workers, supervisor’s salary
 Overheads costs e.g. fixed design fee, factory rent and power for the production line
(c) Describe the different elements of non-production cost – administrative, selling, distribution
and finance.
Non-production costs will potentially consist of the following:
 Administrative costs e.g. head office running costs
 Selling costs e.g. advertising campaign

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Distribution costs e.g. transport costs from the factory to the customer
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 Finance costs e.g. interest payments on borrowings
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(d) Explain the importance of the distinction between production and non-production costs when
valuing output and inventories.
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When valuing output and inventories we only include production costs.
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(e) Explain and illustrate with examples classifications used in the analysis of the product/service
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costs including by function, direct and indirect, fixed and variable, stepped fixed and semi
variable costs.
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(g) Describe and illustrate, graphically, different types of cost behaviour.
Direct costs are any cost directly incurred in the production of the product or service.
Direct costs could include direct materials e.g. a motor and metal
direct labour e.g. assembly workers who are paid for each unit
produced
direct expenses e.g. a hire of a machine for a particular job
The total of all of the direct costs are known as the PRIME COST.
Indirect costs are any cost which is not directly incurred in the production of the product or
service.
Indirect costs could include indirect materials e.g. pallets
indirect labour e.g. supervisor’s salary
indirect expenses e.g. factory rent and power for the production
line
Types of cost behaviour
Fixed costs
These are costs which do not change with the level of activity i.e. they vary with time rather than
production.
Total Cost/
cost unit
$ $
Level of
activity Level of
activity
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Stepped fixed costs
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These are costs which do not change with the level of activity up to a certain point, once the activity
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level exceeds this point they will increase, but then remain stable again until activity levels exceed
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another critical point.
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Total
cost
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Level of
activity
Variable costs
These are costs which do change with the level of activity (e.g. units produced).
Total Cost/
unit
cost
$
$
Level of Level of
activity activity
Examples of fixed costs are rent and head office costs.

Examples of stepped fixed costs are supervisor salary where once the output goes above a certain
level a second supervisor will need to be employed.
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Examples of variable costs are motor, metal, assembly workers’ pay and transport costs.
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Some costs will consist of a fixed and variable element e.g. your electricity bill. These are sometimes
referred to as semi-variable (or semi-fixed or mixed) costs.
Total
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cost
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$
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Level of
activity
A common requirement is to identify what the fixed and variable elements of a cost are. This can be
done using either of the following two techniques that will be seen later:
 High-low method
 Linear regression
(f) Explain and illustrate the use of codes in categorising transactions.
Codes are used in accounting systems as a way of categorising transactions into groups so that
information on specific areas of the business is easier to identify and accounts are easier to
prepare.
Codes can be set up in any way that a business wants. An illustration of a simple coding system
is shown below.
ILLUSTRATION: CODING TRANSACTIONS
KY Ltd uses the following coding system for their cost transactions:
Cost item Code Department Code
Stationery 258 Finance FN
Computers 624 Sales SS
Vehicles 109 Production PR
What account code would be used for the following transactions assuming that the code will show the
relevant department first?
(1) The accountant buys six new computers for his department
(2) The Production director gets a new car
SOLUTION
(1) FN624
(2) PR109
(h) Use high-low analysis to separate the fixed and variable elements of total costs including
situations involving semi variable and stepped fixed costs and changes in the variable cost per
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unit.
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SCENARIO 1: HIGH-LOW ANALYSIS – CONSTANT FIXED AND VARIABLE COSTS
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STEPS
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Step 1: Select the highest and lowest activity levels, and their associated total costs.
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(Note: do not take the highest and lowest costs)
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Step 2: Find the variable cost/unit.
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Cost at high level of activity – Cost at low level of activity
Variable cost/unit =
High level of activity – Low level of activity
Step 3: Find the fixed cost, using either the high or low activity level.
TOTAL COST (TC) = FIXED COST (FC) + VARIABLE COST (VC)
∴ FC = TC – VC
LECTURE EXAMPLE 1.1: HIGH-LOW (CONSTANT FIXED COSTS AND VARIABLE COSTS PER UNIT
The total costs incurred at various output levels in a factory have been measured as follows:
Output Total cost
(units) ($)
26 6,566
30 6,510
33 6,800
44 6,985
48 7,380
50 7,310
Using the high-low method identify what the fixed and variable elements of the cost are.
SOLUTION
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n2
SCENARIO 2: HIGH-LOW ANALYSIS – STEPPED FIXED AND CONSTANT VARIABLE COSTS
015
STEPS
Step 1: Select the highest and lowest activity levels, and their costs.
Step 2: Reduce the highest output cost for the increased fixed cost (i.e. pretend the step doesn’t exist).
Step 3: Find the variable cost/unit.
Adjusted cost at high level of activity – Cost at low level of activity
Variable cost/unit =
Step 4: Find the higher fixed cost, using high activity level.
Fixed cost = Total cost at high activity level – Total variable cost at high activity level
Find the lower fixed cost, using low activity level.
Fixed cost = Total cost at low activity level – Total variable cost at low activity level
Or Fixed cost = Fixed cost at high activity level – Increase in fixed costs
ILLUSTRATION: STEPPED FIXED COST WITH CONSTANT VARIABLE COST/UNIT
When a factory produces at its highest output level of 800 units its total cost is $9,000 and when it
produces at its lowest output level of 500 units its total cost is $6,900. From past experience the
management know that when production exceeds 600 units, the fixed costs increase by $900.
What are the variable and fixed costs?
STEPS
Step 1
The highest activity level is 800 units and the lowest activity level is 500 units.
Step 2
The adjusted highest activity level cost is $9,000 – $900 = $8,100.
Step 3
$8,100−$6,900
The variable cost per unit = = $4
800−500
Step 4
t
The highest activity level FC = $9,000 – (800 units × $4) = $5,800
g h 1 5
The lowest activity level FC = $6,900 – (500 units × $4) = $4,900
y r i 2 0
Or $5,800 – $900 = $4,900.
o p ion
SCENARIO 3: HIGH-LOW ANALYSIS – CONSTANT FIXED AND CHANGING VARIABLE COSTS
C uit
e.g. where economies of scale exist.
STEPS
I n t
rst
Fi
Step 1: Select the highest and lowest activity levels, and their costs.
Step 2: Increase the highest output cost for the decreased variable cost (i.e. pretend the
reduction in VC never happened).
Step 3: Find the lowest activity variable cost/unit.
Adjusted cost at high level of activity – Cost at low level of activity
Lowest activity variable cost/unit =
Highest activity variable cost/unit = Lowest activity variable cost/unit – change in variable costs
Step 4: Find the fixed cost, using either the high or low activity level.
Fixed cost = Total cost at activity level – Total variable cost
ILLUSTRATION: CONSTANT FIXED AND CHANGING VARIABLE COSTS
When a factory produces at its highest output level of 800 units its total cost is $10,600 and when it
produces at its lowest output level of 500 units its total cost is $8,400. From past experience the
management know that when production exceeds 600 units, the variable cost per unit decrease by
$1 per unit.
What are the variable and fixed costs?
STEPS
Step 1
The highest activity level is 800 units and the lowest activity level is 500 units.
Step 2
The adjusted highest activity level cost is $10,600 + ($1 × 800 units) = $11,400.
Step 3
$11,400−$8,400
The lowest activity variable cost per unit = = $10
800−500
Co
The highest activity variable cost per unit = $10 - $1 = $9
Fir
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Step 4
The fixed cost = $10,600 – (800 units × $9) = $3,400
Or the fixed cost = $8,400 – (500 units × $10) = $3,400
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Advantages and disadvantages of the high-low method
n2
015
Advantages
 Simple to calculate and explain
 Only requires two pieces of data
Disadvantage
 The data points used are by definition extreme points (high and low output levels) and may not
be representative of the standard cost behaviour in between.
(i) Explain the structure of linear functions and equations.

If you plot a series of points on a graph and they form a straight line; this is known as a linear
function. Thus the fixed and variable costs we looked at in an earlier section, are both examples
of linear functions. The semi-variable costs would also be a linear function.
(y)
Total
cost
$
Gradient = b
Level of (x)
activity
ht 5
The equation of any straight line is:
r i g 0
y = a + bx
2 1
y
p ion
where:
o
C uit
‘y’ is the vertical axis, that is the dependent variable. In the case of cost accounting, the 'y' is
the total cost.
n t
'a' is the intercept with the vertical axis; that is the y value when x = 0. In the case of cost
I
t
accounting, the 'a' is the fixed cost.
Fi rs
'b' is the gradient/slope of the line, that is the change in y when x increases by 1 unit. In the
case of cost accounting, the 'b' is the variable cost per unit.
‘x’ is the horizontal axis, that is the independent variable. In the case of cost accounting, the 'x'
is the level of activity (usually this will be number of units produced).
(j) Explain and illustrate the concepts of cost objects, cost units and cost centres.
Cost objects are any activity for which the management may require a separate measurement
of cost e.g. the cost of a product or service or the cost of a department.
Cost units are units of production or service for which a cost can be measured e.g. the cost of
producing an i-pod or the charge out rate per hour for a lawyer. For some businesses it may
make sense to use a composite cost unit where more than one variable is taken into the
measure. For example a transport company may use a tonne kilometre as its cost unit as this
will consider not only the weight carried but also the distance carried.
Cost centres are collecting points for costs e.g. a department, a photocopier or a project.
It can be seen that some items may meet the classification of more than one of the categories
above. For example, a particular department may be set up as a cost centre but may also be a
cost object.
(k) Distinguish between cost, profit, investment and revenue centre.

(l) Describe the differing needs for information of cost, profit, investment and revenue centre
managers.
If a business is split into business units (or divisions) it will need to decide what level of control
to allow those business units.
Cost Centre
Part of the business accountable only for costs.
Information needs of cost centre managers
The actual cost to date, a forecast of the total cost and a comparison of this forecast with the
targets they are trying to keep the cost at or below. They will need to have information on likely
costs from future decisions so decisions can be made about which suppliers to use etc.
Profit Centre
Part of the business accountable for costs and revenues.
Information needs of profit centre managers
The actual profit to date, a forecast of the total profit and a comparison of this forecast with the
targets they are trying to keep the profit at or above. They need information to support
decisions on the impact of changing prices on sales volumes.
Investment Centre
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Part of the business accountable for costs, revenues and capital investment.
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Information needs of investment centre managers
The actual return on investment (profit divided by capital investment) to date, a forecast of the
itio
total return on investment and a comparison of this forecast with the targets they are trying to
n2
keep the return on investment at or above. They need to understand how efficient the capital
investment is being in helping them generate profits.
Revenue Centre
Part of the business accountable only for revenues. 015
Information needs of revenue centre managers
The actual revenue to date, a forecast of the total revenue and a comparison of this forecast
with the targets they are trying to keep the revenue at or above. Details of market share would
also be useful.
4 Presenting information
(a) Prepare written reports representing management information in suitable formats according
to purpose.
Report writing is a skill that you are going to need in your ACCA exams and in the workplace.
When writing a report there are certain sections or content that are pretty much universally
recognised. These are described in the table below.
Section/Heading Description
Title This should just tell the reader what the report is about.
Contents Simply a list of where in the report the different sections can be found
(usually includes page references).
Introduction This will be a brief lead into the main document and really is there for a bit
of scene setting.
Terms of reference This section may be included as part of the introduction but in its own right
this section sets out the purpose of the report (i.e. who it is for and what
was asked for along with relevant disclaimers on the scope of the report for
example a reference to it not being used by anyone other than the intended
recipient).
Main issues This is the main body of the report where all of your work will be detailed
t
out. It is common practice to split this into a number of clear subsections
h 5
which are numbered to make referencing easier (you may even find that
i g 1
each paragraph within a section is numbered).
y r
Recommendations
2 0 This is really the “output” section. It is what the person who requested the
p ion
or Conclusions report is going to be primarily interested in and will sometimes be
o
summarised at the start of the report to make it very visible. The
C uit recommendations should be very clear and consistent with the work that
t
has been discussed in the main issues section.
I n
Appendices Any detailed information (tables, graphs, references to information sources
rst
used) will normally be included as appendices in order to avoid overloading
Fi
the main issues section with information. When any material contained in
the appendices is used in the main issues section it will be referenced so the
reader can quickly identify and navigate to where the backup detail can be
seen.
A full formal report will contain all of the above sections whereas shorter less formal report
requirements may not have all the sections or may merge two or more sections together.
(b) Present information using tables, charts and graphs (bar charts, line graphs, pie charts and
scatter graphs).
(c) Interpret information (including the above tables, charts and graphs) presented in
management reports.
Tables
Tables are a very easy way of presenting information about variables where rows and columns are
used to analyse the information.
Consider for example a survey where men and women are surveyed to ask what their favourite colours
are. The results may be shown as follows:
The favourite colour of 56 of students
Colour Men surveyed Women surveyed Total
Red 2 4 6
Blue 18 6 24
Pink 12 8 20
Green 2 4 6
TOTAL 34 22 56
To be effective a table should have clear headings for the rows and columns.
Interpretation
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The table above allows us to conclude that based on the sample of men and women that:

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53% of men prefer the colour blue (18/34).
 The most popular colour for women was pink and 36% of women preferred this colour (8/22).
itio
 Overall red and green were the least popular colours for both men and women with only 21% of
the total sample preferring either of these two colours (12/56).
Bar charts
n2
015
A bar chart is a visual way of showing information where quantities are represented as bars (either
vertical or horizontal) on a chart.
We can use the data in the previous table to illustrate different types of bar chart:
Simple bar chart

Data is shown by bars of equal width, the height of which corresponds to the value of the data.
24
20
Number of students
16
12
Red Blue Pink Green

Multiple bar chart
18
Number of men Number of women
16
14
Number of students
12
10
Red Blue Pink Green
t
Component bar chart
i g h 1 5
r 0
36
y
p ion 2
Green
o
32 Pink
C uit Blue
t
28
n
Red
I
Number of students
rst
24
Fi
20
16
12
Men Women
Percentage component bar chart

%
Green
100
Pink
90 Blue
Number of students
Red
80
70
60
50
40
30
20
10
Fir
Number of men
Co Number of women
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Workings for the above
ntu ght
Number of Number of
Colour men Cumulative women Cumulative
itio
% % % %
Red 2 6 6 4 18 18
n2
Blue 18 53 59 6 27 45
Pink 12 35 94 8 36 81
Green
TOTAL
2
34
6
100
100
015 4
22
19
100
100
Line graph
A line graph is a very simple graph showing the relationship between two variables such and sales
revenue and year. You just draw a straight line between the discrete points on the graph.
Consider an illustration.
Year Sales
($000)
2008 10,500
2009 11,200
2010 11,450
2011 13,000
The line graph would look something like this
Annual sales 2008-2011

14,000
12,000
10,000
8,000
Series 1
6,000
4,000
2,000
0
2008 2009 2010 2011
t
Scatter graphs
i g h 1 5
A scatter diagram (or “scatter graph”) is a good way of determining the relationship between two
y r 2 0
variables. The graph should be drawn with the y axis representing the dependent variable and the
p ion
x axis representing the independent variable; i.e. a change in the value of x, the factor we control, will
o
lead to a change in y.
C uit
For example, if a company increases its output (the independent variable), it would expect an increase
t
in its costs (the dependent variable). We could plot the output for a series of months and resultant
I n
costs and draw a straight “line of best fit” between the points. This line of best fit would have the
t
rs
equation:
Fi
y = a + bx
where:
y = the dependent variable (here costs).
a = the intercept of the y axis i.e. the point below which the y variable cannot go. If y is a cost figure,
this is the “fixed” cost.
b = gradient of the line of best fit. The higher “b” is, the steeper the gradient.
x = the independent variable (here output).
There are two main techniques for estimating the dependent variable:
 High-low method
 Linear regression.
Costs
($000)
7,400 X X
7,200
7,000 X
6,800 X
6,600 X
X
6,400
25 30
Fir Cop
35 40 45 50 Output (units)
Figures here just used for illustration.
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Pie chart
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A pie chart is used to show what proportion or percentage individual elements of a total make up.
n2
The word pie relates to the circular shape.
If we consider the colour preference of men in the earlier example as follows:
Colour
Red
Number of
men
2
%
6
015
Blue 18 53
Pink 12 35
Green 2 6
TOTAL 34 100
A pie chart representing this might look as shown below;
Favourite colours - men

Red Blue Pink Green
6% 6%
35%
53%
ht 5
r i g 2 0 1
y
p ion
o
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I n t
rst
Fi
31
Cost accounting techniques
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1 Accounting for material, labour and overheads
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(a) Accounting for materials
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(i) Describe the different procedures and documents necessary for the ordering, receiving
and issuing of materials from inventory.
n2
The Stores Department is normally responsible for organisations materials. It will control
015
current material levels and decide when to order more or new materials.
When more materials are required to be ordered, a purchase requisition is sent to the
Purchasing Department.
A typical purchase requisition would be as follows:
PURCHASE REQUISTION
Req. No. 0721
Date 06/09/12
Department/job number: D12
Suggested Supplier: Elliotts
Requested by: Charles Adams
Latest date required: 20/09/12
Quantity Code number Description Estimated Cost
Unit $
10 39550 Polypipe 100m 60.00 600.00
15 40202 Polypipe Ducting 5.00 75.00
Authorised signature: J. Henry
32 2: Cost accounting techniques AC C A F2
The Purchasing Department will then draw up a purchase order, which is sent to the
supplier. Copies of the purchase order are also sent to Accounts Department and the
Receiving Department.
Purchase Order Cathedral Supplies,

Church Road,
Our Order Ref: D12/0721 Date 11/09/12
Bishop’s Waltham
Hampshire
SO32 1EE
To: Elliotts
Claylands Road Please deliver to the above address
Swanmore Ordered by: Adam Shah
Hampshire Passed and checked by: Chris Pask
SO31 1HB Total Order Value $782.26
Quantity Code Descriptions Unit $
10 39550 Polypipe 100m 59.00 590.00
15 40202 Polypipe Ducting 5.05 75.75
Subtotal 665.75
VAT (@ 17.5%) 116.51
ht
782.26
5
Total
r i g 0 1
When the supplier delivers the materials, a delivery note will be signed by the individual
2
y
taking the delivery in the Receiving Department.
o p ion
The delivery should then be cross checked against the purchase order.
C uit A goods received note (GRN) is then produced.
I n t A typical GRN would be as follows:
rst GOODS RECEIVED NOTE
Fi
No. 01749
DATE: 18/09/12 TIME: 15.40
OUR ORDER NO: D12/0721

SUPPLIER AND SUPPLIER’S DELIVERY NOTE NO: ELLIOTTS 11784
QUANTITY CODE DESCRIPTION
10 39550 Polypipe 100m

15 40202 Polypipe Ducting
Authorised signature: J. Henry
A copy of the GRN is sent to the Accounts Department, where it is matched against the
purchase order.
When the supplier’s invoice is received this is also matched against the GRN and
purchase order, before it is authorised for payment.
AC C A F 2 2: Cost accounting techniques 33
When an internal department requires materials, a material requisition note will be

passed to the Stores Department.
A typical material requisition note would be as follows:
Materials requisition note

Date required 27/09/12 Cost centre No/ Job No PN0372
Quantity Item code Description $
2 39950 Polypipe 100m 118.00
4 40202 Polypipe Ducting 20.20
Signature of requisitioning Manager/Foreman: Charles Adams Date 24/09/12
(ii) Describe the control procedures used to monitor physical and ‘book’ inventory and to
minimise discrepancies and losses.
The overall objective of inventory control is to minimise the total associated cost. To this
end an accurate record will be maintained of material receipts (GRN) and material issues
Fir Co
(material requisitions), so that the total amount of each item of inventory is known at all
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times.
These amounts are checked by performing stock takes (a stock take is where the physical
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stock is counted and reconciled to the book records) either continuously or on a periodic
basis.
itio
The inventory will also be physically protected to prevent damage, deterioration and
n2
pilferage.
015
The term ‘free inventory’ is sometimes used to refer to the amount of inventory that is
actually available for future use in the business. It is calculated as:
Materials currently in inventory X
Add: Materials on order from suppliers X
Less: Materials allocated to customer orders (X)
Free Inventory X
(iii) Interpret the entries and balances in the material inventory account.
Inventory Account
Reference $ Reference $
Balance b/f (1) 10,340 Issues (4) 98,087
Purchases (2) 105,840 Losses (5) 1,364
Returns (3) 870 Balance c/f (6) 17,599
117,050 117,050
Reference:
(1) This represents the amount of inventory at the start of the period;
(2) This is the total of the materials purchased during the period. In practice there
would be a large number of individual purchase entries; one for each individual
order;
(3) If materials are issued internally, but then found not to be required, they are returned;
(4) This is the total of the materials issued during the period. In practice there would
be a large number of individual issue entries; one for each individual requisition;
(5) If materials are pilfered, damaged, lost or become obsolete, their value will fall and
this is reflected here;
(6) This represents the amount of inventory at the end of the period.
(iv) Identify and explain the costs of ordering and holding inventory.
The ordering costs cover the costs of placing and receiving deliveries. Some of these
costs will be fixed and unaffected by the number of orders placed e.g. the purchasing
department’s staff salaries. Other costs will be variable e.g. a suppliers order charge.
The holding costs cover the costs of storing and maintaining the materials. Some of these
costs will be fixed and unaffected by the number of items held e.g. the warehouse rent.
Other costs will be variable e.g. the interest lost on capital tied up in stock.
(v) Calculate and interpret optimal reorder quantities.
The optimal reorder quantity (also known as the Economic Order Quantity (EOQ)) can be
calculated by using the following formula:
FORMULA GIVEN IN EXAM
t
2Co D
h 5
EOQ=√
i g 1
Ch
y r 2 0
o p ion
Where: EOQ = Economic order quantity
C uit
Co = Cost of placing one order
D = Demand per annum
t
Ch = Cost of holding one unit for one year
t I n And the total annual cost (TAC) is:
Fi rs
Annual order cost + Annual holding cost
D Q
TAC = Co Q + Ch 2
Where: Q = Re-order quantity (i.e. the EOQ)
LECTURE EXAMPLE 2.1: EOQ AND TAC
Paton Co uses components at the rate of 500 units per month, which are bought in at a cost of $1.20
each from the supplier. It costs $20 each time an order is placed, regardless of the quantity ordered.
The total holding cost is 20% per annum of the value of stock held.
What are the EOQ and TAC?
SOLUTION
Co
(vi) Calculate and interpret optimal reorder quantities when discounts apply.
Fir
Companies will sometimes be offered discounts if they order more than a certain
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quantity. These are known as bulk discounts. If such discounts are available this will
change the total annual purchasing cost and so this now needs to be included in
ntu ght
calculating the TAC:
itio
D Q
TAC=Co Q + Ch 2 + PD
n2
Where: P = Price per unit
015
The TAC will now either be minimised at the EOQ or one of the discount points.
We thus need to calculate the TAC at each point and see which is lowest.
LECTURE EXAMPLE 2.2: EOQ AND DISCOUNTS
Paton Co has now been offered a 5% discount on the purchase price for order quantities of 2,000 units
or more and 10% discount on the purchase price for order quantities of 3,000 units or more.
What is the optimum reorder quantity?
SOLUTION
ht 5
(vii)
r i g 0 1
Produce calculations to minimise inventory costs when stock is gradually replenished.
2
y
p ion
Some organisations manufacture their own inventory and this results in the gradual
o
replenishment of their inventory. Such organisations need to decide the size of the batch
C uit
to manufacture (called the Economic Batch Quantity (EBQ)) in order to minimise their
t
total annual costs.
t I n The EBQ can be calculated by using the following formula:
Fi rs
2Co D
√ D
Ch (1 − R)
Where: Co = Cost of setting up a batch ready to be produced

D = Demand per annum (rate of demand)
Ch = Cost of holding one unit for one year
R = Annual replenishment rate (or rate of production)
And the total annual cost (TAC) is:
Annual batch set up cost + Annual holding cost
D Q
TAC = Co Q + Ch (1 − D⁄R) 2
Where: Q (EBQ) = Size of the batch
ILLUSTRATION: GRADUAL REPLENISHMENT
Moore Co manufactures components at the rate of 500 units per week. It costs $2,700 to set up the
production line for a new batch. The annual demand for this product is 10,000 units. The company
closes completely for two weeks every August, but apart from this, is open for the rest of the year.
The storage cost is $2.50 per unit for a year.
What are the EBQ and TAC?
Co = $2,700
D = 10,000 units
Ch = $2.50
R = 500 units × 50 weeks = 25,000 units
2×2,700×10,000
EBQ = √ 10,000 = 6,000 units
2.50(1− )
25,000
10,000 10,000 6,000

TAC = 2,700 × 6,000
+ 2.50 (1 − 25,000)
2
= 4,500 + 4,500
= $9,000
Fir Co
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(viii) Describe and apply appropriate methods for establishing reorder levels where demand
ntu ght
in the lead time is constant.
In practice there will be a time delay between an order being made and the materials
itio
being delivered; this is known as the lead time. If demand is constant the total demand in
n2
the lead time will be:
Lead time in days × Daily demand
015
This is known as the reorder level. When inventories reach this level, an order needs to
be made to prevent the company running out of this item.
ILLUSTRATION: REORDER LEVELS
Paton Co uses components at the rate of 500 units per month. Paton is open five days a week and for
50 weeks per year. It takes the supplier 12 days to deliver the goods having received an order.
What is the reorder level?
12 days × {(500 units × 12 months) / (5 days × 50 weeks)} = 288 units
So Paton should place their order when there are 288 units remaining.
(ix) Calculate the value of closing inventory and material issues using LIFO, FIFO and
average methods.
The ACCA syllabus requires students to be able to apply to following inventory valuation
methods.
 FIFO. Assumes that the oldest goods in stock are those that are sold/issued first.
 LIFO. Assumes that the newest items in stock are sold/issued first.
 AVCO. Items taken out of stock are assumed to consist of an average of all the
items in stock at the time.
We will use an illustrative example to demonstrate the impact of the above techniques
on both inventory value and related gross profit.
LECTURE EXAMPLE 2.3: INVENTORY VALUATION METHODS (FIFI, LIFO & AVCO)
Date Cost per unit Revenue per unit
($) ($)
st
1 Jan opening balance 200 units 10.00
rd
3 Jan Purchased 150 units 10.40
th
5 Jan Sold 100 units 12.50
th
th
t
th
19 Jan Sold 200 units 12.75
g h 1 5
Calculate the stock (inventory) valuation and gross profit using the FIFO, LIFO & AVCO inventory
i
r 0
valuation methods.
SOLUTION
y
p ion 2
(a)
o
C uit
FIFO
t
Workings
t I n No of Cost/unit Value
rs
Date units $ $
Fi
1 Jan
3 Jan
5 Jan
10 Jan
14 Jan
19 Jan
Closing stock
Profit calc
$
Sales
COS
Profit
(b) LIFO
No of Cost/unit Value
Date units $ $
1 Jan
3 Jan
5 Jan
10 Jan
14 Jan
19 Jan
Closing stock
Profit calc
$
Sales
COS
Profit
Fir Co
st I pyri
(c) AVCO (WEIGHTED AVERAGE) A new average price needs to be recalculated each time a
ntu ght
purchase is made at a different price to the existing average price.
itio
No of Cost/unit Value
Date units $ $
1 Jan
n2
015
3 Jan
5 Jan
10 Jan
14 Jan
19 Jan
Closing stock
Profit calc
$
Sales
COS
Profit
Note: In the real world, the average cost is recalculated every time a purchase is made at a
different price.
Comparing the techniques

In periods where prices are increasing (as per the example above) the following observations
can be made.
FIFO
Items issued from stock will be deemed to be the oldest ones and so issued at the oldest cost
(HISTORIC COST). Closing stock values will reflect more up to date prices and hence the profit is
likely to be higher than that reported under the LIFO technique.
LIFO
Newest items are deemed to be issued first out of stock with the result that the cost of items
sold will reflect the more recent and higher cost. Closing stock will be based on the older prices.
Consequently, cost of sales will reflect the more recent prices (ECONOMIC VALUE) and profit
will be lower than under FIFO.
WEIGHTED AVERAGE
By assuming that the sales made and hence items remaining in stock are an average of the
items at that time, it is clear that this method will give a stock valuation and profit figure in
between those figures for the other methods.
Advantages and disadvantages of each method
t
Advantages Disadvantages
FIFO
i g h 1 5
Easy to understand. Issue prices out of stock will vary.
y r 2 0
Closing inventory is most likely to be Material issues from stores will be
p ion
valued at a figure that closely represents understated in periods of high inflation
o
what it would cost to replace it. (and vice versa).
C uit It is probably what is really happening
t
with the stock (i.e. it is normal to try and
I n
use up the oldest stock first).
r stLIFO Issues from stores are at a price close to Remaining stock is assumed to be the
i
current market value. oldest (is this really likely?).
F AVCO More simple administration.

Issue prices out of stock will vary.
Issue price is unlikely to reflect an actual
purchase price.
Price changes won’t significantly distort Issue prices out of stock will vary, albeit
either inventory or profit figures. less dramatically than for the other
methods.
(b) Accounting for labour

(i) Calculate direct and indirect costs of labour.
KEY TERMS
 Direct labour costs are costs directly incurred in the production of the product or
service e.g. assembly workers who are paid for each unit produced.
 Indirect labour costs are any labour costs which are not directly incurred in the
production of the product or service e.g. a supervisor’s salary.
LECTURE EXAMPLE 2.4: DIRECT AND INDIRECT LABOUR COST
Sarah Co pays one of their direct labour employees $1,050 for a week’s work, made up as follows:
$
(1) $4 per unit for 200 units = 800
(2) An extra $2 per unit for 25 units made on Saturday = 50
(3) Bonus (part of a Group Incentive Scheme) = 200
Total $1,050
What are the direct and indirect costs of labour?

SOLUTION
Fir Co
st I pyri
ntu ght
(ii) Explain the methods used to relate input labour costs to work done.
itio
Input labour costs are the total direct and indirect labour costs. The indirect labour costs
do not link directly to the work done. These are dealt with in Section 3 below.
n2
The direct labour costs can be linked to the work done by using time sheets, job cards or
015
piecework tickets.
Time sheets are completed by the member of staff and show the time spent on different
jobs. These sheets will be authorised by the employee’s line manager.
Job cards are maintained for each job. When a member of staff works on a particular job
they record the time spent on that card. Thus several different employees may put time
on the same job card.
Staff who are paid based upon the number of units produced (piecework) will complete a
piecework ticket or operation card, which shows the number of good units produced.
(iii) Prepare the journal and ledger entries to record labour cost inputs and outputs.
The journal and ledger entries to record labour input costs would be as follows:
DR Labour Account
CR Bank & Cash Account
with the net wages paid to staff
DR Labour Account
CR PAYE Account
with the income tax deducted by the company
DR Labour Account
CR National Insurance Account
with the National Insurance deducted by the company
The journal and ledger entries to record labour output costs would be as follows:
DR Work in progress Account
CR Labour Account
with the direct labour cost
DR Indirect labour Account
CR Labour Account
with the indirect labour cost
DR Overtime premium Account
CR Labour Account
with the overtime premium
DR Sick pay Account
CR Labour Account
with the sick pay
DR Idle time Account
CR Labour Account
with the cost of direct labour paid when not actually producing anything.
(iv) Describe different remuneration methods: time-based systems, piecework systems and
individual and group incentive schemes.
A time-based system is where you are paid for the amount of time you have worked. In
ht 5
other words,
r i g 2 0 1 Remuneration = Hours actually worked × Rate of pay per hour
y
p ion
A piecework system is where you are paid for the number of units you actually produce.
o
In other words,
C uit Remuneration = Units actually produced × Rate of pay per unit
I n t An individual incentive scheme is where you are given an extra reward depending upon
t
your own individual performance. Such schemes are sometimes referred to as Bonus
rs
Schemes and are most commonly associated with time-based systems. The extra reward
Fi
may take the form of a share of the profit or shares in the company.
A group incentive scheme is where you are given an extra reward depending upon the
performance of a group or team you are a member of e.g. a department. The extra
reward may again take the form of a share of the profit or shares in the company.
LECTURE EXAMPLE 2.5: INCENTIVE SCHEME
XYZ Co pays its workers at a rate of $10 per standard hour produced.
The standard time for making each of the company’s three products is as follows:
Tables 1.5 hrs
Chairs 0.8 hrs
Sofas 2.0 hrs
One worker produced the following output in January (160 working hours):
Tables 40
Chairs 100
Sofas 18
What pay would this worker receive in January?
SOLUTION
(v) Calculate the level, and analyse the costs and causes of labour turnover.
Labour turnover can be calculated as follows:
Number of staff leaving during the period
Fir Co
Average number of staff employed during the period
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Or as:
Number of staff replacements during the period
ntu ght
Average number of staff employed during the period
The costs associated with labour turnover can be split between preventative costs and
replacement costs.
itio
n2
Preventative costs are costs incurred in order to try and prevent staff leaving in the first
place. Examples of such costs include:



Pension schemes (offering enhanced security)
015
Welfare services e.g. a gym (keeping staff fit)
Medical facilities e.g. on site doctor (keeping staff healthy)
 Counselling (maintaining good relationships)
Replacement costs are costs incurred once someone has left in order to replace them.
Examples of such costs include:
 Advertising job vacancies
 Selection and placement
 Training
 Lower productivity
 Increased faulty output
 Overtime pay to cover the shortfall
The causes of labour turnover are many and varied, but some common examples include:
 Change in personal circumstances e.g. getting married, having children or moving
 Ill health
 Retiring
 More attractive opportunity elsewhere e. g. higher pay, more convenient working hours
 In conflict with manager
 Poor career opportunities
 Dismissal for misconduct e.g. poor time keeping
(vi) Explain and calculate labour efficiency, capacity and production volume ratios.
Labour Efficiency Ratio is calculated as follows:
Expected hours to make the output
Actual hours to make the output
Labour Capacity Ratio is calculated as follows:

Actual hours to make the output
Planned (budgeted) hours
Labour Production Volume Ratio is calculated as follows:

Expected hours to make the output
Planned (budgeted) hours
Note. The Labour Production Volume Ratio = Labour Efficiency Ratio × Labour Capacity
Ratio
LECTURE EXAMPLE 2.6: LABOUR RATIOS?
Bulldog Co planned to make 20,000 units in 100,000 hours. In the end they actually made 22,000 units
in 115,000 hours.
t
What are Bulldog’s labour efficiency, capacity and production volume ratios?
SOLUTION
i g h 1 5
y r 2 0
o p ion
C uit
I n t
rst
Fi
(vii) Interpret the entries in the labour account.
Labour Account
Reference $ Reference $
Bank & cash (1) 89,876 Work in progress –
PAYE (2) 24,266 direct labour (4) 47,977
National Insurance (3) 9,886 Indirect labour (5) 50,246
Overtime premium (6) 16,476
Sick pay (7) 2,476
Idle time (8) 6,853
124,028 124,028
Reference:
(1) This is the net wages actually paid to staff during the period,
(2) This is the income tax deducted by the company on behalf of the Government,
(3) This is the National Insurance deducted by the company on behalf of the
Government,
(4) This is the direct labour cost incurred on actual production during the period,
(5) This is the indirect labour cost incurred during the period,
(6) This is the overtime premium (the excess over normal pay rates) incurred during
the period,
(7) This is the sick pay cost incurred during the period,
(8) This is the cost of direct labour paid when not actually producing anything.
(c) Accounting for overheads
(i) Explain the different treatment of direct and indirect expenses.
Direct expenses are always included in the cost of producing a unit of product or service.
Indirect expenses (also known as overheads) can either also be included in the cost of
producing a unit of product or service (absorption costing) or excluded from the cost of
Fir Co
producing a unit of product or service (marginal costing).
st I pyri
(ii) Describe the procedures involved in determining production overhead absorption rates.
While production overheads are not directly incurred in producing a unit of product or
ntu ght
service, if we ignore them there is a risk that the prices charged will be too low and won’t
cover the total costs incurred by the business.
itio
We thus need to share these overheads over the units produced. This involves a three
n2
step approach:
015
Step 1: Allocate (see (iii)) below).
Step 2: Apportion and Reapportion (see (iii) & (iv) below).
Step 3: Absorb (see (v) below).
(iii) Allocate and apportion production overheads to cost centres using an appropriate
basis.
Some production overheads will relate to only one production cost centre e.g. an
assembly supervisor’s salary or the depreciation charge on a particular piece of
equipment. Putting these overhead costs against their respective cost centres is simple
and known as allocation.
Other production overheads will relate to more than one production cost centre e.g.
factory rent or heat and light expenses. These will need to be shared between the
different cost centres using some fair (but arbitrary) basis, such as the floor areas or
volume of each cost centre. This sharing of overhead costs between cost centres is
known as apportionment.
LECTURE EXAMPLE 2.7: ALLOCATION AND APPORTIONMENT
Harry Co has three cost centres involved in the production of its products. These are the Assembly,
Finishing and Canteen Departments.
The production overhead for the period is $50,000 and is made up as follows:
$
Assembly Supervisor 3,000
Finishing Quality Inspector 4,500
Chef 2,500
Rent 22,000
Heat & Light 18,000
50,000
The following information is also available for each department:

Assembly Finishing Canteen
Floor Area (in square meters) 6,000 3,000 2,000
Volume (in cubic meters) 24,000 9,000 3,000
Number of employees 40 40 5
What is the production overhead for each department?
SOLUTION
ht 5
g 1
Total Basis Assembly Finishing Canteen
y r i 2 0
$ $ $ $
p ion
Assembly Supervisor Allocate
Chef o
C uit
Finishing Quality Inspector Allocate
Allocate
Rent
I n t Floor Area
st
Heat & Light Volume
Fi r
Overheads
(iv) Reapportion service cost centre costs to production cost centres (using the reciprocal
method where service cost centres work for each other).
Some cost centres are directly involved in producing the product or service; these are
known as production cost centres e.g. assembly and finishing. Other cost centres support
these production cost centres; these are known as service cost centres e.g. the canteen.
As the service cost centres are not directly involved in production they have no units of
production passing through them. Thus, the production overhead in service cost centres
needs to be shared across the production cost centres. This is known as
reapportionment.
LECTURE EXAMPLE 2.8: REAPPORTIONMENT OF SERVICE DEPT OVERHEADS
What is the production overhead for each production cost centre?

$ $ $ $ $
Overheads
Reapportionment
Overheads
Sometimes an organisation will have more than one service cost centre and these centres will
work for each other. In these situations a special technique is used to reapportion the costs
known as the reciprocal method.
Before starting the reapportionment, the reciprocal method calculates the total amount of
production overhead to be reapportioned including the share of other service cost centres.
LECTURE EXAMPLE 2.9: RECIPROCAL METHOD
Fir Co
Charles Co has already allocated and apportioned its overheads to its two production cost centres and two
st I pyri
service cost centres as follows:
Total Sawing Polishing Canteen Maintenance
ntu ght
$ $ $ $ $
Overheads 100,000 41,300 31,100 17,600 10,000
itio
The Canteen spends 50% of its time servicing Sawing, 40% Polishing and 10% Maintenance, whilst the
n2
Maintenance spends 40% of its time servicing Sawing, 40% Polishing and 20% Canteen.
015
SOLUTION
(v) Select, apply and discuss appropriate bases for absorption rates.
There is no one correct method for sharing overheads, but there are six commonly used
methods for calculating an overhead absorption rate (OAR):
(1) Cost per labour hour
– better when the activity is mainly manual
(2) Cost per machine hour
– better when the activity is mainly automated
(3) Percentage of direct labour cost
– better when a number of different grades of labour are being used
(4) Percentage of material cost
– better when a number of different materials are being used
(5) Percentage of prime cost
– better when differing amounts of direct cost are being incurred
(6) Cost per unit
– better when a number of similar products are being produced
LECTURE EXAMPLE 2.10: OAR CALCULATION
t
Charles Co has the following details for its two production cost centres:
i g h 1 5 Sawing Polishing
r 2 0
Labour Hours 1,240 8,780
y
p ion
Machine Hours 5,610 2,030
o
What is an appropriate overhead absorption rate for each production cost centre?
C uit
SOLUTION
I n t
r st
Fi
(vi) Prepare journal and ledger entries for manufacturing overheads incurred and absorbed.
The journal and ledger entries for manufacturing overheads incurred would be as
follows:
DR Production Overheads Account
CR Bank & Cash Account
with the actual overheads incurred.
The journal and ledger entries for manufacturing overheads absorbed would be as
follows:
DR Work in Progress Account
CR Production Overheads Account
with the overheads absorbed.
(vii) Calculate and explain the under and over absorption of overheads.
One of the reasons for absorbing the production overheads into the units of production is
to help in the setting of prices; another is to allow us to value inventory in the accounts.
For both these reasons we will need to know the figures at the start of the period and so
budgeted figures are used to calculate the OAR, which is consequently sometimes
referred to as the predetermined overhead absorption rate.
Co
It is quite likely that the actual figures will not be the same as the
Fir
predetermined/budgeted figures and so a difference will arise, resulting in the under or
st I pyri
over absorption of overheads.
ntu ght
LECTURE EXAMPLE 2.11: OVER AND UNDER APSORPTION
itio
At the end of the period Charles Co has the following actual figures for its two production cost centres:
n2
Sawing Polishing
015
Labour Hours 1,190 9,121
Machine Hours 5,300 2,145
Production Overhead 54,345 45,098
What is the under- or over-absorption in each production cost centre?
SOLUTION
2 Absorption and marginal costing

(a) Explain the importance of, and apply, the concept of contribution.
If an organisation which is already making and selling products decides to make and sell just one
more unit, it will receive one more units worth of revenue and will incur one more units worth
of variable costs; the fixed costs will not change.
The difference between the revenue and variable costs is called the contribution, as this
contributes towards the fixed costs and profits of the organisation.
Thus when making decisions about increasing or decreasing production and sales, only the
impact on contribution needs to be considered. In marginal costing fixed costs for a particular
period are treated as simply lump sum costs in the income statement each period and no
attempt is made to spread them across the units that are being produced. Marginal costing
principles are therefore consistent with the concept of contribution.
ILLUSTRATION: CONTRIBUTION IN DECISION MAKING
Isabel Co currently makes three products, however due to new limits on greenhouse gas emissions;
it has been told it can only produce two products in future.
The details per unit of each product are as follows:
t
Matty Paddy Wally
h 5
$ $ $
i g 0 1
Sales price 100 120 90
y r
Variable costs
p ion
Fixed costs
2
(40)
(45)
(50)
(60)
(35)
(42)
o
Profit
C uit
15 10 13
t
Which product should Isabel stop producing?
I n
SOLUTION
rst
We can say that the fixed costs are not relevant to our decision since they will be incurred regardless
Fi
of whether the products are produced.
On purely financial grounds we would stop producing the product that has the lowest contribution per
unit.
Matty Paddy Wally
$ $ $
Sales price 100 120 90
Variable costs (40) (50) (35)
Contribution 60 70 55
Based on this information, Isabel Co should cease the production of product “Wally”.
(b) Demonstrate and discuss the effect of absorption and marginal costing on inventory valuation
and profit determination.
Marginal costing values inventory at the variable production cost, while absorption costing
values inventory at the variable and absorbed fixed production cost. Consequently, absorption
costing will always produce a higher inventory value than marginal costing.
Opening and closing inventory values are used in determining profit and so valuing inventories
differently will produce a different profit figure.
ILLUSTRATION: MARGINAL AND ABSORPTION COSTING INVENTORY VALUES
What are the marginal and absorption costing inventory values for Isabel Co?
Matty Paddy Wally
Marginal costing $ $ $
Inventory value (VC only) 40 50 35
Absorption costing $ $ $
Inventory value (VC + FC) 85 110 77
(c) Calculate profit or loss under absorption and marginal costing.
LECTURE EXAMPLE 2.12: AC AND MC PROFIT CALCULATIONS
Millie Co started business on 1 March making one product called the Runabout, the standard cost of
which is as follows:
$
Co
Direct labour 5
Fir
Direct material 8
st I pyri
Variable production overhead 2
Fixed production overhead 5
ntu ght
Standard production cost $20
itio
The fixed production overhead figure has been calculated on the basis of a budgeted normal output of
36,000 units per annum. The fixed production overhead incurred in March and April was $15,000 each
n2
month.
015
Selling, distribution and administration expenses are:
Fixed $10,000 per month
Variable 15% of the sales value
The selling price per unit is $35 and the number of units produced and sold were:
March April
(Units) (Units)
Production 2,000 3,200
Sales 1,500 3,000
What is the profit or loss under absorption and marginal costing for Millie Co in March and April?
SOLUTION
Absorption costing
March April
$ $
Sales ($35 per unit)
Less cost of sales: (variable & fixed $20 per unit)
(Under)/over-absorption (see workings below)
Gross profit
Selling and distribution costs – variable
– fixed
(Loss)/Profit
Workings
March $
Overheads absorbed ( $ )
Overheads incurred
t
Under-absorption
i g h 1 5
r 0
April
y 2
$
p ion
Overheads absorbed ( )
o
Overheads incurred
C uit
Over-absorption
n t
Marginal costing
t I
rs
March April
Fi
$ $
Sales ($35 per unit)
Less cost of sales: (variable only $15 per unit)
Less variable selling and distribution costs
Contribution
Less actual fixed production costs
Less actual fixed selling and distribution costs
(Loss)/Profit
(d) Reconcile the profits or losses calculated under absorption and marginal costing.
While the formats of the absorption and marginal costing income statements differ, ultimately
the only figures that differ are the inventory values and so adjusting for these will reconcile the
profits or losses calculated under absorption and marginal costing.
If inventory levels are rising, 𝐀𝐂 𝐩𝐫𝐨𝐟𝐢𝐭 > 𝑴𝑪 𝒑𝒓𝒐𝒇𝒊𝒕
If inventory levels are falling, 𝐀𝐂 𝐩𝐫𝐨𝐟𝐢𝐭 < 𝑴𝑪 𝒑𝒓𝒐𝒇𝒊𝒕
The amount of the difference is 𝐌𝐨𝐯𝐞𝐦𝐞𝐧𝐭 𝐢𝐧 𝐢𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲 (𝐮𝐧𝐢𝐭𝐬) × 𝐅𝐢𝐱𝐞𝐝 𝐎𝐀𝐑
The points above are highly important for speeding up your work in the CBE.
LECTURE EXAMPLE 2.13: PROFIT RECONCILIATION
Reconcile the profits or losses calculated under absorption and marginal costing for Millie Co.
SOLUTION
Fir Co
st I pyri
ntu ght
itio
n2
(e)
015
Describe the advantages and disadvantages of absorption and marginal costing.
The advantages of absorption costing are the same as the disadvantages of marginal costing and
vice versa. So from a marginal costing perspective:
Advantages
 Better for decision-making
 Fixed costs are treated as period costs which is exactly what they are
 Profit depends only upon sales (and not production) activity and hence enables clearer
performance evaluation
Disadvantages
 Does not comply Financial Reporting Standards
 All costs must be split into their fixed and variable parts
 Fixed costs are being incurred and so cannot be ignored
3 Cost accounting methods

(a) Job and batch costing
(i) Describe the characteristics of job and batch costing.
A job is a cost unit which consists of a single order or contract. A batch is a group of
identical units produced together and are thus treated as a single cost unit.
Job and batch costing identifies the costs separately for each cost unit. Different jobs or
batches will require different amounts of materials, labour and expenses and so the costs
are calculated individually for each job or batch.
(ii) Describe the situations where the use of job or batch costing would be appropriate.
Job or batch costing is most appropriate where jobs or batches consume very different
amounts of materials, labour and expenses; in other words each job or batch is unique.
(iii) Prepare cost records and accounts in job and batch costing situations.
LECTURE EXAMPLE 2.14: JOB COSTING ACCOUNTING ENTRIES
JC Co uses job costing. On 1 December, there was one uncompleted job in the factory. The job card for
this work is summarised as follows.
t
Job Card, Job No 123
i g h 1 5
0
Costs to date: $
y r
Direct materials
p ion 2
Direct labour (120 hours)
630
600
o
Factory overhead ($2 per direct labour hour) 240
C uit
Factory cost to date 1,470
n t
During December two new jobs were started in the factory, and costs of production were as follows:
I
rst
Direct materials $
Fi
Issued to: Job 123 2,390
Job 124 1,680
Job 125 3,950
Material transfers $
Job 125 to Job 124 250
Job 123 to Job 125 620
Materials returned to store $

From Job 123 870
Direct labour hours recorded

Job 123 430 hrs
Job 124 650 hrs
Job 125 280 hrs
The cost of labour hours during December was $5 per hour, and production overhead is absorbed at
the rate of $2 per direct labour hour. Jobs are delivered to customers as soon as they are completed,
and all three jobs were completed by the end of December.
Administration and marketing overheads are added to the cost of sales at the rate of 20% of factory cost.
Prepare the job accounts for each individual job and prepare the summarised job cost cards for each
job.
SOLUTION
Job accounts
JOB 123
$ $
JOB 124
$ $
Fir Co
st I pyri
JOB 125
$
ntu ght $
itio
n2
Job cards, summarised
015
JOB 123 JOB 124 JOB 125
$ $ $
Materials
Labour
Production overhead
Factory cost
Admin & marketing o’hd (20%)
(iv) Establish job costs from given information.
ILLUSTRATION: JOB COSTS
P&P Co is a printing and publishing company that has just completed the production of 100,000
catalogues, of 64 pages (32 sheets of paper) each, for a customer.
Four operations are involved in the production process: photography, set-up, printing and binding.
Each page of the catalogue required a separate photographic session. Each session costs $150.
Set-up required a plate to be made for each page of the catalogue. Each plate required four hours of
labour at $7 per hour and $35 of materials. Overheads are absorbed on the basis of labour hours at an
hourly rate of $9.50.
In printing, paper costs $12 per thousand sheets. Other printing materials cost $7 per 500 catalogues.
1,000 catalogues are printed per hour of machine time. Labour and overhead costs incurred in
printing are absorbed at a rate of $62 per machine hour.
Binding costs are recovered at a rate per machine hour. The rate is $43 per hour and 2,500 catalogues
are bound per hour of machine time.
What was the cost of this job?
SOLUTION
ht 5
$ $
i g 1
Photography: 64 pages at $150 per page 9,600
r 0
Set-up
y
p ion
Labour:
2
o
64 plates × 4 hours per plate at $7.00 per hour 1,792
C uit
Materials:
64 plates at $35 per plate 2,240
n t
Overhead:
I
64 plates × 4 hours at $9.50 per hour 2,432
rst 6,464
Fi
Printing
Paper:
$12 38,400
100,000 catalogues × 32 sheets ×
1,000
Other materials:
100,000
× $7 1,400
500
Labour and overheads:
100,000
machine hours at $62 per hour 6,200
1,000
46,000
Binding
Labour and overheads:
100,000
machine hours at $43 per hour 1,720
2,500
Total costs 63,784
(b) Process costing

(i) Describe the characteristics of process costing.
When the production process does not allow the individual identification of units of
production, process costing is used.
Process costing spreads the total process costs over the total production giving an
average cost per unit. Production normally consists of several different processes and
because production is normally continuous, there is likely to be work in progress.
The output of the proceeding process forms the material input of the current process.
(ii) Describe the situations where the use of process costing would be appropriate.
Process costing is used in continuous or mass production processes e.g. tins of paint,
processed foods or chemicals.
(iii) Explain the concepts of normal and abnormal losses and abnormal gains.
In some processes the outputs will not equal the inputs due to things such as
evaporation. When these losses can be foreseen they are called normal losses. If the
actual level of loss is greater or less than what was expected, these losses and gains are
called abnormal losses and abnormal gains.
(iv) Calculate the cost per unit of process outputs.
Co
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡𝑠
𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑝𝑟𝑜𝑐𝑒𝑠𝑠 𝑜𝑢𝑡𝑝𝑢𝑡𝑠 =
Fir
𝑁𝑜𝑟𝑚𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
LECTURE EXAMPLE 2.15: PROCESS COSTING (BASIC COST PER UNIT CALC)
st I pyri
ntu ght
DJS Co runs a factory with two process departments. The accounts for the two departments are as
itio
follows:
n2
Process Account – Department 1
015
Units $ Units $
Raw materials 1,000 10,000
Direct labour 8,000
Departmental overheads 6,000 Transfer to Department 2 1,000 24,000
1,000 24,000 1,000 24,000

Units $ Units $
Transfer from
Department 1
Additional raw materials 5,000
Direct labour 4,000
Departmental overheads 3,000 Transfer to Finished goods
What is the cost per unit for each department?

(v) Prepare process accounts involving normal and abnormal losses and abnormal gains.
(vi) Prepare process accounts where losses and gains are identified at different stages of
t
the process.
i g h 1 5
As normal losses are expected they are valued at nil or their scrap value.
y r 2 0 Total costs of inputs – Normal loss scrap value
p ion
The cost per unit of process outputs =
o
Normal output
C uit
ILLUSTRATION: COST PER UNIT CALC WITH NORMAL LOSSES (ZERO SCRAP VALUE)
I n t
t
Now suppose DJS Co normally loses 10% of the inputs to Department 1 and 5% of the inputs to
rs
Department 2.
Fi
What will the two process accounts look like and what is the new cost per unit for each department?
SOLUTION

Units $ Units $
Raw materials 1,000 10,000 Normal loss 100 nil
Direct labour 8,000
Departmental overheads 6,000 Transfer to Department 2 900 24,000
1,000 24,000 1,000 24,000
$24,000
Department 1: Cost per unit = = $26.67
900 units

Units $ Units $
Transfer from 900 24,000 Normal loss 45 nil
Department 1
Direct labour 4,000
Departmental overheads 3,000 Transfer to Finished goods 855 36,000
900 36,000 900 36,000
$36,000
855 units
LECTURE EXAMPLE 2.16: NORMAL LOSSES WITH SCRAP VALUE
Now suppose DJS Co has been offered $5 per unit for any losses.
What will the two process accounts look like and what is the new cost per unit for each department?
SOLUTION
Fir Co
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Units $ Units $
Raw materials
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Direct labour
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Departmental overheads Transfer to Department 2
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Department 1: Cost per unit = __________________ = $

Units $ Units $
Transfer from
Department 1
Additional raw materials
Direct labour
Departmental overheads Transfer to Finished goods
Department 2: Cost per unit = ____________________ = $
Abnormal losses and gains arise if actual losses are either higher or lower than expected. They should,
in theory, not occur and are thus valued at the same cost per unit as good production in the process
account. The overall abnormal loss or gain goes through the income statement.
LECTURE EXAMPLE 2.17: ABNORMAL GAINS AND LOSSES
Now suppose DJS Co has actual output from Department 1 of 860 units and 830 units from
Department 2.
What will the two process accounts and the abnormal losses and gains account look like and what is
the cost per unit for each department?
SOLUTION

Units $ Units $
Department 1: Cost per unit =
ht 5
Units $ Units $
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st
Department 2: Cost per unit =
Fi r Abnormal losses and gains account

Units $ Units $
In Department 1 we lost 40 units which should have been worth $26.11, but instead were worth $5.
Thus giving a loss = 40 units x ($26.11 - $5) = $844.40.
In Department 2 we gained 13 units which should have been worth $5, but instead were worth $41.91.
Thus giving a gain = 13 units x ($41.91 - $5) = $479.83.
Hence there is an overall loss of $844.40 - $479.83 = $364.57.
(f) Calculate and explain the concept of equivalent units.

When there is closing work in progress (WIP), the costs incurred will need to be shared between
the completed output and the closing WIP, but more cost per unit will have been spent on the
completed units than the closing WIP and so the closing WIP are changed into the equivalent
number of fully completed units in order to work out the cost per unit e.g. if there were 100
units of closing WIP 40% complete, they would be equivalent to 40 finished units.
Total input costs – Normal loss scrap value
The cost per equivalent unit of process outputs =
Equivalent number of completed output
LECTURE EXAMPLE 2.18: CLOSING WIP AND EQUIVALENT UNITS
NLB Co runs a business where the first process account is as follows:
Process 1 Account
Units $ Units $
Direct labour 7,100 Transfer to Department 2 800
Departmental overheads 7,100 Closing WIP 200
1,000 24,080 1,000 24,080
The closing WIP is 30% complete.

Fir Co
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What is the cost per unit and the value of completed units and closing WIP?
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SOLUTION
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Sometimes the closing WIP will be completed to different degrees e.g. all of the raw materials
may have been put in but only half of the labour. In these situations the cost per equivalent
needs to be calculated separately for each cost component.
The steps to follow when completing the process account here are as follows:
STEPS
Step 1: Fill in the process account as much as you can first (likely to be missing monetary values
for output and WIP.
Step 2: Complete a working for the equivalent units and cost per equivalent unit.
Step 3: Do a working for the valuation of output and closing WIP (these figures should allow
the process account to be balanced off).
Step 4: Complete the process account.
The following illustration shows the main layout here.
ILLUSTRATION: CLOSING WIP (DIFFERENT DEGREES OF COMPLETION
GLB Co is a firm where the first process account is as follows:
Process 1 Account
Units $ Units $
Direct labour 19,152 Transfer to Department 2
Departmental overheads 6,312 Closing WIP
3,000 51,684 3,000 51,684
Normal losses are 10% of input and have a scrap value of $1 per unit. There are 100 units of closing
WIP which are completed as follows:
Raw materials 100% complete
Direct labour 60% complete
Departmental overheads 30% complete
Complete the Process 1 Account.
t
SOLUTION
g h 1 5
Departmental
r i 0
Total Raw materials Direct labour overheads
y 2
Costs:
o p ion
Inputs 51,684 26,220 19,152 6,312
C uit
Normal losses (300) (300)
Total 51,384 25,920 19,152 6,312
n t
Equivalent units:
I
t
Normal loss 300 nil nil nil
r s
Transfer to Process 2 2,600 2,600 2,600 2,600
i
Closing WIP 100 100 60 30
F Total
Cost per equivalent unit
3,000 2,700
$9.60
2,660.
$7.20
2,630
$2.40
Valuations:
Transfers to Process 2 = 2,600 units × ($9.60 + $7.20 + $2.40) = $49,920
Closing WIP = (100 units × $9.60) + (60 units × $7.20) + (30 units × $2.40) = $1,464
Process 1 Account
Units $ Units $
Raw materials 3,000 26,220 300 300
Direct labour 19,152 Transfer to Department 2 2,600 49,920
Departmental overheads 6,312 Closing WIP 100 1,464
3,000 51,684 3,000 51,684
(g) Apportion process costs between work remaining in process and transfers out of a process
using the weighted average and FIFO methods.
(h) Prepare process accounts in situations where work remains incomplete. (Situations involving
work in process and losses in the same process are excluded.)
If there is closing WIP in one period, then there will be opening WIP in the next period. This will
impact upon the valuations in the following period. We need to make one of two possible
assumptions about this opening WIP.
Either we assume that the opening WIP is mixed in with all other production e.g. chemical
production. This is known as the Weighted average method. With this method the opening WIP
costs and units are included in this period’s costs and units of production.
Or we assume that the opening WIP are completed first in the following period before any new
units are started e.g. paint production. This is known as the FIFO method. With this method the
cost of finishing the opening WIP is added to the opening value and all of this then added to
those units started and finished in the period; in order to arrive at the value of those units
transferred out.
These two methods are different and so result in different valuations (albeit quite similar).
LECTURE EXAMPLE 2.19: FIFO AND WEIGHTED AVERAGE
Bubbles Co produces washing up liquid using a number of processes.

At the start of the period the first process had opening WIP of 800 units, these had all of the required
Fir Co
materials valued at $40,000 and 25% of the conversion (labour and overheads) costs valued at $7,450.
st I pyri
During the period 3,400 units were transferred to process 2 and there were no process losses.
$200,000 had been spent on materials and $172,000 on conversion.
ntu ght
At the end of the period the closing WIP was 600 units, all of the required materials and 50% of the
itio
conversion work had been undertaken.
What is the value of the units transferred out and the closing WIP using the weighted average and
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FIFO methods?
015
SOLUTION
WEIGHTED AVERAGE METHOD
PROCESS A/C
Units $ Units $
Opening WIP
Raw materials Transfer to Process 2
Conversion Closing WIP
Statement of Equivalent Units

Total Raw materials Conversion
$ $ $
Costs:
Opening WIP
Inputs
Total
Equivalent units:
Transfer to Process 2
Closing WIP
Total
Valuation:
Transfers to Process 2 =
Closing WIP =
FIFO METHOD
t
PROCESS A/C
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Units $ Units $
Opening WIP
r i g 2 0 1
y
p ion
Raw materials Transfer to Process 2
o
Conversion Closing WIP
C uit
I n t
Statement of equivalent units
r st Total Raw materials Conversion
i
Costs:
F Inputs
Total
Equivalent units:
Finishing Opening WIP
Started & Finished
Closing WIP
Total
Valuation:
Transfers to Process 2:
Opening WIP =
Started & Finished =
Total
Closing WIP =
(j) Distinguish between by-products and joint products.

Some processes produce more than one product e.g. the refining of crude oil, animal farming.
If one of these products has relatively little economic value it is known as a by-product e.g. saw
dust when a tree trunk is cut into planks of wood.
If the products have reasonably similar economic value then they are known as joint products
e.g. different cuts of meat when an animal is butchered.
(k) Value by-products and joint products at the point of separation.
By-products are treated in the same way as normal losses and so are valued either at nil or their
scrap value. If by-products occur regularly then deduct the income from process costs in the
process account (ie as above) however, if they are a one off occurrence then the proceeds
should be credited to the income statement directly (i.e. will not appear in the process account
at all). Read questions carefully!
Joint products are treated in the same way as good production in Process Costing, however the
costs need to be split between the different joint products. There is no one correct way of
splitting the cost as strictly speaking the costs are incurred jointly (you cannot produce a single
product on its own, you have to produce the products jointly). However the joint costs are
commonly shared between the different products using one of the following bases:
 Physical quantities
Co
 Ultimate sales value
Fir
 Sales value at the split-off point
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(l) Prepare process accounts in situations where by-products and/or joint products occur.
LECTURE EXAMPLE 2.20: JOINT AND BY PRODUCTS

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Several Co buys 10,000 units of material and produces two joint products, A and B from a combined
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process. The joint costs are as follows:
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$
Direct material cost 10,000
Direct labour cost 5,000
Overheads 3,000
Total cost 18,000
The process produces 2,000 units of A which can be sold for $5 per unit and 8,000 units of B which can
be sold for $2.50 per unit.
What is the cost of A and B apportioning the joint costs using sales value and number of units and
show the process account?
SOLUTION
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(c)
t Service/operation costing
Fi
(i) Identify situations where the use of service/operation costing is appropriate.
Service/operation costing is used where the organisation/department is providing a
service rather than a tangible product e.g. rail companies or accountancy firms.
(ii) Illustrate suitable unit cost measures that may be used in different service/operation
situations.
As with product costing, there will not be a correct universal service cost unit; the most
appropriate cost unit will vary from situation to situation. However commonly used unit
cost measures are:
 Time – for professional services
 Passenger miles – for transport services
 Bed days – for private hospitals and hotels
(iii) Carry out service cost analysis in simple service industry situations.
ILLUSTRATION: SERVICE COSTING
Bus Service Co runs three different bus routes. Cost details are as follows:
Route
1 2 3
Number of vehicles 7 12 10
Total vehicle usage 8,000km 8,000km 8,500km
Variable operating costs (per kilometre) $0.60 $0.60 $0.56
Fixed route costs 50,400 $81,600 $68,000
In addition to the above, overheads are incurred and are absorbed into the cost of journeys at a
predetermined rate per kilometre. The predetermined rate for the period was based upon:
Budgeted overheads $331,800
Budgeted vehicle usage 237,000 kilometres
What is the cost per kilometre of each route?
SOLUTION
$50,400
Fixed route cost for route 1 = (7×8,000 km)
= $0.90 per kilometre
$81,600
Fir Co
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$68,000
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$331,800
Overhead absorption rate = 237,000 km
n2 Route
015
1 2 3
$ $ $
Variable operating costs 0.60 0.60 0.56
Fixed route costs 0.90 0.85 0.80
Overheads 1.40 1.40 1.40
Total service costs per kilometre $2.90 $2.85 $2.76
4 Alternative cost accounting

(a) Explain activity based costing (ABC), target costing, life cycle costing and total quality
management (TQM) as alternative cost management techniques.
(b) Differentiate ABC, Target costing and life cycle costing from the traditional costing techniques
(note: calculations are not required).
Traditional approach to costing

General recording of costs
Historically costs have been categorised by their nature, for example
 Research & Development
 Production
 Selling
 Distribution
 Admin, Finance etc
These have then been recorded in the accounts under these headings in the period to which they
relate. There is essentially nothing wrong with this since this suits the preparation of accounts on a
time period basis (i.e. monthly, quarterly or annual accounts).
Treatment of overheads (indirect costs) in product costing
In a traditional costing environment it is assumed that production overheads are driven by the volume
of production and hence when absorbing overheads into the cost units (e.g. units of the product you
are making) it is common to use OAR’s based on ‘units of production’, ‘labour hours’ or ‘machine
hours’.
This approach suits a high volume repetitive production process where the focus is on production of
units at low unit cost where stockpiling is not considered a particular problem (i.e. making items when
there is no current demand is not a problem because somebody will come and buy your products at
some point).
Use of costs as a basis for setting selling prices

A traditional approach to pricing might add up all the costs of manufacturing the items (including the
absorbed overheads) and then add on a mark up in order to arrive at an acceptable selling price.
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Summary
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Many businesses still find that the traditional approach to costing and pricing work perfectly well for
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them in their particular industries where there is a need to focus on high volume production and
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lowering unit production costs.
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However, there are certain characteristics of the environment within which many businesses now
operate that mean new approaches may be more relevant. Some of these environmental
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characteristics include:
I
rst
More global competition and consumer choice leading to:
Fi
 Shorter product lives
 Inventory becoming obsolete more quickly
 Quality becoming a more critical factor
 Greater availability of information and increased speed at which it can be processed.
As a reaction to this a number of techniques have developed that some businesses find are useful to
them in their drive to become more profitable and efficient. Some of these techniques are briefly
discussed below.
Life cycle costing

With the shortening of product life cycles and the ever increasing need to earn profits with limited
resources, it can be argued that in the modern world understanding the overall profitability of
products over their lifetime becomes crucial.
Under the traditional classification for example all R&D costs incurred this year would be charged
against this years’ profits even though the products that they relate to have not yet started generating
revenue. Profits analysed by accounting period then do not give a very good indication of the
profitability of individual product lines.
Life cycle costing aims to address this issue by monitoring/recording costs by product over the
different phases of the products life (typically from development, introduction, growth, maturity and
decline) rather than an accounting period basis. As a result the total profitability of a product can be
identified.
Uses:
 Provides better information as to the success of new product development. This may be
particularly important in an environment where product turnover happens fast and new
products are continually being developed.
 Gives focus on where the majority of costs are incurred in relation to a product (e.g. design and
development) and hence provides a more clear basis for cost reduction schemes.
 May focus attention on trying to extend the life cycle of a product overall whilst showing the
clear importance of a short lead time between R&D spend (no revenue being earned) and the
launch date (revenue starts to be earned).
Limitations:
 It will require more detailed analysis of costs and therefore may be time consuming/costly to
produce.
 It will not provide sufficient information for Financial Reporting purposes
Activity based costing

In many situations in the modern environment we see products being produced in shorter production
runs to cater for the need to produce a diverse range of products to keep customers happy. There is
also more focus on things like quality support costs (quality control checks and design for quality) and
Co
overall indirect costs make up a larger proportion of costs than they used to (especially in service
Fir
businesses).
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ABC seeks to give a better allocation of these indirect costs by trying to understand what truly causes
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these indirect costs to go up and down. The assumption is that not all indirect costs will nowadays be
linked to volume of production.
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ABC establishes a hierarchy of activities to help understand the ‘drivers’ of overhead costs, this
hierarchy comprises:

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Unit based activities. This would include traditional drivers linked to the volume of units such as
015
‘units’, ‘labour hours’, ‘machine hours’.
 Batch related activities. Typically linked to the number of batches of product produced and will
include such drivers as ‘no of production runs’, ‘quality control’ etc.
 Product sustaining activities. Expenditure such as advertising, marketing, design that may be
linked to drivers like ‘no of product lines’.
 Facility sustaining activities. This will include many of the typical head office fixed costs like
rent, rates, cleaning etc that ABC may simply conclude either should be absorbed based on
traditional drivers (assuming there is no better way of linking them to production units) or
simply left out of the detailed overhead analysis and just treated as lump sum period costs.
Target costing
In a competitive market place cost control and reduction together with careful choice of selling prices
become a pre-requisite for success. A traditional cost plus approach to pricing might lead to sub
optimal decision making in this environment due largely to a lack of market/customer focus.
Target costing seeks to address this issue.
By researching the market and having a desired market share in mind a market focused selling price
can be set, from which a required profit margin can be deducted in order to arrive at a target cost.
If the company is then not able to produce at or below this target cost, a cost gap exists and this will
need to be closed (better resource purchasing, increased efficiencies, cut out non-value adding
product features etc).
A company that is using target costing should be continually looking for cost reduction since
competition is likely to put downward pressure on prices as the product goes through its life. As a
pricing/costing approach it is better suited (but not exclusively for) to products at an early stage of
their development or where there is continual scope to reduce costs and/or change work practices.
It will be less suited to service based businesses or where the production process has been committed
to for the long term and is not therefore as flexible.
Traditional approaches to costing focus more on cost control (keeping costs within predetermined
limits) rather than cost reduction (trying to fundamentally reduce your costs) and so this is a difference
with target costing.
Total quality management (TQM)

TQM refers to an overall philosophy within organisations of ‘getting it right first time’ and ‘continuous
improvement’. Put simply, it is about everyone throughout the organisation striving for excellence in
all products, systems and procedures so that ultimately the customer benefits from ever improving
products/services.
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71
Budgeting
Fir Co
1 Nature and purpose of budgeting
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(a) Explain why organisations use budgeting.
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A budget is a financial and/or quantitative plan of what an organisation intends to achieve for a
forthcoming period. Budgeting brings a number of benefits:

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Control – a budget helps to control the organisation by forcing a plan to be produced;

 015
Responsibility – a budget will identify who is responsible for what;
Integration – a budget will ensure the activities of the different parts of the organisation
are integrated together and resources are allocated appropriately;
 Motivation – a budget will help to motivate staff within the organisation;
 Evaluation – a budget will allow evaluation of the actual results.
72 3: Budgeting AC C A F2
(b) Describe the planning and control cycle in an organisation.

One significant benefit of producing budgets is that they form a basis for monitoring your actual
performance and hence provide a framework through which control action can be taken.
The process can be viewed as a series of steps:
Budget is prepared Variance analysis performed by

based on defined comparing actual results to the
corporate objectives budget (budget data may need to be
flexed and account taken of
whether or not items were
controllable or uncontrollable).
Actual results are It may also be necessary to revise
established during the the budget so that operational
budget period variances can be distinguished from
planning variances.
Action is taken This could be based on feedback

following the variance control (learn from what’s already
investigation happened) or feedforward control
(action taken to address an issue
t
before it has happened).
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New/revised objectives
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are set
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p ion
(c)
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Explain the administrative procedures used in the budgeting process
t
The administrative procedures used in the budgeting process are as follows:
t I

n Establish the budget period;
rs
 Issue the budget manual, which lists the stages in the budgeting process;
Fi
 Appoint the Budget Committee, which coordinates the process;
 Identify the Budget Coordinator, who is usually an accountant, to head up the process.
(d) Describe the stages in the budgeting process (including sources of relevant data, planning and
agreeing draft budgets and purpose of forecasts and how they link to budgeting).
The budgeting process can either be top down or bottom up.
With a top down approach, the stages are as follows:
(1) Overall targets are set by the senior management of the organisation;
(2) The principal budget factor is identified;
(3) The other operational and capital budgets are then set;
(4) These budgets are reviewed by the relevant departments to ensure they can be achieved.
Often this will result in the initial budget being revised;
(5) The senior management of the organisation review the revised budget and either accept
it or revise it further and go back to step (4);
(6) Once the budget has been accepted by the senior management it becomes the target.
AC C A F 2 3: Budgeting 73
With a bottom up approach, the stages are as follows:

(1) Each department identifies what it thinks it can achieve;
(2) The principal budget factor is identified;
(3) The other operational and capital budgets are then set;
(4) The senior management of the organisation review the budget and either accept it or
revise it further and it then goes back to each department;
(5) The departments review the revised budget and either accept it or revise it further and
go back to step (4);
(6) Once the budget has been accepted by the senior management it becomes the target.
2 Statistical techniques
(a) Explain the advantages and disadvantages of using the high-low method to estimate the fixed
and variable element of costing.
This has been covered in an earlier section.
(b) Construct scatter diagrams and lines of best fit.
In a CBA exam you will not be asked to draw a scattergraph but you may need to be aware of
Fir Co
the process that has to be gone through in order to make the cost estimates.
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90,000
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Total 80,000
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Cost
70,000
60,000
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50,000
015
40,000
30,000
20,000
10,000
Total
0
0 2000 4000 6000 8000 10000 12000 Output
A graph is plotted of say, costs and output levels (scattergraph) and then a line of best fit is
drawn (sketched approximately) through the points.
The fixed cost can then be estimated as the point at which the line cuts the ‘y’ axis (vertical
one). Estimates can then be made of the variable cost per unit by using one of the other points
that is fairly close to the line as a guide.
The line of best fit in this illustration may look something like as follows:
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
t
0 2000 4000 6000 8000 10000 12000
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(c) Analysis of cost data.
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p ion
(i)
2
Explain the concept of correlation coefficient and coefficient of determination.
o
(ii) Calculate and interpret correlation coefficient and coefficient of determination.
C uit
(iii) Establish a linear function using regression analysis and interpret the results.
t
Using something called regression analysis (see below) it is possible to find, mathematically, the
t I n
line of best fit between two variable (called x and y). However while this is the best line, this
rs
does not necessarily mean that it is particularly close to the actual variables.
Fi
Correlation coefficient (r)
 Indicates the strength of the relationship between the variables i.e. how close the line of
best fit is to the actual variables.
 Will always be somewhere between –1 and +1. The sign simply indicates that the
gradient of the best fit line. The closer the correlation coefficient is to 1, the closer the
line of best fit is to the actual variables. If the correlation coefficient was 1, then the
variables would actually be on a perfect straight line.
 In the illustration that follows, r = 0.957, so this would suggest a very strong positive
relationship between Output and Total cost.
Coefficient of determination (r2)
 Indicates the proportion of change in the y (dependent) variable which is explained by
change in the x (independent) variable.
 Will always be somewhere between 0 and +1.
 In the illustration that follows, r2 = 0.915849, so this indicates that 91.5849% of the
change in the total cost is explained by the change in the output.
The correlation coefficient is calculated using the following formula:

𝑛 ∑ 𝑥𝑦 − ∑ 𝑥 ∑ 𝑦
𝑟=
√(𝑛 ∑ 𝑥 2 − (∑ 𝑥)2 )(𝑛 ∑ 𝑦 2 − (∑ 𝑦)2 )
As we have already seen a linear function takes the form of y = a + bx. Using regression analysis
‘a’ and ‘b’ can be found by using the following formulae:

𝑛 ∑ 𝑥𝑦 − ∑ 𝑥 ∑ 𝑦
𝑏=
𝑛 ∑ 𝑥 2 − (∑ 𝑥)2
and

∑𝑦 ∑𝑥
𝑎= −𝑏
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𝑛 𝑛
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Where a = fixed cost
b = variable cost per unit
x = output
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y = total cost
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LECTURE EXAMPLE 3.1: LINEAR REGRESSION
(units)
Total cost
($)
015
The total costs incurred at various output levels in a factory have been measured as follows:
Output
26 6,566
30 6,510
33 6,800
44 6,985
48 7,380
50 7,310
SOLUTION
Output Total cost
(units) ($)
2
(x) (y) xy x
26 6,566
30 6,510
33 6,800
44 6,985
48 7,380
50 7,310
231 41,551
What is the linear function for these variables?
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What is the correlation coefficient?
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I n t
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What is the coefficient of determination?
(d) Use linear regression coefficients to make forecasts of costs and revenues.
LECTURE EXAMPLE 3.2: COST AND REVENUE FORECASTS USING LINEAR REGRESSION
(a) Using the above cost equation estimate what costs would be at an output level of 40 units?
(b) Similarly, if we were told that the forecast equation for sales volume is given as:
Sales = 4,500 + 200Q
where Q = the quarter number (Q=1 is the first quarter of year 1)
what volume of sales would be forecast for quarter 3 of year 4?
(e) Adjust historical and forecast data for price movements.

This will be dealt with later in the section on index numbers.
(f) Explain the advantages and disadvantages of linear regression analysis.
Advantages
 It takes all pairs of data into consideration unlike the high-low method that just uses two
 It gives a statistically accurate link between the two variables
Disadvantages

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It assumes that there is a linear relationship between the two variables
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 It may suggest a cause and effect relationship where in fact there isn’t one (just because
two variables are plotted against one another doesn’t mean that they are related)
(g)
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Describe the product life cycle and explain its importance in forecasting.
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As part of the strategic review it is necessary to understand where the products are in the
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product life cycle. The product life cycle considers that products go through four main phases of
their life as described below.
Sales
Intro Growth Maturity
015
Decline
Time
Introduction:
The launch of a new product will generally have little initial demand. Marketing will be aimed at
informing customers as to the existence of the product and its benefits.
Growth:
Competition between rival companies increases as demand grows. Products will develop, in
terms of new features. Prices will tend to fall and brand loyalty may develop.
(An additional stage may be identified here – “shakeout” – whereby sales growth begins to dip,
the market is saturated by providers and the weakest providers are “shaken out”.)
Maturity:
The longest stage in the life cycle of the most successful products. Demand reaches its limit and
the organisation must manipulate the marketing mix in order to sustain its position.
Decline:
Demand falls as the existence of substitute products and changing tastes means that the
product either becomes a niche product or becomes obsolete.
Importance for forecasting
When forecasting costs and revenues consideration will need to be given to the stage of the life
cycle that a product is in when making the forecast.
For obvious reasons one would expect to forecast decent growth in the sales volume when a
product is at the growth stage but much smaller growth expectations in the trend in sales as the
product goes through to maturity and eventually into decline where the forecast will be for
falling sales of the product.
(h) Explain the principles of time series analysis (cyclical, trend, seasonal variation and random
elements).
(i) Calculate moving averages.
(j)
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Calculation of trend, including the use of regression coefficients.
(k)
r i g 0 1
Use trend and seasonal variation (additive and multiplicative) to make budget forecasts.
2
(l)
y
p ion
Explain the advantages and disadvantages of time series analysis.
o
C uit
A time series is simply a set of data observed over a period of time. For example, sales patterns
by day, by week, by month, by year etc.
I n t
A time series (TS) forecast identifies four components from a series of past figures recorded
t
over time and then uses them to forecast the future. These components are:
Fi rs  Trend (T) = the underlying long-term movement over time in the historic data. This can
be determined by a process of moving averages (taking consecutive averages of a range
of data). For example, there has been a general upward trend in house prices over the
last five years.
 Seasonal Variation (S) = short term periodic fluctuations in the historic values. This can be
determined by using either the additive or the proportional models (see later). For
example, ice cream sales are higher in Summer than in Winter.
 Cyclical Variation (C) = longer term fluctuations caused by such factors as economic
activity/cycles.
 Random Variation (R) = unpredictable fluctuations such as an act of nature.
You will not be asked to analyse cyclical and random variations. Therefore, we will focus on
trends and seasonal variations in the forecast of future data.
Models used
There are two models that we can use to determine the forecast time series:
(i) The additive model – used where the components are assumed to add together to give
the time series. The components of the Time Series are quoted in actual (absolute)
terms/values.
TS = T + S
LECTURE EXAMPLE 3.3: ADDITIVE MODEL
The trend equation for forecasting sales (A) for quarter (B) is A= 12.2 + 1.3B
Quarter 3 has a seasonal adjustment factor of +1.6 using the additive model.
What is the time series forecast for Q3?
SOLUTION
(ii) The multiplicative (or proportional) model – used where the components are considered
as multiplying together to give the TS. The components of the Time Series are quoted as
a % or fraction of the trend (T).
Co
TS = T  S
Fir
LECTURE EXAMPLE 3.4: MULTIPLICATIVE MODEL
st I pyri
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Forecast sales for the next quarter are $200,000 and the seasonal variation is 0.76
itio
Using the multiplicative model, what is the underlying trend?
n2
SOLUTION
015
TS = T  S
The additive model assumes that the seasonal variations are independent of the trend whereas the
multiplicative model assumes the seasonal variations are linked to the size of the trend.
ILLUSTRATION: IDENTIFYING THE TREND
IPatterns Co has the following historic data of its quarterly sales over the last three years:
Year Quarter Sales
1 1 $60,000
2 $144,000
3 $198,000
4 $240,000
2 1 $72,000
2 $180,000
3 $228,000
4 $262,000
3 1 $106,000
2 $200,000
3 $252,000
4 $286,000
There are three ways of determining the trend in the above data:
 Preparing a graph
 Moving averages
 Linear regression
t
Preparing a graph
i g h 1 5
Using the data on the previous page, we can construct a time series graph.
y r 2 0
o p ion Sales
C uit 350
I n t
300
rst
Fi
250
200
$'000
150 Sales
100
50
0
YR1 YR1 YR1 YR1 YR2 YR2 YR2 YR2 YR3 YR3 YR3 YR3
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Moving averages
First, we need to decide how many periods to include in the average. In this example we are given
quarterly results for different years and so working out the average for each four quarter range seems
most appropriate.
We then work out an average over each four-quarter cycle and in doing so any seasonal distortions
should be eliminated leaving us with an estimation of the underlying trend.
The first average is worked out for quarters 1, 2, 3 and 4 for year 1; the second for quarters 2, 3 and 4
for year 1 and quarter 1 for year 2 and so on.
LECTURE EXAMPLE 3.5: ADDITIVE MODEL
Forecast the sales figures for year 4 based on the previous illustration.
Moving Centred Moving Seasonal
Year Quarter Sales (TS) Average Average (T) Variation
(TS-T)
1 1 $60,000
2 $144,000
$160,500
3 $198,000 $162,000 +$36,000
$163,500
4 $240,000 $168,000 +$72,000
$172,500
2 1 $72,000 $176,250 –$104,250
$180,000
Co
2 $180,000 $182,750 –$2,750
Fir
$185,500
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3 $228,000 $189,750 +38,250
$194,000
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4 $262,000 $196,500 +$65,500
$199,000
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3 1 $106,000 $202,000 –$96,000
$205,000
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2 $200,000 $208,000 –$8,000
$211,000
015
3 $252,000
4 $286,000
4 1
4
The average has been calculated over an even number of periods and so it does not line up against an
individual quarter. So a second moving average of two is taken.
STEPS
Step 1: Calculate the moving averages.
Step 2: Centre the moving averages (only needed if using an even number for the averages) to
give the trend.
Step 3: Calculate seasonal variations (either additive or multiplicative basis).
Step 4: Forecast.
The centred moving average is the trend. So from quarter 3 of year 1 to quarter 2 of year 3 the trend
has moved from $162,000 to $208,000; which is an average quarterly increase of:
By summarising the seasonal variation column we have the following:
Quarter 1 Quarter 2 Quarter 3 Quarter 4

Year 1
Year 2
Year 3
Average
It is now possible to forecast the year 4 sales using the trend movement and seasonal fluctuations we
have calculated.
ILLUSTRATION: MULTIPLICATIVE MODEL

Moving Centred Moving Seasonal
Year Quarter Sales (TS) Average Average (T) Variation
t
(TS÷T)
h 5
1 1 $60,000
r i g 2 0 1
y
2 $144,000
p ion
$160,500
o
3 $198,000 $162,000 122%
C uit
$163,500
t
4 $240,000 $168,000 143%
n
$172,500
t I
2 1 $72,000 $176,250 41%
rs
$180,000
Fi
2 $180,000 $182,750 98%
$185,500
3 $228,000 $189,750 120%
$194,000
4 $262,000 $196,500 133%
$199,000
3 1 $106,000 $202,000 52%
$205,000
2 $200,000 $208,000 96%
$211,000
3 $252,000 $214,571
4 $286,000 $221,142
4 1 $107,025 $227,713 47%
2 $227,255 $234,284 97%
3 $291,435 $240,855 121%
4 $341,448 $247,426 138%

Using the multiplicative model:

We can summarise the seasonal variations as follows:
Year 1 – – 122% 143%
Year 2 41% 98% 120% 133%
Year 3 52% 96% – –
Average 47% 97% 121% 138%
Finally, we can forecast the sales (time series) for year 4 (see bold figures in the above table).
Linear regression
Here, we can use the linear equation y = a + bx, where y is the dependent variable (i.e. the actual
results) and x is the independent variable, which will be periods of time.
ILLUSTRATION: LINEAR REGRESSION
Using our earlier data:

2
Year Quarter Period (x) Sales (y) xy x
Co
$000
Fir
1 1 1 60 60 1
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2 2 144 288 4
3 3 198 594 9
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4 4 240 960 16
2 1 5 72 360 25
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2 6 180 1,080 36
3 7 228 1,596 49
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4 8 262 2,096 64
3 1 9 106 954 81
015
2 10 200 2,000 100
3 11 252 2,772 121
4 12 286 3,432 144
78 2,228 16,192 650
𝑛 ∑ 𝑥𝑦−∑ 𝑥 ∑ 𝑦
𝑏=
𝑛 ∑ 𝑥 2 −(∑ 𝑥)2
(12×16,192)−(78×2,228)
= (12×650)−782
20,520
= 1,716
𝑏 = 11.96
𝑎 = Y̅ − 𝑏X̅
2,228 78
= − (11.96 × 12)
12
= 185.67 – 77.74
𝑎 = 107.9
Therefore Y = 107.9 + 11.96X

Using this equation, we can predict the trend values (y) for the next few quarters:
y = 107.9 + 11.96X
Period (X) (TREND)
13 263.38
14 275.34
15 287.3
16 299.25
These figures will then need to be adjusted for the seasonal variations either using the additive or
multiplicative models.
Limitations of forecasting
 Assumes the historic trends will continue into the future (for time series analysis).
 Becomes less reliable if you go outside the ranges of existing observations.
 Seasonal variations may not be consistent into the future.
 Assumes there is an identifiable relationship
(m) Explain the purpose of index numbers.

(n) Calculate simple index numbers for one or more variables.
t
An index number series measures the relative changes in the volume or value of an item over
h 5
time. Common examples include the FTSE 100 index and Retail Price Index (RPI) or Consumer
r i g 0
Price Index (CPI).
2 1
y
p ion
Price indices
o
C uit
All index number series show the relative or percentage changes over time. They compare the
price in one period to the price in another period – called the base year.
I n t
The index in the base year is always 100. The base year should be a typical time period with no
t
unusual or extreme circumstances. The base year is often the earliest period when the index
rs
series is calculated.
Fi
For example, the Retail Price Index compares the average cost of household expenditure to its
equivalent cost in the base year of 1987.
Formula for simple price index
100 * P1/P0
Where P1 = Price in the current year, and Po = Price in the base year.
Therefore, we could index the following prices into a series with 2001 as the base year.
Year 2001 2002 2003 2004 2005 2006
Price $56 $61 $65 $71 $77 $82
Index 100 109 116 127 138 146
71/56 × 100 = 127

Interpretation
In 2002, prices were 9% higher than in 2001.
In 2004, prices were 27% higher than in 2001.
Quantity indices
As the name suggest, a quantity index is calculated in a similar way to a price index, with a focus
on volumes rather than prices:
100 * Q1/Q0
Year 2001 2002 2003 2004 2005 2006
Volumes (‘000) 370 420 450 490 510 535
Index 100 114 122 132 138 145
Interpretation
In 2002, volumes were 14% higher than in 2001.
In 2004, volumes were 32% higher than in 2001.
(o) Explain the role and features of a computer spreadsheet system.
The role of a computer spreadsheet system is to allow the manipulation and presentation of
data in a clear and understandable format to aid planning, decision making and control.
The features of a computer spreadsheet system include the ability to create charts, use colours
and boarders, tabs for multiple sheets, flexible sizes and functions. Computer spreadsheet
systems now have more than two hundred and fifty functions, but some of the most commonly
used in Management Accounting are as follows:
Co
SUM = adds all the numbers in a range of cells
Fir
AVERAGE = calculates the average of all numbers in a range of cells
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IF = checks whether a condition is met, and returns one value if true and another value if false
HYPERLINK = creates a shortcut or jump that opens a document stored elsewhere
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COUNT = counts the number of cells that contain numbers
MAX = returns the largest value in a set of values
itio
SUMIF = adds the cells specified by a given condition or criteria
PMT = calculates the payment for a loan based on constant payments and a constant interest rate
n2
STDEV = calculates the standard deviation based on a sample
015
(p) Identify applications for computer spreadsheets and their use in cost and management
accounting.
Computer spreadsheets can be used to:
 Calculate the fixed and variable cost using high-low analysis
 Calculate expected values
 Calculate a correlation coefficient and a coefficient of determination
 Calculate the fixed and variable cost using linear regression
 Calculate optimal stock reorder levels with and without discounts
 Reapportion service cost centre costs to production cost centres
 Helping to prepare and flex budgets
 Calculating variances
 Performing cost-volume-profit analysis
 Determine the optimal solution in a single and multi-limiting factor situation
3 Budget preparation
(a) Explain the importance of the principal budget factor in constructing the budget.
The principal budget factor is the factor which limits what an organisation can achieve.
Invariably this will be sales. Once this budget is set the other budgets can then be calculated
(once you know the sales budget, you can work out the production budget and other resource
budgets such as the labour and materials budgets etc).
(b) Prepare sales budgets.
(c) Prepare functional budgets (production, raw materials usage and purchases, labour, variable
and fixed overheads.
LECTURE EXAMPLE 3.6: SALES AND FUNCTIONAL BUDGETS
Plan Co produces two products, the Good and the Bad. Data for these products is as follows:
Good Bad
Materials per unit 12kg 14kg
Labour per unit 1hr 2hrs
Maximum demand 4,300 units 3,600 units
Selling price per unit $15 $20
t
Inventory of finished goods:
h 5
Opening 200 100
i g 1
Closing 50 nil
y r 2 0
Plan also had 2,900 kg of materials at the start of the period and 800kg at the end of the period.
o p ion
Total overheads are $17,840 and are absorbed on a labour hours basis.
C uit
Prepare budgets for sales, production, materials (usage and purchases), labour and overheads.
SOLUTION
I n t
rst
Fi
Fir Co
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(d) Prepare cash budgets

It is critical for a company to keep watch on its cash balances since a lack of cash is the most
common cause of business failure. One of the most effective tools to assist in the cash
management process is the regular production of cash budgets.
KEY TERM
A cash budget is a ‘detailed budget of estimated cash inflows and outflows incorporating
both revenue and capital items’.
A typical cash budget might look as follows:

Jan Feb Mar
$ $ $
Cash receipts
Receipts from customers (W1) X X X
Proceeds from sale of assets X
Cash introduced into business X
Total cash receipts X X X
Cash Payments
Payments to suppliers X X X
Payments to employees (wages etc) X X X
Purchase of non-current assets X
Overheads X X X
Repayment of finance X
Total cash payments X X X
Net receipts/(payments) X (X) X
Opening balance X X X
Closing balance X X X
By preparing a cash budget that looks forward in time the business will be in a position to
identify periods during which they may face either a cash shortage or a cash surplus. Action can
then be taken, in advance, to manage those periods, as follows:
ht 5
What to do if you identify a potential ……
Shortage
r i g 2 0 1

y
p ion
Organise an overdraft

 o
C uit
Offer customer a discount to pay early
Delay paying suppliers
t
 Raise other finance
t I n
Surplus
Fi rs
 Offer more generous terms to your customers
 Arrange to pay off some finance (e.g. loans)
 Organise to put surplus on deposit on the money markets etc.
 …….
LECTURE EXAMPLE 3.7: CASH BUDGETS 1

Jones Co started in business on 1 Jan 20X8. The following information is relevant for the first three
months of trading:
 In January $350,000 share capital was raised.
 Non-current assets were purchased for $100,000 in January. The assets are expected to last for
10 years with a zero resale value. The company has a policy of depreciating assets on a straight-
line basis.
 Sales are expected to be $80,000 in January, growing thereafter at 25% per month. Jones Co
have decided to allow their customers to take three months’ credit.
 Purchases are expected to be $50,000 in January, with 20% growth per month thereafter.
Suppliers are only prepared to initially offer Jones Co one month’s credit.
 Other costs of $20,000 are expected to be incurred on a monthly basis.
Required:
Prepare a cash budget for Jones Co on a monthly basis for Jan-Apr 20X8.
SOLUTION
Jones Co – Cash budget for the four months Jan-Apr 20X8
Jan Feb Mar Apr

$ $ $ $
Cash receipts
From customers (receivables)
Share capital introduced
Total receipts
Cash payments
To suppliers (payables)
Other
Non-current assets
Total payments
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Net cash flow
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Opening balance
Closing balance
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LECTURE EXAMPLE 3.8: CASH BUDGETS 2
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Month 1 $100,000
015
The following sales are anticipated by Bloggs Co over the next six months.
Month 2 $110,000
Month 3 $120,000
Month 4 $130,000
Month 5 $140,000
Month 6 $150,000
 60% of sales are paid for by customers up front with cash at their face value (that is a customer
pays $1 for each $1 they have been charged).
 40% of sales are made on credit to customers who generally pay three months after being
invoiced.
In order to improve cash flow, Bloggs Co has proposed offering credit customers a 10% discount if they
pay one month after sale rather than three months.
Calculate the monthly receipts from customers for the next six months if 30% of credit customers take
up the company’s offer.
Month Month Month Month Month Month

1 2 3 4 5 6
Sales (for reference only) 100,000 110,000 120,000 130,000 140,000 150,000
Cash sales (60%)
Credit sales – 1 month
Credit sales – 3 months
Cash receipts
(e) Prepare master budgets (income statement and statement of financial position).
A business is likely to want to produce a summary budget of its income statement and
statement of financial position as this will be of particular interest to the senior managers and
board of directors.
ht 5
These summary budgets are collectively referred to as the master budget. Preparation of these
i g 1
budgets will be done using information from the other sales and functional budgets.
y r 2 0
p ion
LECTURE EXAMPLE 3.9: MASTER BUDGETS
o
C uit
Jo Ker started up in business on the 1st January 2011 with an initial investment of $50,000 taken out of her
t
savings account. Jo has prepared the following forecast information for the first three months of trading;
(1)
t I n
Non-current assets of $40,000 will be purchased and paid for in January 2011. These assets are
rs
expected to have a useful life of eight years with nil residual value.
Fi
(2) In January Jo will purchase $10,000 of inventory and will maintain this balance each month (i.e.
each month sufficient purchases will be made to replace that month’s sales).
(3) The following sales are forecast for the first three months:
 Jan 2011 $15,000
 Feb 2011 $25,000
 Mar 2011 $35,000
(4) The sales price is set to provide a margin on sales of 40%.
(5) Customers will be allowed one month’s credit however Jo is expecting to have to pay for
purchases from suppliers by cash on order.
(6) Other business expenses are likely to be $3,000 per month. This excludes depreciation.
(7) Jo intends to take out $2,000 each month as cash drawings.
(8) The cash forecast that Jo has already produced shows a closing cash balance at the end of the
first three months of $20,000 overdrawn.
Required:
Prepare a budgeted income statement and statement of financial position for the three months to
31 March 2011.
SOLUTION
Budgeted income statement for the three months ended 31 March 2011
$ $
Sales
Cost of sales
Gross profit
Expenses
General business expenses
Depreciation
Net profit
Budgeted statement of financial position at 31 March 2011
ASSETS $ $
Non-current assets
Current assets
Co
Inventories
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Receivables
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EQUITY AND LIABILITIES
Proprietor’s interest
Capital introduced
n2
015
Profit for period
Less drawings
Current liabilities
Bank overdraft
(f) Explain and illustrate ‘what if’ analysis and scenario planning.
Once a budget has been produced then the users may wish to see what the impact is on the
budgeted figures if one or more of the variables in the budget is changed. This is made much
easier if software such as a spreadsheet is used to prepare the information. Consider the cash
budget example from earlier.

Jan Feb Mar Apr
$ $ $ $
Cash receipts Jan sales not received
From customers (receivables) 80,000 until April after three
Share capital introduced 350,000 months credit is taken.
Total receipts 350,000 0 0 80,000
Cash payments Just 1 month delay

To suppliers (payables) 50,000 60,000 72,000 between making the
Other 20,000 20,000 20,000 20,000 purchase and paying in
Non-current assets 100,000 cash.
Total payments 120,000 70,000 80,000 92,000

Net cash flow 230,000 (70,000) (80,000) (12,000)
Opening balance 0 230,000 160,000 80,000
Closing balance 230,000 160,000 80,000 68,000
You may remember that this budget assumed that Jones was going to offer customers three
months’ credit, so the first cash in from customers was not going to arrive until April ($80,000).
If we consider a scenario where Jones only offers customers two months’ credit the cash budget
would be as follows (assuming only sales figures are affected).
ht 5
Jan Feb Mar Apr
i g 1
$ $ $ $
r 0
Jan sales not received
Cash receipts
y 2
until March, April being
p ion
From customers (receivables) 80,000 100,000 25% larger as per
o
Share capital introduced 350,000 information in the
C uit
original example.
Total receipts 350,000 0 80,000 100,000
t
Cash payments
I n
To suppliers (payables) 50,000 60,000 72,000
t
Other 20,000 20,000 20,000 20,000
Fi rs
Non-current assets 100,000
Total payments 120,000 70,000 80,000 92,000
Net cash flow 230,000 (70,000) 0 8,000
Opening balance 0 230,000 160,000 160,000
Closing balance 230,000 160,000 160,000 168,000
We can clearly see that the impact of this change is to increase the closing bank balance for
March by $80,000 and for April by $100,000 as we benefit from getting cash in from customers
one month earlier.
This sort of “what if” analysis and scenario planning allows managers to assess the impact of
changing certain key variables given that in reality many of the figures will not be known with a
great deal of certainty.
4 Flexible budgets
(a) Explain the importance of flexible budgets in control.
(b) Explain the disadvantages of fixed budgets in control.
(c) Identify situations where fixed or flexible budgetary control would be appropriate.
(d) Flex a budget to a given level of volume.
Performance management involves assessing the current actual performance. Looking at the current
actual performance in isolation is meaningless.
In order to get a good comparison for the actual performance it is sensible to produce a “flexed”
budget that shows what the original budget would have looked like if it had been based on the actual
volume of production and sales. You then have a better like for like comparison and hence
performance assessment. An example of a flexed budget is shown later.
LECTURE EXAMPLE 3.10: FLEXED BUDGET
Z Co is a family owned manufacturing company which has been run for 40 years by Dan Controle.
He believes in strict cost control and sets tough targets for his management team. Staff turnover is
very high and the company is struggling to compete against rival businesses.
The budgeted and actual results of Z Co for September were as follows. The company uses a marginal
Fir Cop
costing system. There was no opening or closing inventories.
Fixed budget Actual
st I yri
Sales and production 1,000 units 700 units
$ $ $ $
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Sales 30,000 21,200
Variable cost of sales
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Direct materials 10,000 6,600
Direct labour 5,000 3,800
Variable overhead
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3,000 2,200
015
18,000 12,600
Contribution 12,000 8,600
Fixed costs 10,000 10,400
Profit/(loss) 2,000 (1,800)
Required:
Prepare a budget that will be useful for management control purposes.
SOLUTION
5 Capital budgeting and discounted cash flows

(a) Discuss the importance of capital investment planning and control.
(b) Define and distinguish between capital and revenue expenditure.
(c) Outline the issues to consider and the steps involved in the preparation of a capital
expenditure budget.
t
Capital spending by a business will often amount to a considerable size of investment and as such will
g h 5
require careful planning before any final decision is made. Once a commitment is made then the
r i 0 1
business needs to closely monitor the spending to ensure that it does not fall outside the pre-agreed
levels.
y 2
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KEY TERMS
n t
Capital expenditure
I
rst
This represents spending on acquiring non-current assets or improving the earning capacity
Fi
of any existing non-current assets. Typically things such as land and buildings, machinery,
computer equipment and vehicles would be good examples of non-current assets.
Capital expenditure results in assets being shown on the statement of financial position and
depreciated over a period of time.
Revenue expenditure
This is spending on maintaining the existing earning capacity of non-current assets (for
example repairs of a piece of capital equipment) or other expenditure such as administration
costs, finance costs and selling costs.
Capital expenditure (CAPEX) budget

The issues to consider when setting a CAPEX budget include the following.
 The size of the investment – For small scale investments the spending may just be incorporated
into a sundry annual budget but for larger scale investments a full detailed budget may be
necessary.
 The time period of the spending – Budgets may need to be prepared on a monthly or annual
basis or even longer (five to ten years) for some large scale investments.
 Financing availability
The capital expenditure budget is part of the overall budgeting process and is integral to the
production of the master budget as it will directly affect things like cash flow, statement of financial
position and income statement.
The steps involved in the preparation of the capital expenditure budget are as follows.
 Departments submit their CAPEX budgets to head office.
 Department budgets are reviewed for reasonableness in light of the overall business needs and
finance available. Unnecessary spending is rejected.
 The accepted CAPEX is then built into a formal budget listing things like date of acquisition,
amount, depreciation policy etc.
 The CAPEX budget is then integrated into the overall master budgets.
(d) Explain and illustrate the difference between simple and compound interest, and between
nominal and effective interest rates.
(e) Explain and illustrate compounding and discounting.
(f) Explain the distinction between cash flow and profit and the relevance of cash flow to capital
investment appraisal.
(g) Identify and evaluate relevant cash flows for individual investment decisions.
(h) Explain and illustrate the new present value (NPV) and internal rate of return (IRR) methods of
Fir Co
discounted cash flow.
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(i) Calculate present value using annuity and perpetuity formulae.
(j) Calculate NPV, IRR and payback (discounted and non-discounted).
(k)
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Interpret the results of NPV, IRR and payback calculations of investment viability.
5.1 Compounding
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If you invest money, in the future you will get back your investment plus the interest you have earned.
015
This can be calculated by using the following formula:
S = X [ 1+r ]n
X S
n
X (1+r)
Where X = initial investment

S = investment’s value at the end of n periods
n = number of periods investment is held for
r = interest rate as decimal
The above formula is based on interest being calculated on a ‘compound’ basis.
5.1.1 Simple and compound interest

Simple interest refers to the interest earned on the original investment only, so that an equal amount
of interest is earned each year.
Compound interest refers to the idea that interest is calculated and paid on the original amount
invested plus any accrued interest earned and received up to that point. This will mean that the
interest earned each year will increase.
LECTURE EXAMPLE 3.11: SIMPLE AND COMPOUND INTEREST
Johnny invests $100 now (sometimes referred to as T0) for three years.
Calculate the value of the investment if the Simple interest is 10%:
Calculate the value of the investment if the Compound interest is 10%:
Visually, this can be seen:

e.g. 10% interest
ht
T0 T1 T2 T3 T4
r i g
$100
0 1 5 $110 $121 $133
Interest
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p ion 2 $10 $11 $12
o
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I n t Note : with compound interest, you
t
earn “interest on your interest”
Fi rs
Unless you are told otherwise, assume that any interest rates you are given in the exam are
compound interest rates. Just be careful of the wording of the question.
5.1.2 Additions/withdrawals from capital

If the amount of capital increases or decreases due to additions or withdrawals, you should break the
calculation down into segments for each addition/withdrawal.
LECTURE EXAMPLE 3.12: WITHDRAWAL OF CAPITAL
Nick invests $400 now with compound interest at 10% but at the end of year 4 he withdraws $200, but
keeps the rest invested for another three years.
How much is there at the end of year 7?
SOLUTION
5.1.3 Compounding for periods other than a whole year

In the equation S = X[1 + 𝑟]n it should be noted that “n” is the number of periods the investment is
held for. This “period” may or may not be a year.
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LECTURE EXAMPLE 3.13: COMPOUNDING EACH SIX MONTH PERIOD
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$1,000 is invested for three years at a 4% six monthly interest rate.
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At the end of the three years, the investment will be worth:
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015
5.1.4 Annual percentage rates (APR)
The APR is the effective annual rate of interest for a given monthly or quarterly rate. It can be
calculated using the formula:
(1 + R) = (1 + r)n
∴ R = (1 + r)n – 1
where R = APR
r = interest rate for the period
n = number of periods in a year
LECTURE EXAMPLE 3.14: APR
Calculate the effective annual rate of interest in the Illustration above.
5.1.5 Nominal rate

Sometimes the annual rate of interest is quoted as a “nominal rate” rather than an effective rate.
For example, a credit card with a 2% monthly nominal interest rate could be quoted as having a 24%
annual rate. Similarly, a card with an annual nominal rate of 12% could be quoted as having a 1%
nominal monthly rate.
LECTURE EXAMPLE 3.15: NOMINAL RATE
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$1,000 is invested now at nominal annual interest rate of 13%, interest compounded monthly.
i g h 1 5
At the end of the first year, the investment will have grown to:
y r 2 0
o p ion
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I n t
rst
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5.2 Discounting
5.2.1 Discounting single sums
In the Illustrations seen in this chapter so far, we calculated what an investment is worth in the future.
However, when appraising investments we want to know what they are worth to the organisation
now, so that we can directly compare rival potential investments.
The concept of the “time value of money” is relevant here. This simply states that cash received in the
future is not worth as much to us as the same amount of cash received today. If we know how much
cash we are going to receive in the future then we will want to estimate how much this is worth to us
today (assuming that we are making our investment decision today). This is referred to as a “present
value”.
Thus rather than calculating future values we will calculate present values.
X S
n
÷(1+r)
Present Value Future Value
To calculate the present value of a future value we rearrange the compounding formula:
S = X[1 + 𝑟]2
1
Therefore, “X”, at its present value = S × (1+𝑟)𝑛
This is the version of the formula you will meet in the exam:
(1 + r)–n
LECTURE EXAMPLE 3.16: DISCOUNTING SINGLE SUMS
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Money Bags is expecting to receive $16,751 in six years. Interest rates will be 5% for the whole six years.
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Calculate the present value of Money Bags’ receipt:
SOLUTION
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In the exam you are given on the formulae sheet the discount factors for individual cash flows for
whole percentages from 1% to 20% for periods 1 to 15.
The present value of a future sum can be determined by multiplying the figure by the relevant
discount factor:
Present value = 16,751 × 0.746 = 12,496 (i.e. the same as the $12,500 above)
LECTURE EXAMPLE 3.17: PRESENT VALUE

We need $10,000 at the end of two years. Assuming we could earn interest at 7% p.a., how much
should we invest now?
SOLUTION
LECTURE EXAMPLE 3.18: PV WITH CHANGE IN DISCOUNT RATES
We need $10,000 at the end of three years. We can earn interest at 7% pa for the first year and 8% for
years 2 and 3. How much should we invest now?
SOLUTION
5.2.2 Discounting annuities

Some investments generate a constant return – an annuity. The present value of an annuity can be
calculated by using the following formula:
1 1
PV= 𝑟 [1 − [1+𝑟]𝑛]
This is the version of the formula you will meet in the exam:
1−(1+𝑟)−𝑛
t
𝑟
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In the exam you are given on the formulae sheet the discount factors for annuity cash flows for whole
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percentages from 1% to 20% for periods 1 to 15.
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p ion
o
LECTURE EXAMPLE 3.19: PRESENT VALUE OF ANNUITY
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Henry is going to receive $150 every year for 12 years. The annual interest rate is 6%.
t I n
The present value of Henry’s annuity is:
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SOLUTION
5.2.3 Perpetuities
Some annuities last forever – a perpetuity. The present value of a perpetuity can be calculated by
using the following formula:
1
PV = 𝑟
(Note: for annuities and perpetuities, it is assumed that the first payment/receipt takes place in one
years’/periods time.)
LECTURE EXAMPLE 3.20: PV OF A PERPETUITY
Victoria is expecting to receive $2,000 a year forever. Interest rates are expected to remain constant at
5%.
Calculate the present value of Victoria’s perpetuity.
SOLUTION
5.3 Relevant cash flows for investment decisions

In decision-making it is important that any decision is based upon relevant information. The correct
financial figures are the relevant costs and revenues.
A relevant cost can simply be defined as a future incremental cash flow. In other words for a figure to
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be relevant it must pass three tests:
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(1) Future: a decision being made today cannot change the past and so only future costs are
considered. Past costs are sometimes referred to as sunk costs and are not relevant and so are
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ignored e.g. the price paid for something which is already owned.
(2) Incremental: only those costs that are affected by the decision are relevant. Some costs are
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sometimes referred to as committed costs and are not relevant and so are ignored e.g. fixed
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costs.
(3) Cash flow: these are factual and not based upon accounting conventions. Also organisations live
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or die due to their cash position. So non-cash flows are not relevant e.g. depreciation.
5.4 Profit v Cash flow

When considering the businesses investment in capital assets there are generally two main types of
approach to the evaluation. Some approaches consider the profitability of the investment and some
consider the future cash flow generation of the investment. For capital investment decision making
the better methods consider the future cash flows as these represent the amounts that are actually
going to be received or paid out in relation to that investment.
Profit based approaches will be subject to whatever the individual company’s accounting policies (e.g.
for depreciation) whereas cash flow approaches will not be subject to such policies.
The main cash based methods are as follows:
 Payback period
 Discounted payback period
 Net Present Value (NPV)
 Internal Rate of Return (IRR)
In simple terms, payback period ignores the timing of the cash flows for a project (unless using
discounted payback) whereas NPV and IRR do take the time value of money into account (see below).
5.4.1 Payback period and discounted payback period

A payback period is simply a calculation of how long it takes for the net cash flows from an investment
to repay the initial investment. When the time value of money is taken into consideration it is known
as a discounted payback.
LECTURE EXAMPLE 3.21: PAYBACK PERIOD AND DISCOUNTED PAYBACK PERIOD
Horizon Ltd is considering a project that will require an investment in machinery of $80,000 and which
will generate an income of $15,000 in the first year, increasing by $5,000 each subsequent year.
The project is expected to last for five years and the machinery is not expected to have any residual
value. The cost of capital for Horizon is 10%.
(a) Calculate the payback period of this project.
(b) Calculate the discounted payback period.
SOLUTION
(a) Payback period
Annual cash flow Cumulative cash flow

$ $
Investment
First year
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Second year
2 0 1
y
p ion
Third year
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Fourth year
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(b) Illustration of discounted payback period
t I n Discount Present Cumulative
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Timing Cash flow Factor Value PV
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$ 10% $ $
0 (80,000) 1.000 (80,000) (80,000)
1 15,000 0.909 13,635 (66,365)
2 20,000 0.826 16,520 (49,845)
3 25,000 0.751 18,775 (31,070)
4 30,000 0.683 20,490 (10,580)
5 35,000 0.621 21,735 11,155
Discounted payback occurs roughly half way through the fifth year (i.e. the point at which the
cumulative cash flow turns positive).
The benefits and drawbacks of payback as an investment appraisal method are:

Benefits Drawbacks
 It is simple to calculate  Ignores time value of money (unless using
discounted payback)
 Easy to understand, especially for non-  Only considers cash flows up to the payback
accountants date
 It uses relevant cash flows  May lead to short-termist decision making
 It can be used as an initial screening tool  No clear decision rule
on projects before undertaking a more
detailed review
 It (rather crudely) allows for risk in the
timing of cash flows
5.4.2 Net present value (NPV)

Most investments will involve a series of cash outflows and inflows at different points in time.
If we calculate the present value of each cash flow and then add all of the present values together, we
can calculate the Net Present Value (NPV) of the investment. Investments with a positive NPV should
be undertaken and those with a negative NPV should not.
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The discount rate used will be the cost of capital (i.e. the return required by the investors).
LECTURE EXAMPLE 3.22: NPV

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Horizon Ltd undertakes a project with the following cash flows:
Timing Cash flow
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$
0 (i.e. now) (80,000)
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1 15,000
2 20,000
3 25,000
4 30,000
5 35,000
Horizon’s cost of capital = 10%
SOLUTION
We can therefore discount any future cash flows and determine whether the net of the future cash
flows (net present value) is positive or negative:
Timing Cash flow Discount factor Present value
$ 10% $
NPV =
If NPV > 0 project is worthwhile

If NPV < 0 project is not worthwhile
If NPV = 0 project breaks even.
(Note: With NPV, it is assumed that all cash flows occur on the last day of the year/period except for the
initial investment.)
When the net present value has been calculated, there is a simple decision rule:
If NPV > 0 project is worthwhile
If NPV < 0 project is not worthwhile
If NPV = 0 project breaks even.
(Note: With NPV, it is assumed that all cash flows occur on the last day of the year/period except for
the initial investment.)
Benefits of NPV Drawbacks of NPV
 It allows for the time value of money  Requires a cost of capital to be estimated
 It shows the change in shareholders wealth  Calculations can be time consuming and not
easily understood by managers
 It can allow for risk
 it looks at the entire project
5.4.3 Internal rate of return (IRR)

The internal rate of return (IRR) is the discount factor which gives a zero NPV. In simple terms the IRR
tells us the actual % return that the project generates.
For a typical project that involves an initial outflow of cash followed by series of inflows, as the
discount factor increases the NPV reduces (i.e. the project becomes less attractive as the cost of
t
financing increases).
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To estimate the IRR of a project
(1)
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Find the NPV of project using the discount rate given in the question (or use an estimate if none
o p ion
is given in the question).
(2)
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Find the NPV of project using a second discount rate. A general rule to follow here is that if your
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NPV in step 1 is positive then you should use a higher discount rate in step 2 (and vice versa for
I n
a negative answer in step 1).
(3)
rstUse the IRR formula below to estimate the IRR.
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𝑁𝑃𝑉
𝐿
𝐼𝑅𝑅 ≈ 𝐿 + 𝑁𝑃𝑉 −𝑁𝑃𝑉 (𝐻 − 𝐿)
𝐿 𝐻
Where L = lower discount factor

H = higher discount factor
To determine whether or not a project should be accepted, the following rule can be used:
If IRR > cost of capital  accept project
If IRR < cost of capital  reject project
The diagram below illustrates how the formula above works graphically.
NPV
NPVL ≈IRR
H
0 %
L
NPV H
_- IRR
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LECTURE EXAMPLE 3.23: IRR
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Calculate the approximate IRR for Horizon Ltd.
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Discount
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Present Discount Present
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Timing Cash flow Factor Value Factor Value
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$ 10% $ 20% $
0 (80,000) 1.000 (80,000)
1 15,000 0.909 13,635
2 20,000 0.826 16,520
3 25,000 0.751 18,775
4 30,000 0.683 20,490
5 35,000 0.621 21,735
11,155
IRR =
Benefits of IRR Drawbacks of IRR

 It allows for the time value of money  It does not tell you whether to accept or
reject the proposal
 It does not require an exact cost of funds to be  It is possible to have more than one IRR
known.
 As a % measure it is familiar to non-accountants.
 It looks at the entire project
6 Budgetary control and reporting

(a) Calculate simple variances between flexed budget, fixed budget and actual sales, costs and
profit.
(b) Discuss the relative significance of variances.
(c) Explain potential action to eliminate variances.
In order to control the performance in an organisation it is useful to compare actual results with a
budget. There are however different classifications of budget that can be used for this purpose. A fixed
budget which is based on original budgeted volumes of sales/production can be used but this may not
mean comparisons are made on a like for like basis unless actual volumes are the same as budgeted
volumes.
A flexed budget may be used instead as this is a budget that has been adjusted to reflect the actual
volume of sales/production and so provides a more meaningful comparison for actual results. When
preparing a flexed budget you must remember that fixed costs do not need to be flexed as they are
unaffected by changes in volume (hence why they are called fixed costs).
The difference between a budget figure and an actual figure for revenue or costs is referred to as a
variance and these will be dealt with in much more detail later on in these Notes.
ILLUSTRATION: BASIC VARIANCE ANALYSIS
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g 1
The standard cost of making a tennis racket is shown below:
y r i 2 0
Standard cost for a tennis racket $
o p ion
Direct materials (0.3kg @ $30 per kg) 9.00
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Direct labour (2hrs @ $12 per hr) 24.00
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Variable production overhead (2hrs @ $4 per hr) 8.00
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Variable (marginal) production cost 41.00
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Contribution per unit 29.00
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Selling Price 70.00
The following information relates to the production and sales for month 2.
Budget
Sales/production volume 15,000 rackets
Actual
Materials cost $165,000 for 5,600 kg
Labour cost $405,000 for 33,000 hours
Variable overhead $135,000
Revenue $1,245,000
Required:
Calculate variances for month 2.
SOLUTION
Original fixed budget v actual results
Original Actual
budget results Variance
Sales volume (units) 15,000 18,000
$ $
Revenue 750,000 885,000 $135,000 (F)
Less costs:
Materials 135,000 165,000 $30,000 (A)
Labour 360,000 405,000 $45,000 (A)
Variable O/H 120,000 135,000 $15,000 (A)
Contribution 135,000 180,000 $45,000 (F)
The above variance analysis is meaningless since actual sales were 18,000 units and consequently you
would expect revenue and costs to be higher than in the original budget based on 15,000 units.
Flexed budget v actual results
Original Flexed Actual
budget budget results Variance
Sales volume (units) 15,000 18,000 18,000
$ $ $
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Revenue 750,000 900,000 885,000 $15,000 (A)
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Less costs:
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Materials 135,000 162,000 165,000 $3,000 (A)
Labour 360,000 432,000 405,000 $27,000 (F)
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Variable O/H 120,000 144,000 135,000 $9,000 (F)
Contribution 135,000 162,000 180,000 $18,000 (F)
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This revised analysis gives us a better basis for comparing the performance of the organisation. Overall
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it can be seen that contribution and hence profit is better than expected primarily due to the labour
and variable overhead costs being much lower than expected. Reasons for this would need to be
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investigated.
(d) Define the concept of responsibility accounting and its significance in control.
A common business structure is one whereby the business is split into divisions or functions
(responsibility centres) and each division/function is run on a “stand alone” basis (ie.
autonomous). The basis of the divisionalisation will usually be product or service driven. For
example, an accountancy firm may have an audit division, tax division, insolvency division etc.
Responsibility accounting describes the system that is set up to assess the performance of
business units/divisions in a decentralised business. Individuals get assigned revenue and cost
areas to be personally responsible for.
The managers of a division will therefore tend to have responsibility for all the functions within
that division (e.g. finance, training, obtaining of resources, sales, etc). In that respect they are
often running a complete business within a larger organisation. This can have motivational
benefits but care is needed to ensure that the divisional managers are motivated to make
decisions that are best for the organisation as a whole and not just their part of the business.
Typical types of division would be
 Cost centre – The manager has responsibility only over managing the costs of the
division. Often service divisions will be set up as cost centres (e.g. IT).
 Revenue centre – The manager purely has responsibility for the sales/revenue generating
activities. A very sales-orientated business, where one manager has key sales targets and
a more senior person has responsibility for the management of costs, might have this set
up. A car sales business would be a possible example.
 Profit centre – The manager is responsible for managing both the revenues (internal and
external) and operating costs.
 Investment centre – The manager is responsible for managing both the revenues
(internal and external) and operating costs plus the level of capital investment within the
division.
(e) Explain the concept of controllable and uncontrollable costs.
KEY TERM
A controllable cost is a ‘cost which can be controlled, typically by a cost, profit or investment
centre manager’.
In a proper system of responsibility accounting it is necessary to ensure that budget holders are
only appraised against items of cost/revenue that they have control over. This necessitates
analysis of items into controllable costs/revenues and uncontrollable ones.
Care needs to be taken when performing this analysis since items that are uncontrollable in the
t
short term may be controllable in the longer term. For example, the rent costs may be unable to
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be affected in the short term (lease agreements etc) but in the longer term more or less space
i
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could be negotiated making it more likely to be controllable in the longer term.
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p ion 2
Also, a cost that is not controllable by one person may be controllable by another person,
o
either:
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 In another department (e.g. you’ve incurred a higher labour cost as your department has
n t
been given inferior materials to work with so longer hours had to be worked. The
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purchasing manager could have controlled this by buying better quality material).
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
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More senior manager. You may have departmental responsibility for operational costs
and revenues but any capital expenditure decisions are agreed at board level. The
depreciation charge in your department is not therefore directly controllable by you.
Some uncontrollable items may get allocated to a responsibility centre (e.g. cost, profit or
investment centre). For example, some apportioned overhead costs may get allocated to a
particular budget holder (e.g. production department manager) even though as a centrally
apportioned cost he has no direct control over them.
Why?
He may be in a position to influence those costs even if he doesn’t control them (e.g. treatment
of equipment to minimise maintenance costs incurred by the maintenance department).
Each situation needs to be viewed on the basis of the facts of that particular situation.
(f) Prepare control reports suitable for presentation to management (to include recommendation
of control action).
A typical control report for a profit centre would include the following type of numerical
comparisons:
Performance report Original
budget Flexed Actual
(fixed) budget costs Variance
Sales/production volumes 10,000 12,000 12,000
Revenue
Internal 150,000 180,000 165,000 15,000 (A)
External 250,000 300,000 320,000 20,000 (F)
400,000 480,000 485,000
Less: Controllable/directly
attributable variable costs
Material 50,000 60,000 64,000 4,000 (A)
Labour 60,000 72,000 69,000 3,000 (F)
Variable overhead 20,000 24,000 22,000 2,000 (F)
Controllable contribution 270,000 324,000 330,000 6,000 (F)
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Less: Controllable/directly
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attributable fixed costs
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Supervisor’s salary 30,000 30,000 34,000 4,000 (A)
Controllable profit 240,000 294,000 296,000 2,000 (F)
Less: Attributable but not
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controllable costs
Depreciation of divisional equipment 50,000 50,000 52,000 2,000 (A)
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Less: Non attributable and non-
controllable costs
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Head office central recharge 30,000 30,000 35,000 5,000 (A)
Divisional net profit 160,000 214,000 209,000 5,000 (A)
A proper report would then contain some recommendations as to what action should now be
taken by the manager of the responsibility centre.
With the above statement for example there may be advice to search around for alternative
suppliers of material since the material costs are showing an adverse variance.
7 Behavioural aspects of budgeting

(a) Explain the importance of motivation in performance management.
(b) Identify factors in a budgetary planning and control system that influence motivation.
(c) Explain the impact of targets upon motivation.
(d) Discuss managerial incentive schemes.
(e) Discuss the advantages and disadvantages of a participative approach to budgeting.
(f) Explain top down, bottom up approaches to budgeting.
Motivation is what drives the actions of people whether inside or outside the workplace. Therefore a
motivated workforce are likely to be acting/behaving in a way that helps the organisation achieve its
goals while at the same time achieving personal goals of the individuals. This is known as “goal
congruent” behaviour.
The main influences on motivation in a planning and control system are:

 Participation – If employees are involved in the budget setting process they are much more
likely to be motivated to achieve the budgets/targets set. A “bottom up” style of budgeting
involves staff at all levels in an organisation whereas a “top down” approach is largely enforced
on staff by the board of directors. These are discussed below.
 Achievability – If targets are set that are either too easy or too difficult then this is likely to
adversely affect motivation. If set too easy staff will drift along knowing that they will hit target
without much effort whereas set too hard staff will not try knowing that they will not be able to
achieve them. The best approach is to set targets that are tough but fair so the staff know that if
they work hard they can achieve them.
 Controllability – Staff will be more motivated if their performance is only assessed against
targets that are within their control.
Incentive schemes
Specific staff incentive schemes have been discussed earlier in the notes but in relation to budgeting
and managerial incentives the following points are relevant.
If salary or bonus is linked to “beating the budget” then there may be the tendency for the following
behaviour to occur:
 Managers might try to overinflate the budgeted costs so that when they actually end up
spending less than budget they get rewarded for it. This is known as budgetary slack.

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Managers in charge of sales budgets may underestimate the level of sales they think they can
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achieve, thus making it easier for them to hit their sales targets and receive bonuses.
2

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p ion
As a result the reward system may encourage individuals to behave in the best interests of
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themselves and not the organisation as a whole (dysfunctional behaviour).
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Top-down (imposed) budgeting
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This is where the budget is set by starting with the overall corporate objectives set by the senior
I
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management and then working down through the different levels of the organisation setting
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appropriate targets to ensure the higher objectives are achieved.
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This can work well in small, young businesses or where there are not the skills lower down the
organisation. Also, if trying to stick to a tight budget (e.g. during economic recession) this approach
can be quite effective.
Advantages
 Can be quicker to produce
 More consistency of plans across all departments (goal congruence)
 Greater awareness of overall resources available
Disadvantages
 Lack of participation may demotivate lower level staff
 Targets may not be as realistic at a local level
Bottom-up (participative) budgeting
This is the reverse of top-down and is where the budget is set by starting with the individual personal
and departmental objectives set by the local management and then working up through the different
levels of the organisation setting appropriate targets to ensure the lower objectives are achieved.
Advantages
 Better local knowledge may result in more accurate budgets
 Improved motivation due to participation
 Better discussion between different departments as the budgets are taken up the organisation
Disadvantages
 Time consuming process
 Increased likelihood of budgetary slack
 Potential lack of goal congruence if individual budgets considered in isolation
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rst
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113
Standard costing
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1 Standard costing systems
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(a)
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Explain the purpose and principles of standard costing.
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(b) Explain and illustrate the difference between standard, marginal and absorption costing.
(c) Establish the standard cost per unit under absorption and marginal costing.
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A standard cost is the pre-determined estimated cost of producing a single unit of product or service.
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The standard cost can be used to produce the fixed, flexible and flexed budgets. The standard cost
may also be compared with the actual costs and hence becomes a control technique.
The standard cost is built up by analysing both the quantities and costs of each element of producing
that product or service e.g. the amount of labour and the labour rate.
Depending upon what is assumed about efficiency levels and wastage, four different standards arise:
(1) Basic Standard – assumes that nothing has changed since the standard was first set;
(2) Current Standard – assumes that current efficiency and cost levels will be maintained;
(3) Attainable Standard – assumes that there will be some improvements in current efficiency and
cost levels;
(4) Ideal Standard – assumes an optimum level of efficiency and cost and minimisation of waste.
Under absorption costing the standard cost includes all of the variable costs and also a fixed overhead
per unit. Under marginal costing the standard cost includes only the variable costs.
114 4: Standard costing AC C A F2
ILLUSTRATION: STANDARD COST CARD
Gold Standard Co produces several products. Relevant details for one of these are given below.
Budgeted output for the year is expected to be 900 units. Each unit requires 40 square metres of
materials, costing $5.30 per square metre and 24 hours of Bonding Department labour, which is paid
$5.00 per hour and 15 hours of Finishing Department labour, which is paid $4.80 per hour. Other
budgeted costs and hours per annum:
Hours $
Variable overhead
Bonding Department 30,000 45,000
Finishing Department 25,000 25,000
Fixed overhead apportioned to this product:
Production 36,000
Selling, distribution and administration 27,000
Fixed overheads are recovered on a unit basis by Gold Standard.
Establish the standard cost per unit under absorption and marginal costing.
Standard absorption cost card:
$
Direct materials (40m × $5.30) 212
t
Direct labour:
g h 1 5
Bonding (24 hours × $5.00) 120
r i 0
Finishing (15 hours × $4.80) 72
y 2
Variable overhead:
o p ion
Bonding {$45,000/30,000 hours) × 24 hours} 36
C uit
Finishing {$25,000/25,000 hours) × 15 hours} 15
Fixed production overheads ($36,000/900 units) 40
I n t
PRODUCTION COST 495
t
Fixed non-production overheads ($27,000/900 units) 30
r s
TOTAL COST 525
Fi Standard marginal cost card:
Direct materials (40m × $5.30)

$
212
Direct labour:
Bonding (24 hours × $5.00) 120
Finishing (15 hours × $4.80) 72
Variable overhead:
Bonding {$45,000/30,000 hours) × 24 hours} 36
Finishing {$25,000/25,000 hours) × 15 hours} 15
TOTAL COST (variable production cost) 455
2 Variance calculations and analysis

(a) Calculate sales price and volume variances.
(b) Calculate materials total, price and usage variances.
(c) Calculate labour total, rate and efficiency variances.
(d) Calculate variable overhead total, expenditure and efficiency variances.
AC C A F 2 4 : St a n d a r d c o s t i n g 115
(e) Calculate fixed overhead total, expenditure and, where appropriate, volume, capacity and
efficiency variances.
(f) Interpret the variances.
(g) Explain factors to consider before investigating variances, explain possible causes of the
variances and recommend control action.
(h) Explain the interrelationships between the variances.
(i) Calculate actual or standard figures where variances are given.
Variances are calculated as follows:
Sales price variance = difference between what the sales revenue actually was and what it should
have been based on the number of units actually sold.
Sales volume variance = difference between the actual and budgeted sales volume, valued at the
standard profit or contribution per unit.
Materials total variance = difference between what the output should have cost and what it actually
cost for materials. It can be analysed into a price and usage variance.
Materials price variance = difference between what the materials used or purchased should have cost
and did cost.
Materials usage variance = difference between how much material should have been used and how
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much material was used, valued at the standard material cost.
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Labour total variance = difference between what the output should have cost and what it did cost for
labour. It can be analysed into a rate and efficiency variance.
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Labour rate variance = difference between what the labour used should have cost and did cost.
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Labour efficiency variance = difference between how much labour should have been used and how
much labour was used, valued at the standard labour cost.
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Variable overhead total variance = difference between what the output should have cost and what it
015
actually cost for variable overheads. It can be analysed into an expenditure and efficiency variance.
Variable overhead expenditure variance = difference between what the variable overhead should
have cost and did cost.
Variable overhead efficiency variance = difference between how much labour should have been used
and how much labour was used, valued at the standard variable overhead cost.
Fixed overhead total variance = difference between what the output should have cost and what it
actually cost for fixed overheads i.e. the under- or over-absorption of fixed overheads. It can be
analysed into an expenditure and volume variance.
Fixed overhead expenditure variance = difference between the budgeted and actual fixed overhead
expenditure.
Fixed overhead volume variance = difference between the actual and budgeted production volume,
valued at the standard fixed overhead cost per unit. It can be analysed into a capacity and efficiency
variance.
Fixed overhead capacity variance = difference between the actual and budgeted labour hours, valued
at the standard fixed overhead cost per hour.
Fixed overhead efficiency variance = difference between how much labour should have been used
and how much labour was used, valued at the standard fixed overhead cost.
LECTURE EXAMPLE 4.1: DETAILED VARIANCE CALCULATIONS
Control Co makes tennis rackets. The standard cost of making a tennis racket is as follows:
$
Direct materials (0.3kg @ $30 per kg) 9
Direct labour (2hrs @ $12 per hr) 24
Variable overheads (2hrs @ $4 per hr) 8
Fixed overheads (2hrs @ $8 per hr) 16
Control Co budgets to sell these rackets at $70 each. The budgeted monthly sales and production is
15,000 rackets.
The following is the actual information for month 2.
Materials cost $165,000 for 5,600kg
Labour cost $405,000 for 33,000 hours
Variable overhead $135,000
Fixed overhead $260,000
Revenue $1,245,000
Calculate the month 2 variances for Control Co using absorption costing principles.
t
SOLUTION
Sales variances
i g h 1 5
y r 2 0
SALES PRICE SALES VOLUME
o p ion
For 18,000 rackets $ Rackets
C uit
Actual revenue Actual sales
I n t
Expected revenue (actual units @
t
Budget sales
rs
standard selling price)
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Variance in rackets
VARIANCE
Valued at STANDARD PROFIT
VARIANCE IN $
Materials variances
TOTAL MATERIALS
18,000 rackets $
Should cost (actual units @
standard cost per unit)
Did cost
VARIANCE
MATERIALS PRICE MATERIALS USAGE
5,600 kg purchased $ 18,000 rackets kg
Should cost (kg purchased @ Should use (units produced @

standard price per kg) standard usage per unit)
Did cost Did use
Co
VARIANCE VARIANCE in kg
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Valued at the standard cost per kg
VARIANCE in $
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Labour variances
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TOTAL LABOUR
015
18,000 rackets $
Did cost
VARIANCE
LABOUR RATE LABOUR EFFICIENCY
33,000 hrs $ 18,000 rackets hrs
Should cost (hours paid for @ Should use (actual units @

standard rate per hour) standard time per unit)
Did cost Did use (actual hours worked)
VARIANCE VARIANCE in hrs
Valued at the standard cost per hr
VARIANCE in $
Variable overhead variances

TOTAL VARIABLE OVERHEAD
18,000 rackets $
Did cost
VARIANCE
VARIABLE OVERHEAD EXPENDITURE VARIABLE OVERHEAD EFFICIENCY

Should cost (actual hours @ Should use (actual units @
standard rate per hour) standard time per unit)
Did use
Did cost
VARIANCE in hrs
VARIANCE
Valued at the standard cost per hr
VARIANCE in $
Fixed overhead variances
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TOTAL FIXED OVERHEAD
r i g 0 1
18,000 rackets $
y
p ion 2
o
C uit
Did cost
t
VARIANCE
t I n
Fi rs
FIXED OVERHEAD EXPENDITURE FIXED OVERHEAD VOLUME
$ Rackets
Budgeted cost (budgeted units @ Actual production
Budget production
Actual cost
VARIANCE Variance in rackets
Valued at standard cost
VARIANCE IN $
FIXED OVERHEAD CAPACITY FIXED OVERHEAD EFFICIENCY
hrs 18,000 rackets hrs

Did take Should use (actual units @
Budgeted to take (budgeted units standard time per unit)
@ standard time per unit) Did use
VARIANCE in hrs VARIANCE in hrs
Valued at the standard cost per hr Valued at the standard cost per hr
VARIANCE in $ VARIANCE in $
Causes of variances
 Sales price variance shows whether the product has been sold for more (favourable) or less
(adverse) than the standard price.
When favourable, the sales price variance could be caused by higher inflation, market
shortages, higher quality or unexpected endorsements. When adverse it could be caused by the
reverse.
 Sales volume variance shows whether more (favourable) or less (adverse) of the product has
been sold than originally budgeted.
When favourable, the sales volume variance could be caused by increased economic activity,
lower prices or successful advertising. When adverse it could be caused by the reverse.
 Materials total variance is best interpreted by looking at its component parts (materials price
and usage variances).
Materials total variance will be caused by a combination of the causes of the price and usage
variances.
 Materials price variance shows whether less (favourable) or more (adverse) has been paid than
the standard price.
When favourable, the materials price variance could be caused by using a cheaper supplier,
obtaining an unforeseen discount, a drop in commodity prices or reducing the quality. When
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adverse it could be caused by the reverse.
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 Materials usage variance shows whether less (favourable) or more (adverse) material has been
used than the standard usage.
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When favourable, the materials usage variance could be caused by using higher quality, being
more efficient, dropping quality thresholds or errors in allocating materials to the job. When
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adverse it could be caused by the reverse.
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 Labour total variance is best interpreted by looking at its component parts (labour rate and
efficiency variances).

variances. 015
Labour total variance will be caused by a combination of the causes of the rate and efficiency
Labour rate variance shows whether less (favourable) or more (adverse) has been paid than the
standard price.
When favourable, the labour rate variance could be caused by using lower grade staff or poor
economic conditions leading to lower pay rises than anticipated. When adverse it could be
caused by the reverse.
 Labour efficiency variance shows whether less (favourable) or more (adverse) labour has been
used than the standard amount.
When favourable, the labour efficiency variance could be caused by higher motivation, better
quality equipment or materials or errors on time sheets. When adverse it could be caused by
the reverse.
 Variable overhead total variance is best interpreted by looking at its component parts (variable
overhead expenditure and efficiency variances).
Variable overhead total will be caused by a combination of the causes of the expenditure and
 Variable overhead expenditure variance shows whether less (favourable) or more (adverse)
has been paid than the standard price.
When favourable, the variable overhead expenditure variance could be caused by unanticipated
economies of scale or lower prices. When adverse it could be caused by the reverse.
 Variable overhead efficiency variance has the same interpretation as the labour efficiency
variance.
Variable overhead efficiency variance will have the same causes as the labour efficiency
variance.
 Fixed overhead total variance shows the over (favourable) or under (adverse) absorption of
fixed overheads.
Fixed overhead total variance will be caused by a combination of the causes of the expenditure
and volume variances.
 Fixed overhead expenditure variance shows whether less (favourable) or more (adverse) has
been paid than the budgeted cost.
When favourable, the fixed overhead expenditure variance could be caused by lower price rises
or savings. When adverse it could be caused by the reverse.
 Fixed overhead volume variance shows whether more (favourable) or less (adverse) of the
product has been produced than originally budgeted.
When favourable, the fixed overhead volume variance will be caused by increased production.
When adverse it could be caused by the reverse.
 Fixed overhead capacity variance shows whether more (favourable) or less (adverse) hours
have been obtained for the fixed overhead than originally budgeted
ht
When favourable, the fixed overhead capacity variance will be caused by the workforce working
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extra hours. When adverse it could be caused by the reverse.
0
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 Fixed overhead efficiency variance shows the same interpretation as the labour efficiency
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variance.
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Fixed overhead efficiency variance will have the same causes as the labour efficiency variance.
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Variance investigation
I
rst
When deciding whether or not to investigate a variance the following considerations may be
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necessary.
 Materiality – The larger the variance the more relevant it may be to investigate;
 Controllability – It is sensible to spend more time investigating variances that you have some
chance of doing something about;
 Adverse or favourable – Investigate adverse variances to enable corrective action to be taken
and favourable ones so that lessons can be learned for elsewhere in the organisation;
 Trend or one-off – It is likely to be more cost effective to investigate variances that are an
ongoing problem rather than waste time/money on investigating one-offs;
 Cost benefit – It is only worth investigating a variance if the benefit of doing so outweighs the
cost of investigation;
 Interrelationship – It is important to identify what the root cause of the variances is so that the
investigation can be made as efficient as possible.
We have calculated the variances separately, but one event can cause a number of different variances.
LECTURE EXAMPLE 4.2: VARIANCE CAUSE AND EFFECT
Cheap Skate Co purchased some low quality materials.

What variances could this give rise to?
SOLUTION
If you are given the variance but not the actual or standard figure, you can find the missing figure by
working backwards.
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LECTURE EXAMPLE 4.3: BACKWARDS VARIANCES
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Back2Front Co has an adverse labour rate variance of $416. The actual hours worked were 10,400
compared to the standard hours of 8,320. The standard rate is $5 per hour.
What was the work force actually paid per hour?
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SOLUTION
015
3 Reconciliation of budgeted and actual profit

(a) Reconcile budgeted profit with actual profit under standard absorption costing.
As variances explain the difference between the budget and the actual figures for the revenue
and individual costs, the total of all of the variances will reconcile budgeted profit with actual
profit.
ILLUSTRATION: BUDGET TO ACTUAL PROFIT RECONCILIATION (ABSORPTION COSTING)
Reconcile budgeted profit with actual profit under standard absorption costing for Control Co.
Profit reconciliation:
$
Budgeted profit (15,000 rackets × $13) 195,000
Sales volume variance 39,000
Flexed budgeted profit (18,000 rackets × $13) 234,000
Sales Price variance (15,000)
Favourable Adverse
Cost variances $ $
Material price variance 3,000
Material usage variance 6,000
Labour rate variance 9,000
Labour efficiency variance 36,000
Variable overhead expenditure variance 3,000
Variable overhead efficiency variance 12,000
Fixed overhead expenditure variance 20,000
Fixed overhead capacity variance 24,000
Fixed overhead efficiency variance 24,000
Total cost variances 99,000 38,000
t
61,000
Actual profit
i g h 1 5
280,000
y r 2
Actual profit working:
0
o p ion
$
C uit
Revenue 1,245,000
Materials (165,000)
t
Labour (405,000)
I n
Variable overhead (135,000)
t
Fixed overhead (260,000)
Fi rs
Profit 280,000
(b) Reconcile budgeted profit or contribution with actual profit or contribution under standard
marginal costing.
In marginal costing the fixed overheads are not absorbed and so the only fixed overhead
variance that is required is the fixed overhead expenditure variance.
Also in marginal costing we work in terms of contribution not profit and so the sales volume
variance needs to be recalculated using the standard contribution rather than the standard
profit.
ILLUSTRATION: BUDGET TO ACTUAL PROFIT RECONCILIATION (MARGINAL COSTING)
Reconcile budgeted profit with actual profit under standard marginal costing for Control Co.
REVISED SALES VOLUME VARIANCE
Rackets
Actual sales 18,000
Budget sales 15,000
Variance in rackets 3,000 (F)
Valued at STANDARD CONTRIBUTION $29
VARIANCE IN $ 87,000 (F)
Reconciliation
$
Budgeted profit (15,000 rackets × $13) 195,000
Budgeted fixed overhead (15,000 rackets × $16) 240,000
Budgeted contribution 435,000
Sales volume variance 87,000
Flexed budgeted contribution (18,000 rackets × $29) 522,000
Sales price variance (15,000)
Favourable Adverse
Co
Cost variances $ $
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Material price variance 3,000
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Material usage variance 6,000
Labour rate variance 9,000
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Labour efficiency variance 36,000
Variable overhead expenditure variance 3,000
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Variable overhead efficiency variance 12,000
Total cost variances 51,000 18,000
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33,000
015
Actual contribution 540,000
Less: Budgeted fixed overhead 240,000
Fixed overhead expenditure variance 20,000
260,000
Actual profit 280,000
Note. As there is no inventory, the absorption and marginal costing profits are the same.
In the above reconciliation we have both added and deducted the budgeted fixed overhead and this
could be omitted and the reconciliation would still work, however the subtotals would no longer have
any meaning.
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y
p ion
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C uit
I n t
rst
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125
Performance measurement
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1 Performance measurement overview
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(a) Discuss the purpose of mission statements and their role in performance measurement.
Mintzberg defines a mission as follows:
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“A mission describes the organisation’s basic function in society, in terms of the products and
n2
services it produces for its customers”.
mission changes).
Campbell and Gould
015
It should be memorable and succinct and enduring (not subject to regular changes unless the
Mission statements should contain the following four elements:

(1) Purpose: Why do we exist and who for?
(2) Strategy: How and where are we going to compete
(3) Behavioural standards: To guide the actions of employees
(4) Values: What does the organisation believe in.
A mission statement will guide the areas that the organisation feels are important to its overall
philosophy and hence the areas that will be important to measure the performance of. By
having a clear mission throughout the organisation and instilled into the culture focus is given to
staff and this should help overall business performance.
(b) Discuss the purpose of strategic and operational and tactical objectives and their role in
performance measurement.
There will be different objectives set within an organisation. These objectives should be able to
be quantified and ideally follow SMART principles, namely:
 Specific
 Measurable
 Achievable
 Relevant
 Timebound
126 5: Performance measurement AC C A F2
A typical hierarchy of objectives will split objectives into the following categories.
Strategic
Strategic objectives will cover long term matters such as objectives around products and
markets (e.g. to gain a 5% share of the market for kettles in the USA within the next five years).
Tactical
Tactical objectives focus on use of resources in the medium term in order to improve efficiency.
For example, “to increase output per employee by 4% in the next year”.
Operational
Objectives here will focus on short term targets necessary to manage the business on a day to
day basis. An example would be “to achieve sales volume of 10,000 units in the North East of
England next week”.
Having categories for objectives such as these is very useful for performance measurement
because it allows focus on the short, medium and long term areas of importance in an
organisation and quantifiable targets on these areas can be set.
(c) Discuss the impact of economic and market conditions on performance measurement.
(d) Explain the impact of government regulation on performance measurement.
Some key factors that might affect a business’s ability to achieve the desired level of
t
performance will include:
g h
Political climate
i 1 5
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The political party in power will make decisions that affect the following aspects of fiscal and
p ion
monetary policy;
o
C uit


Interest rates (affects financing costs and hence profits)
Inflation (budgeting and targets will be impacted, wage rises etc)

I

n t Exchange rates (changes international competitiveness of organisations)
t
Corporate taxes (affects distributable profits)
rs
 Income taxes (consumers disposable incomes)
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 VAT (impact on consumer spending)
 Direct government spending (job creation and direct impact if you supply the govt)
 Offering tax breaks for businesses to relocate to areas of high unemployment
Market conditions
There may be factors affecting the specific market the organisation operates in that could affect
performance, such as
 Number of competitors (home and overseas)
 Boom phase or recessionary phase
 Buoyancy in the stock market
AC C A F 2 5: Performance measurement 127
2 Performance measurement – application

(a) Discuss and calculate measures of financial performance (profitability, liquidity, activity and
gearing) and non-financial measures.
Commonly used financial performance indicators (FPIs) for profitability are as follows:
PBIT
Return on Capital Employed (ROCE) = TALCL
× 100%
Where TALCL = Total Assets Less Current Liabilities

This measures the return made by the organisation from the amount of available capital and so
gives an indication as to how efficient the organisation is at generating profits from its capital.
To improve this measure the efficiency needs to be increased.
Gross Profit
Gross Profit margin = Revenue
× 100%
This measures the ability of the business to sell goods for more than they cost to make. You
might well expect this ratio to remain fairly stable over time and for competitors to show similar
gross margins.
To improve this measure either prices need to rise or production costs fall.
PBIT
Net Profit margin = × 100%
Co
Revenue
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This measures the ability of the business to make an overall profit on the goods it sells. A low
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net profit margin is not necessarily a concern, as the volume of sales and hence the total
absolute profit will also be a factor to consider.
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To improve this measure either prices need to rise or overall costs fall.
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Revenue
Asset turnover = TALCL
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This measure looks at how well your assets are being used to generate sales. Are you being
efficient at using your assets to full potential?
Commonly used FPIs for liquidity are as follows:
Current ratio =
Current assets
Current liabilities
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This ratio looks at the working capital of the organisation and assesses its ability to meet its
short-term debts.
To improve this ratio either current assets need to rise or current liabilities fall.
Current assets − inventories
Quick ratio (or acid test) = Current liabilities
This is considered a better measure of an organisations liquidity especially where inventory

cannot be turned into cash very quickly. To improve this ratio either receivables and cash need
to rise or current liabilities fall.
Additionally, elements of the working capital management (i.e. “activity”) of a business can be
measured as follows:
Cost of sales
Inventory turnover =
Inventories
Inventory
Inventory days = COS
× 365 days ∗
This ratio shows, on average, how long, on average, you are holding items in stock.
Trade receivables
Receivables collection period = Credit turnover
× 365 days ∗
This ratio shows, on average, how long your debtors take to pay you.
Trade payables
Payables payment period = Credit purchases or COS × 365 days ∗ *
This ratio shows, on average, how long your company takes to takes its creditors.
* The working capital cycle includes cash, receivables, inventories and payables. It effectively
represents the time taken to purchase inventories, then sell them and collect the cash. The
length of the cycle is determined using the above ratios.
Commonly used FPIs for gearing are as follows:
The term ‘gearing’ refers to the extent to which a business is dependent on loans and
preference shares, as opposed to ordinary shares and reserves. This is sometimes known as
FINANCIAL RISK.
Gearing ratios indicate the degree of risk attached to the company and the sensitivity of
earnings and dividends to changes in profitability and activity level.
long term debt
 Debt to equity ratio = Equity
%
long term debt
 Gearing = Equity+long term debt %
t
This shows what proportion what proportion of the assets of the company have been financed
h 5
by lenders rather than shareholders. To improve this ratio either more equity needs to be raised
r i g 0 1
or retained profits increased.
2
y
p ion
PBIT
 Interest cover =
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Interest payable
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This determines the number of times that the company can afford to pay its interest charges
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out of its current year profits
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To improve this measure profits either need to improve or level of debt fall.
rst To be meaningful, the above ratios would need to be compared to something such as;
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 Previous years
 Other companies
 Other divisions within this company
 Industry standards
Also, reference should be made to external indicators wherever possible (e.g. inflation, stock
market performance).
Non-financial measures
The financial success of an organisation will often depend upon non-financial factors such as
people, products, service and processes. Non-financial performance indicators (NFPIs) measure
the performance of these factors. While the financial measures are good at indicating how you
have performed in the past and at the moment the NFPIs are much better at indicating how you
are likely to perform in the future.
Unlike FPIs, NFPIs are far more varied and need to be tailored to the particular organisation
concerned. However commonly used areas for NFPIs include the following.
Area Performance measure
Service quality Number of complaints, Proportion of repeat bookings, On time
deliveries, Customer waiting time
Production performance Set up times, Number of suppliers, Inventory days, Output per
employee, Material yield %, Production schedule adherence, Output
requiring reworking, Manufacturing lead times
Marketing effectiveness Trends in market share, Sales volume growth, Customer visits per
salesperson, Client contact hours per salesperson, Customer survey
response information
Personnel Number of complaints received, Staff turnover, Days lost through
absenteeism, Days lost through accident/sickness, Training time per
employee
You will see more specific examples of NFPIs as you go through this section.
(b) Perspectives of the balanced scorecard.
(i) Discuss the advantages and limitations of the balanced scorecard.
(ii) Describe performance indicators for financial success, customer satisfaction, process
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efficiency and growth.
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(iii) Discuss critical success factors and key performance indicators and their link to
objectives and mission statements.
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(iv) Establish critical success factors and key performance indicators in a specific situation.
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The balanced scorecard approach to appraising performance was first put forward by Kaplan &
Norton in 1992 as a way of giving managers a comprehensive view of business performance.
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The aim was essentially to not only focus on financial performance but to also consider human
factors that ultimately drive the financial performance.
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The information provided may include both financial and non-financial elements, and cover
areas such as profitability, customer satisfaction, internal efficiency and innovation and
learning’.
There are a number of key performance indicators (KPIs) for each of the four perspectives of the
balanced scorecard:
FINANCIAL CUSTOMER
A classic set of indicators to measure What do customers (current and
whether value is being added to potential) value from us?
shareholders.
 Delivery performance in terms of
 ROCE, Return on equity time/quantity/quality
 Profit margin – Gross, Net  Complaints
 Turnover growth  % on time deliveries
 Market share  Returns rate
 EPS  Retention rate
 Warranty claims %
VISION &
STRATEGY
INTERNAL BUSINESS PROCESSES INNOVATION & LEARNING
t
What business processes must we excel Will the business be able to create future
h
at in order to satisfy our customers and value?
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shareholders?
i
 Staff turnover
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 Quality control reject rate 
2
Illness rate
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 Turnaround time/Lead time  Development time for new products
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 Production set up time  % revenue from products launched
o
in last 2 years
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Use of balanced scorecard
r st A traditional budgeting and performance management approach will focus on putting a
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financial focus on the functional performance of the business. Consideration will have been
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given to the efficiency of processes within the functional budgeting but there may not be much
emphasis in looking beyond the next budget period.
Producing budgets with the balanced scorecard in mind should force more consideration to be
given to the underlying critical factors for the success of the business over a longer period of
time. Resources should be allocated in an effective manner based on the four dimensions of
performance noted above. It will also ensure that financial and non-financial factors are linked.
Problems associated with the balanced scorecard
 Danger of information overload
 Short term v’s long term conflicts. For example, would you spend money on R&D since
this will, in theory, help you develop new products and be innovative or do you avoid the
expenditure in order to reduce costs and have improved short term performance?
Critical success factors (CSFs) and the performance hierarchy

Critical success factors (CSFs) are those areas of business performance where the company
must succeed in order to achieve its overall strategic objectives. You may see CSFs categorised
as either ‘monitoring’ (CSFs in relation to the ongoing existing business) or ‘building’ (CSFs
looking into the future development of the organisation).
The following flow shows the link between mission statements and key performance indicators.
Corporate mission
Overall strategic objectives
Critical success factors (CSF)
Key performance indicators (KPI)
The first step is therefore to identify the main objectives of the organisation. These will depend
on the overall mission of the organisation. CSFs should then be identified by considering what is
crucial in terms of systems, processes and performance in order to achieve these main
objectives.
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The next step would be to design performance measures (KPIs) that, should they be achieved,
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lead to achievement of the CSFs and ultimately therefore achievement of the organisation’s
objectives. As these measures are likely to form the basis for staff targets and bonus schemes,
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care should be taken to make sure that objectives are SMART (Specific, Measurable, Achievable,
Relevant, Timebound).
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If, for example, a company had an objective to increase sales volume by 10% over a three-year
period then it may identify CSFs such as:
 Produce high quality products
n2
015
 High quality customer service
 On time delivery to customer
Performance measures (KPIs) can then be designed around these CSFs and may include:
 Percentage of products returned as faulty
 Number of customer complaints
 Percentage of customer service calls answered within three rings
 Percentage of downtime on website
 Number of orders taking more than three days to arrive with the customer ......
(c) Economy, efficiency and effectiveness
(i) Explain the concepts of economy, efficiency and effectiveness.
(ii) Describe performance indicators for economy, efficiency and effectiveness.
(iii) Establish performance indicators for economy, efficiency and effectiveness in a specific
situation.
(iv) Discuss the meaning of each of the efficiency, capacity and activity ratios.
(v) Calculate the efficiency, capacity and activity ratios in a specific situation.
The most common way of measuring performance in not for profit organisations and the public
sector is to identify whether they are offering value for money (VFM). The National Audit Office
(NAO) assesses VFM according to three criteria:
(1) Economy – cost of resources used (are you spending more on resources than you
should?). This relates therefore to inputs.
(2) Efficiency – outputs vs. inputs (is there more wastage than expected?)
(3) Effectiveness – achieving targets (even if you are being economical and efficient is what
you’re doing helping the organisation achieve its overall goals?)
The 3 Es can be applied to any business not just the public sector but the reason they work well
in the public sector is owing to those organisations often being very restricted on the amount of
finance available.
EXAMPLES OF RELEVANT INDICATORS
Economy
Variances for:
 Materials price
 Labour rate
 Variance overhead expenditure etc.
Essentially, the actual cost of any resource obtained compared to the expected cost.
Efficiency
Variances for:
 Materials usage
 Labour efficiency and idle time
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 Variable overhead efficiency
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Effectiveness
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For objectives covering an accountancy training business some ideas include:
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Quality – pass rates, % repeat business, number of complaints
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Resource utilisation – teaching days per staff member, % training room occupancy, class size.
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Efficiency, capacity and activity ratios
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The efficiency, capacity and activity ratios can be useful as a means of monitoring how and why
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output was either above or below expectations.
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Activity
This measure considers whether more or less output was produced compared to the budget.
In this context output is often measured in “standard hours” and the activity ratio calculated as
follows:
𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 ℎ𝑜𝑢𝑟𝑠
Efficiency
The efficiency measure focuses on whether more or less output was produced than expected
for the given number of hours actually worked (i.e. was the time actually worked more
productive than expected). The efficiency ratio is shown as:
𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑎𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
Capacity
As the name suggests this measure looks at whether more or less capacity was available than
budgeted (i.e. were staff able to actually work more or less hours than budgeted). The ratio is
shown as:
𝑎𝑐𝑡𝑢𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 ℎ𝑜𝑢𝑟𝑠
It can be seen from the above that the ability to produce more output than budgeted (activity)
is a combination of efficient working (efficiency) and being able to find more time available than
budget (capacity) such that:
𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 𝑟𝑎𝑡𝑖𝑜 × 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜
LECTURE EXAMPLE 5.1: ACTIVITY, EFFICIENCY AND CAPACITY RATIOS
XYZ plc had the following information for September 2011.

Standard time per unit = 2hrs
Budgeted output = 1,000 units
Actual output = 1,050 units
Actual hours = 1,800 hours
Calculate the activity, efficiency and capacity ratios.
SOLUTION
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(d) Unit costs
(i)
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Describe performance measures which would be suitable in contract and process
costing environments.
In a process costing environment there will be much standardisation (consider the
production line in a business that manufactures chocolate biscuits) as units of product
will be identical. In this type of environment it will be quite easy to set predetermined
standards of performance in areas such as:
 Material input costs
 Wastage levels (actual losses compared to normal loss percentages)
 % of time machinery is not working
With contract costing there will be generally much less standardisation as each contract
will be different to the previous one and tailored to the individual customer’s needs.
Whilst some of the same measure can be used there will be more focus on things such
as:
 Customer satisfaction surveys
 On time delivery of contract (particularly relevant for large scale construction
contracts)
 Overall spending v budget (most relevant for very large contracts)
(e) Resource utilisation

(i) Describe measures of resource utilisation in service and manufacturing environments.
(ii) Establish measures of resource utilisation in a specific situation.
Resource utilisation measures in either a service business or manufacturing business will
depend on what resources they each make most use of.
The main resources and suggested utilisation measures would be as follows.
Manufacturing
Resource Measure of utilisation
Materials Wastages levels (as a % of total material), usage variances
Direct labour Idle time, actual to budget hours comparison
Service
Resource Measure of utilisation
Labour Staff to customer ratios, % chargeable time for professional firms (lawyers,
accountants etc), tutor teaching days in a training firm
Buildings % occupancy (hotels), room utilisation % (training firms), occupied bed days
(hospital)
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(f) Profitability
(i)
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Calculate return on investment and residual income.
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(ii) Explain the advantages and limitations of return on investment and residual income.
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Return on Investment (ROI)
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ROI has traditionally been the most widely used measure in divisional performance, largely due
to its similarity to ROCE and the fact that it can be calculated by taking figures from the income
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statement and statement of financial position (balance sheet).
I
rst Should use profit before head office allocations, usually
Fi
Calculated as, before interest and tax, if you are assessing the managers’
performance. If looking at the performance of the division it
may be better to include centrally allocated costs as well.
𝑑𝑖𝑣𝑖𝑠𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
𝑅𝑂𝐼 = 𝑑𝑖𝑣𝑖𝑠𝑖𝑜𝑛𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
May use capital employed (TALCL) or net assets (total
assets – total liabilities) depending upon what information
The answer is expressed as a %. is given in the question. If told to use “average investment”
in the exam you will need to work it out as follows:
Av investment = (opening inv + closing inv)/2
There are a number of possible definitions for the ROI calc (see disadvantages later) so in an
exam you must follow any instructions that the examiner gives you. If no instructions are given
then make it clear what calculation you are using.
Why not just always use ROI then?
It can be argued that using ROI will encourage divisional managers to make decisions that are in
their best interests but not necessarily the best interests of the company as a whole. This is
referred to as dysfunctional behaviour or non-goal congruent behaviour. For this reason other
methods such as residual income have evolved. For example, a manager of a division that has
an existing ROI of 25% will reject a project with an ROI of 20% even if the head office target is
only 16%. This is because the project would reduce the divisional ROI (leading to reduced bonus
perhaps).
Residual Income (RI)
In simple terms this measure identifies the “net” profit of a division after having deducted a
notional charge for interest based on the amount of investment tied up in the division. This
notional charge is estimated with reference to the company’s overall cost of raising finance
(referred to as ‘cost of capital’ or the ‘Weighted Average Cost of Capital (WACC)’).
$
Divisional profit (same definition as for ROI) X
Notional (imputed) interest = divisional investment × cost of capital (X)
Residual income X
It compares the profit actually made with the minimum acceptable profit to the investors. For
example, if you had invested £100,000 in some shares and to compensate you for the risk taken
you want a 5% return, the minimum acceptable to you would be £5,000 p.a. If in year 1 you
received a £7,000 return then you have a residual income of £2,000.
If RI is positive it suggests that the division has generated a profit that is over and above that
which would be required by the capital providers. Therefore, if RI is positive the division has
performed well and value should be being added to investors.
LECTURE EXAMPLE 5.2: ROI V RI

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Smith and Jones are divisions within a large diversified business, Zara Co. Jones was set up recently
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whereas Smith has been in existence for 15 years. The following performance statements are available
for the year:
itio Smith Jones
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$000 $000
Revenue 1,200 850
015
Variable costs (460) (400)
Contribution 740 450
Controllable fixed costs (incl depreciation on div assets) (200) (100)
Controllable profit 540 350
Apportioned central costs (160) (110)
Divisional net profit 380 240
Divisional net assets (@NBV) 2,375 2,000
The overall cost of financing for the company is 10%. Currently Zara Co sets its divisions a target ROI of
14% but is considering introducing residual income into its performance measures.
Calculate the annual ROI and RI for each division.
SOLUTION
Technically residual income is the better method because it is linked to cost of capital and
should result in fewer dysfunctional decisions being made.
ROI is still preferred in the majority of businesses, largely because:
 It gives a % answer and people understand % returns such as ROCE.
 Interdivision comparisons are easier to do since ROI is a relative measure not an absolute
one like RI. This makes it simpler to compare divisions of differing sizes.
 It is not felt that dysfunctional decision making happens often enough to be a real
problem.
 RI does need an estimate of cost of capital to be made.
Ultimately, both ROI and RI use similar information in their calculations and there are certain
flaws/difficulties with identifying the relevant information. The following list will give you some
ideas of what these difficulties are.
Which profit figure to use?
 Identifying what is controllable and what is not
 Pre or post tax figures?
 Attributable and non-attributable costs (including central spreading of overheads)
Which investment figure to use?
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 Do we use opening, closing or average net assets?

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Use of balance sheet values based on historic cost and NBV will make comparing divisions
i
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of differing ages hard. A solution to this is to use replacement cost of assets rather than
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NBV.
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
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How do we include those assets that are not reflected on the balance sheet such as
intangible assets (for example, in a service or people orientated business)?
(g)
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Quality of service.
I
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(i) Distinguish performance measurement issues in service and manufacturing industries.
Fi rs
(ii) Describe performance measures appropriate for service industries.
In modern times manufacturing businesses have had to look externally as well as internally
when setting measures of performance. Internally-focused manufacturing usually leads to
businesses producing products that may be produced at low cost but nobody wants those
products anymore as times have moved on. Clearly, it is always going to be important for a
manufacturing business to have targets set around cost.
A focus on other key areas as follows has become more commonplace:
 Quality of product
 Speed of delivery
 New product development
With global competition failure to address these key areas will usually lead to declining profits
for a manufacturer.
Most textbooks will indicate that there are a few standard features that characterise a service
business such as:
 Intangibility – no physical product (taste, feel, visible presence).
 Inseparability(simultaneity) – the service is usually provided at the same time as it is
consumed.
 Variability/heterogeneity – lack of standardisation. The service is likely to be slightly

different each time and tailored to the needs of each individual consumer.
 Instant/Perishability – The service cannot be “stored” and used later.
Overall with a service business, due to the characteristics, more of the assessment will be via
external feedback on whether you are providing the standard that the customer expects.
The cost structure in a typical manufacturing business will contain direct costs such as materials
and labour, together with a portion of overhead (indirect) costs. In a service based business the
amount of material is likely to be small, and the level of overheads proportionately much
higher. A service business might therefore need information to allow an in depth analysis of the
overheads for activity-based purposes.
One of the more recognised models for assessing performance in a service business is the
Fitzgerald and Moon building block model (1996) which indicates six key dimensions of
performance in a service business.
Included in this list are just a few suggestions of what you might consider measuring in different
types of service business:
(1) Profit/financial (profit growth, profit margins, cash flow generation ...)
(2) Competitiveness (sales growth, market share, new business as a % of total business...)
(3) Flexibility (% customer orders unfulfilled due to demand peaks, ability to service
Co Fir
changing client requirements for timings or service specifications, ability for students to
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switch between weekday and evening classes)
(4) Innovation (% revenue from services launched in last two years, number of new courses
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offered)
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(5) Resource utilisation (occupancy rates in a hotel, tutor teaching days in training business,
staff utilisation rates in a firm of accountants)
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(6) Excellence/Quality (industry awards achieved, world prize-winners trained).
3 Cost reductions and value enhancement 015

(a) Compare cost control and cost reduction.
(b) Describe and evaluate cost reduction methods.
Cost control is where costs are kept within predetermined acceptable limits and providing the
costs are within these limits no action is deemed necessary. Variance analysis is often used as a
way of giving assurance that current costs are within acceptable limits.
Cost reduction is where the current levels of cost are deemed unacceptable (even if within
predetermined limits) and thus the aim is to continually look for ways to reduce the current
level of costs.
To implement cost reduction the organisation could look to just simply cut current spending via
spending freezes or headcount reduction etc. This can be seen as quite a negative approach as
there may not be any strategic rationale for the cuts; however it may have benefits if quick cost
saving measures are necessary.
It is generally more effective for cost reduction schemes to be more carefully thought through
and planned. Some of the more recognised complementary systems to assist in cost reduction
include the following:
ABC – By identifying what really causes your business overhead costs to be incurred (i.e. what
drives the costs in the cost pools) it is much easier to target areas where it may be possible to
reduce your costs.
Target costing – By always trying to achieve a desired profit margin and concentrating on the
consumer target costing forces a business to continually look for ways to reduce costs given that
selling prices are likely to reduce over the life of a product.
Business process reengineering – This is a technique where any business process is reviewed
with a blank sheet of paper. The idea is that you always look for the best (efficient) way of
performing tasks given the current operating environment even if it is not how you perform the
task at the moment. It is quite a radical approach but does stop the business from simply
assuming that the way it does things at the moment is the best way.
(c) Describe and evaluate value analysis
KEY TERMS
Value analysis is ‘A systematic inter-disciplinary examination of factors affecting the
cost of a product or service, in order to devise means of achieving the specified
purpose most economically at the required standard of quality and reliability.’
A key distinguishing feature of value analysis is that it aims to identify the lowest cost method of
t
manufacturing a product such that it is capable of functioning as desired with the required level
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of quality and reliability. There is not a rigid product design as essentially there is a clean sheet
i g 0 1
of paper to work with.
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There are four elements/dimensions that can be considered in relation to value.
o
 Cost value. The cost of making and selling an item
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 Exchange value. The market price
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 Use value. The function or purpose it fulfils
I n
 Esteem value. Prestige of ownership
rst The principal aim is to reduce the cost value whilst maintaining or even enhancing the
Fi
exchange, use and esteem values. It is not always easy to reduce costs while maintaining the
other three aspects of value.
4 Monitoring performance and reporting

(a) Discuss the importance of non-financial performance measures.
As previously noted, non-financial performance measures are very useful at measuring
performance in areas (people, products, services and processes) that will indicate how a
business is likely to perform in the future.
Non-financial performance measures also have the benefit of being very flexible in terms of
what is measured. This makes it easy to tailor a set of performance measures that are very
relevant to an individual business based on what it considers as important. Financial measures
tend to be slightly more rigid/inflexible.
(b) Discuss the relationship between short term and long term performance.
There is a natural tendency to reward staff based on their contribution to the short term
performance of the business since this is often the basis on which external investors judge a
business. Targets for individuals are mostly set with this short term view in mind.
A conflict can arise if achievement of short term goals comes at the detriment of long term
performance. For example, a manager who keeps his costs under budget for the year because
he stopped sending staff on training courses may be rewarded for boosting current year profits.
However over the longer term the staff will feel less valued if they are not trained properly and
their ability to perform their work may suffer. This resulting reduction in productivity and
potentially higher staff turnover will have an adverse effect on long term profits.
It is necessary therefore to set a combination of short and long term targets for staff which
rewards are based on and align these targets so that they are consistent with the overall
strategic objectives of the organisation.
(c) Discuss the measurement of performance in service industry situations.
This has already been discussed in earlier sections of the notes.
(d) Discuss the measurement of performance in non-profit seeking and public sector
organisations.
In a non-profit seeking organisation and indeed in the public sector where profit is not a primary
focus there will be much more focus on non-financial performance measures.
In these types of organisations that do not have shareholders there is usually the need to juggle
many objectives linked to the various stakeholder groups who have a vested interest in the
organisation.
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Multiple objectives can cause the following problems:
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 It may not be possible to simultaneously achieve all objectives, that is some sort of
prioritising may be necessary.

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Different stakeholders may focus on different objectives and have conflicting priorities to
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the organisation.
 The importance of individual objectives may change over time. For example, there may
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be political pressure on certain objectives around election time.
015
Performance could be measured in this sector by:
 Comparing actual performance to non-financial targets
 Questioning users
 Appointing regulators/experts to monitor performance
(e) Discuss measures that may be used to assess managerial performance and the practical
problems involved.
Managerial performance can be assessed by comparing to targets for controllable costs and
revenues that are the responsibility of each manager. Non-financial targets can also be used in
areas such as feedback from staff who work for the manager.
However, it is not always easy to identify what is really controllable by one person and staff may
not feel they can express their true views about a colleague who they have to work for on a day
to day basis. Interpreting results may therefore be tricky.
(f) Discuss the role of benchmarking in performance measurement.
KEY TERM
Benchmarking is the establishment, through data gathering, of targets and comparators,
through whose use relative levels of performance and underperformance can be identified.
By the adoption of identified best practice it is hoped that performance will improve.
Benchmarking overcomes "paradigm blindness” which can be summed up as the mode of

thinking, "the way we do it is the best because this is the way we've always done it." You may
encounter three different types of benchmarking:
 Historic benchmarking
 Industry/Sector benchmarking (competitive benchmarking or if done on strategic long
term measures it may be known as strategic benchmarking)
 Best-in-class benchmarking (functional benchmarking)
The value of benchmarking
 Challenges assumptions
 Helps cut costs (BA cabin crew v Easy Jet)
 Improve service
 Helps simplify processes
 Improves quality
 Changes behaviour
 Helps break resistance to change by demonstrating other methods of solving problems
The pitfalls
 “You get what you measure”. If the basis for benchmarking is flawed, it can lead to new
strategies that are flawed rather than improved performance.
t
 Too much information for managers.

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Takes too much time and money to perform.

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Benchmarking will not identify the reasons for good or poor performance because it does
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not compare competences directly. Managers would have to observe and understand
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how top-performing organisations undertake their activities and assess if these can be
imitated or improved upon.
(g)
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Produce reports highlighting key areas for management attention and recommendations for
I
t
improvement
Fi rs
Once an assessment of performance has been undertaken a summary report should be
produced simply listing out the performance against specified targets (usually in the form of a
table). This table may well form part of an appendix to the report to avoid the user being
initially overloaded with data.
In the main report itself a section pointing out the key observations from the performance
assessment will be useful to the user to recognise the really important aspects of the
assessment.
It would then make sense to have a section highlighting the suggested action points and a
timescale in which the action points should be undertaken.
141
Solutions to
Lecture examples
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Chapter 1
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Lecture example 1.1
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Output Total cost
(units) ($)
High 50 7,310
Low 26 6,566
Difference 24 744
Variable cost per unit = $744 ÷ 24 = $31

Using the high output level fixed costs can now be estimated as follows:
TC = FC + VC
Therefore FC = TC – VC = 7,310 – ($31 × 50) = $5,760
A cost equation could then be written as:
TOTAL COST = $5,760 + ($31 × no of units)
142 S o l u t i o n s t o L e c t u r e e xa m p l e s AC C A F2
Chapter 2
Lecture example 2.1
Co = $20
D = 500 units × 12months = 6,000 units per annum
Ch = $1.20 @ 20% = $0.24
2×20×6,000
EOQ = √ 0.24
= 1,000 units
6,000 1,000
Total annual cost = (20 × 1,000) + (0.24 × 2
) = $𝟐𝟒𝟎
By ordering 1,000 units of inventory whenever Paton places an order, the total annual variable
inventory costs are minimised at $240.
Lecture example 2.2

At the EOQ of 1,000 units (per Lecture example 1):
6,000 1,000
TAC = 20 × 1,000 + 0.24 × 2
+ 1.20 × 6,000 = $𝟕, 𝟒𝟒𝟎
At 2,000 units:
t
6,000 2,000
h
TAC = 20 × 2,000 + ((1.20 × 95%)@20%) × + (1.20 × 95%) × 6,000 = $𝟕, 𝟏𝟐𝟖
5
2
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At 3,000 units:
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6,000
TAC = 20 × 3,000 + ((1.20 × 90%)@20%) ×
3,000
+ (1.20 × 90%) × 6,000 = $𝟔, 𝟖𝟒𝟒
o
2
C uit
By ordering 3,000 units of inventory whenever Paton places an order, the total annual variable
t
inventory costs are minimised at $6,844.
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Lecture example 2.3
Fi rs
(a) FIFO
Workings
Date No of units Cost/unit Value
$ $
1 Jan 200 10.00 2,000
3 Jan 150 10.40 1,560
5 Jan (100) 10.00 (1,000)
10 Jan 60 10.50 630 Cost of sales
14 Jan 140 10.60 1,484 $3,040 (1,000 + 1,000 + 1,040)
(100) 10.00 (1,000)
19 Jan
(100) 10.40 (1,040)
Closing stock 250 2,634
Profit calc
$
Sales (100 × 12.50) + (200 × 12.75) 3,800
COS (see above) (3,040)
Profit 760
AC C A F 2 So l u t i o n s t o L e c t u r e e xa m p l e s 143
(b) LIFO
$ $
1 Jan 200 10.00 2,000
3 Jan 150 10.40 1,560
5 Jan (100) 10.40 (1,040)
14 Jan 140 10.60 1,484 $3,154 (1,040 + 1,484 + 630)
(140) 10.60 (1,484)
19 Jan
(60) 10.50 (630)
Profit calc
$
Sales (100 × 12.50) + (200 × 12.75) 3,800
Profit 646
(c) AVCO (WEIGHTED AVERAGE) A new average price needs to be recalculated each time a
purchase is made at a different price to the existing average price.
Co
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$ $
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1 Jan 200 10.00 2,000
3 Jan 150 10.40 1,560
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350 10.17 3,560
5 Jan (100) 10.17 (1,017)
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14 Jan 140 10.60 1,484 $3,087 (1,017 + 2,070)
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450 10.35 4,657
015
19 Jan (200) 10.35 (2,070)
Profit calc
$
Sales (100 × 12.50) + (200 × 12.75) 3,800
Profit 713
Lecture example 2.4

(1) This is direct as the cost directly relates to each unit produced. We are also told that this is a
direct labour employee.
(2) This is an indirect cost; the fact that certain units were made outside normal working hours and
so paid extra, has nothing to do with the specific units.
(3) This will almost certainly be an indirect cost as it is unlikely that a Group Incentive Scheme
relates to individual items made.
So the labour cost can be analysed as follows:
$
Direct labour cost 800
Indirect labour cost 50 + 200 = 250
Total 1,050
Lecture example 2.5

(40 × 1.5) + (100 × 0.8) + (18 × 2.0)
This worker has produced 176 standard hours of output in his 160 hr working month (i.e. the worker
has worked 10% more efficiently than was expected ….. or the standard was not accurate enough).
This worker will receive $1,760 (176 × $10) for January.
Lecture example 2.6

22,000 units ×(100,000 hours/20,000 units)
Labour Efficiency Ratio = = 95.65%
115,000 hours
115,000 hours
Labour Capacity Ratio = = 115%
100,000 hours
22,000 units ×(100,000 hours/20,000 units)
Labour Production Volume Ratio = = 110%
100,000 hours
Or 95.65% × 115% = 110%
Lecture example 2.7

What is the production overhead for each department?
ht
$ $ $ $
Assembly Supervisor
r i g
Finishing Quality Inspector
0 1 5 3,000
4,500
Allocate
Allocate
3,000
4,500
y
p ion 2
Chef 2,500 Allocate 2,500
o
Rent 22,000 Floor Area 12,000 6,000 4,000
C uit
Heat & Light 18,000 Volume 12,000 4,500 1,500
Overheads 50,000 27,000 15,000 8,000
I n t
t
Lecture example 2.8
i r s
F Overheads
Total
$
50,000
Basis
$
Assembly
$
27,000
Finishing
$
15,000
Canteen
$
8,000
No of
Reapportionment nil employees 4,000 4,000 (8,000)
Overheads 50,000 31,000 19,000 nil
Lecture example 2.9

Let C = the total production overhead of the Canteen
M = the total production overhead of the Maintenance
Then C = 17,600 + 0.2M
M = 10,000 + 0.1C
Thus C = 17,600 + 0.2(10,000 + 0.1C)
C = 17,600 + 2,000 + 0.02C
C – 0.02C = 19,600
0.98C = 19,600
C = 19,600 / 0.98
C = 20,000
So M = 10,000 + (0.1 × 20,000)

M = 10,000 + 2,000
M = 12,000
Total Basis Sawing Polishing Canteen Maintenance
$ $ $ $ $
Overheads 100,000 41,300 31,100 17,600 10,000
Canteen nil % given 10,000 8,000 (20,000) 2,000
Maintenance nil % given 4,800 4,800 2,400 (12,000)
Overheads 100,000 56,100 43,900 nil nil
Lecture example 2.10

It can be seen that the Sawing Department is largely automated and so using cost per machine hour to
calculate the overhead absorption rate would seem appropriate.
Sawing Production Overhead
OAR =
Machine Hours
$56,100
= 5,610 hours
= $10 per machine hour

It can be seen that the Polishing Department is largely manual and so using cost per labour hour to
Co
calculate the overhead absorption rate would seem appropriate.
Fir
st I pyri
Polishing Production Overhead
OAR =
Labour Hours
$43,900
ntu ght
= 8,780 hours
itio
= $5 per labour hour
n2
015
Sawing Department
$
Overhead absorbed $10 × 5,300 hours = 53,000
Overhead incurred (actual amount) 54,345
Under absorbed overhead 1,345
Polishing Department
$
Overhead absorbed $5 × 9,121 hours = 45,605
Overhead incurred (actual amount) 45,098
Over absorbed overhead 507

What is the profit or loss under absorption and marginal costing for Millie Co in March and April?
Absorption costing
March April
$ $
Sales ($35 per unit) 52,500 105,000
Less cost of sales: (variable & fixed $20 per unit) (30,000) (60,000)
22,500 45,000
(Under)/over-absorption (see workings below) (5,000) 1,000
Gross profit 17,500 46,000
Selling and distribution costs – variable (7,875) (15,750)
– fixed (10,000) (10,000)
(Loss)/Profit (375) 20,250
Workings
March
Overheads absorbed (actual × OAR (2,000  $5) $10,000
Overheads incurred (Actual) $15,000
Under-absorption $5,000
April
t
Overheads absorbed (actual × OAR) (3,200  $5)
h
$16,000
r i g 0 1
Overheads incurred (Actual)
5 $15,000
y 2
Over-absorption $1,000
o p ion
Marginal Costing
C uit
March April
$ $
t
Sales ($35 per unit) 52,500 105,000
t I n
Less cost of sales: (variable only $15 per unit) (22,500) (45,000)
rs
30,000 60,000
Fi
Less variable selling and distribution costs (7,875) (15,750)
Less actual fixed production costs (15,000) (15,000)
Less actual fixed selling and distribution costs (10,000) (10,000)
(Loss)/Profit (2,875) 19,250

March April
$ $
Absorption costing (loss)/profit (375) 20,250
Add: Opening stock  Fixed overhead absorption rate Nil 2,500
500  $5
Less: Closing stock  Fixed overhead absorption rate (2,500)
500  $5
700  $5 (3,500)
Marginal costing (loss)/profit (2,875) 19,250

Job accounts
JOB 123
$ $
Balance b/f 1,470 Job 125 a/c 620
Materials (stores a/c) 2,390 (materials transfer)
Labour (wages a/c) 2,150 Stores a/c (materials returned) 870
Production overhead (o’hd a/c) 860 Cost of sales a/c (balance) 5,380
6,870 6,870
JOB 124
$ $
Materials (stores a/c) 1,680 Cost of sales a/c (balance) 6,480
Labour (wages a/c) 3,250
Production overhead (o’hd a/c) 1,300
Job 125 a/c (materials transfer) 250
6,480 6,480
JOB 125
$ $
Co
Materials (stores a/c) 3,950 Job 124 a/c (materials transfer) 250
Fir
Labour (wages a/c) 1,400
st I pyri
Production overhead (o’hd a/c) 560 Cost of sales a/c (balance) 6,280
Job 123 a/c (materials transfer) 620
ntu ght
6,530 6,530
itio
Job cards, summarised
JOB 123 JOB 124 JOB 125
n2
$ $ $
Materials 1,530* 1,930** 4,320***
015
Labour 2,750 3,250 1,400
Production overhead 1,100 1,300 560
Factory cost 5,380 6,480 6,280
Admin & marketing o’hd (20%) 1,076 1,296 1,256
6,456 7,776 7,536
*$(630 + 2,390 – 620 – 870)
**$(1,680 + 250)
***$(3,950 + 620 – 250)

$24,000
Department 1: Cost per unit = = $24
1,000 units

Units $ Units $
Transfer from 1,000 24,000 Normal loss
Department 1
Direct labour 4,000
Departmental overheads 3,000 Transfer to Finished goods 1,000 36,000
1,000 36,000 1,000 36,000
$36,000
Department 2: Cost per unit = = $36
1,000 units

t
Units $ Units $
h 5
Raw materials 1,000 10,000 Normal loss 100 500
Direct labour
r i g 2 0 1 8,000
y
p ion
o
1,000 24,000 1,000 24,000
C uit
t
$23,500
n
I
900 units
r st
i
F
Units $ Units $
Transfer from 900 23,500 Normal loss 45 225
Department 1
Direct labour 4,000
900 35,500 900 35,500
$35,275
855 units

Units $ Units $
Raw materials 1,000 10,000 Normal loss 100 500
Direct labour 8,000 Abnormal loss 40 1,044
1,000 24,000 1,000 24,000
$23,500
Department 1: Cost per unit = = $26.11 (unchanged)
900 units

Units $ Units $
Transfer from 860 22,456 Normal loss 43 215
Department 1
Additional raw materials 5,000 Abnormal gain (13) (545)
Direct labour 4,000
Fir Co
860 34,456 860 34,456
st I pyri
$34,456−$215
ntu ght
860 units − 43 units
itio
Abnormal losses and gains account
Units $ Units $
Department 1 40 1,044
n2
Department 2 13 545
015
Cash – scrap proceeds 27 135
Transfer to Income 364

Statement
40 1,044 40 1,044
In Department 1 we lost 40 units which should have been worth $26.11, but instead were worth $5.
Thus giving a loss = 40 units × ($26.11 – $5) = $844.40.
In Department 2 we gained 13 units which should have been worth $5, but instead were worth $41.91.
Thus giving a gain = 13 units × ($41.91 – $5) = $479.83.
Hence there is an overall loss of $844.40 – $479.83 = $364.57.

$24,080
The cost per equivalent unit of process outputs = = $28
800 units + (200 units @ 30%)
Process 1 Account
Units $ Units $
Direct labour 7,100 Transfer to Department 2 800 22,400
Departmental overheads 7,100 Closing WIP 200 1,680
1,000 24,080 1,000 24,080

What is the value of the units transferred out and the closing WIP using the weighted average and
FIFO methods?
WEIGHTED AVERAGE METHOD
PROCESS A/C
Units $ Units $
t
Opening WIP 800 47,450
h 5
Raw materials ? 200,000 Transfer to Process 2 3,400 ?
Conversion
r i g 2 0 1 172,000 Closing WIP 600 ?
y
p ion
4,000 419,450 4,000 419,450
o
C uit
Statement of Equivalent Units
Costs:
I n t
t
Opening WIP 47,450 40,000 7,450
s
Inputs 372,000 200,000 172,000
Fi r Total
Equivalent units:
Transfer to Process 2
419,450
3,400
240,000
3,400
179,450
3,400
Closing WIP 600 600 300
Total 4,000 4,000 3,700
Cost per equivalent unit $60.00 $48.50

Valuation:
Transfers to Process 2 = 3,400 units × ($60.00 + $48.50) = $368,900
Closing WIP = (600 units × $60.00) + (300 units × $48.50) = $50,550
FIFO METHOD
PROCESS A/C
Units $ Units $
Opening WIP 800 47,450
Raw materials 200,000 Transfer to Process 2 3,400 ?
Conversion 172,000 Closing WIP 600 ?
4,000 419,450 4,000 419,450
Statement of equivalent units

Costs:
Inputs 372,000 200,000 172,000
Total 372,000 200,000 172,000
Equivalent units:
Finishing Opening WIP 800 nil 600
Started & Finished 2,600 2,600 2,600
Closing WIP 600 600 300
Total 4,000 3,200 3,500
Cost per equivalent unit $62.50 $49.14

Valuation:
Transfers to Process 2:
Opening WIP = $47,450 + (600 units × $49.14) = $76,936
Started & Finished = 2,600 units × ($62.50 + $49.14) = $290,271
Total $367,207
Closing WIP = (600 units × $62.50) + (300 units × $49.14) = $52,243
Fir Co
What is the cost of A and B apportioning the joint costs using sales value and number of units and
st I pyri
show the process account?
Sales Value:
ntu ght
Product A Product B Total
Sales value $10,000 $20,000 $30,000
itio
Cost of sales $6,000 (W1) $12,000 $18,000
n2
10,000
W1 – 20,000
× $18,000
Raw materials
Units
10,000
PROCESS A/C
$
10,000
015 Units $
Direct labour 5,000 Product A 2,000 6,000

Overheads 3,000 Product B 8,000 12,000
10,000 18,000 10,000 18,000
Number of units:
Product A Product B Total
Number of units 2,000 8,000 10,000
Cost of sales $3,600 (W2) $14,400 $18,000
2,000
W2 – × $18,000
10,000
PROCESS A/C
Units $ Units $
Direct labour 5,000 Product A 2,000 3,600
Overheads 3,000 Product B 8,000 14,400
10,000 18,000 10,000 18,000
Chapter 3
Lecture example 3.1
What is the linear function for these variables?
Output Total cost
(units) ($)
2
(x) (y) xy x
26 6,566 170,716 676
30 6,510 195,300 900
33 6,800 224,400 1,089
44 6,985 307,340 1,936
ht
48 7,380 354,240 2,304
r i g 0 1 5 50 7,310 365,500 2,500
2
231 41,551 1,617,496 9,405
y
p ion
o
6×1,617,496 − 231×41,551 106,695
𝑏= = = 34.765
C uit
6×9,405 − 2312 3,069
t
41,551 231
n
𝑎= − 34.765 = 5,587
I
6 6
rst
Fi
This means the fixed cost per period is $5,587 (to the nearest $), and the variable cost per unit is
$34.77 to the nearest cent.
The linear function is thus:
Total cost = $5,587 + ($34.77 × units)
What is the correlation coefficient?
6  1,617,496 - 231 41,551
r= 6  9,405 - 231 6  288,423,181 - 41,551 
2 2
106,695
r= 3,0694,053,485
106,695
r = 111,535
r = 0.957
What is the coefficient of determination?
r2 = 0.9572
= 0.915849
Lecture example 3.2

(a) We have established that TC = $5,587 + $34.77Q
Total cost = $5,587 + ($34.77 × 40) = $6,978
(b) Quarter 3 of year 4 would be Q = 15, therefore
Sales = 4,500 + 200(15) = 7,500 units
Lecture example 3.3

Trend = 12.2 + 1.3(3) = 16.1
Time series forecast = 16.1 + 1.6 = 17.7
Lecture example 3.4

TS = T × S
200,000 = T × 0.76
Therefore, Trend = 200,000/0.76 = $263,158
Lecture example 3.5

Seasonal
Co
Year Quarter Sales (TS) Moving Centred Moving Variation
Fir
Average Average (T) (TS–T)
st I pyri
1 1 $60,000
ntu ght
2 $144,000
$160,500
itio
3 $198,000 $162,000 +$36,000
$163,500
n2
4 $240,000 $168,000 +$72,000
$172,500
015
2 1 $72,000 $176,250 –$104,250
$180,000
2 $180,000 $182,750 –$2,750
$185,500
3 $228,000 $189,750 +38,250
$194,000
4 $262,000 $196,500 +$65,500
$199,000
3 1 $106,000 $202,000 –$96,000
$205,000
2 $200,000 $208,000 –$8,000
$211,000
3 $252,000 $214,571
4 $286,000 $221,142
4 1 $127,588 $227,713 –$100,125
2 $228,909 $234,284 –$5,375
3 $277,980 $240,855 +37,125
4 $316,176 $247,426 +68,750

Figures in bold are based on workings that follow.
Step 1: Calculate the moving averages.

Step 2: Centre the moving averages (only needed if using an even number for the averages) to
give the trend.
Step 3: Calculate seasonal variations (either additive or proportional {multiplicative basis}).
Step 4: Forecast.
Now because the average has been calculated over an even number of periods it does not line up
against an individual quarter. So a second moving average of two is taken:
The centred moving average is the trend. So from quarter 3 of year 1 to quarter 2 of year 3 the trend
has moved from $162,000 to $208,000; which is an average quarterly increase of:
($208,000−$162,000)
= $6,571 per quarter
7
By summarising the seasonal variation column we have the following:
Year 1 – – +$36,000 +$72,000
Year 2 –$104,250 –$2,750 +$38,250 +$65,500
Year 3 –$96,000 –$8,000 – –
Average –$100,125 –$5,375 +$37,125 +$68,750
t
It is now possible to forecast the year 4 sales using the trend movement and seasonal fluctuations we
h 5
have calculated (see figures in bold on the original table). For example, year 4 Q1 working would be as
r i g 0 1
follows:
y
p ion 2
Trend = 208,000 + (3 × 6,571) = 227,713 (this brings the trend forward from Q2 of year 3).
o
Seasonal = –100,125 (as per above)
C uit
Therefore forecast = 227,713 – 100,125 = 127,588
I n t
Lecture example 3.6
rst
Prepare budgets for sales, production, materials (usage and purchases), labour and overheads.
Fi
Good Bad
Sales Budget:
Maximum demand 4,300 units 3,600 units
Selling price per unit $15 $20
Revenue $64,500 $72,000
Production Budget: Good Bad

Sales 4,300 3,600
Closing inventory 50 nil
Less: opening inventory (200) (100)
Production 4,150 units 3,500 units
Material Usage:
Materials per unit 12 kg 14 kg
Material Usage 49,800 kg 49,000 kg
Material Purchases:
Total material usage 98,800 kg
Closing inventory 800 kg
Less: opening inventory (2,900) kg
Material Purchases 96,700 kg
Labour:
Labour per unit 1 hr 2 hrs
Labour per product 4,150 hours 7,000 hours
Total labour 11,150 hours
Overheads:
Total overhead $17,840
Total labour 11,150 hours
Overhead per labour hour $1.60
Labour per product 4,150 hours 7,000 hours
Overhead per product $6,640 $11,200
Lecture example 3.7

Prepare a cash budget for Jones Co on a monthly basis for Jan-Apr 20X8. Jan sales not received until
Co
April after three months’ credit is taken.
Fir
st I pyri
Jan Feb Mar Apr
ntu ght
$ $ $ $ Jan sales not
Cash receipts received until
itio
From customers (receivables) 80,000 April after
3 months’
Share capital introduced 350,000
n2
credit is taken.
Total receipts 350,000 0 0 80,000
015
Cash payments Just 1 month
To suppliers (payables) 50,000 60,000 72,000 delay between
Other 20,000 20,000 20,000 20,000 making the
Non-current assets 100,000 purchase and
paying in cash.
Total payments 120,000 70,000 80,000 92,000
Net cash flow 230,000 (70,000) (80,000) (12,000)
Opening balance 0 230,000 160,000 80,000
Closing balance 230,000 160,000 80,000 68,000
Lecture example 3.8

Calculate the monthly receipts from customers for the next six months if 30% of credit customers take
up the company’s offer.
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Sales (for reference only) 100,000 110,000 120,000 130,000 140,000 150,000
Cash sales (60%) 60,000 66,000 72,000 78,000 84,000 90,000

Credit sales – 1 month
(@40% × 30% × 90% ×
10,800 11,880 12,960 14,040 15,120
previous mth sales)
10.8% × prev mth sales
Credit sales – 3 months
(@40% × 70% × sales 3
28,000 30,800 33,600
mths ago)
28% × sales 3 mths ago
Cash receipts 60,000 76,800 83,880 118,960 128,840 138,720
Lecture example 3.9

Prepare a budgeted income statement and statement of financial position for the three months to
ht
31 March 2011.
r i g 0 1 5
Budgeted Income statement for the three months ended 31 March 2011
y 2
$ $
p ion
Sales (15,000+25,000+35,000) 75,000
o
Cost of sales (60% × $75,000) 45,000
C uit
Gross profit 30,000
t
Expenses
I n
General business expenses (3 × $3,000) 9,000
t
Depreciation ({$40,000/8 years} × 3/12 1,250
Fi rs
10,250
Net profit 19,750
Budgeted statement of financial position at 31 March 2011

$ $
ASSETS
Non-current assets ($40,000 less $1,250 depreciation) 38,750
Current assets
Inventories 10,000
Receivables (1 month i.e. March sales) 35,000
45,000
83,750
EQUITY AND LIABILITIES

Proprietors interest
Capital introduced 50,000
Profit for period 19,750
Less drawings (3 × $2,000) 6,000
13,750
63,750
Current liabilities
Bank overdraft 20,000
83,750

We need to prepare a flexible budget for 700 units.
Original Flexed
Budget Budget Actual Variances
1,000 units 700 units 700 units
$ $ $ $
Sales 30,000 21,000 21,200 200 (F)
Variable costs
Direct material 10,000 7,000 6,600 400 (F)
Direct labour 5,000 3,500 3,800 300 (A)
Variable production overhead 3,000 2,100 2,200 100 (A)
18,000 12,600 12,600 –
Contribution 12,000 8,400 8,600 200 (F)
Fixed costs 10,000 10,000 10,400 400 (A)
Profit/(loss) 2,000 (1,600) (1,800) 200 (A)
Workings
(1) Sales
$30,000 / 1,000 units = $30 selling price per unit.
Co
Flexed budget sales 700 units @ $30 = $21,000
Fir
st I pyri
(2) Direct material
$10,000 / 1,000 units = $10 per unit.
ntu ght
Flexed budget = 700 units @ $10 = $7,000
itio
(3) Direct labour
$5,000 / 1,000 units = $5 per unit.
n2
015
(4) Production overhead
$3,000 / 1,000 units = $3 per unit.
By flexing the budget in the question above we are able to compare performance on a like for like
basis. The effect on profit of the difference between budgeted sales volume and actual sales volume
has been removed. The sales variance however is $200 (F). This means that the actual selling price
must have been different to the budgeted selling price, resulting in a $200 (F) selling price variance.
Despite this the overall performance is $200 worse than it should have been. Control of material cost
has been very good as this has been $400 better than expected but all other costs are worse than
expected. Labour and fixed costs are the worst areas which need to be brought back into line.

Johnny invests $100 now (sometimes referred to as T0) for three years.
Simple interest of 10% will earn Johnny $10 (10% × $100) per year for three years (i.e. total interest
earned over 3 years = $30). Therefore, at the end of 3 years, the investment will be worth $130.
Compound interest of 10% will mean that Johnny’s investment will be:
S = X [1 + r]n
= $100 (1 + 0.1)3
= $133.10

Nick invests $400 now with compound interest at 10% but at the end of year 4 he withdraws $200, but
keeps the rest invested for another three years.
How much is there at the end of year 7?
$
4
S4 = 400 (1.1) = 586
withdrawal (200)
Balance at the end of Yr 4 = 386
S7 = 386(1.1)3 = 514

$1,000 is invested for three years at a 4% six-monthly interest rate.
At the end of the three years, the investment will be worth:
Future value (S) = X (1+r)n
= $1,000(1.04)6
= $1,265.32

(1+R) = (1+r)n
ht 5
R
r i g 0 1
= (1+r)n –1 = (1.04)2 – 1
2
y
= 8.16%
o p ion
C uit
t
$1,000 is invested now at nominal annual interest rate of 13%, interest compounded monthly. At the
I n
end of the first year, the investment will have grown to:
rst
Nominal rate 13%
Fi
13%
Monthly rate = = 1.083%
12
 at the end of the first year (12 compound periods), investment = $1,000 (1.01083)12
= $1,138

Money Bags is expecting to receive $16,751 in 6 years. Interest rates will be 5% for the whole 6 years.
The present value of Money Bags’ receipt
Future Value (S) = $16,751
r = 0.05
n =6
1
So the present value, X = 16,751 × = 16,751 × 0.7462 = $12,500
(1+0.05)6
This fraction is often referred to as the “discount factor”


£10,000
PV = = £8,734
(1.07)2

£10,000
PV = = £8,012.51
(1.07)×(1.08)2

Henry is going to receive $150 every year for 12 years. The annual interest rate is 6%.
The present value of Henry’s annuity is.
1 1
$150 × [1 − [1.06]12 ]
0.06
= $150 × 8.384 = $1,258

Similar to above, the same answer can be derived by using the cumulative present value table given
on the formulae sheet:
So PV = $150 × 8.384 = $1,258

Fir Co
st I pyri
Victoria is expecting to receive $2,000 a year for ever. Interest rates are expected to remain constant
at 5%.
The present value of Victoria’s perpetuity is
ntu ght
itio
2,000
So PV = 2,000 × 1/0.05 = 0.05
= $40,000

n2
(a) Payback period
Annual cash flow
$
015 Cumulative cash flow
$
Investment (80,000) (80,000)
First year 15,000 (65,000)
Second year 20,000 (45,000)
Third year 25,000 (20,000)
Fourth year 30,000 10,000
So the payback period is 4 years or if we assume that the cash flows come in evenly throughout
each year:
20,000 2
3+ 30,000
= 3 3 years

Timing Cash flow Discount Factor Present Value
$ 10% $
0 (80,000) 1.000 (80,000)
1 15,000 0.909 13,635
2 20,000 0.826 16,520
3 25,000 0.751 18,775
4 30,000 0.683 20,490
5 35,000 0.621 21,735
NPV = 11,155

Calculate the approximate IRR for Horizon Ltd.
Timing Cash flow Discount Present Discount Present
Factor Value Factor Value
$ 10% $ 20% $
0 (80,000) 1.000 (80,000) 1.000 (80,000)
1 15,000 0.909 13,635 0.833 12,495
2 20,000 0.826 16,520 0.694 13,880
3 25,000 0.751 18,775 0.579 14,475
t
4 30,000 0.683 20,490 0.482 14,460
h 5
5 35,000 0.621 21,735 0.402 14,070
r i g 0 1
11,155 (10,620)
y
p ion 2
11,155
IRR ≈ 10 + × (20 – 10)
o
11,155 –(10,620)
C uit
= 15.1%
Chapter 4
I n t
r st
F i Lecture example 4.1
Sales variances
SALES PRICE SALES VOLUME
For 18,000 rackets $ Rackets
Actual revenue 1,245,000 Actual sales 18,000
Expected revenue (18,000 × $70) 1,260,000 Budget sales 15,000
VARIANCE 15,000 (A) Variance in rackets 3,000 (F)

Valued at STANDARD PROFIT $13
Materials variances
TOTAL MATERIALS
18,000 rackets $
Should cost (18,000 × $9) 162,000
Did cost 165,000
VARIANCE 3,000 (A)
MATERIALS PRICE MATERIALS USAGE

5,600 kg purchased $ 18,000 rackets kg
Should cost (5,600 × $30) 168,000 Should use (18,000 × 0.3kg) 5,400
Did cost 165,000 Did use 5,600
VARIANCE 3,000 (F) VARIANCE in kg 200 (A)
Valued at the standard cost per kg $30
VARIANCE in $ 6,000 (A)
Labour variances
Fir Co
TOTAL LABOUR
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18,000 rackets $
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Should cost (18,000 × $24) 432,000
Did cost 405,000
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VARIANCE 27,000 (F)
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33,000 hrs
LABOUR RATE
$
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18,000 rackets
LABOUR EFFICIENCY
hrs
Should cost (33,000 × $12 ) 396,000 Should use (18,000 × 2 hrs) 36,000
VARIANCE 9,000 (A) VARIANCE in hrs 3,000 (F)
Valued at the standard cost per hr $12
VARIANCE in $ 36,000 (F)
Variable overhead variances

TOTAL VARIABLE OVERHEAD
18,000 rackets $
Should cost (18,000 × $8) 144,000
Did cost 135,000
VARIANCE 9,000 (F)
VARIABLE OVERHEAD EXPENDITURE VARIABLE OVERHEAD EFFICIENCY

Should cost (33,000 × $4) 132,000 Should use (18,000 × 2 hrs) 36,000
VARIANCE 3,000 (A) VARIANCE in hrs 3,000 (F)
Valued at the standard cost per hr $4
Fixed overhead variances
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TOTAL FIXED OVERHEAD
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18,000 rackets $
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Should cost (18,000 × $16) 288,000
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Did cost 260,000
VARIANCE 28,000 (F)
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FIXED OVERHEAD EXPENDITURE FIXED OVERHEAD VOLUME
$ Rackets
Budgeted cost (15,000 × $16) 240,000 Actual production 18,000
Actual cost 260,000 Budget production 15,000
VARIANCE 20,000 (A) Variance in rackets 3,000 (F)
Valued at standard cost $16
FIXED OVERHEAD CAPACITY FIXED OVERHEAD EFFICIENCY
hrs 18,000 rackets hrs
Did take 33,000 Should use (18,000 × 2 hrs) 36,000
Budgeted to take (15,000 × 2 hrs) 30,000 Did use 33,000
VARIANCE in hrs 3,000 (F) VARIANCE in hrs 3,000 (F)

Valued at the standard cost per hr $8 Valued at the standard cost per hr $8
VARIANCE in $ 24,000 (F) VARIANCE in $ 24,000 (F)
Lecture example 4.2

An adverse materials usage variance, due to needing more materials because of the poor quality.
A favourable materials price variance, due to the lower materials price.
An adverse labour efficiency variance (and variable and fixed overhead efficiency variances), due to a
drop in productivity because of the poor quality materials.
An adverse labour rate variance, due to having to pay the staff overtime for working extra hours to
deal with the poor quality materials.
An adverse fixed overhead volume variance, due to a drop in actual production because of the poor
quality materials.
An adverse sales price variance, due to the lower quality of the final product.
An adverse sales volume variance, due to the lower quality of the final product.
Lecture example 4.3

What was the work force actually paid per hour?
LABOUR RATE
10,400 hrs $
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Should cost (10,400 × $5 ) 52,000
Fir
Did cost ?
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VARIANCE 416 (A)
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? = 52,000 + 416 = $52,416 for 10,400 hours
So the work force was actually paid $5.04 per hour.
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Chapter 5
Lecture example 5.1
Calculate the activity, efficiency and capacity ratios.
015
(2ℎ𝑟𝑠 𝑥 1,050 𝑢𝑛𝑖𝑡𝑠) 2,100 𝑠𝑡𝑑 ℎ𝑟𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = (2ℎ𝑟𝑠 𝑥 1,000 𝑢𝑛𝑖𝑡𝑠) = 2,000 𝑠𝑡𝑑 ℎ𝑟𝑠 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 = 1.05 𝑜𝑟 𝟏𝟎𝟓%
2,100 𝑠𝑡𝑑 ℎ𝑟𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 𝑟𝑎𝑡𝑖𝑜 = 1,800 𝑎𝑐𝑡𝑢𝑎𝑙 ℎ𝑟𝑠
= 1.167 𝑜𝑟 𝟏𝟏𝟔. 𝟕%
1,800 𝑎𝑐𝑡𝑢𝑎𝑙 ℎ𝑟𝑠

𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = 2,000 𝑏𝑢𝑑𝑔𝑒𝑡 ℎ𝑟𝑠 = 0.9 𝑜𝑟 𝟗𝟎%
This information tells us that overall 5% more output was produced than budgeted. This was achieved
through very efficient working during the time the staff were able to work since the efficiency was
nearly 17% above standard efficiency whilst the workers were not able to work as many hours as
budgeted (only 90% of budget time was available).
This may have been due to illness, strikes or simply that there was not enough demand for the
products to require them to work more than 1,800 hours.
Lecture example 5.2

Calculate the annual ROI and RI for each division.
Smith Jones
ROI
× 100
Divisional net assets 2,375 2,000
16% 12%
RI
Notional interest (divisional net assets × 10%) 237.5 200
Residual Income 142.5 40
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Formulae sheets
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166 Formulae sheets AC C A F2
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AC C A F 2 Fo r m u l a e s h e e t s 167
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168 Formulae sheets AC C A F2
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Question Bank
ACCA F5
Performance Management
Exams from September 2017
JUNE 2017 RELEASE

ii I n t r o d u c t i o n ACCA F5 Question Bank
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No part of this publication may be reproduced, stored in a retrieval system
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or transmitted, in any form or by any means, electronic, mechanical,
I
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photocopying, recording or otherwise, without the prior written permission
rs
of First Intuition Ltd.
Fi Any unauthorised reproduction or distribution in any form is strictly

prohibited as breach of copyright and may be punishable by law.
We are grateful to the Association of Chartered Certified Accountants and

the Chartered Institute of Management Accountants for permission to
reproduce past examination questions and model answers.
Additional comments and guidance have been prepared by First Intuition

Ltd.
© First Intuition Ltd, 2017

ACCA F5 Question Bank Introduction iii
Computer or paper-based exam?
Sessional computer based exams are available for papers F5 to F9. Until December 2017 these run
alongside the traditional paper based exams and you may sit either.
At the time of printing this question bank, the ACCA had announced that they are hoping to phase out
the paper exams from March 2018. If this happens you will then have to sit the CBE. If you are taking
your exam from March 2018 onwards, please check the ACCA website for further detail
www.accaglobal.com
The timing of the paper exam and the computer based exam differ. In the paper exam you will have 3
hours and 15 minutes. However, in the computer based exam you will be given 3 hours and 20
minutes, but there will be an extra five objective test questions, known as ‘seeded’ questions. The
ACCA set seeded questions for control purposes only and there is no mark allocated to them.
However, you will not know which of the questions is seeded at the point that you are answering the
questions, so you will need to take the same approach to all questions.
The technical content of paper based and computer based exams is identical, but there is a slightly
wider variety of question styles in the computer based exam.
You will find a variety of question styles in this question bank, so that you are prepared for the
Co
computer based exam as well as the paper one. You will find more detail about the computer based
Fir
exams in the following places:
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http://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5/specimen-exams.html
and
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http://www.accaglobal.com/content/dam/ACCA_Global/Students/exam/Guide%20to%20CBEs_FINAL.
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PDF
The ACCA has produced a specimen exam.
017
The paper version of the 2016 specimen exam is included at the back of this question bank.However,
there is a computer based version of the specimen on the ACCA website. If you are taking the
computer based exam , it is VITAL that you work through the computer based specimen, which can
be found at the following:
https://sampletds1.pearsonvue.com/Minerva/startDelivery?sessionUUID=e9d2538e-a34f-4137-9e10-
9bca83a3867a
In addition, it is VITAL that you look at the extra constructed response questions and the constructed
response workspace information provided at:
https://sampletds1.pearsonvue.com/Minerva/startDelivery?sessionUUID=c1b72428-26de-4c09-9c0f-
04c69ef893c5
iv I n t r o d u c t i o n ACCA F5 Question Bank
Contents
Page
Computer or paper-based exam? iii
Tuition Questions 3
Tuition Answers 65
Revision Questions 139
Revision Answers 229
Exam paper questions and answers 347
Formulae sheet
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I n t
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Fi Icons in this Question Bank
You will find a full debrief of this question on your online course
ACCA F5 Question Bank Part 1 Tuition questions 1
PART 1 TUITION QUESTIONS
Objective test and Scenario

Question Page ref
Syllabus area no Q
1: Specialist cost and management accounting techniques

Activity based costing 1-4 3 65
Scenario question: Duff Co 5-9 4 66
Target costing 10-16 5 66
Scenario question: Edward Co 17-21 7 68
Life cycle costing 22-26 8 69
Throughput accounting 27-32 9 69
Scenario question: Gopher Garage 33-37 11 70
Environmental accounting 38-40 12 72
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2: Decision-making techniques
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Relevant cost analysis 1-4 14 73
Cost volume profit analysis 5-11 15 73
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Scenario question: Cardio Co 12-16 17 75
Limiting factors 17-22 18 76
Pricing decisions
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23-28 20 77
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Make-or-buy and other short-term decisions
Scenario question: Herera Co 29-33 22 78
Dealing with risk and uncertainty in decision-making
Scenario question: Louiedewie Co
34-38
39-43017 23
25
79
80
3: Budgeting and control

Budgetary systems and type of budget 1-10 27 81
Quantitative analysis in budgeting 11-17 29 82
Standard costing 18-19 31 84
Scenario question: Kamal Co 20-24 31 84
Material mix and yield variances 25-28 33 85
Scenario question: Product Zed 29-33 34 86
Sales mix and quantity variances 34-35 35 87
Scenario question: Memia Co 36-40 36 88
Planning and operational variances 41-45 38 89
Scenario question: Demia Co 46-50 39 90
Performance analysis 51 41 91
2 Part 1 Tuition questions ACCA F5 Question Bank
Question Page ref

Syllabus area no Q
4: Performance measurement and control

Performance management information systems 1-5 42 92
Sources of management information 6-9 43 92
Management reports 10-12 44 93
Performance analysis in private sector organisations 13-17 45 94
Scenario question: Oliver’s Salon 18-22 46 94
Divisional performance and transfer pricing 23-29 47 96
Scenario question: Abel Co 30-34 50 97
Performance analysis in not-for-profit organisations and the public 35-37 51 98
sector
External considerations and behavioural aspects 38-39 52 98
Long form
Based on Page ref
Question name Syllabus area Past exam Q A
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7
1
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Cut and Stitch
2 0 1 Limiting factor analysis Q3 J10 (a)-(c) 53 99

2 WX
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Pricing Q3, J13, (b) amended 54 102
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Gym Bunnies Risk and uncertainty in decision
making
Q1, J13, (a) and (c) 55 105
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PC Co Budgetary systems/Types of budget Q3, D11 57 109
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2 The Safe Soap Co Materials mix and yield Q5, D14 57 112
variances/Activity-based budgeting
3 Bedco Planning and operational variances Q5, D13 58 114
4 Jump Performance analysis and Q5, J10 59 116
behavioural aspects

1 Web Co Performance analysis in private Q3, D12 61 119
sector organisations
2 AT Co Performance analysis in private Q2, D10 62 122
3 Bath Co Divisional performance and transfer Q2, D11, (b) and (c) 63 126
pricing
4 Hammer Co Divisional performance and transfer Q4, J10 64 130
pricing
ACCA F5 Question Bank Tuition questions: 1: Specialist cost and management accounting techniques 3
PART 1 TUITION QUESTIONS: Objective test and Scenario

1 RDE plc uses an activity based costing system to attribute overhead costs to its three products.
The following budgeted data relates to the year to 31 December 20X8:
Product X Y Z
Production units (000) 15 25 20
Batch size (000 units) 2.5 5 4
Machine set up costs are caused by the number of batches of each product and have been
estimated to be $600,000 for the year.
Calculate the machine set up costs that would be attributed to each unit of Product Y to the
nearest $0.01.
2
Fir Co
According to ABC, which of the following is the correct statement of the hierarchy of levels of
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activity within an organisation, ranked from the bottom upwards?
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Facility
sustaining
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Product
Product
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sustaining
Batch
3 For which one of the following costs might the number of production runs be a cost driver?
 Production scheduling
 Product development costs
 Short-run variable overhead costs
 Materials handling and despatch costs
4 Tuition questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank
4 KY makes several products including Product W. KY is considering adopting an activity-based

approach for setting its budget. The company’s production activities, budgeted activity costs
and cost drivers for next year are given below.
Cost driver
Activity $ Cost driver quantity
Set up costs 200,000 No. of set ups 800
Inspection / quality control 120,000 No. of quality tests 400
Machines are reset after each batch. Quality tests are carried out after every second batch.
The budgeted data for Product W for next year are:
Direct materials $2.50 per unit
Direct labour 0.03 hours per unit @ $18 per hour
Batch size 150 units
Budgeted production 15,000 units
Calculate, using activity based costing, the budgeted total production cost per unit for Product W
to the nearest $0.01.
DUFF CO
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The following scenario relates to questions 5-9. Each question is worth 2 marks.
2
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Duff Co manufactures three products X, Y and Z. Each product uses the same materials and the same
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type of direct labour but in different quantities. For many years Duff Co has been using full absorption
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costing and absorbing overheads on the basis of direct labour hours, but is considering switching to
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activity-based costing (ABC).
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The following data relates to the three products.
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rs
Product X Product Y Product Z
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20,000 16,000 22,000
Direct material cost ($ per unit) 25 28 22
Direct labour (hours per unit) 2.5 3 2
Direct labour cost ($ per unit, @ $12 per hour) 30 36 24
Machine hours per unit 1.5 1.25 1.4
Batch size (units) 500 800 400
Number of purchase orders per batch 4 5 4
Duff Co also expects to incur the following indirect costs.
Cost pools
$
Machine set up costs Number of batches 280,000
Material ordering costs Number of purchase orders 316,000
Machine running costs Number of machine hours 420,000
General facility costs Number of machine hours 361,400
1,377,400
5 Calculate the budgeted full production cost per unit of product X using Duff Co’s current
method of absorption costing, to the nearest $0.01.
$
6 Calculate the total material ordering costs for Product Y to the nearest $.
7 Calculate the machine running and general facility costs per unit for Product Z to the nearest
$0.01.
8 Calculate the budgeted full production cost per unit of product X using ABC, to the nearest
$0.01, on the basis that total overheads allocated to Product X under activity-based costing are
$492,824.
9 Which TWO of the following statements about ABC are correct?

 ABC is only useful for production overheads.
 ABC is most useful when overheads are related to volume.
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 ABC is an absorption costing system.

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ABC must be based on activities that are measurable in quantitative terms.
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Target costing
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10 The selling price of Product X is set at $350 for each unit and sales for the coming year are
expected to be 500 units.
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A return of 30% on the investment of $300,000 in Product X will be required in the coming year.
What is the target cost for each unit of Product X?
$
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11 A company has calculated that the target cost for Product Z is $40 per unit. This is based on an
expected production and sales volume of 3,000 units. The company wishes to earn a profit of
25% on sales.
What market price is the target cost for Product Z based on (to two decimal places)?
 $10.00
 $30.00
 $50.00
 $53.33
12 T Company uses target costing. The company wishes to close the target cost gap that exists for
one of its products.
Which of the following may be used to close the target cost gap?
 Replace skilled workers with less skilled workers for the more basic production tasks
 Replace existing material with higher quality material
 Raise the selling price of the product
 Use a higher grade of labour to complete work ahead of schedule
13 The following are all steps in the implementation of the target costing process for a product.
Rank them in the correct sequence.
Calculate the
target cost
Calculate the
target cost gap
Calculate the
current cost
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Set the required
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profit
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Set the selling
oprice
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14
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Which of the following statements describes target costing?
rst  It calculates the expected cost of a product and then adds a margin to it to arrive at the
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target selling price.
 It allocates overhead costs to products by collecting the costs into pools and sharing
them out according to each product’s usage of the cost driving activity.
 It identifies the market price of a product and then subtracts a desired profit margin to
arrive at the desired cost.
 It identifies different markets for a product and then sells that same product at different
prices in each market
15 Saris Co has set a budgeted labour cost based on the assumption of a learning rate of 80%. Its
Production Director has now found that the actual learning rate is 70%.
Which of the following statements is true?
 The cost gap will increase and the target cost will increase.
 The cost gap will decrease and the target cost will decrease.
 The cost gap will remain the same and the target cost will decrease.
 The cost gap will decrease and the target cost will remain the same.
16 Which TWO of the following techniques are relevant to target costing?

 Value analysis
 Iso-contribution analysis
 Variance analysis
 Functional analysis
EDWARD CO
Edward Co assembles and sells many types of radio, and also repairs radios for customers. It is
considering extending its product range to include digital radios. These radios produce a better sound
quality than traditional radios and have a large number of potential additional features not possible
with the previous technologies.
A radio is produced by assembly workers assembling a variety of components. Production overheads
are currently absorbed into product costs on an assembly labour hour basis.
Edward Co is considering a target costing approach for its new digital radio product. A selling price of
$44 has been set in order to compete with a similar radio on the market that has comparable features
to Edward Co’s intended product. The board have agreed that the acceptable margin (after allowing
for all production costs) should be 20%.
Fir Co
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Cost information for the new radio is as follows.
Component 1 (Circuit board) – these are bought in and cost $4.70 each.
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Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each completed radio.
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However, Edward Co estimates that 4% of the purchased wire is lost in the assembly process. Wire
costs $4.80 per metre to buy.
Other materials – other materials cost $8.10 per radio.
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Assembly labour – these are skilled people who are difficult to recruit and retain. It takes 30 minutes
to assemble a radio and the assembly workers are paid $12.60 per hour. It is estimated that 10% of
hours paid to the assembly workers is for idle time.
Production overheads – variable production overhead for each radio is $20 per hour and fixed
overhead for each radio is $12 per hour.
17 Which TWO of the following would be benefits of introducing a target costing approach?
 Edward Co will have a greater internal focus on its product development.
 Cost control can begin at the design stage.
 Edward Co will be able to pass on cost increases to its customers.
 The radio will only include features that the customer regards as valuable.
18 Calculate the reduction in cost that would be achieved by eliminating the labour idle time and
the wire lost in the assembly process, to the nearest $0.01.
$
19 Assuming a change in supplier meant that the cost of Component 2 fell to $4.40 per metre,
there was no idle time with labour and all other costs remained the same, calculate the cost gap
to the nearest $0.01.
20 Which TWO of the following are measures that Edward Co might wish to use to reduce the cost
gap?
 Only including standard components in the radio
 Including additional features that the competitor’s radio does not have
 Analysing costs into cost pools
 Increasing the automation of the manufacturing process
21 Which of the following would be a problem with introducing a target cost approach to the
repair services provided by Edward Co?
 The outcomes of the repair services cannot be specified properly.
 The repair work carried out will vary according to the problems found.
 The time of the skilled labour used in the repair process has to be costed.
 The service is carried out when the customer requires it.
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Life cycle costing
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22 Which THREE of the following costs are typically costs which occur at the Research and
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Development stage of a product’s life cycle?
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 Design costs
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 Testing costs
rst  Promotional costs
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 Production facility investment costs
 Customer support costs
 Inventory costs
23 A company is about to launch a new product. Total lifetime sales are expected to be 44,000
units. $3,250,000 has been incurred on design and development. Promotional costs over the
product’s life are expected to be $2,000,000. De-commissioning of the machine will cost
$250,000 at the end of the product’s life. Production of the product is expected to cost an
average of $150 per unit.
What is the life cycle cost per unit over the product’s life?
24 Which of the following is NOT a benefit of life cycle costing?

 Improved awareness of total costs
 Assists with long-term planning
 Emphasises the importance of early stage design and development costs
 Results in a market driven pricing strategy
25 In calculating the life cycle costs of a product, which of the following items would be included?
Included Excluded
Research and development  
Planning and concept design  
Testing  
Production  
Advertising  
Distribution and customer service  
26 When are the bulk of a product's life cycle costs normally determined?
 At the design/development stage
 When the product is introduced to the market
 When the product is in its growth stage
 On disposal
Throughput accounting
Co
27 A company manufactures two products which requires three different machine processes:
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Processing time per metre in hours
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Product A Product B
Pressing 0.50 0.50
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Stretching 0.25 0.40
Rolling 0.40 0.25
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Each product requires 1 metre of material/unit. Production for the month is expected to be
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10,000 metres for Product A and 15,000 for Product B.
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Available resources for the month are expected to be:
Available resource
Material 30,000 metres
Pressing time 13,000 hours
Stretching time 8,000 hours
Rolling time 7,750 hours
Using throughput accounting, what is the bottleneck resource?
 Material
 Pressing time
 Stretching time
 Rolling time
28 A company manufactures a product which requires two hours per unit of machine time.
Machine time is a bottleneck resource as there are only five machines which are available for
24 hours per day, five days per week. The product has a selling price of $65 per unit, direct
material costs of $25 per unit, labour costs of $20 per unit and factory overhead costs of
$10 per unit. These costs are based on weekly production and sales of 300 units.
What is the throughput accounting ratio (to 2 decimal places)?
$
29 Z Company uses throughput accounting to help assess the efficiency of its operations.
Which of the following would improve its throughput accounting ratio?
 Introduce restrictions specifying the maximum allowed hours for each shift
 Replace existing material with higher quality material
 Raise the selling price of the product
 Use a higher grade of labour for the work
30 X Co uses a throughput accounting system. Details of product A, per unit, are as follows:
Selling price $320
Material costs $80
Conversion costs $60
Time on bottleneck resource 6 minutes
What is the return per hour for product A?
31 Which TWO of the following features distinguish throughput accounting from other costing systems?
 It does not attempt to maximise profit.
t
 Work in progress is valued at material cost only.

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Costs are allocated to products when they are completed or sold.

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Only labour cost is treated as a variable cost.
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32 Which of the following is NOT an influence on the throughput contribution measure used in a
system of throughput accounting?
I

n t Direct material price
t
 Direct material usage
Fi rs
 Direct labour price
 The volume of throughput
GOPHER GARAGE
Gopher Garage offers MOTs and full services to its customers. All MOTs and services have to be carried
out by one of the four mechanics at the garage. They are assisted by three trainees. The garage’s two
receptionists also deal with customers when they arrive and when they pay for the work that has been
done.
The average length of time that is spent by each member of staff on work for each customer is as
follows:
MOTs Service
Hours Hours
Mechanic 1.25 3.20
Trainee 0.50 1.50
Receptionist 0.25 0.30
The garage is open for 10 hours a day, 5 days a week. It is closed for public holidays that total two
weeks in any year. Annual staff salaries are $55,000 for each mechanic, $25,000 for each trainee and
$30,000 for each receptionist. The cost of oil and other materials used during MOTs is $15 per
customer, and the cost of oil and other materials used during services is $25 per customer. Other
garage costs (excluding raw materials and labour) amount to $125,000.
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Gopher Garage charges $120 for each MOT and $200 for each service.
Fir
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The garage’s accountant has identified mechanic time as being the bottleneck activity.
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33 What is the annual capacity of the bottleneck activity in terms of the maximum number of each
activity?
MOTs
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Services
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34 The garage’s accountant has calculated the cost per hour to be $48.
What is the throughput accounting ratio for both services?
 MOT 1.75 Service 1.14
35 What would be the effect on the bottleneck if the garage employed another three mechanics?
 The mechanics’ time would be a bottleneck for MOTs only.
 The mechanics’ time would be a bottleneck for services only.
 The mechanics’ time will remain the bottleneck for both MOTs and services.
 There will no longer be a bottleneck.
36 Which TWO of the following measures could the garage use to improve the throughput
accounting ratio?
 Decrease the time spent by the mechanics on each customer
 Decrease the time spent by the trainees on each customer
 Decrease the operating expenses of the garage
 Decrease the price of the work done for each customer
37 Which of the following statements regarding the theory of constraints is/are true?
True False
It can be applied to the management of all external  
factors affecting the organisation.
It is concerned with overcoming a bottleneck  
identified in a single activity.
It aims to limit the amount of non-bottleneck  
resources used.
It tries to avoid the build-up of inventories.  
Environmental accounting
t
38 Which of the following statements about environmental accounting is/are true?
i g h 1 7 True False
y r 2 0
A significant problem for environmental accounting is  
p ion
that it is difficult to measure environmental costs.
oAn aim of environmental accounting is to encourage
C uit
organisations to quantify the costs and benefits of
 
t
improving environmental practices.
I n
The use of input/output analysis forces an  
t
organisation to monitor the cost of wasted material
rs
and other environmental pollution.
Fi
It is not possible to use activity based costing to  
identify cost drivers for environmental costs.
39 Using the US Environmental Protection Agency’s definition of environmental costs, how would
the cost of producing an environmental report be classified?
 Conventional cost
 Contingent cost
 Image and relationship cost
 Potentially hidden cost
40 When activity-based costing is used for environmental accounting, which statement is correct
for environment-related costs and environment-driven costs?
 Environment-related costs can be attributed to joint cost centres and environment-
driven costs cannot be.
 Environment-driven costs can be attributed to joint cost centres and environment-
related costs cannot be.
 Both environment-related costs and environment-driven costs can be attributed to joint
cost centres.
 Neither environment-related costs nor environment-driven costs can be attributed to
joint cost centres.
Fir Co
st I pyri
ntu ght
itio
n2
017
14 T u i t i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank
Relevant cost analysis

1 L is currently quoting for a job that will involve the use of three materials A, B and C. Material A
is currently in inventory with a book value of $4,000. If it was used on the job, it would need to
be replaced at a cost of $5,000. Its scrap value is $1,000. There is a surplus of Material B in
inventory. Its book value is $3,000 and it has no realisable or scrap value. There is a surplus of
Material C in inventory. Its book value is currently $6,000. It could be sold for $4,500 or used on
another job as a substitute for Material D, which L currently does not have in inventory. The
costs of obtaining D would be $4,250.
What is the relevant cost to L of using materials in inventory on this job?
2 A company is considering a one-year contract which will require three skilled workers. Skilled
workers can be hired on a temporary basis for one year at a cost of $20,000 per worker.
Alternatively, the company could retrain some existing workers who are currently paid $12,000
per worker. The training would cost $5,000 in total. If these existing workers were used, the
ht 7
company would need to replace them at a total cost of $45,000.
r i g 0 1
What is the total relevant cost of labour for the one-year contract?
2

y
p ion
$60,000
o
C uit


$41,000
$45,000
t
 $50,000
t I n
rs
3 Studley Co purchased a machine three years ago for $15,000. It can be sold now for $9,000. The
Fi
current replacement cost of an equivalent machine is $14,000. If Studley Co keeps the machine
for use in the business it is expected to generate net income of $17,000.
What is the relevant cost of the machine?
 $9,000
 $14,000
 $15,000
 $17,000
4 A company has received a special order for which it is considering the use of material B which it
has held in its inventory for some time. This inventory of 945 kg was bought at $4.50 per kg. The
special order requires 1,500 kg of material B. If the inventory is not used for this order, it would
be sold for $2.75 per kg. The current price of material B is $4.25 per kg.
What is the total relevant cost of material B for the special order, to the nearest $0.01?
$
ACCA F5 Question Bank Tuition questions: 2: Decision-making techniques 15
Cost volume profit analysis

5 A business manufactures a single product which it sells for $50. The variable costs of production
are $10 a unit. Next month fixed costs will be $800,000. The Finance Director wants to realise a
profit of $120,000. How many units must be sold to generate this profit?
6 Which of the following is the correct formula to calculate the break-even sales volume (in units)
for a business?
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
 𝐶𝐶
𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝑆𝑆
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑢𝑢𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
 𝐶𝐶
𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝑆𝑆
Co
7 A company makes a single product which it sells for $30 per unit.
Fir
st I pyri
Fixed costs are $18,000 per month. The contribution/sales ratio is 40%.
Next month the company’s profit target is $36,000.
ntu ght
What sales volume is required to achieve next month’s profit target?
itio
 1,200 units
 1,500 units
 3,000 units
n2
017
 4,500 units
8 ZT Ltd produces and sells three products, A,B and C in the ratio 1:2:1.
Sales price and variable cost data for the products is as follows:
A B C
Selling price ($) 8 8 10
Variable cost ($) 5 4.50 6
ZT Ltd has fixed costs of $70,000
What is ZT’s break-even sales revenue?
9 A profit-volume chart can illustrate the relationship between

 Sales revenue and costs
 Sales volume and costs
 Sales volume, revenue and costs
 Sales volume and profit

Fixed costs are $13,000 per month.
The contribution/sales ratio is 40%.
Sales revenue is $62,500.
What is the margin of safety in units?
11 Matt Milk Bar is planning to invest in a new blending machine, which will expand the range of
drinks it can offer. Its owner has estimated the following daily results for drinks associated with
the new machine:
$
Sales (200 units) 600
Variable costs (450)
Contribution 150
Incremental fixed costs (45)
Profit 105
t
Which of the following statements that relate to the sensitivity of the investment are true?
i g h 1 7
r 0
True False
y 2
The investment is more sensitive to a change in sales
p ion
 
o
price than sales volume.
C uit
If variable costs increase by 25% the investment will  
make a loss.
I n t
The margin of safety is 92.5%.  
rst The investment’s sensitivity to incremental fixed costs  
Fi
is 70%.
CARDIO CO
Cardio Co manufactures and sells three types of fitness equipment: treadmills (T), cross trainers (C)
and rowing machines (R).
The budgeted sales prices and volumes for the next year are as follows:
T C R
Selling price $1,600 $1,800 $1,400
Units 420 400 380
The budgeted revenues and costs for each product are shown below.
T C R
$ $ $
Sales revenues 672,000 720,000 532,000
Variable costs 263,760 286,400 201,780
Fixed costs 73,940 78,100 59,320
Cardio Co’s Finance Director is considering various possibilities, including aiming for a
contribution/sales ratio of 65%. He is also looking at a scenario where the contribution/sales ratio was
60%, with sales revenues falling to $1,600,000 and fixed costs to $175,000.
12
Fir Co
Calculate the weighted average contribution to sales ratio for Cardio Co to the nearest 0.01%.
%
st I pyri
ntu ght
itio
13 Calculate the breakeven sales revenue at a Contribution/Sales ratio of 65%, to the nearest $000.
n2
$ 000
14
017
Calculate the margin of safety at a contribution/sales ratio of 60%, with sales revenues having
fallen to $1,600,000 and fixed overheads to $175,000, to the nearest 0.1%.
15 Cardio Co’s production department currently has problems meeting demand for these products,
although this will be addressed in the medium-term by a large investment in manufacturing
facilities. For now, Cardio Co’s Chief Executive has instructed the Production Department to
prioritise manufacture of products by the contribution per unit that they make.
Which of the following would NOT occur if the products making the highest contribution were
manufactured and sold first?
 Cardio Co will cover its fixed costs more quickly.
 Fewer unit sales will need to be made in order to break even.
 The breakeven point will be lower.
 The C/S ratio will rise.
16 Once Cardio Co’s new manufacturing facilities are open, the company intends to introduce a
new, mobile, cross-trainer. This will be supported by a large advertising and promotion
campaign to encourage demand. The intention is initially to charge a high price for this product,
although it may fall over time.
Which TWO of the following are reasons why Cardio Co may wish to charge a high price
initially for the mobile cross-trainer?
 The sensitivity of its demand to price is uncertain.
 The product is likely to have a long life cycle.
 It will generate high initial cash flows to cover the marketing expenditure.
 It wishes to discourage competitors from entering the market.
Limiting factors
17 TT Co operates a JIT policy with minimal inventories. It manufactures a single product with the
following cost card:
Product A
$
Materials (at $2 per kg) 8
Labour (at $5 per hour) 10
t
Other overheads 7
h 7
Total production cost 25
r i g 0 1
Next month demand is 4,000 units, 15,000 kg of material are available and 8,500 labour hours.
2
y
p ion
What is the limiting factor next month?
o
C uit
 Sales demand
Material only
t

I n
 Labour only
t
 Material and labour
Fi 18rs Conrad Co manufactures two products, X and Y. Details of both products are as follows:
Product X Product Y
$ $
Selling price 105 136
Materials 18 16
Labour (at $10 per hour) 30 45
Variable overhead 12 15
Fixed overhead 20 25
Profit per unit 25 35
Maximum demand (units) 800 1,500

It has selected the optimal production plan to maximise profit for the month based on 4,650
labour hours. An extra 90 hours have become available at the standard rate of $10 per hour.
How much additional profit can be earned in the month?
$
19 The following statements have been made about linear programming:

1 The shadow price of a scarce resource is the increase in contribution available if one
more unit of the resource is obtained
2 Non-scarce resources always have zero slack
Which of the above statements is/are true?
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
20 A company has the following production planned for the next four weeks. The figures reflect the
full capacity level of operations. Planned output is equal to the maximum demand per product.
Product A B C D
$ per unit $ per unit $ per unit $ per unit
Selling price 160 214 100 140
Raw material cost 24 56 22 40
Direct labour cost 66 88 33 22
Variable overhead cost 24 18 24 18
Fixed overhead cost 16 10 8 12
Profit
Fir Co
30 42 13 48
st I pyri
Planned output 300 125 240 400
Direct labour hours per unit 6 8 3 2
ntu ght
The direct labour force is threatening to go on strike for two weeks out of the coming four. This
itio
means that only 2,160 hours will be available for production rather than the usual 4,320 hours.
n2
If the strike goes ahead, which TWO products should be produced if profits are to be maximised?
 A



B
C
D
017
21 Highfly Co manufactures two products, X and Y, and any quantities produced can be sold for
$60 per unit and $25 per unit respectively.
Variable costs per unit of the two products are as follows:
Product X Product Y
$ $
Materials (at $5 per kg) 15 5
Other variable costs 6 5
Total 45 13
Next month, only 4,200 kg of material and 3,000 labour hours will be available. The company
aims to maximise its profits each month.
The company wants to use the linear programming model to establish an optimum production
plan. The model considers ‘x’ to be number of units of Product X and ‘y’ to be the number of
units of Product Y.
Which of the following statements of objective function and constraints is/are correct?
Correct Incorrect
Objective function 60x + 25y  
Material constraint 3x + y ≤ 4,200  
Labour constraint 4x + 0.5y ≥ 3,000  
22 C Co uses material B, which has a current market price of $0·80 per kg. In a linear program,
where the objective is to maximise profit, the shadow price of material B is $2 per kg.
Which TWO of the following statements are correct?
 Contribution will be increased by $2 for each additional kg of material B purchased at the
current market price.
 The maximum price which should be paid for an additional kg of material B is $2.
 Contribution will be increased by $1·20 for each additional kg of material B purchased at
the current market price.
 The maximum price which should be paid for an additional kg of material B is $2·80.
Pricing decisions
t
23 Clogs Co sells its most popular style of wooden shoes at a profit of 20% on the current selling
g h 1 7
price of $35. Due to a material shortage, the costs of producing this style of shoe are expected
i
r 0
to increase by 5% next year.
y
p ion 2
What will the new selling price need to be to maintain the 20% profit margin, to the nearest
o
C uit
$0.01?
t
$
t I n
rs
24 Longbourne Co manufactures and sells covers for phones and MP3 players. The current selling
Fi
price is $10 each. Weekly demand is currently 300 covers. If Longbourne increased its price by
$1, the demand would drop to 250 covers.
What is the straight line demand equation for Longbourne Co?
 P = 10 – 0.02Q
 P = 10 – 0.004Q
 P = 16 – 0.02Q
 P = 16 – 0.004Q
25 A car rental company charges different prices to customers hiring the same make of car,
depending on the day of the week, the month of the year and the length of the rental.
The following statements have been made about its pricing strategy.
1 The company has adopted a price discrimination strategy.
2 The company’s strategy is successful because all customers have the same price elasticity
of demand.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
26 DCT Co cleans carpets. It determines its selling price by adding a mark-up of 40% to total costs.
Variable costs are $5 per carpet for cleaning and $1 for advertising. Based on an expected
volume of 2,000 carpets, fixed cleaning costs are expected to be $9,000.
What should DCT charge per carpet for cleaning?
 $7.00
 $8.40
 $10.50
Fir Co
st I pyri
 $14.70
27
ntu ght
A company sets a low initial price for its product with the aim that high volumes will be sold and
market share gained quickly.
itio
This is an example of the application of which pricing policy?
 Target pricing
n2
017
 Volume discounting
 Penetration pricing
 Price skimming
28 A company has entered two different new markets.

In market A, it is initially charging low prices so as to gain rapid market share while demand is
relatively elastic.
In market B, it is initially charging high prices so as to earn maximum profits while demand is
relatively inelastic.
Which price strategy is the company using in each market?
Price Penetration Market

discrimination pricing skimming
A   
B   
Make or buy and other short-term decisions
HERERA CO
Herera Co manufactures and sells three products, details of which are as follows:
$ $ $
Selling price 80 90 100
Materials 20 30 25
Labour 30 15 40
Share of general overhead (based on maximum demand) 10 15 15
Profit per unit 20 30 20
The same employees are used to make all three products. The maximum demand for any product is
1,000 units per month. Available labour is restricted to $55,000 monthly.
An outside manufacturer has now offered to supply Herera at the following costs:
ht
Cost to buy in ($ per unit)
7
55 65 105
r i g 2 0 1
29
y
p ion
If Herera Co wishes to use the outside manufacturer wherever it is profitable, which products
o
C uit
should Herera Co buy in?
t
 X only
I n
 Y only
t
 Both X and Y
i r s  X, Y and Z
F 30 What would be the order of priority of making the products in house?
Z
31 Herera Co has just received a special contract to make Product Y. Labour will not be a constraint
now, but it does need additional machine capacity. It purchased a machine that could be used
three years ago for $25,000. It can be sold now for $8,000. The current replacement cost of an
equivalent machine is $10,000. If Herera Co keeps the machine for use elsewhere in the
business it is expected to generate net income of $11,000.
What is the relevant cost of the machine for the special contract?
 $8,000
 $10,000
 $11,000
 $17,000
32 Which of the following represents the minimum price that Herera Co could charge for the
contract?
 Marginal cost
 Full cost
 Marginal cost plus incremental costs
 Incremental costs plus opportunity costs
Co
33 On the basis of winning the special contract to manufacture Product Y, Herera Co now believes
Fir
it has evidence that it can apply price discrimination to Product Y.
st I pyri
Which of the following conditions must hold if price discrimination is to be effective?
ntu ght
 There must be little or no chance of a black market developing.
 There must be little or no chance that competitors can and will undercut the firm's prices
itio
in the lower-priced market segments.
n2
 Each of the sectors of the market must show similar intensities of demand.
 The cost of segmentation and administration should exceed the extra revenue derived
017
from the price discrimination strategy.

34 A decision maker who uses the maximax criteria to make decisions would be classified as:
 Risk averse
 Risk seeking
 Risk neutral
 Risk managing
35 A company is not sure whether to build a small or large café and past experience suggests there
is a 40% chance that demand will be low.
Demand
Size of restaurant Low High
$ $
Small 400,000 600,000
Large (500,000) 1,000,000
The company has determined that building the small café will be best, based on the fact it has
the highest expected value at $520,000.
The company could commission a survey which would accurately predict the level of demand.
What is the maximum that it should pay for the survey?
Use the following information to answer the next three questions.

Sarah owns a café on the beach at Sandsea that serves light lunches. She has analysed her results over
the last summer and has found that they have varied according to the supplies she has ordered each
day, and the daily demand levels, which have mostly been determined by the weather. Sarah has put
together a payoff table that shows the level of daily profits the café would earn depending on the
combination of demand and supply of lunches:
ht 7
Daily supply (lunches)
r i g 2 0 1 50 75 100 125
y
50 $200 $160 $125 $95
p ion
Daily demand 75 $200 $300 $265 $235
o(lunches)
C uit
100
125
$200
$200
$300
$300
$420
$420
$390
$540
36
I n t
If Sarah uses a maximax approach in decision-making, what level of supply will she choose?
t
 50
i r s  75
F
 100
 125
37 If Sarah uses a maximin approach in decision-making, what level of supply will she choose?
 50
 75
 100
 125
38 If Sarah uses a minimax regret approach in decision-making, what level of supply will she
choose?
 50
 75
 100
 125
LOUIEDEWIE CO
Louiedewie Co has identified an investment project and estimated the following cash returns for next
year, depending on how strong competition is likely to be.
Estimated cash return ($) Probability
No competition +150,000 0.35
Average competition +75,000 0.20
Strong competition -35,000 0.45
39 What is the expected cash return on the project?
40 If the project requires an investment of $80,000, what is the probability that it will be
profitable?
 Nil
 0.35
Co
 0.55
 0.65
Fir
st I pyri
ntu ght
41 Louiedewie Co is also bidding for three other contracts, which are awarded independently of
each other. The board estimates it has a 45% chance of winning Contract A, 20% chance of
itio
winning Contract B, and 35% chance of winning Contract C. The profits from A, B and C are
estimated to be $500,000, $550,000 and $575,000 respectively.
n2
What is the expected value to the company of the profits from all three contracts?



$225,000
$500,000
$542,000
017
 $536,250
42 Louiedewie Co’s contract manager has now claimed that if the company wins Contract A which
is awarded first, it can use the knowledge it has gained to improve its chances of winning
Contracts B and C. He claims its chances of winning contracts B will increase to 30% and its
chances of winning Contract C will increase to 50%.
Calculate the expected value to the company of the profits from all three contracts if Contract
A is won.
$
43 The following statements have been made about the uses of expected value:
1 Expected values are used to promote a risk-seeking attitude to decision-making.
2 Expected values are more valuable as a guide to decision-making when they refer to
outcomes that will occur many times.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
ht 7
r i g 2 0 1
y
p ion
o
C uit
I n t
rst
Fi
ACCA F5 Question Bank Tuition questions: 3: Budgeting and control 27
Budgetary systems and type of budget

1 Which of the following would be considered as objectives of budgeting?
Objective Not objective

Authorisation of expenditure  
Business expansion  
Performance monitoring  
Resource allocation  
2 Which of the following statements about budgeting is/are true?
True False
A budget helps to control an organisation by forcing it  
to create a plan.
A budget helps an organisation to co-ordinate the  
allocation of resources.
Fir Co
A budget can help an organisation to motivate staff.  
st I pyri
An organisation is legally required to prepare a master  
budget annually.
3
ntu ght
A budget which is broken down into departmental or functional objectives is likely to be MOST
useful to an organisation’s:
itio
n2
 Senior management
 Middle management


Junior management
All levels of management 017
4 Using variances to comparing actual performance against standard at the end of the period is:
 A strategic planning tool
 A non-financial control technique
 A feed-forward control technique
 An example of feedback control
5 X Co uses rolling budgeting, updating its budgets on a quarterly basis. After carrying out the last
quarter’s update to the cash budget, it projected a forecast cash deficit of $400,000 at the end
of the year. Consequently, the planned purchase of new capital equipment has been
postponed.
Which of the following types of control is the sales manager’s actions an example of?
 Feedforward control
 Negative feedback control
 Positive feedback control
 Double loop feedback control
28 T u i t i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank
6 The following statements have been made about the behavioural issues relating to the difficulty
of targets:
1 If a budget is too easy, most staff will be motivated to excel as they will see the budget as
realistic and attainable.
2 If a business wants to encourage staff to improve efficiency it is best to create a budget
based on ideal conditions.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
7 Match the following descriptions to the budgeting processes that they describe.
Zero- Beyond
Rolling Incremental Flexible based budgeting
Set at the start of the     
year for various
different activity levels
t
Continually extended by     
h 7
adding another budget
r i g 0 1
period when the first
2
y
budget period expires
o p ion
Prepared by building     
C uit
on a previous period’s
budgeted or actual
t
figures
t I n
Uses adaptive     
rs
management processes
Fi
and procedures
8 Zed Co wishes to change from a top-down system of budgeting to a bottom-up system.

Which of the following difficulties is it most likely to encounter as a result of the change?
 A lack of appropriate systems and spreadsheets
 A lack of comparative information
 Less ownership of the budget by staff
 Budgets will take longer to produce
9 Which of the following is an advantage of non-participative budgeting as compared to

participative budgeting?
 It increases motivation.
 It is less time consuming.
 It increases acceptance.
 The budgets produced are more attainable.
10 Following complaints by its managers about the current system of budgeting, P is considering
adopting principles of ‘beyond budgeting’. Which of the following is most likely to be a
disadvantage of introducing ‘beyond budgeting’?
 There will be more budgetary slack.
 More time will be spent on budgeting.
 It may be more difficult to co-ordinate the plans of different departments.
 It will lead to P becoming less focused on customer requirements.
Quantitative analysis in budgeting

Use the following information to answer the next two questions.
Zee Ltd made 500 units of product Y in April with a total cost of $10,000, and 800 units in May
with a total cost of $13,000. Using the high/low method of analysing costs:
11 What is the variable cost per unit, to the nearest $0.01?
12 What will the total cost be in June, if Zee makes 700 units?
$
Fir Co
st I pyri
ntu ght
13 TW is a company which designs and manufactures e-readers. From its past experiences, TW has
realised that whenever a new engineer is employed, there is a learning curve with a 95%
itio
learning rate which exists for the first 20 jobs.
n2
A new design engineer has just completed his first job in three hours.
Note: at the 95% learning rate the value of b is – 0.074
017
How long would it take the engineer to complete the sixth job (do all workings to 3 decimal
places)?
 2.45 hours
 2.78 hours
 3.00 hours
 4.67 hours
14 The following statements have been made about budgeting techniques:

1 Learning curves are of limited relevance in a modern manufacturing business where
production is all automated.
2 Where there is uncertainty surrounding the annual sales figure for a product, the use of
expected values may help quantify the long-run average sales figure.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
15 Which of the following statements about using spreadsheets in budgeting is/are true?
True False
Spreadsheets can easily take account of lots of qualitative  
factors.
Spreadsheets are useful when the values of the inputs to the  
budget are likely to change.
Spreadsheets are only as accurate as the formulae and other  
inputs that they depend on.
Spreadsheets allow for the analysis of large volumes of  
quantitative data.
16 A company predicted that the learning rate for production of a new product would be 80%.
The actual learning rate was 75%. The following possible reasons were stated for this:
I Additional training was given to the workforce before they started to produce the
product.
II Unexpected problems were encountered with production.
III Unexpected changes to Health and Safety laws meant that the company had to increase
the number of breaks during production for employees.
Which of the above reasons could have caused the difference between the expected rate of
t
learning and the actual rate of learning?

i g h 1 7
All of the above
y

r 2 0
II and III only
p ion
 I only
o
C uit
 None of the above
17
I n t
The accountant of West Co is currently preparing the company’s annual flexed budget. She has
t
calculated that the maximum production capacity is 350,000 units and also come up with the
rs
following figures:
Fi
Production units 250,000 300,000 325,000
$ $ $
Material costs 1,500,000 1,800,000 1,950,000
Labour costs 1,250,000 1,500,000 1,625,000
Fixed costs 600,000 600,000 600,000
In addition, for each increment of 40,000 units produced, one supervisor will need to be
employed, at an annual salary of $30,000.
What will be the total production cost if production is 90% of total capacity?
$
Standard costing
18 Which of the following statements about standard costing is/are true?
True False
Standard costs should only ever be based on marginal costing  
principles.
The use of basic standards is likely to give rise to meaningful  
variances.
Current standards provide the best basis for motivating  
employees to improve performance.
Basic standards are short-term targets and useful for day-to-day  
control purposes.
19 Standard costing may be used for which FOUR of the following purposes?
 Planning
 Valuing inventory
 Meeting the legal requirement to report standard costs to shareholders
 Claiming tax back
 Assessing performance
Co
 Motivating staff
Fir
st I pyri
KAMAL CO
ntu ght
itio
n2
Kamal Co has produced the following performance analysis for the January to March quarter during
which no changes were made to the specification of its product.
017
Budget Actual
Number of units 6,000 7,200
$ $
Revenue 540,000 633,600
Labour (48,000) (58,716)
Materials (210,000) (205,000)
Fixed overheads (69,000) (79,500)
Profit 213,000 290,384
20 The following statements have been made:

1 The company must have dropped the selling price in the period.
2 Overheads have increased as a result of the increase in sales volume.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
21 What should the profit be according to the flexed budget?
22 As a result of the results in January to March, Kamal Co reconsidered its approach to budgeting
and adopted a form of rolling budgeting, starting in April for the next twelve months. The
budgeted figures for the remainder of the year before the rolling budget was introduced were
as follows:
$
April-June 550,000
July-September 560,000
October-December 575,000
Kamal Co amended the budget so that budgeted sales for April-June were 20% higher than in
the original budget, and then increased by 5% in July-September and October-December. It did
not subsequently amend the budget for July-September. Actual sales for July-September were
$610,000.
Calculate the difference in the total sales operational variance, using the original budgeted
and revised (rolling) budgeting figures.
ht 7
i g 1
23 One of the directors has proposed that Kamal Co should consider introducing a system of zero-
r 2 0
based budgets for certain activities, for example marketing.
y
o p ion
Which of the following would be considered in relation to the marketing department under
C uit
zero-based budgeting?
t
Considered Not considered
I n
Whether a marketing initiative should be undertaken  
t
at all
rs
Whether the marketing department should be
Fi
 
outsourced
Whether some or all of the activities that are part of a  
proposed marketing campaign are justified
Whether some or all of the activities that are part of a  
proposed marketing campaign can be done more
cheaply
24 The following statements have been made about the rolling and zero-based approaches to
budgeting:
1 When pricing and resources are uncertain, rolling budgets are likely to provide better
information for control and decision-making.
2 Zero-based budgeting is likely to identify opportunities to carry out activities more
efficiently.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
Material mix and yield variances

25 A company has a process in which the standard mix for producing 9 litres of output is as follows:
$
4.0 litres of D at $9 per litre 36.00
3.5 litres of E at $5 per litre 17.50
2.5 litres of F at $2 per litre 5.00
58.50
A standard loss of 10% of inputs is expected to occur. The actual inputs for the latest period were:
$
4,300 litres of D at $9 per litre 38,700
3,600 litres of E at $5 per litre 19,800
2,100 litres of F at $2 per litre 4,620
63,120
Actual output for the period was 9,100 litres.
What is the materials mix variance?
Adverse Favourable
$...................  
26
Fir Co
A company that manufactures luxury biscuits has decided to amend the ingredients mix to
st I pyri
include more fruit and nuts which are expensive and less oats which are cheap.
The following have arisen:
1
2
An adverse materials mix variance
A lower quality biscuit ntu ght
itio
Which of the above are most likely to be a result of the decision to change the ingredient mix?
 1 only
n2
017
 2 only
 Neither 1 nor 2
 Both 1 and 2
27 Which of the following is a NOT a method of controlling a company’s production process?

 Appointment of a machine supervisor
 Training for customer service team
 Sample testing of batches of product
 Monitoring of materials and labour variances
28 A company manufactures Product P by mixing three materials. The standard material quantity
and material cost per unit of Product P are as follows:
$
Material W 12 kg @ $5.00 60
Material X 18 kg @ $6.00 108
Material Y 20 kg @ $8.00 160
328
In February, the actual mix used was as follows:
Quantity $
Material W 970 kg 4,947
Material X 1,230 kg 7,134
Material Y 1,400 kg 11,060
The actual output was 76 units of Product P.
What was the material yield variance for February?
Adverse Favourable
$...................  
PRODUCT ZED
ht 7
i g 1
y r 2 0
To produce 15 litres of product Zed, a standard input of 16 litres is required, made up of 9 litres of
o p ion
Chemical A and 7 litres of Chemical B. Chemical A has a standard cost of $10 per litre and Chemical B
C uit
has a standard cost of $15 per litre.
t
During September, the actual results showed that 1,650 litres of product Zed were produced, using a
I n
total input of 900 litres of Chemical A and 900 litres of Chemical B (1,800 litres in total).
rst
The price/litre was as budgeted for both chemicals.
Fi 29 The following statements have been made about the period:

1 There was no materials price variance.
2 The materials yield variance was favourable.
Which of the above statements are true?
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
30 What was the materials mix variance in September, to the nearest $0.01?
Adverse Favourable
$...................  
31 The following statements have been made about mix variances

1 Mix variances help managers identify problems with the quality of output.
2 Adverse mix variances over a period are likely to have an adverse effect on labour
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
32 The production department now believes that the total input of 900 litres of Chemical A and 900
litres of Chemical B (1,800 litres in total) should only have produced 1,500 litres of product Zed.
Calculate the material usage operational variance to the nearest $0.01.
Adverse Favourable
$...................  
33 Which of the following factors would explain an adverse material usage planning variance?
Fir Cop Explain Not explain
st I yri
Changes in the production process causing increased  
loss of materials
ntu ght
A higher than expected level of waste of materials  
itio
Quality control identifying a high proportion of  
materials as sub-standard
n2
A new supplier supplying poorer quality materials  
Sales mix and quantity variances

34
017
A company which sells a range of different breakfast cereals experiences an adverse sales mix
variance.
Which of the following is the most likely cause?
 The number of people eating breakfast cereals has fallen.
 The company has increased the price of its cereals.
 The company has spent too much money on marketing.
 Cost-conscious customers are switching to lower margin cereals in the range.
35 The following budgeted data for a particular period was available for a company selling two
products:
Sales price per unit Variable cost per unit Sales volume in units
Product A $20 $8 15,840
Product B $24 $11 10,560
The actual results for the period were as follows:
Sales price per unit Variable cost per unit Sales volume in units
Product A $22 $8 14,200
Product B $26 $11 12,500
What is the total sales quantity contribution variance for the period?
Adverse Favourable
$...................  
MEMIA CO
Memia Co makes televisions and computers. The standard costs and revenue for each television are as
t
follows:
i g h 1 7 $
r 0
Standard cost 130
y
p ion 2
Standard contribution 80
o
Standard sales price 210
C uit
The standard costs and revenue for each computer are as follows:
I n t $
t
Standard cost 210
r s
Standard contribution 100
Fi Standard sales price
Budgeted production and sales were 12,000 televisions (10% of the market) and 8,000 computers.
310
As more people are watching TV on their computers, the market for televisions has shrunk to 100,000.
Memia Co’s actual sales for the period were 11,000 televisions with total revenue of $2,200,000.
However, Memia Co did sell 14,000 computers.
36 The following statements have been made about the total sales variances for televisions:
1 The total sales volume variance has all arisen due to the shrinking market.
2 The only sales price variance is an operational variance of $110,000 adverse.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
37 Calculate the sales market size and share variances for televisions.
Market size
Adverse Favourable
$...................  
Market share
Adverse Favourable
$...................  
38 Calculate the sales mix variance.
Adverse Favourable
$...................  
39 Calculate the sales quantity contribution variance.
Adverse Favourable
$...................  
Fir Co
st I pyri
40 The directors of Memia Co have collected some non-financial data relevant to sales of
televisions over the last two years as follows:
ntu ght 20X1 20X2
itio
Sales volumes (units) 12,000 11,000
Number of returns (units) 1,080 1,000
n2
No of customer complaints regarding late delivery 360 320
017
Which of the following is true?
 Performance has improved in relation to both product returns and customer complaints.
 Performance has deteriorated in relation to both product returns and customer
complaints.
 Performance has improved in relation to product returns but deteriorated in relation to
customer complaints.
 Performance has deteriorated in relation to product returns but improved in relation to
customer complaints.
Planning and operational variances

41 After Gen Co prepared its material budget for the first quarter, two pieces of additional
information came to light:
The Purchasing Manager managed to reduce the price of the material by placing one bulk order
at the start of the quarter.
At the end of the previous quarter, Gen Co bought a new machine as a result of its use in the
first quarter, material wastage levels fell from 3% to 2%.
Which of these factors should the budget be revised for?
 The price saving only
 The use of the new machine
 Neither factor
 Both factors
42 The learning effect entered on a budget spreadsheet was overstated due to a computer input
error.
Which of the following is this most likely to give rise to?
 An adverse labour rate variance
t
 A favourable labour usage variance
h 7
A favourable labour efficiency operational variance
g


y r i 0 1
An adverse labour efficiency planning variance
2
43
o p ion
Julienne Co has identified a labour efficiency planning variance. Which of the following is the
C uit MOST likely cause?
I n t
 A decision by the production manager to work overtime
t
 A decision by the production manager to change the grade of labour
rs
 A surplus of labour in the market
Fi
 A change in working practices to comply with new regulatory restrictions on rest periods
44 Caf Co budgeted to sell 10,000 units of a new product in the period at a budgeted selling price
of $5 per unit. Actual sales volumes in the period were as budgeted but the actual sales price
achieved was only $4 per unit. This was because a competitor launched a similar product at the
same time. Caf Co had been unaware that this was going to happen when it prepared its budget
and, had it known this, it would have revised its expected selling price to $3·80 per unit, which
was the price of the competitor’s product.
What is the sales price planning variance?
Adverse Favourable
$...................  
45 The following details have been extracted from the accounting records of RG for August.
Output of RG 800 units 890 units
Materials 4,000kg 4,375kg
Cost per kg $20.00 $21.60
It has now been realised that the standard cost per kg of the material should have been $20.90.
What are the following variances for August to the nearest $0.01?
Materials planning price variance
Adverse Favourable
$...................  
Materials operational price variance
Adverse Favourable
..................  
DEMIA CO
Co
Fir
st I pyri
Demia Co makes televisions. The original standard prime costs, based on a budgeted production and
sales of 12,000 units, are as follows:
ntu ght
$
Materials 70
itio
Labour 3hrs @ $20 per hr 60
Standard prime cost 130
Actual production and sales were 11,000 televisions.

n2
017
Before the period started, Demia’s production equipment broke down and it was forced to buy a new
machine, which requires less labour input. As a result the new standard time for production is 2.5
hours per unit. During the period Demia spent $756,250 on 29,000 hours of labour.
46 The following statements have been made about the total labour variances:
1 The total labour rate variance is all due to planning errors.
2 The total labour efficiency variance is Nil.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
47 What are the correct planning and operational labour efficiency variances?
Planning labour efficiency variance
Adverse Favourable
$...................  
Operational labour efficiency variance
Adverse Favourable
$...................  
48 The new standard labour cost is based on 2.5 hours of semi-skilled labour at $20/hr. The labour
supervisor is thinking of arranging for the work to be done in pairs, using one semi-skilled and
one unskilled worker, each working for 1.5 hours.
Calculate the maximum hourly rate, to the nearest $0.01, that the supervisor can afford to
pay the unskilled workers without giving rise to an adverse labour rate variance.
49 The total overheads for 12,000 units were budgeted as $504,000, compared with $400,000 at
t
last year’s level of 9,000. The management accountant has identified that the fixed costs step
i g h 1 7
up by 20% at 10,000 units.
r 2 0
Calculate the budgeted variable cost per unit for televisions.
y
o p ion
$
C uit
50
I n t
The management of Demia Limited wishes to increase the level of contribution from sales of
t
televisions and to do so by adopting a target costing approach.
Fi rs
Which TWO of the following would be techniques that Demia Limited could use to aim
towards achieving a target cost?
 Use of bespoke components where possible
 Better training for unskilled workers
 Change in the packaging of the televisions
 Use of components with a longer lifespan
Performance analysis
51 Which of the following statements about variances is/are true?
True False
In a rapidly changing environment variances based on standard  
costs are likely to provide a meaningful analysis of
performance.
When monitoring performance, a company only needs to focus  
on adverse variances.
A desire to create a favourable material price variance may  
result in the purchasing manager taking decisions which are
incompatible with TQM.
If a company operates a JIT policy, it is not likely to experience  
any labour idle time variance.
Fir Co
st I pyri
ntu ght
itio
n2
017
42 T u i t i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank
Performance management information systems

1 An information system contains external and internal data which is both qualitative and
quantitative.
What is this system most likely to be used for?
 Strategic planning
 Management control
 Operational control
 Strategic planning, management control and operational control
2 A report which provides information about daily inventory movements would be most likely to
be used for:
 Strategic planning
 Management control
 Operational control
t
 Strategic planning, management control and operational control
i g h 1 7
3
y r 2 0
Which of the following is/are characteristics of a Decision support system?
o p ion Characteristic Not a characteristic
C uitProvides summary information for the Board  
t
Provides information in a flexible format  
t I n
Facilitates “what if” analysis  
rs
Can be used to assist resource planning  
Fi 4 The following statements have been made about open and closed systems:
1 Open systems refer to systems that interact with other systems or the outside environment.
2 Closed systems are preferable for performance management.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
ACCA F5 Question Bank Tuition questions: 4: Performance measurement and control 43
5 Which of the following areas of a business would an enterprise resource planning system
generally cover?
Cover Not cover

Order processing  
Manufacturing  
Distribution  
Customer service  
Human resources  
Finance  
Sources of management information

6 Which of the following is/are internal sources of management accounting information and
which are external sources?
Internal External
Database of customer information  
Inventory management system  
Results of market research  
Fir Cop
Payroll system  
7
st I yri
The following statements have been made about sources of information:
1
ntu ght
Having access to external information means decisions can be made in a more informed
itio
way.
n2
2 Using internal information reduces the need to rely on third party information which may
be inaccurate.
 1 only 017
 2 only
 Neither 1 nor 2
 Both 1 and 2
8 The following are all types of costs associated with management information:
I Use of bar coding and scanners
II Verification of payroll accuracy by Financial Controller
III Lack of resource available to spend on other value-adding activities
Which of the above are examples of process costs?
 II only
 I and II only
 I and III only
 All of the above
9 Which of the following is/are examples of direct data capture costs and which is/are examples
of processing costs?
Direct data
capture Processing
Use of bar coding and scanners  
Payroll department analysis of personnel costs  
Completion of timesheets by employees  
Input of timesheet information onto management  
information system
Management reports
10 Which TWO of the following controls within an organisation help to ensure the accuracy of
information?
 Completeness checks
 Hierarchical passwords
 Data encryption
 Validation of input data
11
ht 7
Which of the following statements about data controls is/are true?
r i g 2 0 1 True False
y
p ion
A range check is a form of validation control.  
o
Hierarchical passwords can be used to grant different  
C uit
access rights to different users of a database.
t
Firewalls protect data from external access.  
I n
Encryption means that data can only be understood by  
t
those transmitting and receiving it, and not by anyone
rs
intercepting it.
Fi 12 Which of the following controls would NOT be designed to ensure the security of confidential
information?
 Storage of sensitive data in locked filing cabinets
 Remote storage of back-up copies of data
 Use of a data encryption software package
 Requiring all staff to sign a confidentiality agreement
Performance analysis in private sector organisations

13 Which of the following performance indicators are considered to be financial measures and
which of the following are considered to be non-financial measures?
Financial Non-financial
Product returns rate  
Market share  
Asset turnover  
Staff turnover  
14 Which of the following is NOT a perspective of the balanced scorecard?

 Non-financial
 Internal Business Processes
 Customer
 Innovation & Learning
15 Which THREE of the following are included in Fitzgerald and Moon’s Building blocks?
 Decisions
 Dimensions
Fir Co
st I pyri
 Returns
 Rewards
ntu ght
 Standards
 Targets
itio
n2
16 For which of the following would the return on capital employed be a useful performance
measure?

 017
The sales team who are responsible for the revenue generated from selling product
Factory supervisors who are responsible for the costs incurred in producing product
 The Operations Director who is responsible for the sales team and for factory costs
 The Managing Director who has overall responsibility for the businesses costs and
revenues, including the administration and finance functions
17 The following ratios have been calculated for a company:
Gross profit margin 42%

Operating profit margin 28%
Gearing (debt/equity) 40%
Asset turnover 65%
What is the return on capital employed for the company, to the nearest 0.1%?
%
OLIVER’S SALON
Oliver is the owner and manager of Oliver’s Salon, which is a quality hairdresser that experiences high
levels of competition. The salon traditionally provided a range of hair services to female clients only. A
year ago, at the start of his 20X9 financial year, Oliver decided to expand his operations to include the
hairdressing needs of male clients.
The prices for the female clients were not increased during the whole of 20X8 and 20X9 and the mix of
services provided for female clients in the two years was the same.
Two new staff were recruited at the start of 20X9. The first was a junior hairdresser, to support the
specialist hairdressers for the female clients. She was appointed on a salary of $9,000 per annum. The
second new staff member was a specialist hairdresser for the male clients. There were no increases in
pay for existing staff at the start of 20X9 after a big rise at the start of 20X8, which was designed to
cover two years’ worth of increases.
The latest financial results are as follows.
20X8 20X9
$ $ $ $
Sales 200,000 238,500
Less cost of sales:
Hairdressing staff costs 65,000 91,000
t
Hair products – female 29,000 27,000
h 7
Hair products – male 8,000
r i g 2 0 1 94,000 126,000
y
Gross profit 106,000 112,500
o p ion
Less expenses: 28,000 32,500
C uit
Profit 78,000 80,000
t
Oliver thinks the salon is much busier than a year ago and was expecting more profit.
t I n
Oliver introduced some non-financial measures of success two years ago.
rs
20X8 20X9
Fi
Number of complaints 12 46
Number of male client visits 0 3,425
Number of female client visits 8,000 6,800
Number of specialist hairdressers for female clients 4 5
Number of specialist hairdressers for male clients 0 1
18 Calculate the average price for hair services per male client in 20X9.
19 Are the following statements about Oliver’s Salon true or false?
True False
Gross and net profit margins have decreased in 20X9  
compared with 20X8.
Average cost per staff member has increased in 20X9  
compared with 20X8.
20 Which of the following is least likely to be an explanation for the increase in the number of
complaints in 20X9 compared with 20X8?
 The change in customer base bringing in male clients who are more likely to complain
 Female customers complaining about the change in atmosphere following the
introduction of male services
 The mix of services offered to female clients
 Poor quality work from the new trainee
21 Which of the following statements is true?

 Resource utilisation of the property has increased and resource utilisation of specialist
female hairdressers has decreased.
 Resource utilisation of the property has increased and resource utilisation of specialist
female hairdressers has increased.
 Resource utilisation of the property has decreased and resource utilisation of specialist
 Resource utilisation of the property has decreased and resource utilisation of specialist
female hairdressers has increased.
22 Oliver is thinking about introducing more non-financial measures of performance, as he believes
Fir Co
that selecting the right measures can help improve customer satisfaction and hence ultimately
st I pyri
profitability.
Which of the following will be a problem/problems for Oliver in introducing more measures?
ntu ght Problem Not a problem
itio
It may be difficult to define measures for quality of  
service provided.
n2
Increasing the number of measures may increase the  
chances of the measures giving a conflicting picture.
017
Increasing the number of measures will mean that the  
business has more of an external focus, rather than
focusing on internal problems.
Oliver may have to spend more time himself on  
measurement work and less on servicing customers.
Divisional performance and transfer pricing

23 Which of the following does the manager have control over in a cost centre?
Control No control
Revenue generation  
Attributable costs  
Apportioned head office costs  
Investment in non-current assets  
24 Division A makes and transfers a product to Division B and receives the market price for the
transferred item, whilst Division B only gets charged with the variable cost of the item.
This transfer pricing approach is known as a:
 Dual pricing system
 Opportunity cost system
 Two-part tariff system
 Market based system
25 Tallulah Ltd uses Return on Investment (ROI) and Residual Income (RI) performance measures.
The Medchester division has net assets of $12m and in the year to 31 December 20X4 it earned
profit before interest and tax of $1.8m and paid interest of $0.3m. Tallulah Ltd’s cost of capital
is 12%.
What are the correct ROI, to the nearest 0.1%, and RI, to the nearest $0.01m, for the year to
31 December 20X4?
ROI
%
RI
t
$ million
i g h 1 7
26
y r 2 0
Dust Co has two divisions, A and B. Each division is currently considering the following separate
o p ion
projects:
C uit Division A Division B
t
Capital required for the project $32·6 million $22·2 million
I n
Sales generated by project $14·4 million $8·8 million
t
Operating profit margin 30% 24%
rs
Cost of capital 10% 10%
Fi
Current return on investment of division 15% 9%
If residual income is used as the basis for the investment decision, which Division(s) would
choose to invest in the project?
 Division A only
 Division B only
 Both Division A and Division B
 Neither Division A nor Division B
27 Oxco has two divisions, A and B. Division A makes a component for air conditioning units which
it can only sell to Division B. It has no other outlet for sales.
Current information relating to Division A is as follows:
Marginal cost per unit $100
Transfer price of the component $165
Total production and sales of the component each year 2,200 units
Specific fixed costs of Division A per year $10,000
Cold Co has offered to sell the component to Division B for $140 per unit. If Division B accepts
this offer, Division A will be shut.
If Division B accepts Cold Co’s offer, what will be the impact on profits per year for the group
as a whole?
Increase Decrease
$...................  
28 Which of the following does the manager have control over in an investment centre?
Control No control
Generation of revenues  
Investment in non-current assets  
Fir Cop
Investment in working capital  
Apportioned head office costs  
st I yri
ntu ght
29 At the start of the year, a division has non-current assets of $4 million and makes no additions
or disposals during the year. Depreciation is charged at a rate of 10% per annum on all non-
itio
current assets held at the end of the year. Working capital is $0·5 million at the start of the year
although this is expected to increase by 20% by the end of the year. The budgeted profit of the
n2
division after depreciation is $1·2m.
017
What is the expected ROI of the division for the year, to the nearest 0.01%, based on average
capital employed?
%
ABEL CO
The production division of Abel Co has the following standard unit costs for the production of an
electronic component:
Direct material $2.00
Direct labour $2.50
Variable overheads $1.50
Fixed overheads are expected to be $300,000 and maximum capacity is 100,000 units.
The production division currently makes and transfers all 100,000 components to the retail division,
which completes the assembly and sells it to individual consumers for $15, after incurring additional
costs of $2.50 per unit. The current transfer price policy is full cost plus 30%.
The production division has been offered the chance to sell all the components it can produce to a
commercial buyer who is willing to pay $11 per unit. The retail division can source components
externally at a price of $11.50. Assume the maximum demand for the retail division’s product is
100,000 units.
30 What is the transfer price per unit under the current policy, to the nearest $0.01?
t
$
i g h 1 7
31
y r 2 0
Which of the following statements relating to the current system of transfer pricing are true?
o p ion
1 Full cost-based transfer prices are most appropriate where there is an intermediate
C uit market for the product.
I n t
2 When the producing division is operating at full capacity, a full cost-based approach
should be used for the transfer price.
rst 1 only
Fi

 2 only
 Neither 1 nor 2
 Both 1 and 2
32 What is the minimum transfer price that will ensure Abel Co maximises company profit, given
the offer from the commercial buyer?
 $12.50
 $11.00
 $9.00
 $8.50
33 What is the maximum contribution that Abel Co can earn if the production division decides to
supply the commercial customer?
$
34 The Finance Director of Abel Co is considering switching away from the current policy, but is
concerned about how the Production division will cover its fixed costs.
Which of these methods will NOT help address the problem?
 Giving the production and retail divisions a share of Abel Co’ s overall contribution
 Setting the transfer price at variable cost, but reporting the value of the transfer for the
Production division at total cost
 Setting the transfer price at market value if an external market exists for the product
 Transferring a fixed fee to the Production division
Performance analysis in not-for-profit organisations and the public sector

35 Which of the following is/are characteristics for a public sector organisation such as a hospital?
Characteristic Not a characteristic

Some non-quantifiable objectives  
Multiple stakeholders  
Objectives may be subject to political pressures  
Conflicting priorities for resource allocation  
36
Fir Co
Which of the following is a common way of assessing Value For Money?
st I pyri
 Economy, Efficiency, Effectiveness
Economy, Efficiency, Environment
ntu ght

 Efficiency, Effectiveness, Environment
itio
 Economy, Energy, Effectiveness
37
n2
Def Co provides accounting services to government departments. On average, each staff
017
member works six chargeable hours per day, with the rest of their working day being spent on
non-chargeable administrative work. One of the company’s main objectives is to produce a high
level of quality and customer satisfaction.
Match DEF Co’s targets for the next year to the aspect of economy, efficiency and
effectiveness at Def Co to which they relate.
Economy Efficiency Effectiveness
Cutting departmental expenditure by 5%   
Increasing the number of chargeable   
hours handled by advisers to 6·2 per day
Obtaining a score of 4·7 or above on   
customer satisfaction surveys
Retaining all current contracts with   
government departments
External considerations and behavioural aspects

38 Which TWO of the following are negative behavioural aspects of a change in an organisation’s
performance management system?
 Increased motivation to achieve rewards by achieving targets
 Manipulation of targets to ensure results achieved
 Dysfunctional decision making
 Teamwork rather than self-interest encouraged
39 The following statements have been made about external considerations and performance
management
1 An organisation which takes account of external factors is more likely to focus on the
aspects of performance that its managers can control.
2 Planning and operational variances are a way of taking external considerations into
account when assessing performance.
 1 only
 2 only
 Neither 1 nor 2

ht
Both 1 and 2
7
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o
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rst
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PART 1 TUITION QUESTIONS: Long form
Limiting factors
1 CUT AND STITCH (Q3, JUNE 2010)

Cut and Stitch (CS) make two types of suits using skilled tailors (labour) and a delicate and unique
fabric (material).
Both the tailors and the fabric are in short supply and so the accountant at CS has correctly produced a
linear programming model to help decide the optimal production mix.
The model is as follows.
Variables:
Let W = the number of work suits produced
Let L = the number of lounge suits produced
Constraints:
Fir Co
Tailors’ time: 7W + 5L ≤ 3,500 (hours) – this is line T on the diagram
st I pyri
Fabric: 2W + 2L ≤ 1,200 (metres) – this is line F on the diagram
Production of work suits: W ≤ 400 – this is line P on the diagram
ntu ght
Objective is to maximise contribution subject to:
itio
C = 48W + 40L
On the diagram provided the accountant has correctly identified OABCD as the feasible region and
point B as the optimal point.
n2
017
Required:
(a) Find by appropriate calculation the optimal production mix and related maximum contribution
that could be earned by CS. (4 marks)
(b) Calculate the shadow prices of the fabric per metre and the tailor time per hour. (6 marks)
The tailors have offered to work an extra 500 hours provided that they are paid three times their
normal rate of $1.50 per hour at $4.50 per hour.
Required:
(c) Briefly discuss whether CS should accept the offer of overtime at three times
the normal rate. (6 marks)
(d) Calculate the new optimum production plan if maximum demand for W falls
to 200 units. (4 marks)
(20 marks)
Pricing decisions
2 WX (Q3B, JUNE 2013 AMENDED)

WX is reviewing the selling price of one of its electronic products. The current selling price of the
t
product is $25 per unit and annual demand is forecast to be 150,000 units at this price. Market
g h 1 7
research indicates that the level of demand would be affected by any change in the selling price.
i
r 0
Detailed analysis from this research shows that for every $1 increase in selling price, annual demand
y 2
would reduce by 25,000 units and that for every $1 decrease in selling price, annual demand would
p ion
o
increase by 25,000 units.
C uit
A forecast of the annual costs that would be incurred by WX in respect of this product at differing
t
activity levels is as follows.
t I n
Annual production (units) 100,000 160,000 200,000
rs
$000 $000 $000
Fi
Direct materials 200 320 400
Direct labour 600 960 1,200
Overhead 880 1,228 1,460
The cost behaviour patterns represented in the above forecast will apply for the whole range of output
up to 300,000 units per annum of this product.
Required:
(a)
(i) Calculate the total variable cost per unit. (2 marks)
(ii) Calculate the selling price of the product that will maximise the company’s profits.
(4 marks)
(b) Explain TWO reasons why WX might decide NOT to use this optimum selling price. (4 marks)
WX has recently been suffering from liquidity problems and hopes that these will be eased by the
launch of its new webcam, which has revolutionary audio sound and visual quality. The webcam is
expected to have a product life cycle of two years.
(c) Explain the ‘market skimming’ (also known as ‘price skimming’) pricing strategy and discuss, as
far as the information allows, whether this strategy may be more appropriate for WX than
charging one price throughout the webcam’s entire life. (10 marks)
(20 marks)
Dealing with risk and uncertainty in decision making
3 GYM BUNNIES (Q1, JUNE 2013 AMENDED)

Gym Bunnies (GB) is a health club. It currently has 6,000 members, with each member paying a
subscription fee of $720 per annum. The club is comprised of a gym, a swimming pool and a small
exercise studio.
A competitor company is opening a new gym in GB’s local area, and this is expected to cause a fall in
GB’s membership numbers, unless GB can improve its own facilities. Consequently, GB is considering
whether or not to expand its exercise studio in a hope to improve its membership numbers. Any
improvements are expected to last for three years.
Option 1
No expansion. In this case, membership numbers would be expected to fall to 5,250 per annum for the
next three years. Operational costs would stay at their current level of $80 per member per annum.
Option 2
Expand the exercise studio. The capital cost of this would be $360,000. The expected effect on
membership numbers for the next three years is as follows:
Probability Effect on membership numbers
Fir Co
0.4 Remain at their current level of 6,000 members per annum
0.6 Increase to 6,500 members per annum
st I pyri
The effect on operational costs for the next three years is expected to be:
ntu ght
Probability Effect on operational costs
0.5 Increase to $120 per member per annum
itio
0.5 Increase to $180 per member per annum
n2
A decision tree has been started to illustrate these options, but requires completion:
Option 1
017
5,250 members 0.5
A
D
0.5
6,000 members
Option 2
$(360k)
0.4
0.6
6,500 members 0.5

B
0.5
Required:
(a) Using the criterion of expected value, use the points on the decision tree to recommend the
decision that GB should make.
Note: Ignore time value of money. (8 marks)
(b) Calculate the maximum price that GB should pay for perfect information about the expansion’s
exact effect on MEMBERSHIP NUMBERS. (6 marks)
(c) Briefly discuss the problems of using expected values for decisions of this nature. (2 marks)
(d) Discuss the usefulness of simulation, and worst and best case figures as methods of analysing
and assess the risk that exists in a business’s decision-making. (4 marks)
(20 marks)
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Budgetary systems and types of budget
1 PC CO (Q3, DECEMBER 2011)

You have recently been appointed as an assistant management accountant in a large company, PC Co.
When you meet the Production Manager, you overhear him speaking to one of his staff, saying:
‘Budgeting is a waste of time. I don’t see the point of it. It tells us what we can’t afford but it doesn’t
keep us from buying it. It simply makes us invent new ways of manipulating figures. If all levels of
management aren’t involved in the setting of the budget, they might as well not bother preparing
one.’
Required:
(a) Identify and explain SIX objectives of a budgetary control system. (9 marks)
(b) Discuss the concept of a participative style of budgeting in terms of the six objectives identified
in part (a). (11 marks)
Fir Co (20 marks)
Materials mix and yield variances st I pyri

ntu ght
2 THE SAFE SOAP CO (DECEMBER 2014 AMENDED)
itio
n2
The Safe Soap Co makes environmentally-friendly soap using three basic ingredients. The standard
017
cost card for one batch of soap for the month of September was as follows:
Material Kilograms Price per kilogram ($)
Lye 0.25 10
Coconut oil 0.6 4
Shea butter 0.5 3
The budget for production and sales in September was 120,000 batches. Actual production and sales
were 136,000 batches. The actual ingredients used were as follows:
Material Kilograms
Lye 34,080
Coconut oil 83,232
Shea butter 64,200
The Safe Soap Co has used activity-based costing to allocate its overheads for a number of years. One
of its main overheads is machine set-up costs. The following information was available in relation to
set-up costs for September.
Budget
Total number of set ups 30
Total set-up costs $40,500
Actual
Total number of set ups 36
Total set-up costs $45,400
Required:
(a) Calculate the total material mix variance and the total material yield variance for September.
(8 marks)
(b) In October the materials mix and yield variances were as follows:
Mix: $6,000 adverse
Yield: $10,000 favourable
The production manager is pleased with the results overall, stating:
‘At the beginning of September I made some changes to the mix of ingredients used for the
soaps. As I expected, the mix variance is adverse in both months because we haven’t yet
updated our standard cost card but, in both months, the favourable yield variance more than
makes up for this. Overall, I think we can be satisfied that the changes made to the product mix
are producing good results and now we are able to produce more batches and meet the
growing demand for our product.’
The sales manager, however, holds a different view and says:
‘I’m not happy with this change in the ingredients mix. I’ve had to explain to the board why the
sales volume variance for October was $22,000 adverse. I’ve tried to explain that the quality of
the soap has declined slightly and some of my customers have realised this and simply aren’t
happy but no-one seems to be listening. Some customers are even demanding that the price of
the soap be reduced and threatening to go elsewhere if the problem isn’t sorted out.’
h
Required:
t 7
r
(i)
i g 0 1
Briefly explain what the adverse materials mix and favourable materials yield variances
2
y
p ion
indicate about production at Safe Soap Co in October. (4 marks)
o
C uit
Note: You are NOT required to discuss revision of standards or operational and planning
variances.
I n t
(ii) Discuss whether the sales manager could be justified in claiming that the change in the
t
materials mix has caused an adverse sales volume variance in October. (2 marks)
Fi rs
(c) Calculate the following activity-based variances in relation to the set-up cost of the machines:
(i) The expenditure variance (3 marks)
(ii) The efficiency variance (3 marks)
(20 marks)
3 BEDCO (Q5, DECEMBER 2013)

Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain. It uses a just-
in-time system and holds no inventories.
The standard cost for the cotton which is used to make the bed sheets and pillowcases is $5 per m2.
Each bed sheet uses 2 m2 of cotton and each pillowcase uses 0.5 m2. Production levels for bed sheets
and pillowcases for November were as follows.
Budgeted production Actual production
levels (units) levels (units)
Bed sheets 120,000 120,000
Pillowcases 190,000 180,000
The actual cost of the cotton in November was $5.80 per m2. 248,000 m2 of cotton was used to make
the bed sheets and 95,000 m2 was used to make the pillowcases.
The world commodity prices for cotton increased by 20% in the month of November. At the beginning
of the month, the hotel chain made an unexpected request for an immediate design change to the
pillowcases. The new design required 10% more cotton than previously. It also resulted in production
delays and therefore a shortfall in production of 10,000 pillowcases in total that month.
The Production Manager at Bedco is responsible for all buying and any production issues which occur,
although he is not responsible for the setting of standard costs.
Required:
(a) Calculate the following variances for the month of November, for both bed sheets and pillow
cases, and in total:
(i) Material price planning variance; (3 marks)
(ii) Material price operational variance; (3 marks)
(iii) Material usage planning variance; (3 marks)
(iv) Material usage operational variance. (3 marks)
(b) Assess the performance of the production manager for the month of November. (8 marks)
(20 marks)
Fir Co
st I pyri
Performance analysis and behavioural aspects
4 JUMP (Q5, JUNE 2010) ntu ght

itio
Jump has a network of sports clubs which is managed by local managers reporting to the main board.
n2
The local managers have a lot of autonomy and are able to vary employment contracts with staff and
017
offer discounts for membership fees and personal training sessions. They also control their own
maintenance budget but do not have control over large amounts of capital expenditure.
A local manager’s performance and bonus is assessed relative to three targets. For every one of these
three targets that is reached in an individual quarter, $400 is added to the manager’s bonus, which is
paid at the end of the year.
The maximum bonus per year is therefore based on 12 targets (three targets in each of the four
quarters of the year).
Accordingly, the maximum bonus that could be earned is 12 × $400 = $4,800, which represents 40% of
the basic salary of a local manager. Jump has a 31 March year end.
The performance data for one of the sports clubs for the last four quarters is as follows.
Qtr to Qtr to Qtr to Qtr to
30 June 30 September 31 December 31 March
2009 2009 2009 2010
Number of members 3,000 3,200 3,300 3,400
Member visits 20,000 24,000 26,000 24,000
Personal training sessions booked 310 325 310 339
Staff days 450 480 470 480
Staff lateness days 20 28 28 20
Days in quarter 90 90 90 90
Agreed targets are:

1. Staff must be on time over 95% of the time (no penalty is made when staff are absent from
work)
2. On average 60% of members must use the clubs’ facilities regularly by visiting at least 12 times
per quarter
3. On average 10% of members must book a personal training session each quarter
Required:
(a) Calculate the amount of bonus that the manager should expect to be paid for the latest
financial year. (6 marks)
(b) Discuss to what extent the targets set are controllable by the local manager (you are required to
make a case for both sides of the argument). (9 marks)
(c) Describe two methods as to how a manager with access to the accounting and other records
could unethically manipulate the situation so as to gain a greater bonus. (5 marks)
(20 marks)
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1 WEB CO (Q3, DECEMBER 2012)

Web Co is an online retailer of fashion goods and uses a range of performance indicators to measure
the performance of the business. The company’s management have been increasingly concerned
about the lack of sales growth over the last year and, in an attempt to resolve this, made the following
changes right at the start of Quarter 2.
(a) Advertising: Web Co placed an advert on the webpage of a well-known online fashion magazine
at a cost of $200,000. This had a direct link from the magazine’s website to Web Co’s online
store.
(b) Search engine: Web Co also engaged the services of a website consultant to ensure that, when
certain key words are input by potential customers onto key search engines, such as Google and
Yahoo, Web Co’s website is listed on the first page of results. This makes it more likely that a
customer will visit a company’s website. The consultant’s fee was $20,000.
Fir Co
(c) Website availability: During Quarter 1, there were a few problems with Web Co’s website,
st I pyri
meaning that it was not available to customers some of the time. Web Co was concerned that
this was losing them sales and the IT department therefore made some changes to the website
in an attempt to correct the problem.
ntu ght
The following incentives were also offered to customers:
(a)
itio
Incentive 1: A free ‘Fast Track’ delivery service, guaranteeing delivery within two working days,
n2
for all continuing customers who subscribe to Web Co’s online subscription newsletter.
Subscribers are thought by Web Co to become customers who place further orders.
(b)
017
Incentive 2: A $10 discount to all customers spending $100 or more at any one time.
The results for the last two quarters are shown below, Quarter 2 being the most recent one. The
results for Quarter 1 reflect the period before the changes and incentives detailed above took place
and are similar to the results of other quarters in the preceding year.
Quarter 1 Quarter 2
Total sales revenue $2,200,000 $2,750,000
Net profit margin 25% 16.7%
Total number of orders from customers 40,636 49,600
Total number of visits to website 101,589 141,714
Conversion rate – visitor to purchaser 40% 35%
The percentage of total visitors accessing website through magazine link 0 19.9%
Website availability 95% 95%
Number of customers spending more than $100 per visit 4,650 6,390
Number of subscribers to online newsletter 4,600 11,900
Required:
Assess the performance of the business in Quarter 2 in relation to the changes and incentives that the
company introduced at the beginning of this quarter. State clearly where any further information
might be necessary, concluding as to whether the changes and incentives have been effective.
(20 marks)
2 AT CO (Q2, DECEMBER 2010)

The Accountancy Teaching Co (AT Co) is a company specialising in the provision of accountancy tuition
courses in the private sector. It makes up its accounts to 30 November each year. In the year ending
30 November 2009, it held 60% of market share. However, over the last 12 months, the accountancy
tuition market in general has faced a 20% decline in demand for accountancy training leading to
smaller class sizes on courses. In 2009 and before, AT Co suffered from an ongoing problem with staff
retention, which had a knock-on effect on the quality of service provided to students. Following the
completion of developments that have been ongoing for some time, in 2010 the company was able to
offer a far-improved service to students. The developments included:
 A new dedicated 24-hour student helpline
 An interactive website providing instant support to students
 A new training programme for staff
 An electronic student enrolment system
 An electronic marking system for the marking of students’ progress tests. The costs of marking
electronically were expected to be $4 million less in 2010 than marking on paper. Marking
expenditure is always included in cost of sales
Extracts from the management accounts for 2009 and 2010 are shown below:
2009 2010
$000 $000 $000 $000
t
Turnover 72,025 66,028
Cost of sales
i g h 1 7 (52,078) (42,056)
r 0
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p ion
Indirect expenses:
2
o
Marketing 3,291 4,678
C uit
Property 6,702 6,690
Staff training 1,287 3,396
I n t
Interactive website running costs
Student helpline running costs
–
–
3,270
2,872
rst
Enrolment costs 5,032 960
Fi
Total indirect expenses (16,312) (21,866)
Net operating profit 3,635 2,106
On 1 December 2009, management asked all ‘freelance lecturers’ to reduce their fees by at least 10%
with immediate effect (‘freelance lecturers’ are not employees of the company but are used to teach
students when there are not enough of AT Co’s own lecturers to meet tuition needs). All employees
were also told that they would not receive a pay rise for at least one year. Total lecture staff costs
(including freelance lecturers) were $41·663 million in 2009 and were included in cost of sales, as is
always the case. Freelance lecturer costs represented 35% of these total lecture staff costs. In 2010
freelance lecture costs were $12·394 million. No reduction was made to course prices in the year and
the mix of trainees studying for the different qualifications remained the same. The same type and
number of courses were run in both 2009 and 2010 and the percentage of these courses that was run
by freelance lecturers as opposed to employed staff also remained the same.
Due to the nature of the business, non-financial performance indicators are also used to assess
performance, as detailed below.
2009 2010
Percentage of students transferring to AT Co from another training provider 8% 20%
Number of late enrolments due to staff error 297 106
Percentage of students passing exams first time 48% 66%
Labour turnover 32% 10%
Number of student complaints 315 84
Average no of employees 1,080 1,081
Required:
Assess the performance of the business in 2010 using both financial performance indicators calculated
from the above information AND the non-financial performance indicators provided.
Note: Clearly state any assumptions and show all workings clearly. Your answer should be structured
around the following main headings: turnover; cost of sales; gross profit; indirect expenses; net
operating profit. However, in discussing each of these areas you should also refer to the non-financial
performance indicators, where relevant.
(20 marks)
3 BATH CO (Q2, DECEMBER 2011)

Bath Co is a company specialising in the manufacture and sale of baths. Each bath consists of a main
unit plus a set of bath fittings. The company is split into two divisions, A and B. Division A
manufactures the bath and Division B manufactures sets of bath fittings. Currently, all of Division A’s
sales are made externally. Division B, however, sells to Division A as well as to external customers.
Both of the divisions are profit centres.
Co
The following data is available for both divisions.
Fir
st I pyri
Division A
Current selling price for each bath $450
ntu ght
Costs per bath:
Fittings from Division B $75
itio
Other materials from external suppliers $200
Labour costs $45
Annual fixed overheads
n2 $7,440,000
017
Annual production and sales of baths (units) 80,000
Maximum annual market demand for baths (units) 80,000
Division B
Current external selling price per set of fittings $80
Current price for sales to Division A $75
Costs per set of fittings:
Materials $5
Labour costs $15
Annual fixed overheads $4,400,000
Maximum annual production and sales of sets of fittings (units)
(including internal and external sales) 200,000
Maximum annual external demand for sets of fittings (units) 180,000
Maximum annual internal demand for sets of fittings (units) 80,000
The transfer price charged by Division B to Division A was negotiated some years ago between the
previous divisional managers, who have now both been replaced by new managers. Head Office only
allows Division A to purchase its fittings from Division B, although the new manager of Division A
believes that he could obtain fittings of the same quality and appearance for $65 per set, if he was
given the autonomy to purchase from outside the company. Division B makes no cost savings from
supplying internally to Division A rather than selling externally.
Required:
(a) Under the current transfer pricing system, prepare a profit statement showing the profit for
each of the divisions and for Bath Co as a whole. Your sales and costs figures should be split into
external sales and inter-divisional transfers, where appropriate. (6 marks)
(b) Head Office is considering changing the transfer pricing policy to ensure maximisation of
company profits without demotivating either of the divisional managers. Division A will be given
autonomy to buy from external suppliers and Division B to supply external customers in priority
to supplying to Division A.
Calculate the maximum profit that could be earned by Bath Co if transfer pricing is optimised.
(8 marks)
(c) Discuss the issues of encouraging divisional managers to take decisions in the interests of the
company as a whole, where transfer pricing is used. Provide a reasoned recommendation of a
policy Bath Co should adopt. (6 marks)
(20 marks)
4 HAMMER CO (Q4, JUNE 2010)

Hammer is a large garden equipment supplier with retail stores throughout Toolland. Many of the
products it sells are bought in from outside suppliers but some are currently manufactured by
t
Hammer’s own manufacturing division ‘Nail’.
g h 1 7
The prices (a transfer price) that Nail charges to the retail stores are set by head office and have been
i
r 0
the subject of some discussion. The current policy is for Nail to calculate the total variable cost of
y
p ion 2
production and delivery and add 30% for profit. Nail argues that all costs should be taken into
o
consideration, offering to reduce the mark-up on costs to 10% in this case. The retail stores are
C uit
unhappy with the current pricing policy arguing that it results in prices that are often higher than
comparable products available on the market.
I n t
Nail has provided the following information to enable a price comparison to be made of the two
t
possible pricing policies for one of its products.
Fi rs
Garden shears
Steel: the shears have 0.4kg of high quality steel in the final product. The manufacturing process loses
5% of all steel put in. Steel costs $4,000 per tonne (1 tonne = 1,000kg)
Other materials: Other materials are bought in and have a list price of $3 per kg although Hammer
secures a 10% volume discount on all purchases. The shears require 0.1kg of these materials.
The labour time to produce shears is 0.25 hours per unit and labour costs $10 per hour.
Variable overheads are absorbed at the rate of 150% of labour rates and fixed overheads are 80% of
the variable overheads.
Delivery is made by an outsourced distributor that charges Nail $0.50 per garden shear for delivery.
Required:
(a) Calculate the price that Nail would charge for the garden shears under the existing policy of
variable cost plus 30%. (6 marks)
(b) Calculate the increase or decrease in price if the pricing policy switched to
total cost plus 10%. (4 marks)
(c) Discuss whether or not including fixed costs in a transfer price is a sensible policy. (4 marks)
(d) Discuss whether the retail stores should be allowed to buy in from outside suppliers if the prices
are cheaper than those charged by Nail. (6 marks)
(20 marks)
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 1: Specialist cost and management accounting techniques 65
PART 1 TUITION ANSWERS: Objective test and Scenario
1 $ 7.50
Total number of batches = (15/2·5) + (25/5) + (20/4) = 16

Cost driver rate = $600,000 / 16 = $37,500
Cost per unit = $37,500 / 5,000 = $7·50
Alternatively cost per unit = $37,500 × 5/ 25,000 = 7.50
2
Facility 4
sustaining
Fir Co
st I pyri
Product 1
ntu ght
itio
Product 3
sustaining
Batch 2
n2
017
3  Production scheduling
4 $ 5.71
Cost driver rates

Set up costs $200,000 / 800 = $250 per set up
Inspection/quality costs $120,000 / 400 = $300 per test
Product W cost per unit
Direct materials $2.50
Direct labour $0.54
Set up costs: 15,000/150 units = 100 batches, 100 × $250 / 15,000 units = $1.67
Inspection / quality cost: 100 batches/2 = 50 inspections, 50 × $300 / 15,000 units = $1.00
Total production costs = $2.50 + $0.54 + $1.67 + $1.00 = $5.71
66 Tuition answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k
DUFF CO
5 $ 79.25
Total labour hours = (20,000 × 2.5) + (16,000 × 3) + (22,000 × 2) = 142,000

Overhead absorption rate = 1,377,400/142,000 = $9.70 per hour
Full cost per unit of X = $25 + $30 + ($9.70 × 2.5) = $79.25
6 $ 65833
Budgeted production and sales volumes (units) 20,000 16,000 22,000

Number of batches 40 20 55
Number of purchase orders per batch 4 5 4
Number of purchase orders 160 100 220
Total number of purchase orders = 160 + 100 + 220 = 480 orders
Total ordering costs for Y = $316,000 × (100/480) = $65,833
t
7 $ 13.54
i g h 1 7
Total machine hours = (20,000 × 1.5) + (16,000 × 1.25) + (22,000 × 1.4) = 80,800 machine hours
y r 2 0
Machine running and facility costs = $420,000 + $361,400 = $781,400
p ion
Machine running and facility costs allocated to Z = ($781,400/80,800) × (22,000 × 1.4) = $297,860
o
Machine running and general facility costs per unit of Z = $297,860/22,000 = $13.54
C uit
I n t
t
8 $ 79.64
Fi rs
Overhead cost per unit of X = $492,824/20,000 = $24.64
Full cost per unit of X = $25 + $30 + $24.64 = $79.64
9  ABC is an absorption costing system.

 ABC must be based on activities that are measurable in quantitative terms.
ABC can be used for production and non-production overheads and is only of limited use if
overheads are volume-related.
Target costing
10 $ 170
Required return = 30% × $300,000 = $90,000

Target cost = (500 × $350) – $90,000 = $85,000
Per unit = $85,000/500 = $170
11  $53.33
If profit = 25% sales, then target cost = 75% sales
Selling price = $40/0.75 = $53.33
12  Replace skilled workers with less skilled workers for the more basic production tasks
13
Calculate the 3
target cost
Calculate the 5
target cost gap
Calculate the 4
current cost
Set the required 2
Fir Co
profit
Set the selling 1

st I pyri
ntu ght
price
 itio
n2
14 It identifies the market price of a product and then subtracts a desired profit margin to
arrive at the desired cost.
017
A target cost is arrived at by identifying the market price of a product and then subtracting a
desired profit margin from it.
15  The cost gap will decrease and the target cost will remain the same.
The lower learning rate will mean costs are lower and the cost gap will decrease. The target cost
will not be affected by the change in the learning rate as it is determined by selling price and
desired margin.
16  Value analysis
 Functional analysis
Iso-contribution analysis relates to limiting factor analysis. Variance analysis is a feedback
technique whereas target costing is a feedforward technique.
EDWARD CO
17  Cost control can begin at the design stage.
 The radio will only include features that the customer regards as valuable.
Target costing will mean that Edward Co has a greater external focus. The introduction of target
costing is likely to have been prompted by the market conditions that are forcing Edward Co to
accept a selling price and not subsequently being able to pass on cost increases to its customers.
18 $ 0.75
Cost of labour idle time = (30/60) × $12.60 × (10/90) = $0.70

Cost of material waste = (25/100) × $4.80 × (4/96) = $0.05
Total cost reduction = $0.70 + $0.05 = $0.75
19 $ 1.05
Desired cost = $44 × 80% = $35.20
ht 7
Revised cost of material for radio = $4.40 × (25/100) × (100/96) = $1.15
i g 1
Current cost = $4.70 + $1.15 + $8.10 + ((30/60) × ($12.60 + $20 + $12)) = $36.25
y r 2 0
Cost gap = $36.25 – $35.20 = $1.05
o p ion
20
C uit
 Only including standard components in the radio
I

n t Increasing the automation of the manufacturing process
rst Just using standard components is a legitimate way to reduce costs. Automation could reduce
Fi
costs by cutting down skilled labour time. Reducing the number of features will reduce the cost
gap – increasing the number of features will only work if Edward Co can charge a higher price.
Analysing costs into cost pools is the starting point of activity-based costing.
21  The repair work carried out will vary according to the problems found.
The repair service will be a potentially unique job in response to the problems that the
customer has had.
The outcome of the repair service can be specified – it is the problem being fixed and the radio
working properly again. Costing the time is not itself a problem as that will have to be done
whatever the costing method. Reducing labour time may however be problematic. The service
being carried out when required should not be an issue with costing this sort of service.
Life cycle costing

22  Design costs
 Testing costs
 Production facility investment costs
Promotional costs are normally incurred at Introduction. Customer support costs increase from
the growth stage onwards. Inventory costs would only be relevant once production had started.
23 $ 275
3,250,000 + 2,000,000+250,000 = 5,500,000/44,000units = $125

$125 + $150 = $275 per unit
24  Results in a market driven pricing strategy

This is a benefit of target costing.
Fir Cop
25
Included Excluded
st I yri
Research and development  
Planning and concept design  
Testing
ntu ght  
itio
Production  
Advertising  
Distribution and customer service
n2  
26  At the design/development stage 017

27  Stretching time
Available resource Required
Material 30,000 metres 10,000 + 15,000 = 25,000 metres
Pressing time 13,000 hours 10,000 × 0.5 + 15,000 × 0.5 = 12,500 hrs
Stretching time 8,000 hours 10,000 × 0.25 + 15,000 × 0.4 = 8,500 hrs
Rolling time 7,750 hours 10,000 × 0.4 + 15,000 × 0.25 = 7,750 hrs
28 $ 1.33
Time available = 24 × 5 × 5 = 600 hrs

Production = 300 units, hence time per unit = 2 hrs (600/300)
Return per machine hour = (65 ─ 25)/2 = $20
Conversion cost per hour = (20 + 10)/2 = $15
TAR = $20/15 = 1.33
29  Raise the selling price of the product

This will increase the throughput contribution.
30 $ 2400
$320 – $80/(6/60) = $2,400
31  It does not attempt to maximise profit.

 Work in progress is valued at material cost only.
Throughput assumes that only material costs are variable, whereas labour and other costs will also
be variable beyond a certain time horizon, and this will affect the calculation of maximum profit.
32  Direct labour price
GOPHER GARAGE
t
33
MOTs
i g h8000
1 7
y r 2 0
p ion
Services 3125
o
C uit
Total garage hours per year = 10 × 5 × 50 = 2,500 hours
t
There are 4 mechanics, so total hours available = 2,500 hours × 4 = 10,000
t I n
Based on the time taken for each activity, they can perform 10,000/1.25 = 8,000 MOTs or
rs
10,000/3.2 = 3,125 services
Fi 34 
MOT
MOT 1.75 Service 1.14
Return per hour = (Selling price – Materials)/Time taken on the bottleneck

= ($120 – $15)/1.25 = $84
Throughput accounting ratio = Return per hour/Cost per hour = $84/$48 = 1.75
Service
Return per hour = (Selling price – Materials)/Time taken on the bottleneck
= ($200 – $25)/3.2 = $54.69
Throughput accounting ratio = Return per hour/Cost per hour = $54.69/$48 = 1.14
35  The mechanics’ time would be a bottleneck for MOTs only.

The existing capacity for each activity is:
MOTs Service
Mechanic 8,000 3,125
Trainee (2,500 × 3 ÷ 0.5/1.5) 15,000 5,000
Receptionist (2,500 × 2 ÷ 0.25/0.3) 20,000 16,667
Employing another three mechanics would mean that their hours available would be 17,500,
allowing them to carry out 14,000 MOTs or 5,469 services. As a result, the mechanics would still
be the bottleneck for MOTs but the trainees would be the bottleneck for services, as they can
only work on 5,000 services.
36  Decrease the time spent by the mechanics on each customer

 Decrease the operating expenses of the garage
Throughput accounting is concerned with minimising the throughput activity, inventory and
operating expenses. The time taken by the trainees is not relevant, as it is not currently the
throughput activity. Decreasing the selling price will worsen the throughput ratio.
Fir Cop
37
True False
st I yri
It can be applied to the management of all external  
factors affecting the organisation.
ntu ght
It is concerned with overcoming a bottleneck  
identified in a single activity.
itio  
It aims to limit the amount of non-bottleneck
resources used.
It tries to avoid the build-up of inventories.
n2  
017
According to the theory of constraints, it is wasteful to use non-bottleneck resources above the
level required for maximum throughput, as it will lead to a build-up of excess inventory.
Using throughput accounting will not help manage external activities that the business cannot
control. Overcoming a bottleneck in one activity may result in another activity becoming a
bottleneck and throughput accounting will be applied to this as well.
38
True False
A significant problem for environmental accounting is  
that it is difficult to measure environmental costs.
An aim of environmental accounting is to encourage  
organisations to quantify the costs and benefits of
improving environmental practices.
The use of input/output analysis forces an  
organisation to monitor the cost of wasted material
and other environmental pollution.
It is not possible to use activity based costing to  
identify cost drivers for environmental costs.
ABC principles can be used to identify cost drivers for environmental costs.
39  Image and relationship cost
40  Environment-related costs can be attributed to joint cost centres and environment-

driven costs cannot be.
ht 7
This is the correct option as environment-driven costs are allocated to general overheads, not
r i g
joint centres.
2 0 1
y
p ion
o
C uit
I n t
rst
Fi
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision making techniques 73
2: Decision making techniques
1 $ 9500
Relevant cost of A is replacement cost of $5,000.

Relevant cost of B is zero as material is surplus with no realisable value.
Relevant cost of C is best alternative use. L is better off selling C for $4,500 compared with using
it and not having to purchase D for $4,250.
Relevant cost = $5,000 + $4,500 = $9,500
2  $50,000
The company can either hire new workers at a cost of $60,000 or retrain the existing ones.
The incremental cost of using the existing workers is the training cost of $5,000 plus their
Co
replacement cost of $45,000 = $50,000 in total. This is the cheaper option.
Fir
3  $14,000
st I pyri
Deprival value is the lower of
ntu ght
Replacement cost ($14,000) and
itio
n2
The higher of NRV ($9,000) and economic value ($17,000) = $17,000
Hence relevant cost = $14,000
4 $ 4957.50
017
Cost of the quantity to be bought = (1,500 – 945) × $4·25 = $2,358.75
Opportunity cost of quantity in hand = 945 × $2·75 = $2,598.75
Total relevant cost = $4,957.50
5 23000
Fixed cost + Profit 920,000
Contribution per unit
= 40
= 23,000
74 T u i t i o n a n s w e r s : 2 : D e c i s i o n m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
6  𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
Note: 𝐶 is used to calculate break-even sales revenue ($)
𝑟𝑎𝑡𝑖𝑜
𝑆
7  4,500 units
Contribution required = $18,000 + $36,000 = $54,000
Contribution per unit = 40% × $30 = $12
Hence break-even sales = $54,000/$12 = 4,500 units
8 $ 170000
One package makes (2 × $3.50) + $3 + $4 = total contribution of $14

Break-even no. of packages = $70,000/$14 = 5,000
Break-even sales revenue = (10,000 × $8) + (5,000 × $8) + (5,000 × $10) = S170,000
t
9  Sales volume and profit
g h 1 7
A break-even chart illustrates the relationship between sales volume, revenue and costs.
i
y r 2 0
o p ion 15000
C uit
10
t
Sales = $62,500
I n
Break even sales = $13,000/0.4 = $32,500
rst
Margin of safety (sales revenue) = $30,000
Fi
Margin of safety (units) $30,000/$2 =15,000 units
11
True False
The investment is more sensitive to a change in sales  
price than sales volume.
If variable costs increase by 25% the investment will  
make a loss.
The margin of safety is 92.5%.  
The investment’s sensitivity to incremental fixed costs  
is 133%.
Price will have to fall by (105/600) × 100% = 17.5% for investment to breakeven. Volume will
have to fall by (105/150) × 100% = 70%.
An increase in variable costs of 25% = $450 × 0.25 = $112.50, greater than the profit of $105
Sales at breakeven point = 45/(150/200) = 60
Margin of safety = ((200 – 60)/200) × 100% = 70%
Sensitivity to fixed costs = (105/45) × 100% = 233%
CARDIO CO
12 60.92 %
Weighted average contribution to sales ratio (WA C/S ratio) = total contribution/total sales revenue.
T C R
$ $ $
Sales revenue 672,000 720,000 532,000
Variable costs (263,760) (286,400) (201,780)
Contribution 408,240 433,600 330,220
WA C/S ratio = ($408,240 + $433,600 + $330,220)/($672,000 + $720,000 + $532,000) =

$1,172,060/$1,924,000 = 60·92%
13 $ 325 000
Fixed costs = $73,940 + $78,100 + $59,320 = $211,360
Breakeven sales revenue = fixed costs/weighted average C/S ratio
= $211,360/65% = $325,169, say $325,000
Fir Co
14 81.8 %
st I pyri
ntu ght
Breakeven sales revenue = fixed costs/weighted average C/S ratio
= $175,000/60% = $291,667
itio
Margin of safety = ((Budgeted sales – Breakeven sales)/Budgeted sales sales) × 100%
n2
= (($1,600,000 – $291,667)/$1,600,000) × 100% = 81.8%
15  The C/S ratio will rise. 017

If all the products are eventually sold, the total C/S ratio will remain the same. Even if they are
not, the products with the highest contribution per unit may not be the products with the
highest C/S ratio.
16  The sensitivity of its demand to price is uncertain.

 It will generate high initial cash flows to cover the marketing expenditure.
Cardio Co is likely to play safe and start by charging a higher price to try to cover the large
marketing expenditure, if it is not sure of the responsiveness of demand to price. The product
may be a prestige product, where a higher price can be charged to gain the kudos of owning it.
A long life cycle is more likely to mean lower prices being charged initially, as the product has a
longer time to become profitable. A high price gives competitors who are prepared to undercut
similar products more opportunity to enter the market.
Limiting factors
17  Material only
4,000 units require 16,000 kg material and 8,000 labour hours. Hence material is currently the
scarce resource.
18 $ 1200
Since X makes the best contribution per labour hour (see working below), the company will
already be producing the maximum of X (800 units = 2,400 hours) and using the balance for Y.
Hence a further 90 hours would make 20 more units of Y and therefore $1,200 additional
contribution (profit).
Working Product X Product Y
Contribution per unit $45 $60
Labour hours 3 4.5
Contribution per hour $15 $13.33
Maximum demand (units) 800 1,500

Current plan: 4,650 hours available
800 units of X 2,400 hours
ht
500 units of Y 2,250 hours
r i g 0 1 7
19
y

p ion 2
1 only
o
Non-scarce resources are not being used to their maximum capacity so by definition will have
C uit some slack. Resources that form the critical constraints limiting the optimal production plan will
t
have zero slack.
t I n
Fi rs
20  A
 D
Product A B C D
Selling price per unit $160 $214 $100 $140
Raw material cost $24 $56 $22 $40
Direct labour cost at $11 per hour $66 $88 $33 $22
Variable overhead cost $24 $18 $24 $18
Contribution per unit $46 $52 $21 $60
Contribution per labour hour $7.67 $6.50 $7 $30
Rank 2 4 3 1
Normal monthly hours
(total units × hours per unit) 1,800 1,000 720 800
If the strike goes ahead, only 2,160 labour hours will be available.
Therefore make all of D, then 1,360 hours’ worth of A (2,160 – 800 hrs).
21
Correct Incorrect
Objective function 60x + 25y  
Material constraint 3x + y ≤ 4,200  
Labour constraint 4x + 0.5y ≥ 3,000  
Contribution for X = $15 ($60 – $45)

Contribution for Y = $12 ($25 – $13)
Objective function = 15x + 12y
Constraints:
Material = 3x + y ≤ 4,200 (as X uses 3 kgs of material (15/5), Y uses 1 kg (5/5))
Labour = 4x + 0.5y ≤ 3,000 (as X uses 4 labour hrs (24/6), Y uses 0.5 hrs (3/6))
22  Contribution will be increased by $2 for each additional kg of material B purchased at the

current market price.
 The maximum price which should be paid for an additional kg of material B is $2·80.
Co
The statement that the maximum price is £2 is wrong as it reflects the common misconception
Fir
that the shadow price is the maximum price which should be paid, rather than the maximum
st I pyri
extra over the current purchase price.
The statement about contribution being $1.20 is wrong but could be thought to be correct if the
ntu ght
statement about the maximum price being $2 was wrongly assumed to be correct.
itio
n2
Pricing decisions
23 $ 36.75
Current cost = 80% × $35 = $28

017
New selling price = ($28 × 1.05) /0.80 = $36.75
24  P = 16 – 0.02Q
P = a – bQ and when P = 10, Q = 300, so 10 = a – 300b
b = change in price/change in quantity = 1/50 = 0.02
10 = a – (0.02 × 300)
10 = a – 6, so a = 16
25  1 only
In order for the company to charge different prices, each group of customers (market segment)
must have different price elasticity of demand.
26  $14.70
Total cost per carpet = 5 + 1 + 4.5 ($9,000/2,000) = $10.50
Selling price = $10.50 × 1.40 = $14.70
27  Penetration pricing
28
A   
B   
HERERA CO
t

h
29 Both X and Y
r i g 0 1 7
Z makes a loss if it is bought in, whereas X and Y still make a contribution (see below).
y
p ion 2
30
o
C uit
t
X 3
t I n Y 2
Fi rs Z
Working:
1

Contribution per unit if make 30 45 35
Contribution if buy in 25 25 (5)
Labour saved if buy in 30 15 n/a
Lost contribution per $ labour $0.17 $1.33 n/a
Order of making 3 2 1
31  $10,000
Deprival value is the lower of:
 Replacement cost ($10,000) and
 The higher of NRV ($8,000) and economic value ($11,000) = $11,000
Hence relevant cost = $10,000
32  Incremental costs plus opportunity costs

These are the costs that are relevant to the decision.
33  There must be little or no chance of a black market developing.

The lack of a black market means that Herera Co can enforce price discrimination.

34  Risk seeking
35 $ 240000
Expected value with the survey

= (0.4 × $400,000) + (0.6 × $1,000,000)
= $760,0000
Expected value without the survey
Fir Co
= $520,000
st I pyri
Therefore maximum value of the survey = $760,000 – $520,000 = $240,000
36  125
ntu ght
itio
The choice using maximax will be the choice that gives the best possible result, which is a profit
n2
of $540 if demand and supply are 125 lunches.
37  50
Look at the worst possible outcome for each level of supply:
017
50 75 100 125
$200 $160 $125 $95
The best of these outcomes is $200 for 50 lunches supplied.
38  125
Minimax regret table is as follows:
Daily supply (units)
50 75 100 125
50 $0 $40 $75 $105
Daily demand 75 $100 $0 $35 $65
(units) 100 $220 $120 $0 $30
125 $340 $240 $120 $0
The highest regret figures are shown in bold, and 125 has the lowest of these, therefore choose
125.
LOUIEDEWIE CO
39 $ 51750
Expected return = (0.35 × 150,000) + (0.20 × 75,000) + (0.45 × -35,000) = $51,750
40  0.35
The project will make a profit if returns exceed $80,000, which only applies in the no
competition situation.
41  $536,250
Expected value = (0.45 × $500k) + (0.2 × $550k) + (0.35 × $575k) = $536,250
42 $ 952500
Expected value = $500k + (0.3 × $550k) + (0.5 × $575k) = $952,500
ht 7
g 1

i
43 2 only
y r 2 0
Expected values support a risk-neutral attitude to decision-making. They are most useful when
o p ion
they refer to events that will occur many times.
C uit
I n t
rst
Fi
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 3: Budgeting and control 81

1
Objective Not objective
Authorisation of expenditure  
Business expansion  
Performance monitoring  
Resource allocation  
2
True False
A budget helps to control an organisation by forcing it  
to create a plan.
A budget helps an organisation to co-ordinate the  
allocation of resources.
Fir Cop
A budget can help an organisation to motivate staff.  
An organisation is legally required to prepare a master  
st I yri
budget annually.
ntu ght
There is no legal obligation to prepare a budget.
3  Junior management
itio
n2
4  An example of feedback control
017
5  Feedforward control
6  Neither 1 nor 2
If a budget is too easy, staff will not necessarily give their greatest efforts.
A budget based on ideal conditions is likely to be demotivating. Budgets need to be challenging
but achievable in order to encourage improved efficiency.
82 T u i t i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k
7
Zero- Beyond
Rolling Incremental Flexible based budgeting
Set at the start of the     
year for various different
activity levels
Continually extended by     
adding another budget
period when the first
budget period expires
Prepared by building on a     
previous period’s
budgeted or actual figures
Uses adaptive     
management processes
and procedures
8  Budgets will take longer to produce
9  It is less time consuming.
ht 7

r i g 2 0 1
y
10 It may be more difficult to co-ordinate the plans of different departments.
o p ion
C uit
I n t
t
11 $ 10.00
Fi rs
Highest cost is $13,000 for an output of 800 units.
Lowest cost is $10,000 for an output of 500 units.
Using the high-low method to establish values for a and b:
$(13,000−10,000) $3,000
Variable cost per unit = (800−500)
= 300 𝑢𝑛𝑖𝑡𝑠 = $10 per unit
12 $ 12000
$(13,000−10,000) $3,000
As above: Variable cost per unit = (800−500)
= 300 𝑢𝑛𝑖𝑡𝑠 = $10 per unit
Fixed costs can be calculated by reference to the total costs when output is 500 units
Total cost = $10,000 = Fixed cost + (500 units × $10)
Fixed cost = $10,000 ─ $5,000 = $5,000
So in June total cost = $5000 + (700 × $10) = $12,000
13  2.45 hours
b
Y = ax
Average time for six jobs: 3 × 6 – 0.074 = 2.627 hours
Total time required for six jobs = 6 × 2.627 hours = 15.762 hours
Average time for five jobs: 3 × 5 – 0.074 = 2.663 hours
Total time required for five jobs = 5 × 2.663 hours = 13.315 hours
Time required to perform the 6th job = Total time required for six jobs – total time required for
five jobs.
Therefore, time required to perform the 6th job = 15.762hours –13.315 hours = 2.447 hours
14  Both 1 and 2
15
True False
Spreadsheets can easily take account of lots of  
qualitative factors.
Spreadsheets are useful when the values of the inputs  
Fir Co
to the budget are likely to change.
st I pyri
Spreadsheets are only as accurate as the formulae and  
other inputs that they depend on.
Spreadsheets allow for the analysis of large volumes  
ntu ght
of quantitative data.
itio
Spreadsheets are unable to deal with qualitative factors.
n2
017
16  I only
The learning rate was actually better than expected and only I could cause it to improve.
17 $ 4305000
90% production = 350,000 × 0.9 = 315,000

At each level of production, material cost = $6 per unit, labour cost = $5 per unit, so both are
fully variable, total variable cost = $11 per unit
315,000/40,000 = 7.875, so 8 supervisors will be required.
Total production costs = (315,000 × $11) + $600,000 + (8 × $30,000) = $4,305,000
Standard costing
18
True False
Standard costs should only ever be based on marginal  
costing principles.
The use of basic standards is likely to give rise to  
meaningful variances.
Current standards provide the best basis for  
motivating employees to improve performance.
Basic standards are short-term targets and useful for  
day-to-day control purposes.
Standard costs can be based on a variety of costing approaches e.g. total absorption costing,
marginal costing, ABC principles
Basic standards are often out-of-date and therefore unlikely to give rise to meaningful
variances.
Current standards reflect existing levels of efficiency and are unlikely to motivate employees to
improve performance.
Basic standards are likely to be out-of-date and may not be relevant for day-to-day control.
ht 7
i g 1
19  Planning
y r 
2 0 Valuing inventory
o p ion  Assessing performance
C uit  Motivating staff
I n t
r st
i
K C
AMAL O
F 20  1 only
The budget selling price was $90 ($540,000/6,000) and the actual price was $88
($633,600/7,200). Fixed overheads should not be affected by changes in sales volume.
21 $ 269400
Budget contribution = $282,000 (213,000 + 69,000) = $47 per unit

Flexed profit = (7,200 @ 47) – 69,000 = $269,400
22 $ 133000
Variance calculated using original budget = $610,000 – $560,000 = $50,000 F

Revised budget = $550,000 × 120% × 105% = $693,000
Variance calculated using revised budget = $610,000 – $693,000 = $83,000 A
Difference = $50,000 + $83,000 = $133,000
Note that this is the difference between the original and revised budget figures for the quarter.
23
Considered Not considered
Whether a marketing initiative should be undertaken  
at all
Whether the marketing department should be  
outsourced
Whether some or all of the activities that are part of a  
proposed marketing campaign are justified
Whether some or all of the activities that are part of a  
proposed marketing campaign can be done more
Co
cheaply
Fir
st I pyri
All of these would be considered as part of zero-based budgeting.
24  Both 1 and 2
ntu ght
itio
Rolling budgets are updated a short period at a time, so can more easily accommodate changes
in price and resource availability.
n2
Zero-based budgeting starts with no preconceived assumptions about how activities should be
017
carried out, so budget-setters can identify the most efficient way to operate without being
influenced by whether it will mean changing the current way things are done.

25
Adverse Favourable
$2400  
Actual Standard
Actual quantity quantity cost
Material Standard mix Actual mix Variance per kg Variance
kgs kgs kgs $ $

A 4,000 4,300 (300) 9 (2,700)
B 3,500 3,600 (100) 5 (500)
C 2,500 2,100 400 2 800
10,000 10,000 (2,400) A
26  1 only
The change will increase the cost of the mix at standard prices and most likely increase the
quality of the biscuit.
27  Training for customer service team

This will not affect the production process.
28
Adverse Favourable
$1312  
Actual
Standard quantity quantity Standard
Material Standard mix Standard mix Variance cost per kg Variance
kgs kgs kgs $ $
W 912 864 48 5 240
X 1,368 1,296 72 6 432
Y 1,520 1,440 80 8 640
3,800 3,600 1312F
ht 7
r i g 2 0 1
PRODUCT ED Z
y
p ion
29 o
C uit 1 only
I n t
We’re told that the price/litre is as budgeted.
t
Standard yield is 15/16 = 0.9375 × input quantity. Expected yield from actual input of 1,800
Fi rs
litres is 1,800 x 0.9375 = 1,687.5 litres. Actual yield is only 1,650 litres, less than expected.
30
Adverse Favourable
$562.50  
9/16 7/16
A B Total
Standard 1,012.5 787.5 1,800
Actual 900 900 1,800
112.5 112.5
$10 $15
1,125 F 1,687.5 A 562.5 A
AQSM: A = 9/16 × 1,800 = 1, 012.50 litres; B = 7/16 × 1,800 = 787.50 litres
The Mix Variance is given by: T2 – T1 = $562.50 adverse
Material mix variances are concerned with quantity, not quality. A favourable materials mix is
more likely to lead to an adverse labour efficiency variance, because the cheaper materials may
be more difficult to use or take more time to use because there is more waste.
32
Adverse Favourable
$1631.25  
AM SQSM
Materials AQ SP SQ SP
A 900 9,000 1,113.75 11,137.50
B 900 13,500 866.25 12,993.75
Total T1 = 22,500 T2 = 24,131.25
SM: A = 9/16 and B = 7/16
Expected input for yield of 1,650 litres = 1,650 × (1,800/1,500) = 1,980 litres
SQSM: A = 9/16 × 1,980 = 1,113.75 litres; B = 7/16 × 1,980 = 866.25 litres
Co
Operational materials usage variance = $24,131.25 – $22,500 = $1,631.25 favourable
Fir
33
st I pyri
ntu ght
Explain Not explain
itio
Changes in the production process causing increased  
loss of materials
n2
A higher than expected level of waste of materials  
Quality control identifying a high proportion of  
017
materials as sub-standard
A new supplier supplying poorer quality materials  
Advanced knowledge of changes in the production process and a new supplier supplying sub-
quality materials could have influenced the planning process. Actual waste being higher is an
operational factor. Quality control rejecting a large amount of materials is generally an
operational factor, unless we know that quality control procedures were changed.

34  Cost-conscious customers are switching from premium products to lower margin cereals
in the range.
This will increase the proportion of low margin sales and have a negative impact on profitability.
35
Adverse Favourable
$3720  
The sales quantity contribution variance is calculated as follows:

Actual sales Standard sales Difference Standard
in std mix in std mix in units contribution Variance
Product A 16,020 15,840 180F $12 $2,160F
Product B 10,680 10,560 120F $13 $1,560F
Total $3,720F
MEMIA CO
36  2 only
The difference between budgeted and actual sales is 1,000 televisions. The volume variance
that would be expected due to the shrinking market is 2,000 units (revised sales would be 10% ×
100,000 units = 10,000 units). Therefore, there must be both a planning and operational sales
volume variance (see below).
t
Sales price variance: actual revenue $2,200,000 – (11,000 units @$210) = $110,000 adverse
g h 1 7
There is no information to suggest this is anything other than an operational variance.
i
y r 2 0
37
o p ion
C uit
Market size
I n t Adverse Favourable
t
$160000  
Fi rs Market share
Adverse Favourable
$80000  
Market size (Planning sales volume)

Televisions
Revised budget sales 10,000
Original budget sales 12,000
Variance 2,000 (A)
VARIANCE IN $ 160,000 (A)
Market share (Operating sales volume)
Televisions
Actual sales 11,000
Revised sales 10,000
Variance in televisions 1,000 (F)
38
Adverse Favourable
$80000  
Actual sales Actual sales Difference Standard

in std mix in actual mix in units contribution Variance
Televisions 15,000 11,000 4,000A $80 $320,000A
Computers 10,000 14,000 4,000F $100 $400,000F
Total $80,000F
39
Adverse Favourable
$440000  
Weighted average budgeted contribution per unit = (12,000 × $80) + (8,000 × $100)
/(12,000 + 8,000) = $88
Sales quantity variance in units = (15,000 + 10,000) – (12,000 + 8,000) = 5,000 favourable
Sales quantity variance in $ = 5,000 × $88 = $440,000 favourable
Fir Co
st I pyri
40  Performance has deteriorated in relation to product returns but improved in relation to
customer complaints
Sales volumes (units)
ntu ght 12,000 11,000
itio
Number of returns (units) 1,080 1,000
No of customer complaints regarding late delivery 360 320
n2
Returns as % of sales 9.0% 9.1%
Customer complaints as % of sales 3.0% 2.9%
Planning and operational variances 017

41  The use of the new machine
The price saving is the result of an operational decision. The budget should however have been
prepared on the basis that the new machine would be used.
42  An adverse labour efficiency planning variance

If the learning curve was overstated in error at the planning stage the work will have taken
longer than expected.
43  A change in working practices to comply with new regulatory restrictions on rest

practices
This is likely to have a negative impact on productivity but is due to an uncontrollable external
factor.
44
Adverse Favourable
$12000  
Planning variance = ($3·80 – $5) × 10,000 = $12,000 adverse
45
Adverse Favourable
$3937.50  
4,375 kg × ($20 – $20.90) = $3,937.50 adverse

Materials operational price variance
Adverse Favourable
$3062.50  
(4,375kg × ($20.90 – $21.60)) = $3,062.50 adverse
ht 7
g 1
DEMIA CO
y r i 2 0
p ion
o
C uit
There is no revised planning information for labour rate, any rate difference will be operational.
If Demia spent 29,000 hours making 11,000 units compared to an original flexed budget of
n t
33,000 hours, there is clearly a labour efficiency variance of some sort.
t I Total labour efficiency variance = (29,000 hours – 33,000 hours) @ $20 = $80,000 favourable
Fi 47rs Planning labour efficiency variance
Adverse Favourable
$110000  
Adverse Favourable
$30000  
Planning labour efficiency variance

(Standard hours for actual production (11,000 × $3) – revised hours for actual production
(11,000 × 2.5)) × standard rate
11,000 TVs: (33,000 –27,500) × $20 = $110,000 favourable
(Actual hours – revised standard hours for actual production) × standard rate
11,000 TVs: (29,000 – 27,500) × $20 = $30,000 adverse
Note: this approach uses the Examiner’s preferred method of calculating the P&O variances.
48 $ 13.33
Original standard = 2.5 @$20 = $50

For a nil variance, cost of 1.5 hours unskilled time must be no more than $50 – (1.5@$20) = $20
So max rate per hour = $20/1.5 = $13.33
49 $ 20
400,000 – 9,000 VC = (504,000 – 12,000 VC)/1.2
480,000 – 10,800 VC = 504,000 – 12,000 VC
1,200 VC = $24,000
VC = $20
50  Better training for unskilled workers

 Change in the packaging of the televisions
Better training should reduce inefficiencies and waste. Changing the packaging could either
make the packaging cheaper, or more durable (with any increase in costs because the packaging
Fir Co
was more durable being outweighed by the reduced risk of breakages).
st I pyri
Use of standard components should help reduce costs. The length of life of components used
does not affect production costs.
ntu ght
itio
51
n2
017
True False
In a rapidly changing environment variances based on  
standard costs are likely to provide a meaningful
analysis of performance.
When monitoring performance, a company only needs  
to focus on adverse variances.
A desire to create a favourable material price variance  
may result in the purchasing manager taking decisions
which are incompatible with TQM.
If a company operates a JIT policy, it is not likely to  
experience any labour idle time variance.
Variances will be less meaningful in a rapidly changing environment as standards are likely to be
out of date. When monitoring performance, a company should focus on significant favourable
and adverse variances. A desire to create a favourable material price variance may result in the
Purchasing Manager buying cheaper quality material which would be incompatible with TQM. If
a company operates a JIT policy, it will produce to order and not for inventory and therefore
may experience a labour idle time variance.
92 T u i t i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

1  Strategic planning
2  Operational control
3  Provides summary information for the Board

Provides summary information for the Board  
Provides information in a flexible format  
Facilitates “what if” analysis  
Can be used to assist resource planning  
Providing summary information for the board is a characteristic of an Executive information
t
system.
i g h 1 7
y r 2 0
p ion
4  1 only
o
C uit
Open systems are preferable for performance management as they are able to take account of
external uncontrollable factors.
I n t
5
rst
Fi
Cover Not cover
Order processing  
Manufacturing  
Distribution  
Customer service  
Human resources  
Finance  

6
Internal External
Database of customer information  
Inventory management system  
Results of market research  
Payroll system  
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 4: Performance measurement and control 93
7  Both 1 and 2
8  II only
Use of bar coding and scanners are costs of direct data capture.
Lack of resource available to spend on other value-adding activities is an example of an indirect
cost.
9
Direct data Processing
capture
Use of bar coding and scanners  
Payroll department analysis of personnel costs  
Completion of timesheets by employees  
Input of timesheet information onto management  
information system
Co
Management reports
Fir
st I pyri
10  Completeness checks
ntu ght
 Validation of input data
11
itio
n2 True False
017
A range check is a form of validation control.  
Hierarchical passwords can be used to grant different  
access rights to different users of a database.
Firewalls protect data from external access.  
Encryption means that data can only be understood by  
those transmitting and receiving it, and not by anyone
intercepting it.
12  Remote storage of back-up copies of data


13
Financial Non-financial
Product returns rate  
Market share  
Asset turnover  
Staff turnover  
14  Non-financial
The other perspective is Financial.
15  Dimensions
 Rewards
 Standards
16 
ht 7
The Managing Director who has overall responsibility for the businesses costs and
i g 1
revenues, including the administration and finance functions
y r 2 0
o p ion 18.2
C uit
17 %
t
ROCE can be calculated by multiplying the operating profit margin and the asset turnover.
I n
28% × 65% = 18·2%
rst
Fi
OLIVER’S SALON
18 $ 20
20X8: Female clients paid $200,000 for 8,000 visits. This is an average price per visit of
$200,000/8,000 = $25
In 20X9 the female hairdressing prices did not increase and the mix of services did not change
so of the total revenue $170,000(6,800 × $25) was from female clients. This means that the
balance of $68,500 ($238,500 – $170,000) was from male clients at an average price of $20 per
visit ($68,500/3,425)
19
True False
Gross and net profit margins have decreased in 20X9  
compared with 20X8.
Average cost per staff member has increased in 20X9  
compared with 20X8.
Gross margin: 20X8 – $106,000/$200,000 = 53%, 20X9 – $112,500/238,500 = 47.2%

Net margin: 20X8 – $78,000/200,000 = 39%, 20X9 – $80,000/238,500 = 33.5%
Both margins have fallen, so the first statement is true.
Average staff cost: 20X8 – $65,000/4 = $16,250, 20X9 – $91,000/6 = $15,167
Average staff cost has fallen, so the second statement is false.
20  The mix of services offered to female clients

We are told that the mix hasn’t changed. The others are all plausible explanations on the basis
of the information given.
Co

Fir
21 Resource utilisation of the property has increased and resource utilisation of specialist
st I pyri
Property used is the same, so resource allocation is reflected in the total number of cuts, which
ntu ght
have increased from 8,000 to 6,800 + 3,425 = 10,225
Average number of clients per specialist female hairdresser has fallen from (8,000/4) = 2,000 to
(6,800/5) = 1,360
itio
n2
017
22
Problem Not a problem
It may be difficult to define measures for quality of  
service provided.
Increasing the number of measures may increase the  
chances of the measures giving a conflicting picture.
Increasing the number of measures will mean that the  
business has more of an external focus, rather than
focusing on internal problems.
Oliver may have to spend more time himself on  
measurement work and less on servicing customers.
The business needs to solve the internal problems that it has, but having an external focus
should mean that it concentrates on the measures that are more important to customers,
where its competitors may be doing better.
Some of the new measures are likely to involve assessment and inspection, which Oliver is likely
to have to carry out himself. He will also need to spend time making an overall assessment of
what the measures tell him.

23
Control No control
Revenue generation  
Attributable costs  
Apportioned head office costs  
Investment in non-current assets  
24  Dual pricing system
25 ROI
15.0 %
RI
$ 0.36 million
t
ROI = 1.8/12 = 15.0%
g h 1 7
RI = 1.8 – (12% × 12) = 0.36
i
y r 2 0
26
o p ion
 Division A only
C uit Division A: Profit = $14·4m × 30% = $4·32m
t
Imputed interest charge = $32·6m × 10% = $3·26m
t I n Residual income = $1·06m
rs
Division B: Profit = 8·8m × 24% = $2·112m
Fi
Imputed interest charge = $22·2m × 10% = $2·22m
Residual income = $(0·108)m
27
Increase Decrease
$78000  
Increase in variable costs from buying in (2,200 units × $40 ($140 – $100)) = $88,000
Less the specific fixed costs saved if A is shut down = ($10,000)
Decrease in profit = $78,000
28
Control No control
Generation of revenues  
Investment in non-current assets  
Investment in working capital  
Apportioned head office costs  
29 27.59 %
Opening capital employed: $4m + $0·5m = $4·5m
Closing capital employed: ($4m × 0·9) + ($0·5 × 1·2) = $3·6m + $0·6 = $4·2m
Average capital employed = $4·35m
Profit after depreciation = $1·2m
Therefore, ROI = $1·2m/$4·35m = 27·59%
ABEL CO
30 $ 11.70
Marginal cost = $6 + share of overheads $3 ($300,000/100,000 units) = full cost $9

$9 × 1.3 = $11.70
31  Neither 1 or 2
Fir Co
A full cost-based approach should only be used if there is no intermediate market for the
st I pyri
product. An opportunity cost approach should be used if the producing division is operating at
full capacity.
ntu ght
itio
32  $11
n2
If capacity is limited, it is better for the company to sell 100,000 components to the individual
consumer: contribution = $15 ─ $6 ─ $2.50 = $6.50 per unit, than to the commercial buyer at a
017
contribution of $5 ($11 ─ $6)
The production division will therefore want the TP to be at least $11.
The retail division will accept transfers provided the cost is less than its incremental net revenue
$15 ─ $2.50 = $12.50
33 $ 600000
Now the production division can sell 100,000 components to the commercial buyer @$5
contribution = $500,000 and the retail division can buy in the components and earn
contribution from the individual consumers @ $1 per unit ($15 ─ $11.50 ─ $2.50) = $100,000
Total company contribution = $500,000 + $100,000 = $600,000
34  Setting the transfer price at market value if an external market exists for the product
There is no guarantee that the market value will be enough to cover fixed costs.
The other methods are all used in practice to resolve this problem.

35
Some non-quantifiable objectives  
Multiple stakeholders  
Objectives may be subject to political pressures  
Conflicting priorities for resource allocation  
36  Economy, Efficiency, Effectiveness
37
Cutting departmental expenditure by 5%   
Increasing the number of chargeable   
hours handled by advisers to 6·2 per day
Obtaining a score of 4·7 or above on   
customer satisfaction surveys
t
Retaining all current contracts with   
h 7
government departments
r i g 2 0 1
y
p ion
o
38
C uit  Manipulation of targets to ensure results achieved
I n t
 Dysfunctional decision making
rst
Fi
39  Both 1 and 2
AC C A F 5 Q u e s t i o n B a n k Tuition answers: 2: Decision-making techniques 99
PART 1 TUITION ANSWERS: Long form
Limiting factors
1 CUT AND STITCH

EXAMINER’S COMMENTS
This was probably the least-well answered question on the paper overall. This is not really
surprising, since I find that few students enjoy linear programming, and I think this comes
from a fear of anything too mathematical.
Part (a) was fairly straightforward. This should have been really well answered and I think
the reason why it wasn’t is because candidates did not expect to be given the optimal
production point in a question. They expected to have to find it themselves. Because of this,
they didn’t read the question properly and many candidates performed lots of calculations
Co
trying to find the optimal production point!
Fir
st I pyri
It is so important to read questions carefully in all exams. An expectation of what the
requirement will read, based on past questions must not be developed as, when this
ntu ght
happens, candidates inevitably don’t answer the question that is currently being asked.
A good attempt at part (a) would have been to solve the two simultaneous equations for the critical
itio
constraints at point B, in order to arrive at the optimum quantity of W and L to be produced. Then,
these numbers needed to be put into the objective function in order to find contribution.
n2
It is essential to show all workings. Where workings are not shown, full marks cannot be
017
given. Also, it was not sufficient to simply try and read the optimum quantities off the graph.
The requirement said “find by appropriate calculation....”
(a) The optimal production mix can be found by solving the two equations given for F and T.
7W + 5L = 3,500
2W + 2L = 1,200
Multiplying the second equation by 2.5 produces:
7W + 5L = 3,500
5W + 5L = 3,000
2W = 500
W = 250
Substituting W = 250 in the fabric equation produces:
2 × 250 + 2L = 1,200
2L = 700
L = 350
100 T u i t i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k
The optimal solution is when 250 work suits are produced and 350 lounge suits are produced.
The contribution gained is $26,000:
C = 48W + 40L
C = (48 × 250) + (40 × 350)
C = 26,000
EXAMINER’S COMMENTS: PART (b)

Some candidates gave perfect answers to this but, admittedly, these candidates were in the minority.
Most answers were poor and this is clearly an area that needs to be revisited. A common
error was finding a total shadow price of $14 for fabric and tailor time jointly, rather than
calculating them separately. Such answer scored poorly.
EXAM SMART
Learning how to perform key techniques is really important in the exam. For example here
you need to know and be able to demonstrate that the shadow price is calculated by:
 Adding one extra unit of resource to the constraint.
 Recalculating the optimum point and the quantities of the two products at the new optimum point.
 Recalculating the overall contribution at the new optimum point and

t
Identifying the increased contribution over and above the original optimum point.
i g h 1 7
r 2 0
(b) The shadow prices can be found by adding one unit to each constraint in turn.
y
p ion
Shadow price of T
o
7W + 5L = 3,501
C uit 2W + 2L = 1,200
t
Again multiplying the second equation by 2.5 produces:
t I n 7W + 5L = 3,501
rs
5W + 5L = 3,000
Fi
2W = 501
W = 250.5
Substituting W = 250.5 in the fabric equation produces:
(2 × 250.5) + 2L = 1,200
2L = 1,200 – 501
L = 349.5
Contribution earned at this point would be = (48 × 250.5) + (40 × 349.5) = 26,004 which is an
increase of $4.
Hence the shadow price of T is $4 per hour.
Shadow price of F
7W + 5L = 3,500
2W + 2L = 1,201
Again, multiplying the second equation by 2.5 produces:
7W + 5L = 3,500.0
5W + 5L = 3,002.5
2W = 497.5
W = 248.75
Substituting W = 248.75 in the fabric equation produces:

(2 × 248·75) +2L = 1,201
2L = 1,201 – 497.5
L = 351.75
Contribution earned at this point would be = (48 × 248.75) + (40 × 351.75) = 26,010, which is an
increase of $10.
Hence the shadow price of F is $10 per metre.
EXAMINER’S COMMENTS: PART (c)

If part (b) was poorly answered, part (c) was really poorly answered!
Many candidates could perform the calculations in part (b) but did not, on the whole,
understand that the shadow price is the premium OVER AND ABOVE the normal price that
could be paid for extra tailor time. Again, this area clearly needs revisiting.
EXAM SMART
The Examiner’s point raises a common issue with interpreting shadow prices. You need to
realise that the shadow price (in this case $4 per hour of tailor time) represents the
maximum amount over and above the current price of the resource ($1.50 per hour) that CS
Co
might consider paying. Hence $1.50 + $5 = $5.50 per hour is the theoretical maximum per
Fir
hour that might be considered worth paying for extra tailor hours.
st I pyri
ntu ght
(c) The shadow price represents the maximum premium above the normal rate a business should
be willing to pay for more of a scarce resource. It is equal to the increased contribution that can
itio
be gained from gaining that extra resource.
n2
The shadow price of labour here is $4 per hour. The tailors have offered to work for $4.50 – a
premium of $3.00 per hour. At first glance the offer seems to be acceptable. However, many
017
businesses pay overtime at the rate of time and a half and some negotiation should be possible to
create a win/win situation. Equally some consideration should be given to the quality aspect here. If
excessive extra hours are worked then tiredness can reduce the quality of the work produced.
EXAMINER’S COMMENTS: PART (d)

Candidates needed to appreciate that whilst fabric remained a critical constraint, maximum
demand for W now became the other critical constraint rather than tailor time. Therefore,
the constraints for fabric and W now needed to be solved in order to find the optimum
production mix. It was surprising to see that candidates who completed part (a) correctly
could not do part (d) as essentially, the technique required was the same.
(d) If maximum demand for W falls to 200 units, the constraint for W will move left to 200 on the x
axis of the graph. The new optimum point will then be at the intersection of:
W = 200 and
2W + 2L = 1,200
Solving these equations simultaneously, if:
W = 200, then (2 × 200) + 2L = 1,200
Therefore L = 400.
So, the new production plan will be to make 400L and 200W.
EXAM SMART
A quick inspection of the graph for the maximum demand of W (line P) moving to 200 units
would identify that there would now be a new optimum point (not point B anymore).
Marking guide Marks

(a) Optimal point calculation 3
Contribution 1 4
(b) For each shadow price 3 6
(c) Rate discussion 3 6
Other factors e.g. tiredness, negotiation 3
(d) Find optimum point 1
Solve 2 equations 2
Conclusion 1 4
Maximum marks available 20
Pricing decisions
ht 7
i g 1
2 WX
y r 2 0
p ion
EXAMINER’S COMMENTS: PART (a)
o
C uit
It was surprising, even disappointing, to find that many candidates were not able to apply
t
the ‘high – low’ technique to calculate the total variable cost of the unit.
t I n
Part (a)(ii) was generally answered well, but a significant number of candidates made an
rs
error when calculating the selling price that would maximise the company’s profit, and put
Fi
forward an answer that could not be possible in the context of the question.
Common errors
 Unable to apply the high-low technique (part (a)(i)).
 Incorrectly believing that the total variable cost was simply the sum of the direct
material and direct labour.
 Unable to calculate the selling price that would maximise the company’s profits (part (a)(ii)).
EXAM SMART
From the information we can tell that material and labour are purely variable costs since the
total costs change in direct proportion to annual production units. Material costs are $2 per
unit and labour is $6 per unit.
Since the overhead costs do not vary in proportion to the units produced and are not
constant in total they must represent a semi variable cost.
(a)
(i) The optimum selling price occurs where marginal cost = marginal revenue.
Marginal cost is assumed to be the same as variable cost. From the data it can be
determined that the costs of direct materials and direct labour are wholly variable and
total $8 per unit. [($200,000+ $600,000) / 100,000]
The overhead costs appear to be semi-variable and will be analysed using the High Low
method:
Units $000
High 200,000 1,460
Low 100,000 880
Difference 100,000 580
Thus, the variable overhead cost per unit is $580,000 / 100,000 = $5.80. The total
variable cost per unit is therefore $13.80.
EXAM SMART
An alternative working for part (ii) for the price/demand relationship would be as follows.
1
𝑏 = 25,000 = 0.00004
Where P = $25, X = 150,000 and b = 0.00004
Co
Therefore 25 = a - 0.00004 × 150,000
25 = a - 6
Fir
st I pyri
a = 31
Therefore P = 31 - 0.00004X
ntu ght
itio
(ii) The price at which there is zero demand can be calculated to be $25 + ((150,000/25,000)
n2
× $1)) = $31
There is a change in demand of 25,000 units for every $1 change in selling price so the
017
equation of the selling price is:
$31 ─ 0.00004x
And thus the equation for marginal revenue is:
$31 ─ 0.00008x
Equating marginal cost and marginal revenue gives:
13.80 = 31 ─ 0.00008x
─17.20 = ─0.00008x
─17.2/-0.00008 = x = 215,000
If x = 215,000 then the optimum selling price is:
$31 ─ (0.00004 × 215,000) = $22.40

The situation described above was compounded in part (b) when candidates attempted to
explain figures that were completely incorrect.
Example 1: explaining an optimum selling price of $5
Example 2: discussing an output figure of 3.34 million units
Common errors
 Submitting reasons in part (b) that did not relate to the figure calculated in part (a)(ii).
 Unclear workings.
 Submitting lengthy answers when addressing part (b) that were disproportionate to the
marks available.
(b) There are many reasons why this price may not be used (candidates are expected to explain
TWO).
 There may be inaccuracies in the demand forecasts at different prices because the model
assumes that demand is driven solely by price. In fact there are many different factors
that influence demand; these include advertising, competitor actions and changing
fashions / tastes.
 The model also assumes that the relationship between price and demand is static
whereas in reality it is regularly changing.
 There may be inaccuracies in the determination of the marginal cost, the assumption that
marginal cost equals variable cost may itself be invalid, but even if this is acceptable then
the assumption that all variable costs vary with volume is unrealistic. Some of these costs
may be driven by factors other than volume. Again there is an assumption the unit
variable cost is unchanging once it has been determined.
(c)
ht
Market skimming
7
r i g 0 1
Market skimming is a strategy that attempts to exploit those areas of the market which are
2
y
relatively insensitive to price changes. Initially, high prices for the webcam would be charged in
o p ion
order to take advantage of those buyers who want to buy it as soon as possible, and are
C uit
prepared to pay high prices in order to do so.
t
The existence of certain conditions is likely to make the strategy a suitable one for WX. These
I n
are as follows:
rst  Where a product is new and different, so that customers are prepared to pay high prices
Fi
in order to gain the perceived status of owning the product early. The webcam has
superior audio sound and visual quality, which does make it different from other
webcams on the market.
 Where products have a short life cycle this strategy is more likely to be used, because of
the need to recover development costs and make a profit quickly. The webcam does only
have a two-year life cycle, which does make it rather short.
 Where high prices in the early stages of a product’s life cycle are expected to generate
high initial cash inflows. If this were to be the case for the webcam, it would be
particularly useful for WX because of the current liquidity problems the company is
suffering. Similarly, skimming is useful to cover high initial development costs, which
have been incurred by WX.
 Where barriers to entry exist, which deter other competitors from entering the market;
as otherwise, they will be enticed by the high prices being charged. These might include
prohibitively high investment costs, patent protection or unusually strong brand loyalty.
It is not clear from the information whether this is the case for WX.
 Where demand and sensitivity of demand to price are unknown. In WX’s case, market
research has been carried out to establish a price based on the customers’ perceived
value of the product. The suggestion therefore is that some information is available
about price and demand, although it is not clear how much information is available.
 It is not possible to say for definite whether this pricing strategy would be suitable for
WX, because of the limited information available. However, it does seem unusual that a
high-tech, cutting edge product like this should be sold at the same price over its entire,
short life cycle. Therefore, price skimming should be investigated further, presuming that
this has not already been done by WX.
Marking guide Marks
(a)
Calculate the variable cost per unit 2
Determine the selling price equation 2
Calculate the optimum selling price per unit 2
(b)
Explain two reasons why the company might not use this optimum price – two marks each) 4
(c)
Explanation 2
Discussion of each condition – max two marks each 7
Conclusion 1
Dealing with risk and uncertainty in decision making
Fir Co
st I pyri
3 GYM BUNNIES
ntu ght
(a) Option 1
itio
Net income = $720 – $80 = $640 per annum.
Total annual income = $640 × 5,250 = $3.36m
Option 2
n2
017
If costs $120 per annum, net income = $720 – $120 = $600 per annum.
If costs $180 per annum, net income = $720 – $180 = $540 per annum.
Total annual income
If membership 6,000 (A):
$600 × 6,000 = $3.6m
$540 × 6,000 = $3.24m
If membership 6,500 (B):
$600 × 6,500 = $3.9m
$540 × 6,500 = $3.51m
Expected value and decision:
EV at A = (0.5 × $3.6m) + (0.5 × $3.24m) = $3.42m
EV at B = (0.5 × $3.9m) + (0.5 × $3.51m) = $3.705m
EV at C = (0.4 × $3.42m) + (0.6 × $3.705m) = $3.591m per annum
At D, compare EV of:
Option 1: (3 × $3.36m) = $10·08m
Option 2: (3 × $3.591m) – $360k = $10·413m
Therefore choose option 2 – expand exercise studio.
Net income $3.36 per annum
Net income $600 per annum Net income $3.6 per annum
Option 1
$3.42m
$10.413m 5,250 members: net per annum 0.5
income $640 per annum
A
D
0.5
6,000 members
Option 2 Net income $540 per annum Net income $3.24 per annum
$(360k)
0.4
$3.591m C
per annum Net income $600 per annum
0.6 Net income $3.9 per annum
$3.705
6,500 members per annum 0.5
B
0.5
ht 7
Net income $540 per annum Net income $3.51 per annum
r
i g 2 0 1
y
p ion
o
Part (b) asked candidates to calculate the maximum price that the company should pay for
C uit
perfect information about the expansion’s exact effect on membership numbers. Very few
t
candidates answered part (b) correctly. Candidates must revise this area well.
EXAM SMART
t I n
Fi rs
Remember that the value of perfect information (VOPI) is calculated be working out the
difference between what the EV would be if you had perfect information (in this case this
would be knowledge of what the membership numbers would change to) compared to the
EV if you didn’t have this knowledge. It might help to consider this in tabular format. The
values in the table represent the net income figures over the full three-year period
Expansion option
Option 1 Option 2
$ $
6,000 members under option 2 (see note 1 below) $10.08m $9.9m
6,500 members under option 2 $10.08m $10.755m
Note 1
If option 1 is undertaken you know you will get net income of $3.36m pa (5,250 × {720 –
80}), hence over three years this is $10.08m. If we choose option 2 and it turns out member
numbers are 6,000 then the return is $9.9m. (Net income of 3 yrs × $3.42m (see decision
tree) = $10.26m less the capital costs of $0.36m = $9.9m.)
If we don’t have perfect information about the membership levels then the EV’s are as per
the examiners workings above, namely;
Option 1 = $10.08m
Option 2 = $10.413m
So, without perfect information you’d choose option 2 per the tree and get an EV of
$10.413m. With perfect information the following can be concluded. If you knew membership
was going to be 6,000 (prob = 0.4), you would choose option 1 and get $10.08m whereas if
you knew membership was going to be 6,500 (prob = 0.6) you would choose option 2 and get
$10.755m, giving an overall EV of $10.485m ({0.4x$10.08m} + {0.6x$10.755m})
The VOPI is therefore $10.485m - $10.413m = $0.072m
(a) With perfect information:

If membership numbers were 6,000:
EV = $3.42m × 3 = $10.26m
Less costs of $360k = $9.9m
Therefore, with these membership numbers, GB would choose option 1 instead.
If membership numbers were 6,500:
EV = $3.705 × 3 = $11.115m
Less costs of $360k = $10.755m
In this instance, GB would choose option 2.
So, if membership numbers are 6,000, of which there is a 0.4 probability, EV will be $10.08m
Fir Co
(option 1) and if membership numbers are 6,500, of which there is a 0.6 probability, then EV will
st I pyri
be $10.755m (option 2).
Therefore EV with perfect information = (0.4 × $10.08m) + (0.6 × $10.755) = $10.485m.
ntu ght
Without perfect information the EV is $10·413m, therefore the value of it is $72k ($10.485m –
itio
$10.413m). This represents the maximum price that GB should be prepared to pay for the
information.

n2
017
Part (c) asked for a brief discussion of using expected values for a decision of this nature.
It was only worth two marks, which is why the requirement asked for only a ‘BRIEF’
discussion. Many candidates spotted the most obvious point, which is that the expected
value criterion is useful for decisions that are repeated but is less relevant to one off
decisions of this nature since it merely gives a long run average of what the outcome would
be if a decision were repeated many times. However, marks could still be earned for making
points such as the fact that probabilities are difficult to ascertain etc. Please note that the
marks available for a requirement are indicative of the length of answer expected. Writing a
whole page of answer for this requirement is simply wasting valuable time that could have
been spent elsewhere.
(b) The expansion decision is a one-off decision, rather than a decision that will be repeated many
times. Expected values, on the other hand, give us a long run average of the outcome that
would be expected if a decision was to be repeated many times. The actual outcome may not
be very close to the expected value calculated and the technique is therefore not really very
useful here.
Also, estimating accurate probabilities is difficult because this exact situation has not arisen
before.
The expected value criterion for decision-making is useful where the attitude of the investor is
risk neutral. We do not know what the management of Gym Bunnies’ attitude to risk is, which
makes it difficult to say whether this criterion is a good one to use. In a decision such as this
one, it would be useful to see what the worst case scenario and best case scenario results
would be too, in order to assist decision-making.
(c) Methods of uncertainty reduction
Simulation
Computer models can be built to simulate real life scenarios. The model will predict what range
of returns the business could expect from a given decision without having risked any actual
cash. The models use random number tables to generate possible values for the uncertainty the
business is subject to. Again, computer technology is assisting in bringing down the cost of such
risk analysis.
Calculation of worst and best case figures
A business will often be interested in range. It enables a better understanding of risk. An
accountant could calculate the worst case scenario, including poor demand and high costs while
being sensible about it. He could also calculate best case scenarios including good sales and
minimum running costs. This analysis can often reassure the business. The production of a
probability distribution to show the business the range of possible results is also useful to
explain risks involved. A calculation of standard deviation is also possible.
Marking guide Marks
(a) Expected value and decision
ht
EV at A 2
EV at B
EV at C
r i g 0 1 7 2
2
y
p ion 2
Compare EVs at D 1
o
Recommendation that follows 1
C uit
8
(b) Price of perfect information
t
EV with 6,000 members 2
I n
EV with 6,500 members
t
2
rs
Price 2
Fi
6
(c) Discussion 2
(d) Simulation 2
Worst-best case figures 2
4
1 PC CO
Part (a) was where the bulk of the easy marks were on this paper: a requirement to identify
and explain six objectives of a budgetary control system. A good number of answers scored
full marks. On the whole, candidates either knew the answer or didn’t; there wasn’t much in
between.
EXAM SMART
If you had identified that the bulk of the easy marks on this paper were in this question, it
would have been worth your while attempting this question first.
Fir Co
st I pyri
(a) Objectives of a budgetary control system
ntu ght
 To compel planning
Budgeting makes sure that managers plan for the future, producing detailed plans in
itio
order to ensure the implementation of the company’s long-term plan. Budgeting makes
n2
managers look at the year ahead and consider the changes in conditions that might take
place and how to respond to those changes in conditions.
 To co-ordinate activities
017
Budgeting is a method of bringing together the activities of all the different departments
into a common plan. If an advertising campaign is due to take place in a company in three
months’ time, for example, it is important that the production department know about
the expected increase in sales so that they can scale up production accordingly. Each
different department may have its own ideas about what is good for the organisation.
For example, the purchasing department may want to order in bulk in order to obtain
bulk quantity discounts, but the accounts department may want to order in smaller
quantities so as to preserve cash flow.
 To communicate activities
Through the budget, top management communicates its expectations to lower level
management. Each department has a part to play in achieving the desired results of the
company, and the annual budget is the means of formalising these expectations. The
whole process of budget setting, whereby information is shared between departments,
facilitates this communication process.
 To motivate managers to perform well
The budget provides a basis for assessing how well managers and employees are
performing. In this sense, it can be motivational. However, if the budget is imposed from
the top, with little or no participation from lower level management and employees, it
can have a seriously demotivational effect. This is discussed further in part (b).
 To establish a system of control

Expenditure within any organisation needs to be controlled and the budget facilitates
this. Actual results are compared to expected results, and the reasons for any significant,
unexpected differences are investigated. Sometimes the reasons are within the control of
the departmental manager and he/she must be held accountable; at other times, they
are not.
 To evaluate performance
Often, managers and employees will be awarded bonuses based on achieving budgeted
results. This makes more sense than evaluating performance by simply comparing the
current year to the previous year. The future may be expected to be very different than
the past as economic conditions change. Also, events happen that may not be expected
to reoccur. For example, if weather conditions are particularly wet one year, a company
making and selling umbrellas would be expected to make higher than usual sales. It
would not be fair to assess managers against these historical sales levels in future years,
where weather conditions are more normal.
(Other possible objectives include:
 To delegate authority to budget holders
A formal budget permits budget holders to make financial decisions within the specified
limits agreed, i.e. to incur expenditure on behalf of the organisation.
t
 To ensure achievement of the management’s objectives
h 7
Objectives are set not only for the organisation as a whole but also for individual targets.
r i g 0 1
The budget helps to work out how these objectives can be achieved.)
2
y
p ion
o
C uit
Part (b) was a little more challenging: a requirement to discuss the concept of participative
t
budgeting in terms of the objectives identified in part (a). Answers to this were mixed, with
I n
some good attempts but some poor ones too. A small number of candidates didn’t know
t
what participative budgeting was (the clue is in the title) so they scored nothing. Others
Fi rs
managed to score marks by making some valid observations about it, even if they didn’t
necessarily tackle it in the best way, which was by using the objectives in part (a) as headings
in order to give the answer some structure.
EXAM SMART
Remember that participative budgeting is sometimes referred to as bottom up budgeting,
where there is more involvement from all across the organisation.
(b) Participative budgeting

‘Participative budgeting’ refers to a budgeting process where there is some level of involvement
from subordinates within the organisation, rather than budgets just being set by the top level of
management.
There are various views about whether participative budgeting is more effective than other
styles. Each of the objectives from part (a) is dealt with below, considering the extent to which
participative budgeting helps to achieve this.
 To compel planning
Participative budgeting will compel planning. Although participation can take many
forms, often it will take the form of bottom-up budgeting, whereby the participation
starts at the lowest level of management and goes all the way up to the top. If this is the
case, then planning is taking place at many levels, and should be more accurate than if it
simply takes place at a high level, by individuals who are not familiar with the day to day
needs of the business.
 To co-ordinate activities
Co-ordination of activities may become more time consuming if a participative style of
budgeting is used. This is because, not only does there need to be co-ordination between
departments but there also has to be co-ordination between the different levels of
management within each department. The process should be cumbersome but also
effective, with everyone knowing exactly what the plan is.
 To communicate activities
Communication will be particularly effective with participative budgeting, although how
effective depends on the extent of the participation. If all levels of management are
involved, from the bottom up, then all levels of management know what the plan is.
However, the plan may change as different departments’ budgets are reviewed together
and the overall budgeted profit compared to the top level management’s expectations. Hence, it
may be the case that those people involved in the initial budgets, i.e. lower level
management, have to deal with their budgets being changed.
 To motivate managers to perform well
If managers play a part in setting the budget, they are more likely to think that the figures
Fir Co
included in them are realistic.
st I pyri
Therefore, they are more likely to try their best to achieve them. However, it may be that
managers have built budgetary slack into their budgets, in an attempt to make
ntu ght
themselves look good. Therefore, managers could end up performing less well than they
would do had tougher targets been set by their superiors.
itio
 To establish a system of control
n2
In terms of establishing a system of control, it is largely irrelevant whether the budget
setting process is a participative one or not. What is important is that actual results are
017
compared to expected, and differences are investigated. This should happen irrespective
of the budget setting process. Having said that, control is only really effective if the
budgeted figures are sound. As stated above, whilst they are more likely to be realistic if
a participative style of budgeting is used, the system is open to abuse in the form of
budgetary slack.
 To evaluate performance
Managers will be appraised by comparing the results that they have achieved to the
budgeted results. A participative budget will be an effective tool for this provided that
participation is real rather than pseudo and provided that the managers have not built
slack into their figures, which has gone uncorrected.
[Examiner’s note: candidates would not be required to write all of this for the available marks.]
Marking guide Marks
(a) Objectives
Each objective 1½
Max 9
(b) Participative style of budgeting
Explaining participative budgeting 2
Each objective discussed in relation to it 1½
Max 11
Materials mix and yield variances
2 THE SAFE SOAP CO

The final question on the paper was for 15 marks and covered material mix and yield
variances. Part (a) asked for the calculations for these and was very well answered. It was
impressive to see the number of candidates who scored full marks here.
(a) Variance calculations

Mix variance
Total kg of materials per standard batch = 0·25 + 0·6 + 0·5 = 1·35 kg
Therefore standard quantity to produce 136,000 batches = 136,000 × 1·35 kg = 183,600 kg
Actual total kg of materials used to produce 136,000 batches = 34,080 + 83,232 + 64,200
= 181,512 kg
Actual Standard
Actual quantity quantity cost
t
Material Standard mix Actual mix Variance per kg Variance
i g h 1 7
r 0
kgs kgs kgs $ $
y 2
Lye 181,512 × 0·25/1·35 = 33,613·33 34,080 (466·67) 10 (4,666·70)
p ion
Coconut oil 181,512 × 0·6/1·35 = 80,672 83,232 (2,560) 4 (10,240)
o
Shea butter 181,512 × 0·5/1·35 = 67,226·67 64,200 3,026·67 3 9,080·01
C uit
181,512 181,512 (5,826·69)A
n t
Yield variance
I
Actual
rst
Standard quantity quantity Standard
Fi
Material Standard mix Standard mix Variance cost per kg Variance
kgs kgs $ $
Lye 0·25 × 136,000 = 34,000 33,613·33 386·67 10 3,866·70
Coconut oil 0·6 × 136,000 = 81,600 80,672 928 4 3,712
Shea butter 0·5 × 136,000 = 68,000 67,226·67 773·33 3 2,319·99
183,600 181,512 9,898·69F

Part b(i) asked for a brief explanation of what each of the variances indicates about
production at the company, Safe Soap Co. Some candidates did not read the question
properly and started discussing the manager’s performance. This was not what the question
asked so – future candidates – make sure that you always read requirements carefully. So,
for example, as regards the adverse material mix variance, answers should have stated that
it shows that the mix of materials used in October was more expensive than the standard
mix. It was surprising to see that many candidates did not know that this is what an adverse
materials mix variance shows. This was similar to some of the responses to question 2,
where the calculations were done reasonably well but understanding of what the
calculations actually meant was sometimes lacking.
Part b (ii) also proved problematic for a number of candidates. It read ‘discuss whether the
sales manager could be justified in claiming that the change in the materials mix has caused
an adverse sales volume variance in October.’ The expectation was that candidates would
identify the fact that the change in mix could have led to the adverse sales volume variance
but it cannot be definitively said that it did. Many answers tried to make it a black and white
matter i.e. yes or no, when in fact the answer was grey.
Quite a few candidates said that the sales manager couldn’t be justified in his claims because
a more expensive mix of materials was used and this means sales volumes should go up.
Again, it’s simply not as straight-forward as this. A more expensive mix might be used in
production but this doesn’t mean that a product will necessarily be better. In the case of
something like soap, adhering to a certain formula is very important.
(b)
(i) A materials mix variance will occur when the actual mix of materials used in production is
different from the standard mix. So, it is inputs which are being considered. Since the
total mix variance is adverse for the Safe Soap Co, this means that the actual mix used in
September and October was more expensive than the standard mix.
A material yield variance arises because the output which was achieved is different from
the output which would have been expected from the inputs. So, whereas the mix
variance focuses on inputs, the yield variance focuses on outputs. In both September and
October, the yield variance was favourable, meaning that the inputs produced a higher
level of output than one would have expected.
Fir Co
(ii) Whilst the mix and yield variances provide Safe Soap Co with a certain level of
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information, they cannot address any quality issues which arise because of the change in
mix. The consequences of the change may well have an impact on sales volumes. In Safe
Soap Co’s case, the sales volume variance is adverse, meaning that sales volumes have
ntu ght
fallen in October. It is not known whether they also fell in September but it would be
usual for the effects on sales of the change in mix to be slightly delayed, in this case by
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one month, given that it is only once the customers start receiving the slightly altered
n2
soap that they may start expressing their dissatisfaction with the product.
There may also be other reasons for the adverse sales volume variance but given the
(c)
taken on board. 017
customer complaints which have been received, the sales manager’s views should be
(i) Expenditure variance

Cost driver rate = $40,500/30 = $1,350
Expected cost therefore = 36 × $1,350 $48,600
Actual cost $45,400
Variance $3,200 F
(ii) Efficiency variance

Expected no. of batches per set up
120,000/30 = 4,000
Therefore, expected no. of set ups for 136,000 = 136,000/4,000 = 34
Actual number of set ups 36
Difference 2A
× standard rate per set up $1,350

Variance $2,700 A
Marking guide Marks

Mix variance 4
Quantity variance 4
8
(b) (i) Variances
Marks per variance explained 2 4
(ii) Discussion
Per valid point 1 2
(c) (i) Expenditure variance 3
(ii) Efficiency variance 3
3 BEDCO
(a) Planning and operational variances
t
(i) Material Price Planning Variance (MPPV)
i g h 1 7 (Standard price – revised price) × actual quantity
y r 2 0
Sheets ($5 – $6) × 248,000 = $248,000 adverse
p ion
Pillow cases ($5 – $6) × 95,000 = $95,000 adverse
o
C uit (ii)
Total $343,000 adverse
Material Price Operational Variance (MPOV)
I n t (Revised price – actual price) × actual quantity
rst
Sheets ($6 – $5.80) × 248,000 = $49,600 favourable
Fi
Pillow cases ($6 – $5.80) × 95,000 = $19,000 favourable
Total $68,600 favourable
(iii) Material Usage Planning Variance (MUPV)
(Standard quantity for actual production – revised quantity for
actual production) × standard price
RQ for each pillow case = 0·5 m × 1·1 = 0·55 m
Sheets (240,000 – 240,000) × $5 = 0
Pillow cases (90,000 – 99,000) × $5 = $45,000 adverse
(iv) Material Usage Operational Variance (MUOV)
(Actual quantity – revised quantity for actual production) ×
standard price
Sheets (248,000 – 240,000) × $5 = $40,000 adverse
Pillow cases (95,000 – 99,000) × $5 = $20,000 favourable
(b) Performance of the Production Manager

In total, there has been an overspend of $339,400, which looks poor. However, when the
reasons for this are examined, together with the variances calculated in (a), it is apparent that
the production manager cannot be held solely responsible for the overspend. In fact, he has had
little control over the situation.
Increase in cotton price
Since cotton is used to make bed sheets and the price of this rose in the world market by 20%,
the Production Manager’s performance has to be looked at in light of this. Because of the
increased market price, the adverse material price planning variance is very high, since the
budgeted cost of $5 per m2 was far below the actual market price of $6 per m2. The Production
Manager cannot be held responsible for this since he does not set the standard costs. He can
only be held responsible for any difference in price between the $6 market price and the $5.80
actual price paid. Since the $5.80 paid per m2 is less than the market price of $6 per m2, the
Production Manager performed well, as shown by the favourable material price operating
variance of $68,600.
Increase in amount of cotton used
Since more cotton was used for actual production than budgeted, a total adverse material
usage variance of $65,000 ($45,000 + $20,000) arose. However, of this, $45,000 (material usage
planning variance) arose because of the request for a change in the design of the pillowcases by
Co
Bedco’s customer. This was not within the control of the Production Manager and his
Fir
performance should not therefore be assessed on it. However, an adverse material usage
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operational variance of $20,000 also arose; the performance of the Production Manager is weak
here. Most of the adverse operational variance actually related to the production of bed sheets
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rather than pillowcases. It is not clear why this arose but it is definitely poor. Bedco was also
unable to produce all the pillowcases ordered by its customer in November as the order fell
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short by 10,000 units. If this was genuinely because of the late design change, however, it
seems unfair to judge the Production Manager on this.
Marking guide
n2 Marks
MPPV
MPOV
017 3
3
MUPV 3
MUOV 3
Max 12
(b) Discussion
Each valid point 2
Max 8
4 JUMP
Part (a) examined the calculation of bonuses for a manager based on a set of given targets;
answers to this were good on the whole.
(a) Bonus calculation:

Qtr to Qtr to Qtr to Qtr to Bonus hits
30/06/09 30/09/09 31/12/09 31/03/10
Staff on time
On-time % 430/450 = 452/480 = 442/470 = 460/480 =
95.5% 94.2% 94.0% 95.8% 2
Bonus earned? Yes No No Yes
Members visits
Target visits 60% × 3,000 ×12 60% × 3,200 × 12 60% × 3,300 × 12 60% × 3,400 × 12
t
= 21,600 = 23,040 = 23,760 = 24,480
Actual visits
i g h 1 7
20,000 24,000 26,000 24,000
r 0
Bonus earned? No Yes Yes No 2
y
p ion 2
o
Personal training
C uit
Target 10% × 3,000 10% × 3,200 10% × 3,300 10% × 3,400
= 300 = 320 = 330 = 340
t
Actual sessions 310 325 310 339
I n
Bonus earned Yes Yes No No 2
rst
Total 6
Fi
The bonus earned by the manager would be 6 × $400 = $2,400, which is 50% of the total bonus available.

Part (b) required a discussion of the extent to which the three targets set were controllable
by managers. For a narrative requirement, this was fairly well answered overall.
A minority of candidates did misread the requirement though and instead gave commentary
on the extent to which the targets had been met in the year.
EXAM SMART
Follow the clues given by the Examiner in the requirement. Here:
 There are three targets given: a sub-heading for each one would give a clear line of
demarcation between each part of the question.
 There are nine marks awarded for this requirement: three marks per target.
 The requirement states that you need to make a case for both sides of the argument.
Therefore your answer needs to be balanced.
 Focus on how much control you think the manager has. Form a conclusion on this for
each target if you can.
(b) An important principle of any target-based bonus system is that the targets must be based on
controllable aspects of the manager’s role.
Staff on time
The way in which a manager manages staff can have a big bearing on whether or not an
individual staff member is keen to work and arrive on time. We are told that the local manager
has the power to vary employment contracts so he should be able to agree acceptable shift
patterns with staff and reward them for compliance. In this respect the lateness of staff is
controllable by the manager.
On the other hand, an individual staff member may be subject to home pressures or problems
with public or other transport meaning that even they cannot control the time of arrival at work
on some days. The manager cannot control these events either. If this problem became regular
for a member of staff, then the local manager could vary the contract of employment
accordingly.
Overall, lateness to work is controllable by the local manager.
Member use of facilities
The local manager controls the staff and hence the level of customer service. Good quality
customer services would probably encourage members to use the facilities more often. Equally,
by maintaining the club to a high standard, then the local manager can remove another
potential reason for a member not to use the facilities regularly.
Fir Co
On the other hand, customers are influenced by many factors outside of the club. Their state of
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health or their own work pressures can prevent members being able to come to the club.
ntu ght
Overall, the local manager can only partly control the number of member visits.
Personal training sessions
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Again, the local manager controls the level of customer service and the standard of
n2
maintenance in the personal training department. He also has control over prices so, if the
bookings fall, he is able to reduce prices or make special offers to encourage use of the facilities.
017
On the other hand, personal training sessions may be seen as a luxury by customers and in
times of financial difficulty they are expendable by them. Personal training sessions are often
available from other sources and competition can force down the sales of the club. The
manager can respond to that by improving services. He cannot, however, make significant
investment in improving the facilities without board approval.
Overall, the local manager can only partly control the number of personal training sessions
booked.

Again, there were some good answers here, with only a minority of candidates talking about
manipulating profits, which wasn’t relevant to a business where profit based targets weren’t
being used.
EXAM SMART
In this requirement you should have focused on the instances where no bonus would be
received and think about whether it would have been possible to manipulate the figures to
hit a bonus target in any of those situations.
(c) There are a variety of methods by which the performance data can be manipulated.
Cut off
The unethical manager could record visits in a different period than was actually the case. For
example, in quarter three the target for personal training sessions was not met by 20 sessions.
This was probably obvious to the manager in the last few days of that quarter. He could have
therefore recorded some sessions as having taken place in the next quarter. Indeed, only one
session would have to be moved in this way in order for the manager to meet the target in the
final quarter and gain another $400 of bonus.
Reduce prices to below economic levels to encourage use
The targets that the manager is subject to are mainly volume driven. A reduction in prices would
harm profitability but would not damage the manager’s bonus potential. More sessions are
bound to follow if the price is set low enough. (Other ideas would be acceptable, including
advising staff to take the day off if they were going to be late. This would damage service levels
admittedly, but would potentially gain a bonus for lateness.)
Marking guide Marks
(a) Per target 2 Max 6
(b) For each target – supporting controllability 1½
For each target – denying controllability 1½ Max 9
t
(c) For each idea of manipulation, up to 2½ Max 5
g h 1 7
y r i 2 0
o p ion
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I n t
r st
Fi
1 WEB CO
This was a classic performance management question and was generally well-answered by
candidates compared to other questions on the paper. The company in the question had
made certain changes and introduced some incentives in order to boost sales and the
requirement asked for a discussion of whether these changes and incentives had been
effective. As usual, it was necessary to do some preliminary calculations in order to assess
performance and candidates should be reminded that absolute figures are rarely useful and
percentage changes are far more informative.
The most common weakness in answers was the classic commentary stating that, for
example, “Sales have gone up, which is good.” Comments such as these simply won’t score
Fir Co
marks. Candidates needed to consider the relationship between the data and calculations
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with the information given in the question, in this case relating to the changes and incentives
introduced. If this link is not being made, rarely will comments score marks.
ntu ght
Good candidates identified that, although sales had increased by 25%, net profit had
decreased by 33%, but this was due to the mass of expenses that had been incurred in
itio
bringing about the changes. Consequently, the benefits of these changes would be expected
to continue for some time, and it would certainly be useful to see quarter 3’s results when
n2
these were available.
017
Poorer candidates seemed to think that the decrease in net profit margin was a sign that
things were going wrong and cost of sales must be increasing dramatically. Again, I would
emphasise that, at this level, candidates are expected to link the information in the scenario
with the data and their calculations in order to draw valid conclusions. The candidates
producing weaker answers appeared almost not to have read the scenario and simply to
have read the data. In a question like this, it is really useful to annotate the written parts of
the scenario and where, for example, it states that $200,000 has been spent on advertising,
note down next to it the calculations that might help to analyse the effect of that (NPM,
increase in sales.) Then, when writing answers, the link has already been noted down and is
ready to be discussed.
As far as the calculations go, it is useful to produce a small schedule either at the beginning
or end of the answer with all workings on. This makes it easy to mark and see where the
calculations have come from, so that credit can still be given even where minor errors have
been made.
EXAM SMART
In exams it is important to not make silly mistakes. For example, it is very easy to misread a
calculator and see the increase in subscriptions as 259% and not 159%. You need to work
steadily and methodically, clearly showing workings as you progress.
Also do be imaginative in your calculations and make sure you talk about them too!
For example, if the profit margin had been maintained at 25% then profit would have been:
$2750k × 25% = $687.5k. With the actual profit only being $459,250, this is a shortfall of
$228,250. This then gives you room to think why this has happened and what the impact
could be.
You could calculate the average spend per visit – it has risen from $54.14 to $55.44, a 2%
increase and so on.
Since you have to relate the performance to changes in incentives you should start off by
identifying what the changes in incentives are. Then use clear subheadings to break your
answer down for the Examiner to make it easy for the markers to award you marks.
Web Co has made three changes and introduced two incentives in an attempt to increase sales. Using
the performance indicators given in the question, it is possible to assess whether these attempts have
been successful.
Total sales revenue
This has increased from $2.2 million to $2.75m, an increase of 25% (W1). This is a substantial increase,
especially considering the fact that a $10 discount has been given to all customers spending $100 or
more at any one time. However, because a number of changes and incentives have been introduced, it
is not possible to assess how effective each of the individual changes/incentives has been in increasing
sales revenue without considering the other performance indicators.
ht
Net profit margin (NPM)
7
r i g 0 1
This has decreased from 25% to 16.7%. In $ terms this means that net profit was $550,000 in Quarter 1
2
y
and $459,250 in Quarter 2 (W2). If the 25% NPM had been maintained in Quarter 2, the net profit
o p ion
would have been $687,500 for Quarter 2. It is therefore $228,250 lower than it would have been. This
C uit
is mainly because of the $200,000 paid out for advertising and the $20,000 paid to the consultant for
the search engine work. The remaining $8,250 difference could be a result of the cost of the $10
n t
discounts given to customers who spent more than $100, depending on how these are accounted for.
t I
Alternatively, it could be due to the costs of providing the Fast Track service. More information would
rs
be required on how the discounts are accounted for (whether they are netted off sales revenue or
Fi
instead included in cost of sales) and also on the cost of providing the Fast Track service.
While it is not clear how long the advert is going to run for in the fashion magazine, $200,000 does
seem to be a very large cost.
This expense is largely responsible for the fall in NPM. This is discussed further under ‘number of visits
to website’.
Number of visits to website
These have increased dramatically from 101,589 to 141,714, an increase of 40,125 visits (39.5% W3).
The reason for this is a combination of visitors coming through the fashion magazine’s website (28,201
visitors W5), with the remainder of the increase most probably being due to the search engine
consultants’ work. Both of these changes can therefore be said to have been effective in improving the
number of people who at least visit Web Co’s online store. However, given that the search engine
consultant only charged a fee of $20,000 compared to the $200,000 paid for magazine advertising, in
relative terms, the consultant’s work provided value for money. Web Co’s sales are not really high
enough to withstand a hit of $200,000 against profit, hence the fall in NPM.
Number of orders/customers spending more than $100
The number of orders received from customers has increased from 40,636 to 49,600, an increase of
22% (W4). This shows that, while most of the 25% sales revenue increase is due to a higher number of
orders, 3% of it is due to orders being of a higher purchase value. This is also reflected in the fact that
the number of customers spending more than $100 per visit has increased from 4,650 to 6,390, an
increase of 1,740 orders. So, for example, if each of these 1,740 customers spent exactly $100 rather
than the $50 they might normally spend, it would easily explain the 3% increase in sales that is not due
to increased order numbers. It depends partly on how the sales discounts of $10 each are accounted
for. As stated above, further information is required on these.
An increase in the number of orders would also be expected, given that the number of visitors to the
site has increased substantially.
This leads on to the next point.
Conversion rate – visitor to purchaser
The conversion rate of visitors to purchasers has gone down from 40% to 35%. This is not surprising,
given the advertising on the fashion magazine’s website. Readers of the magazine may well have
clicked on the link out of curiosity and may come back and purchase something at a later date. It may
be useful to have a breakdown of the visitor to purchaser rate, showing one statistic for visitors who
have come from the online magazine and one for those who have not. This would help clarify the
position.
Website availability
Rather than improving after the work completed by Web Co’s IT department, the website’s availability
has stayed the same. This means that the IT department’s changes to the website have not corrected
the problem. Lack of availability is not good for business, although its exact impact is difficult to
ascertain. It may be that visitors have been part of the way through making a purchase only to find
Fir Co
that the website then becomes unavailable. More information would need to be available about
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aborted purchases, for example, before any further conclusions could be drawn.
Subscribers to online newsletter
ntu ght
These have increased by a massive 159%. It is not clear what impact this has had on the business as we
itio
do not know whether the level of repeat customers has increased. This information is needed.
Surprisingly, it seems that there has not been an increased cost associated with providing Fast Track
n2
delivery, as the whole fall in net profit has been accounted for, so one can only assume that Web Co
managed to offer this service without incurring any additional cost itself.
Conclusion
017
With the exception of the work carried out to make the system more available, all of the other
measures seem to have increased sales or, in the case of Incentive 1, increased subscribers. More
information is needed in relation to a couple of areas, as noted above. The business has therefore
been responsive to changes made and incentives implemented but the cost of the advertising was so
high that, overall, profits have declined substantially. This expenditure seems too high in relation to
the corresponding increase in sales volumes.
Workings
1 Increase in sales revenue ($2.75m ─ $2.2m)/$2.2m = 25% increase.
2 NPM: 25% × $2.2m = $550,000 profit in Quarter 1.
16.7% × $2.75m = $459,250 profit in Quarter 2.
3 No. of visits to website: increase = (141,714 ─ 101,589)/101,589 = 39.5%
4 Increase in orders = (49,600 ─ 40,636)/40,636 = 22%
5 Customers accessing website through magazine line = 141,714 × 19.9% = 28,201
6 Increase in subscribers to newsletter = (11,900 ─ 4,600)/4,600 = 159%
Marking guide Marks

Calculations 4
Missing info 3
Discussion and further analysis (2 to 3 marks per point) 18
Conclusion 2 Max 20
2 AT CO
This was a typical performance measurement question. There was quite a lot of information
to absorb but I strongly believe that, unless you are given plenty of information to work
with, it is only possible to make very generalised, insipid comments. This is not what F5 is all
about. I want candidates to be able to handle information and make some quality analysis
about it. It requires common sense and ability to link information. This should not be too
much to ask of a part-qualified accountant, who would have to exhibit these qualities in the
workplace.
Needless to say, answers were poor. Anyone who had read my article on this area, or indeed
ht 7
my predecessor’s article on this area, would know that insipid comments such as ‘turnover
i g 1
decreased by 8.3%, which is poor’ will score only a calculation mark, for working out the
y r 2 0
8.3%. Is this decrease in turnover poor? Well, it depends on the market in which the
p ion
company is operating. You have to read the scenario. When you take into account the fact
o
that there has been a 20% decline in the demand for accountancy training, AT Co’s 8.3%
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looks relatively good. You must link information; this is an essential skill for any accountant.
t
Nothing is ever what it seems...ask any auditor!
I n
Let me also take the opportunity to distinguish between an acceptable comment, which
t
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might earn one mark, compared to a good point, which might earn two marks. Cost of sales
Fi
fell by $10.022m in the year. Part of this reduction was down to a fall in freelance lecture
costs. A good candidate would have commented that, whilst the company requested that
freelance lecturers reduce their fees by 10%, the actual fee reduction gained was 15%, a
strong performance. A comment such as this would have earned two marks. A less
observant comment, earning one mark, would have been that the reduction in cost of sales
was partly due to the fact that the company requested freelance lecturers to reduce their
fees by 10%.
I hope that this question will serve as a good revision question to future examinees of F5.
The information given is there to help you make worthwhile comments. It is not there to trip
you up. When planning the question, you should annotate it carefully, cross-referencing
different parts of the question, linking financial and non-financial information etc.
EXAM SMART
Let’s develop the examiner’s points about the good commentary about the freelance
lecturer costs. A good style is to think:
 What has happened (often the number calculated)?
 Why has it happened (root cause – often given in the question)?
 So what or what then (your judgement and/or the possible consequence)?
By thinking of this, you should be able to not only pick up the computation marks but also
the ‘good’ standard narrative marks.
For example:
Cost of sales:
This fell by $10.022m (19.2%) over the year (what). This impressive cost reduction was
largely caused by (so what) AT Co requiring freelance tutors to reduce their fees by 10%
(why). Freelance fees were however cut by 15.0% (W1), creating major cost savings (why).
AT Co will need to maintain freelance tutor goodwill, so seeking future major fee reductions
may not be possible (what then).
Working 1
2009 freelance fees: 35% x $41.663m = $14.582m
2010 freelancer fees = $12.394m
12.394−14.582
% fall = 14.582
× 100% = -15.0%
Turnover
Turnover has decreased from $72.025 million in 2009 to $66.028 million in 2010, a fall of 8.3%.
However, this must be assessed by taking into account the change in market conditions, since there
Fir Co
has been a 20% decline in demand for accountancy training. Given this 20% decline in the market
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place, AT Co’s turnover would have been expected to fall to $57.62m if it had kept in line with market
conditions. Comparing AT Co’s actual turnover to this, its actual turnover is 14.6% higher than
ntu ght
expected. As such, AT Co has performed fairly well, given market conditions.
It can also be seen from the non-financial performance indicators that 20% of students in 2010 are
itio
students who have transferred over from alternative training providers. It is likely that they have
transferred over because they have heard about the improved service that AT Co is providing. Hence, they
n2
are most likely the reason for the increased market share that AT Co has managed to secure in 2010.
017
Cost of sales
Cost of sales has decreased by $10.022m (19.2%) in 2010. This must be considered in relation to the
decrease in turnover as well. In 2009, cost of sales represented 72·3% of turnover and in 2010 this
figure was 63.7%. This is quite a substantial decrease. The reasons for it can be ascertained by, firstly,
looking at the freelance staff costs.
In 2009, the freelance costs were $14.582m. Given that a minimum 10% reduction in fees had been
requested to freelance lecturers and the number of courses run by them was the same year on year,
the expected cost for freelance lecturers in 2010 was $13.124m. The actual costs were $12.394m
($2.2m lower than 2009). These show that a fee reduction of 15% was actually achieved. This can be
seen as a successful reduction in costs.
Other cost savings must have occurred. Permanent staff numbers have remained constant as have
their salaries at about $27m. Given that of the $10.0m overall reduction in cost of sales, $2.2m savings
arose from freelancer savings, $7.8m will have come from other sources. $4m savings have been
gained by moving to electronic marking of progress tests. This appears to be a sensible move and will
lead to lower marking costs going forward. The remaining $3.8m savings may have arisen due to less
costs being incurred in other activities relating to student numbers. The fall in student numbers over
the year causing cost savings.
Gross profit
As a result of the above, the gross profit margin has increased in 2010 from 27.7% to 36.3%. This is a
big increase and reflects very well on management.
Indirect expenses
 Marketing costs: These have increased by 42.1% in 2010. Although this is quite significant, given
all the improvements that AT Co has made to the service it is providing, it is very important that
potential students are made aware of exactly what the company now offers. The increase in
marketing costs has been rewarded with higher student numbers relative to the competition in
2010 and these will hopefully continue increasing next year, since many of the benefits of
marketing won’t be felt until the next year anyway. The increase should therefore be viewed as
essential expenditure rather than a cost that needs to be reduced.
 Property costs: These have largely stayed the same in both years.
 Staff training: These costs have increased dramatically by over $2 million, a 163.9% increase.
However, AT Co had identified that it had a problem with staff retention, which was leading to a
lower quality service being provided to students. Also, due to the introduction of the interactive
website, the electronic enrolment system and the online marking system, staff would have
needed training on these areas. If AT Co had not spent this money on essential training, the
quality of service would have deteriorated further and more staff would have left as they
became increasingly dissatisfied with their jobs. Again, therefore, this should be seen as
essential expenditure.
Given that the number of student complaints has fallen dramatically in 2010 to 84 from 315, the
staff training appears to have improved the quality of service being provided to students.
 Interactive website and the student helpline: These costs are all new this year and result from
ht
an attempt to improve the quality of service being provided and, presumably, improve pass
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rates. Therefore, given the increase in the pass rate for first time passes from 48% to 66% it can
r 0
be said that these developments have probably contributed to this. Also, they have probably
y
p ion 2
played a part in attracting new students, hence improving turnover.

o
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Enrolment costs have fallen dramatically by 80·9%. This huge reduction is a result of the new
electronic system being introduced. This system can certainly be seen as a success, as not only
t
has it dramatically reduced costs but it has also reduced the number of late enrolments from
I n
297 to 106.
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Net operating profit
Fi
This has fallen from $3.635m to $2.106m. On the face of it, this looks disappointing but it has to be
remembered that AT Co has been operating in a difficult market in 20Y0. It could easily have been
looking at a large loss. Going forward, staff training costs will hopefully decrease. Also, market share
may increase further as word of mouth spreads about improved results and service at AT Co. This may,
in turn, lead to a need for less advertising and therefore lower marketing costs.
It is also apparent that AT Co has provided the student website free of charge when really it should
have been charging a fee for this. The costs of running it are too high for the service to be provided
free of charge and this has had a negative impact on net operating profit.
[Note: Students would not have been expected to write all this in the time available.]
Workings (Workings in $000)
1 Turnover
Decrease in turnover = $72,025 – $66,028/$72,025 = 8.3%
Expected 2010 turnover given 20% decline in market = $72,025 × 80% = $57,620
Actual 2010 turnover CF expected = $66,028 – $57,620/$57,620 = 14.6% higher
2 Cost of sales
Decrease in cost of sales = $42,056 – $52,078/$52,078 = 19·2%
Cost of sales as percentage of turnover: 2009 = $52,078/$72,025 = 72.3%
2010 = $42,056/$66,028 = 63.7%
Freelance staff costs: in 2009 = $41,663 × 35% = $14,582
Expected cost for 2010 = $14,582 × 90% = $13,124
Actual 2010 cost = $12,394
$12,394 – $14,582 = $2,188 decrease
$2,188/$14,582 = 15% decrease in freelancer costs
3 Gross profit margin
2009: $19,947/$72,025 = 27.7%
2010: $23,972/$66,028 = 36.3%
4 Increase in marketing costs = $4,678 – $3,291/$3,291 = 42.1%
5 Increase in staff training costs = $3,396 – $1,287/$1,287 = 163.9%
6 Decrease in enrolment costs = $960 – 5,032/5,032 = 80.9%
7 Net operating profit
Decreased from $3,635 to $2,106. This is fall of 1,529/3,635 = 42.1%
Marking guide
Fir Co Marks
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Turnover:
8.3% decrease ½
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Actual turnover 14.6% higher ½
Performed well CF market conditions 1
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Transfer of students 1
Max 3
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Cost of sales:
19.2% decrease ½
017
63.7% of turnover ½
15% fee reduction from freelance staff 2
Other costs of sale fell by $3.8m 2
Online marketing saving $4m 1
Max 5
Gross profit – numbers and comment 1
Indirect expenses:
Marketing costs 42.1% increase ½
Increase necessary to reap benefits of developments 1
Benefits may take more than one year to be felt ½
Property costs – stayed the same ½
Staff training:
163.9% increase ½
Necessary for staff retention 1
Necessary to train staff on new website etc 1
Without training staff would have left 1
Less student complaints 1
Interactive website and student helpline:
Attracted new students 1
Increase in pass rate 1
Marking guide Marks

Enrolment costs:
Fall of 80.9% ½
Result of electronic system being introduced 1
Reduced number of late enrolments 1
Max 9
Net operating profit:
Fallen to $2.106m ½
Difficult market 1
Staff training costs should decrease in future 1
Future increase in market share 1
Lower advertising cost in future 1
Charge for website 1
Max 3
3 BATH CO
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This question covered transfer pricing and really separated out the strong candidates from
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the weak ones. Part (a) contained the easy marks, with a simple requirement to prepare a
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profit statement under the current transfer pricing system. There were many perfect
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answers here, because the requirement was not difficult. However, weaker candidates
simply didn’t know what the words ‘profit statement’ meant, and just produced some
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workings showing total profit for the company. These candidates scored very few marks.
t I
rs
EXAM SMART
Fi It is really important to take your time to read the question set. A profit statement implies
that some sort of income statement is needed – clearly showing the revenues and costs of
each division and also the company in total.
The best approach was to use a table, set out with columns for Division A, Division B and the
company as a whole. The rows need to show each key revenue source and cost and also the
key sub-totals. Remember, in the individual division’s profit statement, the transfer price
needs to appear. Here it is a revenue for Division B, being exactly matched by a cost in
Division A. From the company’s perspective these amounts cancel (as would any inter-
company trading in a group).
(a) Profit statement

Division A Division B Division C
$000 $000 $000
Sales revenue:
External (1) 36,000 9,600 45,600
Inter-divisional transfers 0 6,000
Total 36,000 15,600 45,600
Variable costs:
External material costs (2) (16,000) (1,000) (17,000)
Inter-divisional transfers (3) (6,000) 0
Labour costs (4) (3,600) (3,000) (6,600)
Total (25,600) (4,000) (23,600)
Fixed costs (7,440) (4,400) (11,840)
Profit 2,960 7,200 10,160
Workings ($000)
1 External sales
Div A: 80,000 × $450 = $36,000
Div B: 120,000 × $80 = $9,600
Div B: 80,000 × $75 = $6,000
Fir Co
2 External material costs
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Div A: 80,000 × $200 = $16,000
Div B: 200,000 × $5 = $1,000
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3 Inter-divisional transfers
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Div A: 80,000 × $75 = $6,000
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4 Labour costs
Div A: 80,000 × $45 = $3,600

Div B: 200,000 × $15 = $3,000
017
Part (b) asked for a calculation of the maximum profit that could be earned if transfer pricing
was optimised. ‘Optimised’ meant set at a level that would make the total company profit as
high as possible. In order for this to be the case, the transfer price needed to be set
somewhere between Division B’s marginal cost of $20 and the current market price of the
fittings of $65 per set. Any price between this range would make sure that Division A bought
the fittings from Division B, provided that Division A was told that it could only buy the
fittings from outside the group if the price was lower than the price being charged by
Division B. If Division B was allowed to sell to the external market too, then the profit could
be maximised at $11,060.
This logic was totally lost on the majority of candidates. However, many of them managed to
get to the maximum profit by having Division B selling 180,000 sets of fittings outside the
group and then selling the remaining 20,000 sets of fittings to B at $75. This was a half
decent attempt at the question but the reality would be, of course, that, in the real world,
Division A would not want to pay $75 for the fittings if it could buy them from an external
supplier for only $65. This is not, therefore, optimisation of transfer pricing, because this
would require the company to have a policy of making Division A buy from B, EVEN if fittings
were cheaper elsewhere and this would cause behavioural issues, with Division A’s manager
becoming de-motivated.
EXAM SMART
It is important to think of the behavioural aspects of the question and how that affects your
numerical calculations. Try to think of the divisions as if they were stand-alone entities.
They will want to maximise their own profits, particularly if their management receive profit-
related incentives.
The transfer price will have to be $65 or lower, if Division A’s manager will see it as more
profitable to buy from Division B as opposed to externally.
Similarly, Division B’s manager, knowing that the division is not at full capacity (and must
therefore be selling externally all that it can), will be willing to accept a transfer price bigger
than its variable costs per unit (here $20 variable production cost).
Therefore, any transfer price between $20 and $65 per unit should be acceptable to both
managers and would have gained full marks in the exam.
(b) Bath Co’s profit if transfer pricing is optimised

Division A Division B Division C
$000 $000 $000
Sales revenue:
External (1) 36,000 14,400 50,400
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Internal sales (2) 0 1,300 0
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Total 36,000 15,700 50,400
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Variable costs:
1
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External material costs (3) (19,900) (1,000) (20,900)
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Inter-divisional transfers (2) (1,300) 0 0
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Labour costs (3,600) (3,000) (6,600)
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Total (24,800) (4,000) (27,500)
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Fixed costs (7,440) (4,400) (11,840)
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Profit 3,760 7,300 11,160
Fi rs Note: A transfer price of $65 has been used on the assumption that the company will introduce
the policy discussed in (c). Provided that the transfer price is set between the minimum of $20
(Division B’s marginal cost) and $65 (the cost to Division A of buying from outside the group), the
actual transfer price is irrelevant in this calculation. The overall profit of the company will be the
same.
Workings ($000)
1 External sales
Div A: 80,000 × $450 = $36,000
Div B: 180,000 × $80 = $14,400
2 Internal sales/inter-divisional transfers
20,000 × $65 = $1,300
3 Material costs
Div A: 60,000 × $265 + (20,000 x $200) = $19,900
Div B: 200,000 × $5 = $1,000

Part (c) was a narrative requirement and was generally poorly answered. There was a certain
element of follow on from (b), although not entirely, so problems of lack of understanding in
(b) fed through to (c). It was surprising how many candidates attempted part (c) before parts
(a) and (b). While it’s always advisable to get the easy marks first where possible, and these
are often the discussion marks, this is not possible where the narrative fully or partly follows
on from the numbers.
EXAM SMART
Be careful to identify sub requirements where you need to have tackled the earlier parts of
the question first. This is one of them! Failure to do this will mean your answer to part (c) is
little more than a sterile textbook answer.
(c) Issues and suitable transfer price

Divisional managers’ performance is assessed using a metric as decided by the company. This
may simply be the profit for the period, or, depending on the type of responsibility centre being
used, a metric such as residual income or return on capital employed. Whatever the metric
Co
being used, the division’s profit figure is going to affect it and divisional managers are therefore
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going to be keen to maximise their individual profits. By focusing on individual decisions,
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divisional managers are often not aware of the impact of their decisions on the company as a
whole. This would particularly be the case where a decision which is in the best interests of the
ntu ght
company actually makes an individual division’s performance look worse.
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The transfer pricing system in place needs to take into account the behavioural impact of the
prices being charged. Sometimes, this can mean that a ‘dual transfer pricing system’ needs to
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be introduced in order to ensure that divisional managers act in the interests of the company as
a whole.
 017
It can be seen from part (b) that the best decision for the company is that:
Division A buys 60,000 sets of fittings from an outside supplier and buys the remaining
20,000 sets of fittings from Division B in order to ensure that Division B is working to full
capacity.
 Division B sells as many sets of fittings as possible externally, at $80 per set. Since the
maximum external demand is 180,000 units, Division B sells the remaining 20,000 sets of
fittings to Division A. The minimum transfer price that would be acceptable to Division B
is its marginal cost of $20 per unit, since it has spare capacity. However, if this transfer
price is used, Division B becomes worse off than before the autonomy was given, and
Division B’s manager will not like this. As far as Division A is concerned, it will not want to
pay more than the $65 that it can buy from outside the Group.
Bath Co’s policy therefore needs to ensure that, first, Division A’s manager is prepared to buy
20,000 sets of fittings from Division B and second, Division B is prepared to sell them at $65 per
set. Since it is in Division B’s best interest to work to full capacity and the manager of Division B
knows that Division A can obtain fittings for $65 per set, it should not be difficult for B to agree
to sell to A at this price. A policy of negotiated transfer prices would achieve this fairly quickly.
However, the company also needs to have a policy that divisions buy internally first, where this
would be in the best interests of the overall profitability of the company. This would ensure that
Division A buys the 20,000 sets of fittings from Division B. This way, the overall profit of the
company is maximised while also ensuring that divisional managers do not become
demotivated.
Marking guide Marks

(a) Profit statement
Sales revenue:
External 1
Inter-divisional transfers (revenue – Div B) ½
External material costs 1
Inter-divisional transfers (costs – Div A) ½
Labour costs 1
Fixed costs 1
Profit 1
6
(b) Revised profit
External sales 1
Inter-divisional transfers (revenue – Div B) 1
Material costs 2
Internal transfers (materials) (costs – Div A) 1
Labour costs 1
Fixed costs 1
Profit 1
8
(c) Transfer price difficulties and policies
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Each well explained point on difficulties 1
h 7
Max 4
i g 1
Well reasoned recommendation 4
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Maximum for (c) overall 6
o p ion
C u i t
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4 HAMMER O C
t I n
rs
Fi The numerical parts were quite well answered by most candidates. However, a disappointing
number of answers included the fixed costs within part (a) and part (b) which defied the
purpose of the whole question really.
That having been said, most answers were good.
EXAM SMART
Requirements (a) and (b) represent a fairly simple 10 marks which students at this level
should be expecting to get. Essentially this is just cost plus pricing workings.
(a) Price under existing policy

$
Steel (0.4/0.95 × $4.00) 1.68
Other materials ($3.00 × 0.9 × 0.1) 0.27
Labour (0.25 × $10) 2.50
Variable overhead (0.25 × $15) 3.75
Delivery 0.50
Total variable cost 8.70
Mark-up 30% 2.61
Transfer price 11.31
(b) The only difference would be to add the fixed costs and adjust the mark-up %.
$
Existing total variable cost 8.70
Extra fixed cost (0.25 × $15 × 0.8) 3.00
Total cost 11.70
Mark-up 10% 1.17
Transfer price 12.87
The price difference is therefore 12.87 – 11.31 = $1.56 per unit
Fir Co
In part (c), a discussion of whether fixed costs should be included in a transfer price was
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required. The quality of answers was really poor.
ntu ght
The question was looking for a couple of key points, for example, that including fixed costs
guarantees a profit for the seller but invites manipulation of overheads and passes on
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inefficiencies from one part of the business to another.
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Also, that this strategy causes fixed costs of one division to be turned into a variable cost for
another division.
EXAM SMART
017
Following on from the examiners point about turning a fixed cost into a variable cost, this in
a transfer pricing scenario can always run the risk of leading to sub-optimal decision making
from the group’s perspective.
The danger is that by incorporating the fixed cost into the transfer price leads to the selling
division charging a price that is above that of an external supplier.
(c) As far as the manufacturer is concerned, including fixed costs in the transfer price will have the
advantage of covering all the costs incurred. In theory this should guarantee a profit for the
division (assuming the fixed overhead absorption calculations are accurate). In essence the
manufacturer is reducing the risk in his division.
The accounting for fixed costs is notoriously difficult with many approaches possible. Including
fixed costs in the transfer price invites manipulation of overhead treatment.
One of the main problems with this strategy is that a fixed cost of the business is being turned
into a variable cost in the hands of the seller (in our case the stores). This can lead to poor
decision-making for the group since, although fixed costs would normally be ignored in a
decision (as unavoidable), they would be relevant to the seller because they are part of their
variable buy in price.

Part (d) also rarely produced answers scoring full marks.
It asked whether retail stores should be allowed to buy in from outside suppliers. Key points
in any answer should have been that the overall profitability of the company is key, as is goal
congruence; these points were rarely made.
Thankfully, many candidates did spot the more obvious points such as the fact that the
quality and reliability of any external supplier would need to be assessed.
EXAM SMART
A balanced argument here is important. There are likely to be advantages and
disadvantages of allowing the purchase of the shears or other products from outside
suppliers.
However, once again keep your ideas practical and applied to the scenario! An answer could
look like this:
 Local managers may like the autonomy and freedom to purchase from outside. It may
allow Hammer to make more profit if manager’s can locally bargain with suppliers.
 However control may be needed if local managers are buying inferior products. Poor
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local purchasing may damage customer goodwill and ultimately Hammer’s brand.
h 7
 Similarly careful attention to the service levels of suppliers should be paid. If suppliers
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were to dramatically raise prices then local managers may not be able to respond
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effectively. Only a centralised buying department may have the power to negotiate
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more strongly on Hammer’s behalf.
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(d) Degree of autonomy allowed to the stores in buying policy
t I n
If the stores are allowed too much freedom in buying policy Hammer could lose control of its
rs
business. Brand could be damaged if each store bought a different supplier’s shears (or other
Fi
products). On the other hand, flexibility is increased and profits could be made for the business
by entrepreneurial store managers exploiting locally found bargains. However, the current
market price for shears may only be temporary (sale or special offer) and therefore not really
representative of their true market ‘value’. If this is the case, then any long-term decision to
allow retail stores to buy shears from external suppliers (rather than from Nail) would be wrong.
The question of comparability is also important. Products are rarely ‘identical’ and
consequently, price differences are to be expected. The stores could buy a slightly inferior
product (claiming it is comparable) in the hope of a better margin. This could seriously damage
Hammer’s brand.
Motivation is also a factor here, however. Individual managers like a little freedom within which
to operate. If they are forced to buy what they see as an inferior product (internally) at high
prices it is likely to de-motivate. Also with greater autonomy, the performance of the stores will
be easier to assess as the store managers will have control over greater elements of their
business.
Marking guide Marks

(a) Steel 1
Other material 1
Labour 1
Variable overhead 1
Delivery 1
Mark-up 1 6
(b) Fixed cost 2
Mark-up 2 4
(c) Covers all cost 1
Risk 1
Fixed cost accounting 1
Converts a FC to VC 2 Max 4
(d) Market price may be temporary 1
Brand 1
Profitability 1
Flexibility 1
Control 1
Motivation 1
Performance assessment
Fir Co 1
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Comparability 1 Max 6
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ACCA F5 Question Bank Part 2 Revision questions 135
PART 2 REVISION QUESTIONS
Objective test and Scenario

Question Page ref
Syllabus area no Q A

Activity based costing 1-4 139 229
Scenario question: Wash Co 5-9 140 230
Target costing 10-16 141 232
Scenario question: Helot Co 17-21 143 233
Life cycle costing 22-25 145 234
Scenario question: Fit Co 26-30 146 235
Throughput accounting 31-35 147 236
Scenario question: Sweet Treats Bakery 36-40 149 238
Co
Environmental accounting 41-43 151 239
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Relevant cost analysis 1-3 153 240
Scenario question: Losmetic Co
ntu ght 4-8 154 241
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Cost volume profit analysis 9-14 155 242
Scenario question: Hare Events 15-19 157 243
Limiting factors
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20-24 159 244
017
Scenario question: Higgins Co 25-29 161 246
Pricing decisions 30-35 162 248
Scenario question: ALG Co 36-40 164 249
Make-or-buy and other short-term decisions 41 165 250
Scenario question: Three departments 42-46 165 251
Scenario question: Chemco 47-51 167 252
Dealing with risk and uncertainty in decision-making 52-55 168 253
Scenario question: Three products 56-60 169 254
Scenario question: Sandrunner 61-65 170 255
Scenario question: Mylo 66-70 170 256
136 P a r t 2 R e v i s i o n q u e s t i o n s ACCA F5 Question Bank
Question Page ref

Syllabus area no Q A

Budgetary systems and type of budget 1-10 174 258
Scenario question: Kenneth Co 11-15 176 260
Quantitative analysis in budgeting 16-21 178 262
Scenario question: Comfynap Co 22-26 179 263
Standard costing 27 181 265
Scenario question: Corfe Co 28-32 181 265
Material mix and yield variances 33-36 183 266
Scenario question: Romeo Co 37-41 185 268
Sales mix and quantity variances 42-43 186 269
Scenario question: Cut Co 44-48 187 270
Planning and operational variances 49-52 188 271
Scenario question: Fedia Co 53-57 190 272
Performance analysis 58-59 191 274
t
Performance management information systems 1-4 192 275
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Sources of management information 5-6 193 276
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Management reports
2 0 1 7-9 193 276
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Performance analysis in private sector organisations 10-13 194 276
o
Scenario question: Bus Co 14-18 196 278
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Scenario question: Jamair Co 19-23 198 279
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Divisional performance and transfer pricing 24-29 199 280
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Scenario question: Cardale Co 30-34 202 283
s
Scenario question: Andover and Winchester 35-39 203 284
Fi r Performance analysis in not-for-profit organisations and the public

sector
Scenario question: Seatown Council
40-41
42-46
205
205
285
285
External considerations and behavioural aspects 47 207 286
ACCA F5 Question Bank Part 2 Revision questions 137
Long form
Based on Page ref

Question name Syllabus area Past exam Q A
1 The Telephone Co Relevant costs Q1, D11, (a) 209 287
2 Hair Co CVP Q1, D12, (a) and (b) 210 292
3 CSC Co Limiting factors Q2, S16 211 295
4 Heat Co Pricing, Learning curves Q2, J11, (a) 213 298
5 Robber Co Make or Buy and other short term Q1, J12, (a) and (c) 214 302
decisions
6 Cement Co Risk and uncertainty in decision Q1, J11 215 306
making

1 Newtown School Budgetary systems/Types of budget Q5, J13, (c) and (d) 216 311
2 Mic Co Quantitative analysis in budgeting Q3, D13 217 314
Co
3 Noble Standard costing, including sales mix Q3, J11, (a) and (c) 218 316
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and quantity variances
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4 Block Co Sales mix and quantity variances Q4, J13 220 320
including Planning and operational
variances
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5 Truffle Co Planning and operational variances Q2, D12 221 323
6 Sticky Wicket Performance analysis and Q2, J10 221 326
behavioural aspects
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1 Squarize Performance analysis in private
017 Q2, J13 223 330
2 Jungle Co Performance analysis in private Q1, S16 224 332

3 Protect against Fire Co Divisional performance and transfer Q4, D13 225 336
pricing
4 Biscuits and Cakes Divisional performance and transfer Q5, J12, (a),(b),(c) and 226 338
pricing (e)
5 Man Co Divisional performance and transfer Q4, M/J 16 amended 227 341
pricing/ Performance analysis in
private sector organisations
138 P a r t 2 R e v i s i o n q u e s t i o n s ACCA F5 Question Bank
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ACCA F5 Question Bank Revision questions: 1: Specialist cost and management accounting techniques 139
PART 2 REVISION QUESTIONS: Objective test and Scenario

1 Which of the following statements about activity-based costing is/are true?
True False
ABC can only be used within a manufacturing  
environment.
ABC assumes that most overhead costs are incurred at  
the product level.
A cost driver is a factor which causes a change in the  
cost of an activity.
Traditional absorption costing tends to under-estimate  
overhead costs for high volume products.
2 A company manufactures two products, C and D, for which the following information is available:
Co
Product C Product D Total
Fir
Budgeted production (units) 1,000 4,000 5,000
st I pyri
Labour hours per unit/in total 8 10 48,000
Number of production runs required 13 15 28
ntu ght
Number of inspections during production 5 3 8
Total production set up costs $140,000
Total inspection costs $80,000
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Other overhead costs $96,000
Other overhead costs are absorbed on the basis of labour hours per unit.
017
Using activity-based costing, what is the budgeted overhead cost per unit of product D, to the
nearest $0.01?
3 Teddy Co makes two products using the same type of material and the same workforce. The
following information is available:
Product Product
Lou Dew
Budgeted production (units) 5,000 4,000
Material per unit ($) 20 25
Labour per unit ($) 40 60
Fixed overheads relating to materials are $150,000. The cost driver for these costs is the cost of
material purchased.
General fixed overheads are $374,000. These are absorbed on the basis of labour cost.
Using activity-based costing, what is the budgeted fixed overhead cost per unit of product
Lou, to the nearest $0.01?
$
140 Revision questions: 1: Specialist cost and management accounting techniques ACCA F5 Question Bank
4 A company makes two products using the same type of materials and skilled workers. The
following information is available:
Product A Product B
Budgeted volume (units) 1,000 2,000
Material per unit ($) 10 20
Labour per unit ($) 5 20
Fixed costs relating to material handling amount to $100,000. The cost driver for these costs is
the volume of material purchased.
General fixed costs, absorbed on the basis of labour hours, amount to $180,000.
Using activity-based costing, what is the total fixed overhead amount to be absorbed into
each unit of product B (to the nearest whole $)?
 $113
 $120
 $40
 $105
WASH CO
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Wash Co assembles and sells two types of washing machines – the Spin (S) and the Rinse (R).
y
p ion
The company’s policy is to transfer the machines from its assembly division to its retail division at full
o
cost plus 10%.
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The overhead costs are currently allocated to the products on the basis of labour hours, but Wash Co’s
t
Chief Management Accountant is contemplating using machine hours or activity-based costing (ABC)
I n
for absorption.
rst
You have obtained the following information for the last month from the assembly division.
Fi
Product S Product R
Production and sales (units) 3,200 5,450
Materials cost $117 $95
Labour cost (at $12 per hour) $6 $9
Machine hours (per unit) 2 1
Total no. of production runs 30 12
Total no. of purchase orders 82 64
Total no. of deliveries to retail division 64 80
Overhead costs: $
Machine set-up costs 306,435
Machine maintenance costs 415,105
Ordering costs 11,680
Delivery costs 144,400
Total 877,620
5 Calculate a transfer price to the nearest $ for Product S if machine hours are used as the basis
for absorption.
$
6 Using ABC, calculate to the nearest $ the machine overheads (set-up and maintenance costs)
that will be absorbed by each unit of Product S.
7 Using ABC, calculate to the nearest $ the selling overheads (ordering and delivery costs) that will
be absorbed by each unit of Product R.
8 The Chief Accountant is also considering using ABC when analysing environmental costs.
Which of the following statements relating to environmental activity-based costing
(environmental ABC) is/are true?
True False
Environmental ABC will be concerned with prevention  
activities as well as detection and correction activities.
Environmental ABC helps identify environment-driven  
costs, which may be hidden within general overheads.
Volume of emissions may be a cost driver in  
Fir Cop
environmental ABC.
Environmental ABC can measure cost savings resulting  
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from measures to reduce environmental impact.
9
ntu ght
As well as environmental ABC, the Chief Accountant is looking at other techniques for
itio
accounting for environmental impacts.
Which TWO of the following statements relating to accounting for environmental costs are
true?
n2


disposal 017
Flow cost accounting involves analysing materials flows into two categories, material and
Input/output analysis aims to identify residual or waste.

 Environmental life cycle costing looks at costs up until the point production ceases.
 Environment-related costs are connected with activities for which costs can be directly
traced.
Target costing
10 Which of the following statements in relation to costing techniques is/are true?
True False
Target costing is a market driven approach to pricing.  
Using target costing to set selling prices guarantees  
that a company will make a profit on its products.
Unlike traditional costing methods, in ABC production  
overheads are not absorbed across product units.
An organisation which switches to ABC may find that  
some of its existing products, which require minimal
labour hours, no longer appear profitable.
11 The unit selling price of Product Z has been set at $200. The company requires a profit margin of
40%. The product specification includes material, labour and overheads at $55, $75 and $15
respectively.
What is the cost gap for each unit of Product Z?
12 Which of the following is/are characteristics of a service industry?
Characteristic Not characteristic

Homogenity  
Intangibility  
Perishability  
Spontaneity  
13 Which TWO of the following methods of reducing an organisation’s costs in order that its target cost
gap can be closed would be most effective in reducing the costs in a service industry context?
 Use a lower grade of labour
 Renegotiate terms with suppliers
t
 Reduce the time spent in terms of labour hours

i g h 1 7
Attempt to increase sales volumes to achieve economies of scale
y r 2 0
p ion
14 S Company is a manufacturer of multiple products and uses target costing. It has been noted
o
that Product P currently has a target cost gap and the company wishes to close this gap.
C uit
Which of the following may be used to close the target cost gap for product P?
I

n t Use overtime to complete work ahead of schedule
t
 Substitute current raw materials with cheaper versions
Fi rs
 Raise the selling price of P
 Negotiate cheaper rent for S Company’s premises
15 The selling price of Product X is set at $550 for each unit and sales for the coming year are
What is the target cost for each unit of Product X, to the nearest $0.01?
16 Which of the following techniques is NOT relevant to target costing?

 Value analysis
 Variance analysis
 Functional analysis
 Activity analysis
HELOT CO (SECTION B, SEPTEMBER 2016)

The following scenario relates to Questions 17–21. Each question is worth 2 marks.
Helot Co develops and sells computer games. It is well known for launching innovative and interactive
role-playing games and its new releases are always eagerly anticipated by the gaming community.
Customers value the technical excellence of the games and the durability of the product and
packaging.
Helot Co has previously used a traditional absorption costing system and full cost plus pricing to cost
and price its products. It has recently recruited a new finance director who believes the company
would benefit from using target costing. He is keen to try this method on a new game concept called
Spartan, which has been recently approved.
After discussion with the board, the finance director undertook some market research to find out
customers’ opinions on the new game concept and to assess potential new games offered by
competitors. The results were used to establish a target selling price of $45 for Spartan and an
estimated total sales volume of 350,000 units. Helot Co wants to achieve a target profit margin of 35%.
The finance director has also begun collecting cost data for the new game and has projected the following:
Production costs per unit $
Direct material 3·00
Direct labour 2·50
Co
Direct machining 5·05
Fir
Set-up 0·45
st I pyri
Inspection and testing 4·30
Total non-production costs $000
Design (salaries and technology)
Marketing consultants
ntu ght 2,500
1,700
Distribution
itio 1,400
17
n2
Which of the following statements would the finance director have used to explain to Helot Co’s
cycle?
1
017
board what the benefits were of adopting a target costing approach so early in the game’s life-
Costs will be split into material, system, and delivery and disposal categories for
improved cost reduction analysis
2 Customer requirements for quality, cost and timescales are more likely to be included in
decisions on product development
3 Its key concept is based on how to turn material into sales as quickly as possible in order
to maximise net cash
4 The company will focus on designing out costs prior to production, rather than cost
control during live production
 1, 2 and 4
 2, 3 and 4
 1 and 3
 2 and 4
18 What is the forecast cost gap for the new game?

 $2·05
 $0·00
 $13·70
 $29·25
19 The board of Helot Co has asked the finance director to explain what activities can be
undertaken to close a cost gap on its computer games.
Which of the following would be appropriate ways for Helot Co to close a cost gap?
1 Buy cheaper, lower grade plastic for the game discs and cases
2 Using standard components wherever possible in production
3 Employ more trainee game designers on lower salaries
4 Use the company’s own online gaming websites for marketing
 1, 2 and 3
 1, 3 and 4
 2 and 4
 2 and 3
t
20 The direct labour cost per unit has been based on an expected learning rate of 90% but now the
h 7
finance director has realised that a 95% learning rate should be applied.
r i g 0 1
Which of the following statements is true?
2

y
p ion
The target cost will decrease and the cost gap will increase
o
C uit


The target cost will increase and the cost gap will decrease
The target cost will remain the same and the cost gap will increase
I

n t The target cost will remain the same and the cost gap will decrease
rst
Fi
21 Helot Co is thinking about expanding its business and introducing a new computer repair service
for customers. The board has asked if target costing could be applied to this service.
Which of the following statements regarding services and the use of target costing within the
service sector is true?
 The purchase of a service transfers ownership to the customer
 Labour resource usage is high in services relative to material requirements
 A standard service cannot be produced and so target costing cannot be used
 Service characteristics include uniformity, perishability and intangibility
Life cycle costing

22 Which TWO of the following statements about life cycle costing are correct?
 A disadvantage of life cycle costing is that it may be difficult, at the start of a product’s
life, to arrive at a realistic estimate of the product’s costs over a number of years.
 Life cycle costing is particularly suitable for innovative organisations which incur high
costs during the early stages of a product's life cycle.
 Life cycle costing is particularly useful for organisations that develop products with a long
life.
 The life cycle approach is designed to help organisations analyse product costs each year
easily.
23 What is the name of the costing approach which identifies a product’s selling price and
establishes ways of making the product that will earn an acceptable profit?
 Absorption costing
 Activity based costing
 Life cycle costing
 Target costing
Co
24 Which of the following statements that have been made about life cycle costing is/are true?
Fir
st I pyri
True False
It focuses on the short-term by identifying costs at the  
ntu ght
beginning of a product’s life cycle.
itio
It identifies all costs which arise in relation to the  
product each year and then calculates the product’s
n2
profitability on an annual basis.
It accumulates a product’s costs over its whole life time  
017
and works out the overall profitability of a product.
It allocates costs to each stage of a product’s life cycle  
and writes them off at the end of each stage.
25 A manufacturing company which produces a range of products has developed a budget for the
life-cycle of a new product, P. The information in the following table relates exclusively to
product P:
Lifetime total Per unit
Design costs $800,000
Direct manufacturing costs $20
Depreciation costs $500,000
Decommissioning costs $20,000
Machine hours 4
Production and sales units 300,000
The company’s total fixed production overheads are budgeted to be $72 million each year and
total machine hours are budgeted to be 96 million hours. The company absorbs overheads on a
machine hour basis.
What is the budgeted life-cycle cost per unit for product P?

 $24·40
 $25·73
 $27·40
 $22·73
FIT CO
Fit Co specialises in the manufacture of a small range of high-tech products for the fitness market. It is
currently considering the development of a new type of fitness monitor, which would be the first of its
kind in the market. It would take one year to develop, with sales then commencing at the beginning of
the second year. The product is expected to have a life cycle of two years, before it is replaced with a
technologically superior product. The following cost estimates have been made.
Year 1 Year 2 Year 3
Units manufactured and sold 100,000 200,000
Research and development costs $160,000
Product design costs $800,000
Marketing costs $1,200,000 $1,000,000 $1,750,000
Manufacturing costs:
ht 7
g 1
Variable cost per unit $40 $42
y r i 2 0
Fixed production costs $650,000 $1,290,000
p ion
Distribution costs:
o
Variable cost per unit $4 $4.50
C uit
Fixed distribution costs $120,000 $120,000
Selling costs:
t
Variable cost per unit $3 $3.20
t I n
Fixed selling costs $180,000 $180,000
s
Administration costs $200,000 $900,000 $1,500,000
Fi r 26 Which of the following costs would be included as part of the calculation of life cycle costs?
Included Not included

Research and development costs  
Product design costs  
Marketing costs  
Distribution costs  
Selling costs  
Administration costs  
27 Which TWO of the following are benefits of using life cycle costing?
 It attempts to distinguish clearly between the costs of different periods.
 It gives a good indication of the success of research and development and design activities.
 It ensures that products do not enter a decline stage of their life cycle.
 It matches initial costs to the revenues that the product finally earns.
28 In which TWO of the following circumstances is life cycle costing particularly useful?
 Products with a short life
 Products with an even spread of costs and revenues over their lives
 Very simple products
 Products being launched in a competitive environment where time to market is very
important
29 After preparing the cost estimates above, Fit Co realises that it has not taken into account the
effect of the learning curve on the production process. The variable manufacturing cost per unit
above, of $40 in Year 2 and $42 in Year 3, includes a cost for 0.5 hours of labour. The Year 2 cost
per hour for labour is $24 and the Year 3 cost is $26 per hour. Subsequently, it has been
estimated that, although the first unit is expected to take 0.5 hours, a learning curve of 95% is
expected to occur until the 100th unit has been completed. The result will be that it takes a
total labour time of 35.56 hours for the first 100 units.
Calculate to the nearest $10,000, the labour cost that will be included for Year 2 in the
calculation of the life cycle cost.
$ 000
Fir Co
30 Further analysis has been undertaken of the costs of the new product. Now the total
st I pyri
manufacturing life cycle costs of the monitor are estimated to be $12,600,000 and total life
cycle costs overall of $23,000,000. The sales director believes that the maximum price of the
new monitor would be $85 and the board wishes to make a 20% profit margin on it. The
ntu ght
research and development and product design teams have estimated that they could undertake
extra work, with the aim of finding ways to reduce total manufacturing costs by 25%.
itio
Calculate the maximum level of costs that could be incurred by the research and development
n2
and product design teams if a 20% profit margin is to be achieved, assuming that the changes
they suggest successfully reduce manufacturing costs by 25%.
$ 000 017
31 Which of the following statements about throughput accounting is/are true?
True False
Throughput accounting is based on the concept that  
there is a finite capacity at certain critical points in an
organisation’s production schedule.
Throughput accounting treats labour as a fixed cost in  
the short-term.
Throughput accounting focusses on improving  
efficiency by using all production facilities to their
maximum capacity.
The aim of throughput accounting is to increase the  
speed with which products move through an
organisation in order to maximise profit.
32 S Ltd manufactures three products, A, B and C. The products use a series of different machines
but there is a common machine, P, that is a bottleneck.
The selling price and standard cost for each product for the forthcoming year is as follows:
A B C
$ $ $
Conversion costs 55 40 66
Machine P - minutes 12 10 7
Using a throughput accounting approach, what would be the ranking of the products for best
use of the bottleneck?
33 A company manufactures a product which requires four hours per unit of machine time.
Machine time is a bottleneck resource as there are only ten machines which are available for
ht
12 hours per day, five days per week. The product has a selling price of $130 per unit, direct
7
g 1
material costs of $50 per unit, labour costs of $40 per unit and factory overhead costs of
r i 0
$20 per unit. These costs are based on weekly production and sales of 150 units.
y 2
p ion
What is the throughput accounting ratio (to 2 decimal places)?
o
C uit
 1.33
t
 2.00
I n
 0.75
t
 0.31
Fi rs
34 Which of the following statements about the concepts underlying throughput accounting
is/are correct?
True False
Inventory levels should be kept to a minimum.  
All machines within a factory should be 100% efficient,  
with no idle time.
The distinction between direct and indirect costs is not  
useful.
Labour should be treated as a fixed cost that is part of  
total factory cost.
35 A manufacturing company uses three processes to make its two products, X and Y. The time
available on the three processes is reduced because of the need for preventative maintenance
and rest breaks.
The table below details the process times per product and daily time available:
Hours Hours required Hours required
available to make one unit to make one unit
Process per day of product X of product Y
1 22 1·00 0·75
2 22 0·75 1·00
3 18 1·00 0·50
Daily demand for product X and product Y is 10 units and 16 units respectively.
Which of the following will improve throughput?
 Increasing the efficiency of the maintenance routine for Process 2
 Increasing the demand for both products
 Reducing the time taken for rest breaks on Process 3
 Reducing the time product X requires for Process 1
SWEET TREATS BAKERY (SECTION B, DECEMBER 2016)

Fir Co
st I pyri
Sweet Treats Bakery makes three types of cake: brownies, muffins and cupcakes. The costs, revenues
ntu ght
and demand for each of the three cakes are as follows:
itio
Brownies Muffins Cupcakes
n2
Selling price ($ per unit) 1.50 1.40 2.00
Material cost ($ per unit) 0.25 0.15 0.25
017
Labour cost ($ per unit) 0.40 0.45 0.50
Overhead ($ per unit) 0.15 0.20 0.30
Minimum daily demand (units) 30 20 10
Maximum daily demand (units) 140 90 100
The minimum daily demand is required for a long-term contract with a local cafe and must be met.
The cakes are made in batches using three sequential processes; weighing, mixing and baking. The
products must be produced in their batch sizes but are sold as individual units. Each batch of cakes
requires the following amount of time for each process:
Weighing (minutes) 15 15 20
Mixing (minutes) 20 16 12
Baking (minutes) 120 110 120
The baking stage of the process is done in three ovens which can each be used for eight hours a day, a
total of 1,440 available minutes. Ovens have a capacity of one batch per bake, regardless of product
type.
Sweet Treats Bakery uses throughput accounting and considers all costs, other than material, to be
'factory costs' which do not vary with production.
36 On Monday, in addition to the baking ovens, Sweet Treat Bakeries has the following process
resources available:
Process Minutes available
Weighing 240
Mixing 180
Which of the three processes, if any, is a bottleneck activity?
 Weighing
 Mixing
 Baking
 There is no bottleneck
37 On Wednesday, the mixing process is identified as the bottleneck process. On this day, only 120
minutes in the mixing process are available.
Assuming that Sweet Treats Bakery wants to maximise profit, what is the optimal production
plan for Wednesday?
 80 brownies, 30 muffins and 100 cupcakes
t
i g h 1 7
r 0
38 Sweet Treats Bakery has done a detailed review of its products, costs and processes.
y
p ion 2
Which TWO of the following statements will improve the throughput accounting ratio?
o
C uit


The café customer wants to negotiate a loyalty discount.
A bulk discount on flour and sugar is available from suppliers.
I

n t There is additional demand for the cupcakes in the market.
t
 The rent of the premises has been reduced for next year.
Fi rs
39 On Friday, due to a local food festival at the weekend, Sweet Treats Bakery is considering
increasing its production of cupcakes. These cupcakes can be sold at the festival at the existing
selling price.
The company has unlimited capacity for weighing and mixing on Friday but its existing three
ovens are already fully utilised, therefore in order to supply cupcakes to the festival, Sweet
Treats Bakery will need to hire another identical oven at a cost of $45 for the day.
How much will profit increase by if the company hires the new oven and produces as many
cupcakes as possible?
 $31.00
 $55.00
 $95.00
 $140.00
40 In a previous week, the weighing process was the bottleneck and the resulting throughput ratio
(TPAR) for the bakery was 1.45.
State which of the following statements about the TPAR for the previous week are true and
which are false.
True False
The bakery’s operating costs exceeded the total throughput  
contribution generated from the three products.
Less idle time in the mixing department would have  
improved the TPAR
Improved efficiency during the weighing process would have  
improved the TPAR.
41 Which of the following statements about environmental cost accounting is/are true?
True False
The majority of environmental costs are already  
captured within a typical organisation’s accounting
Co
system. The difficulty lies in identifying them.
Fir
st I pyri
Input/output analysis divides material flows within an  
organisation into three categories: material flows,
system flows, and delivery and disposal flows.
ntu ght
Input/output analysis enables classification of output  
itio
as finished production, scrap and waste.
Environmental life cycle costing enables analysis of  
n2
clean-up and disposal activities relating to a product.
42 The following are types of management accounting techniques:

I Flow cost accounting
017
II Input/output analysis
III Life-cycle costing
IV Absorption costing
Which of the above techniques could be used by a company to account for its environmental
costs?
 I only
 II and III only
 I, II and III only
43 Different management accounting techniques can be used to account for environmental costs.
One of these techniques involves analysing costs under three distinct categories: material,
system, and delivery and disposal.
What is this technique known as?
 Activity-based costing
 Life-cycle costing
 Input-output analysis
 Flow cost accounting
ht 7
r i g 2 0 1
y
p ion
o
C uit
I n t
rst
Fi
ACCA F5 Question Bank Revision questions: 2: Decision-making techniques 153

1 Which of the following statements about relevant costing is/are true?
True False
Decisions should always be based on future  
incremental accounting profits.
When a required resource is in scarce supply, the  
opportunity cost of the next best alternative use
needs to be considered.
Sunk costs are irrelevant to decision making as the  
expenditure has already been incurred.
Depreciation may be a relevant cost if it is incremental  
to the project being considered.
2 A company has received a special order which needs 1,000 metres of material Z. It has
800 metres of material Z in inventory, which it purchased for $5 per metre. If the inventory is
not used for this order, it would be sold for $3.75 per metre. The current price of material Z is
$4.50 per metre.
Fir Co
st I pyri
What is the total relevant cost of material B for the special order?
ntu ght
$
3
itio
The Fruit Company (F Co) currently grows fruit which customers pick themselves from the fields
n2
before paying. F Co is concerned that a large number of customers are eating some of the fruit
017
whilst picking it and are therefore not paying for all of it. As a result, it has to decide whether to
hire staff to pick and package the fruit instead.
Which of the following values and costs are relevant to the decision?
Relevant Not relevant

The total sales value of the fruit currently picked and  
paid for by customers
The cost of growing the fruit  
The cost of hiring staff to pick and package the fruit  
The total sales value of the fruit if it is picked and  
packaged by staff instead
154 R e v i s i o n q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA F5 Question Bank
LOSMETIC CO
Losmetic Co is a company producing a variety of cosmetic creams and lotions. The company has just
been asked by one of its biggest customers, a chain of stores, to produce a one-off order of creams for
a special promotion that the stores are running. The order needs to be completed within three weeks.
The following cost estimate has been prepared:
Materials $
Silk powder 15,000 grams at $2.20 per gram 33,000
Silk amino acids 5,000 grams at $0.80 per gram 4,000
Aloe vera 20,000 grams at $1.40 per gram 28,000
Labour
Skilled 500 hours at $12 per hour 6,000
Unskilled 250 hours at $8 per hour 2,000
Factory overheads 750 hours at $4 per hour 3,000
Total production cost 76,000
General fixed overheads 15% of total production cost 11,400
Total cost 87,400
As the order is a one-off order, Losmetic Co will be quoting on a relevant cost basis, so that it can offer
as competitive a price as possible.
ht 7
i g 1
4 Losmetic Co has sufficient inventory of all materials currently to fulfil the order. The current
y r 2 0
replacement costs from the company’s normal supplier are silk powder $2.50 per gram, silk
p ion
amino acids $1 per gram, aloe vera $1.70 per gram.
o
C uit
The silk amino acids are not needed currently for any other purposes. Both the silk powder and
aloe vera are in regular use. However, owing to temporary problems with the normal supplier,
t
15,000 grams of aloe vera will have to be purchased from another supplier at $2 per gram, in
t I n
order to fulfil other orders if the one-off order is accepted.
rs
Calculate the cost of materials that should be included in the quotation.
Fi $
5 The skilled labour force is paid a guaranteed annual salary based on a 40-hour week at a rate of
$12 per hour. There is no spare capacity for the next three weeks. Overtime is paid at time and
a half. Skilled labour could be brought in from outside at a rate of $16 per hour.
There are two spare members of staff who are unskilled labour. They must be paid a minimum
of $8 per hour for a 30-hour week. Additional hours are paid at the hourly rate, but they will be
paid time and a half for the next three weeks for every hour that exceeds what they would have
worked if they worked an average 40-hour week each week.
Calculate the cost of labour that should be included in the quotation.
$
6 Of the factory overheads, $1.60 relates to the electricity costs connected with running the
machinery. The other $2.40 is the cost of the supervisor’s salary. The supervisor is paid an
annual salary that is the equivalent of $40 per hour. He receives a premium of 25% on this rate
for overtime, which he is paid on an hourly basis. He is expected to work 15 hours’ overtime if
Losmetic Co accepts this order.
Calculate the cost that should be included in the quotation for factory overheads.
7 How should the general fixed overheads be treated when preparing the quotation?
 The overheads should be included because they are production costs.
 The overheads should be excluded because they are not opportunity costs.
 The overheads should be excluded because they are not incremental costs.
 The overheads should be included to ensure Losmetic Co makes a profit from the order.
8 Which of the following statements about relevant costing is/are true?
True False
All cash expenses are relevant costs, all non-cash  
Co
expenses are non-relevant costs.
Fir
st I pyri
Notional costs are never relevant costs.  
Fixed costs are never relevant costs.  
ntu ght
Not all future costs are relevant costs.  
Cost volume profit analysis itio

n2
017
9 The following statements have been made about CVP analysis:
Which of the following statements about CVP analysis is/are true?
True False
CVP can help a company assess how sensitive its profits  
might be to below budget performance.
CVP analysis uses a total absorption costing approach.  
CVP analysis is flexible enough to deal with changes in  
both variable and fixed costs at different levels of activity.
Break-even analysis can only be used for a single product  
or for multiple products which are sold in a constant mix.

Fixed costs are $18,000 per month.
The contribution/sales ratio is 60%.
Sales revenue is $43,500.
What is the margin of safety in units?
11 P Co makes two products – P1 and P2 – budgeted details of which are as follows:

P1 P2
$ $
Selling price 10·00 8·00
Cost per unit:
Direct materials 3·50 4·00
Direct labour 1·50 1·00
Variable overhead 0·60 0·40
Fixed overhead 1·20 1·00
Profit per unit 3·20 1·60
Budgeted production and sales for the year ended 30 November 2015 are:
Product P1 10,000 units
The fixed overhead costs included in P1 relate to apportionment of general overhead costs only.
However, P2 also includes specific fixed overheads totalling $2,500.
If only product P1 were to be made, how many units (to the nearest unit) would need to be
sold in order to achieve a profit of $60,000 each year?
 25,625 units
 19,205 units
 18,636 units

ht 7
26,406 units
r i g 2 0 1
y
12 Which of the following are required in order to calculate the break-even sales revenue for a
o p ion
manufacturing company which produces multiple products?
C uit Required Not required
t
Product mix ratio  
t I n Contribution to sales ratio for each product  
rs
General fixed costs  
Fi
Method of apportioning general fixed costs  
13 Christine Co makes two products, the sara and the cristina. Production and sales of the sara are
three times that of the cristina. Each unit of the sara makes a contribution of $12, each unit of
the cristina makes a contribution of $7. Fixed costs are $269,000.
How many units of both products taken together must be made and sold to achieve a profit of
$75,000?
14 A company makes and sells product X and product Y. Twice as many units of product Y are made
and sold as that of product X. Each unit of product X makes a contribution of $10 and each unit
of product Y makes a contribution of $4. Fixed costs are $90,000.
What is the total number of units which must be made and sold to make a profit of $45,000?
 7,500
 22,500
 15,000
 16,875
HARE EVENTS (SECTION B, DECEMBER 2016)

Hare Events is a company which specialises in organising sporting events in major cities across
Teeland. It has approached the local council of Edglas, a large city in the north of Teeland, to request
permission to host a running festival which will include both a full marathon and a half marathon race.
Based on the prices it charges for entry to similar events in other locations, Hare Events has decided
on an entry fee of $55 for the full marathon and $30 for the half marathon. It expects that the
maximum entries will be 20,000 for the full marathon and 14,000 for the half marathon.
Hare Events has done a full assessment of the likely costs involved. Each runner will receive a race pack
on completion of the race which will include a medal, t-shirt, water and chocolate. Water stations will
need to be available at every five kilometre (km) point along the race route, stocked with sufficient
supplies of water, sports drinks and gels. These costs are considered to be variable as they depend on
the number of race entries.
Hare Events will also incur the following fixed costs. It will need to pay a fixed fee to the Edglas council
for permits, road closures and support from the local police and medical services. A full risk
assessment needs to be undertaken for insurance purposes. A marketing campaign is planned via
advertising on running websites, in fitness magazines and at other events Hare Events is organising in
Teeland, and the company which Hare Events usually employs to do the race photography has been
approached.
Fir
The details of these costs are shown below:
Co
st I pyri
Full marathon Half marathon
ntu ght
$ $
Race packs 15.80 10.80
itio
Water stations 2.40 1.20
n2
$
Council fees 300,000
017
Risk assessment and insurance 50,000
Marketing 30,000
Photography 5,000
15 If Hare Events decides to host only the full marathon race, what is the margin of safety?
 35.0%
 47.7%
 52.3%
 65.0%
16 Assuming that the race entries are sold in a constant sales mix, based on the expected race
entry numbers, what is the sales revenue that Hare Events needs to achieve in order to break
even (to the nearest $000)
 $385,000
 $575,000
 $592,000
 $597,000
17 Hare Events wishes to achieve a minimum total profit of $500,000 from the running festival.
What are the number of entries Hare Events will have to sell for each race in order to achieve
this level of profit, assuming a constant sales mix based on the expected race entry numbers
applies? Work to the nearest whole number.
 Full marathon: 17,915 entries Half marathon: 12,540 entries
18 Hare Events is also considering including a 10 km race during the running festival. It expects the
race will have an entry fee of $20 per competitor and variable costs of $8 per competitor. Fixed
costs associated with this race will be $48,000.
If the selling price per competitor, the variable cost per competitor and total fixed costs for
this 10 km race all increase by 10%, which of the following statements will be true?
 Break-even volume will increase by 10% and break-even revenue will increase by 10%.
 Break-even volume will remain unchanged but break-even revenue will increase by 10%.
 Break-even volume will decrease by 10% but break-even revenue will remain unchanged.
 Break-even volume and break-even revenue will both remain the same.
19
ht 7
Which of the following statements relating to cost volume profit analysis are true?
r
(i)
i g 0 1
Production levels and sales levels are assumed to be the same so there is no inventory
2
y
p ion
movement.
o
C uit
(ii) The contribution to sales (C/S ratio) can be used to indicate the relative profitability of
different products.
I n t
(iii) CVP analysis assumes that fixed costs will change if output either falls or increases
t
significantly.
Fi rs
(iv) Sales prices are recognised to vary at different levels of activity especially if higher
volume of sales is needed
 (i), (ii) and (iii)
 (ii), (iii) and (iv)
 (i) and (ii)
 (iii) and (iv)
Limiting factors
20 A company uses the linear programming model to find the optimal production plan for its two
products X and Y. The model considers ‘x’ to be number of units of product X and ‘y’ to be the
number of units of product Y.
It has identified the following equations:
Objective function = Maximise 8x + 12y
Subject to the following constraints:
Material 2x + y ≤ 2,000
Unskilled labour: x + y ≤ 1,500
and x ≥ 400
What is the optimal solution for the output of X and Y?
Co
21 Taylor Co manufactures two products, A and B, and any quantities produced can be sold for
Fir
$30 per unit and $25 per unit respectively.
st I pyri
Variable costs per unit of the two products are as follows:
ntu ght
Product A Product B
$ $
itio
Materials (at $2 per kg) 8 6
n2
Other variable costs 7 3
Total 25 14
017
Next month, only 3,200 kg of material and 2,000 labour hours will be available. The company
aims to maximise its profits each month and wants to use the linear programming model to
establish an optimum production plan.
The model considers ‘x’ to be number of units of Product A and ‘y’ to be the number of units of
Product B.
Which of the following statements of objective function and constraints is correct?
Objective function Material constraint Labour constraint
 30x + 25y 4x +3y ≤ 3,200 2x + y ≤ 2,000
 5x + 11y 4x + 3y ≥ 3,200 2x + y ≥ 2,000
 5x + 11y 4x + 3y ≤ 3,200 2x + y ≤ 2,000
 30x + 25y 4x + 3y ≥ 3,200 2x + y ≥ 2,000
22 A linear programming model has been formulated for two products, X and Y. The objective
function is depicted by the formula C = 5X + 6Y, where C = contribution, X = the number of
product X to be produced and Y = the number of product Y to be produced.
Each unit of X uses 2 kg of material Z and each unit of Y uses 3 kg of material Z. The standard
cost of material Z is $2 per kg.
The shadow price for material Z has been worked out and found to be $2·80 per kg.
If an extra 20 kg of material Z becomes available at $2 per kg, what will the maximum
increase in contribution be?
 Increase of $96
 Increase of $56
 Increase of $16
 No change
23 A company manufactures three products using different amounts of the same grade of labour,
which is in short supply.
The following budgeted data relates to the products:
Per unit: P1 P2 P3
$ $ $
t
h 7
Materials ($2 per kg) (40) (32) (22)
i g 1
Labour ($10 per hour (10) (20) (11)
y r 2 0
Variable overheads (20) (28) (24)
p ion
Fixed overheads (6) (9) (12)
o
C uit
t
Rank the products 1,2,3 in the order they should be manufactured, assuming that the
n
company wants to maximise profits.
t I
rs
Ranking
Fi
P1
P2
P3
24 A jewellery company makes rings (R) and necklaces (N).

The resources available to the company have been analysed and two constraints have been
identified:
Labour time 3R + 2N ≤ 2,400 hours
Machine time 0·5R + 0·4N ≤ 410 hours
The management accountant has used linear programming to determine that R = 500 and N =
400.
Which of the following is/are slack resources?
1 Labour time available
2 Machine time available
 1 only
 2 only
 Both 1 and 2
 Neither 1 nor 2
HIGGINS CO
Fir Co
st I pyri
Higgins Co (HC) manufactures and sells pool cues and snooker cues. The cues both use the same type
of good quality wood (ash), which can be difficult to source in sufficient quantity. The supply of ash is
ntu ght
restricted to 5,400 kg per period. Ash costs $43.20 per kg.
itio
The cues are made by skilled craftsmen who are well known for their workmanship. HC’s craftsmen
are generally only able to work for 12,000 hours in a period. The craftsmen are paid $18 per hour.
n2
HC sells the cues to a large market. Demand for the cues is strong and the company has estimated that
017
up to 15,000 pool cues and 12,000 snooker cues can be sold in any period. The selling price for pool
cues is $41 and the selling price for snooker cues is $69.
Manufacturing details for the two products are as follows.
Pool cues Snooker cues
Craftsmen time per cue 0.5 hours 0.75 hours
Ash per cue 250 g 250 g
Other variable costs per cue $1.20 $4.70
HC does not keep inventory.
25 Calculate the maximum contribution that HC could earn if ash and labour were not constraints.
26 Calculate the number of pool and snooker cues HC would manufacture if demand for both types
of cue was not a constraint and assuming HC continues to manufacture both types of cue.
27 If the amount of ash available was increased to 7,000 kg and the amount of skilled labour
available was increased to 16,000 hours, which of the following statements would be true,
assuming maximum demand for pool cues was 15,000 and maximum demand for snooker cues
was 12,000?
 Labour would remain a constraint but ash would no longer be a constraint.
 Ash would remain a constraint but labour would no longer be a constraint.
 Both labour and ash would still be constraints.
 Neither labour nor ash would be constraints.
28 Assume that the constraints that limit HC are the constraints on labour available and the
demand for snooker cues. Under these constraints 6,000 pool cues are made. The contribution
for snooker cues has recently increased to $45 per cue and for pool cues to $25 per cue.
Some of the craftsmen have offered to work overtime, provided that they are paid double time
for the extra hours over the contracted 12,000 hours. HC has estimated that up to 1,200 hours
per period could be gained in this way.
Calculate the shadow price of labour.
29
t
Which of the following statements relating to limited factor analysis or linear programming
h 7
g 1
is/are true?
y r i 2 0 True False
o p ion
The objective function is the function relating to the  
C uit
limitation of the scarce resource.
t
The constraints in graphical linear programming analysis  
n
are drawn as straight lines.
t I The shadow price is only significant for constraints that  
rs
are binding.
Fi
There will be slack if less than the maximum amount  
available of a limited resource is needed.
Pricing decisions
30 Which of the following statements about price elasticity of demand is/are true?
True False
If PED < 1, total revenue will rise if the selling price of  
the product is increased.
If PED >1, the demand is said to be inelastic.  
PED may be at different levels at different points on the  
demand curve.
If a downward demand curve changes to become  
steeper, demand is becoming more elastic.
31 A company’s demand curve is P = 34 – 0.05Q. It experiences some cost discounts if it produces

200 units or more, so its cost function is as follows:
TC = 1,500 + 3Q (up to Q = 199)
TC = 1,900 + 2.8Q (if Q = 200 or more)
What is the optimum selling quantity and price, to the nearest $0.01?
Quantity
Price $
32 A company wishes to enter two different new markets.

In market A, it has estimated that demand will be relatively elastic.
In market B, demand is likely to be relatively inelastic initially.
Which price strategy is most appropriate for the company to use in each market?

A   
B   
Fir Co
st I pyri
33 Which of the following statements about pricing is/are true?
ntu ght
True False
Target costing results in a market driven selling price.  
itio
Cost-plus pricing only works if the % mark-up is applied  
to total absorption costing.
n2
A cost-plus pricing policy will always result in a profit for  
017
the company.
Penetration pricing aims to recover the high initial costs  
of product development.
34 Which TWO of the following circumstances that may arise in relation to the launch of a new
product favour a penetration pricing policy?
 Demand is relatively inelastic.
 There are significant economies of scale.
 The firm wishes to discourage new entrants to the market.
 The product life cycle is particularly short.
35 Which of the following statements regarding market penetration as a pricing strategy is/are
correct?
1 It is useful if significant economies of scale can be achieved
2 It is useful if demand for a product is highly elastic
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
ALG CO
ALG Co is launching two new, innovative, products onto the market and is trying to decide on the right
launch price for them.
The first product’s expected life is three years. Given the high level of costs which have been incurred
in developing the product, ALG Co wants to ensure that it sets its price at the right level and has
therefore consulted a market research company to help it do this. The research, which relates to
similar but not identical products launched by other companies, has revealed that at a price of $60,
annual demand would be expected to be 250,000 units.
However, for every $2 increase in selling price, demand would be expected to fall by 2,000 units and
for every $2 decrease in selling price, demand would be expected to increase by 2,000 units.
A forecast of the annual production costs which would be incurred by ALG Co in relation to the new
product are as follows:
Annual production (units) 200,000 250,000 300,000 350,000
$ $ $ $
Direct material 2,400,000 3,000,000 3,600,000 4,200,000
Direct labour 1,200,000 1,500,000 1,800,000 2,100,000
Overheads 1,400,000 1,550,000 1,700,000 1,850,000
ht 7
g 1
36 Calculate the total fixed overheads for this product, using the high-low method.
y
$
r i 2 0
o p ion
37
C uit Given the data above, which of the following is the correct formulation of the demand function?
I n t
 P = 190 – 0·001x
t
 P = 250 – 0·001x
Fi rs
 P = 250 – 0·0005x
 P = 310 – 0·001x
38 The second product’s variable costs have been identified as $20 per unit and its demand
function has been formulated as 240 – 0.001x.
Calculate the expected revenue for the product.
39 ALG Co plans to adopt a policy of market skimming for the two new products.
In which TWO of the following situations is market skimming an appropriate policy?
 Customers are prepared to pay high prices to obtain a new product.
 Products have a long life cycle.
 Barriers to entry deter competitors.
 There are significant economies of scale connected with output.
40 One of the directors has read about the market penetration pricing policy and wishes to have an
idea of what the differences are between market penetration and market skimming policies.
In which of the following situations would a market skimming policy be more likely to be
used, and in which situations would a market penetration policy be more likely to be used?
Skimming Penetration
The level of demand is unknown.  
Demand is expected to be elastic.  
ALG Co can discourage competitors from entering the  
market.
ALG has excess production capacity.  

41 A business makes two components which it uses to produce one of its products. Details are:
Component A Component B
Per unit information: $ $
Buy in price 14 17
Material 2 5
Labour
Fir Co 4 6
st I pyri
Variable overheads 6 7
General fixed overheads 4 3
ntu ght
Total absorption cost 16 21
The business wishes to maximise contribution and is considering whether to continue making
itio
the components internally or buy in from outside.
n2
Which components should the company buy in from outside in order to maximise its
contribution?


A only
B only 017
 Both A and B
 Neither A nor B
THREE DEPARTMENTS
The following are performance figures for three retail departments operated by a shop.
Café Bedding Furniture Total
$ $ $ $
Sales 10,000 25,000 50,000 85,000
Variable costs 7,000 13,000 29,000 49,000
Share of fixed shop overheads 5,000 6,000 8,000 19,000
Profit/loss (2,000) 6,000 13,000 17,000
The furniture department is located on the ground floor of the shop, and the bedding department and
café are located on the fifth floor.
42 The following statements have been made about the café:

1 The café should be closed down as it is loss making.
2 Without the café, the shop’s total profit would be higher.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
43 You have been informed that if the café is shut down, fixed shop overheads of $3,500 would be
saved, but the bedding department is likely to lose 10% of its revenues.
If the café is closed, what will the new profit figure be?
44 Which of the following is the most likely explanation of why the bedding department will lose
10% of its revenues?
t
 Customers often visit the café after they have been in the bedding department.
h 7
 Customers have to go through the bedding department to get to the café.

r i g 0 1
Customers often visit the furniture department and the café department together.
2
y
The bedding department and café are complementary.
p ion

45 o
C uit If the café is shut, what measure can the shop take that is most likely to prevent the bedding
t
department losing 10% of its revenues?
t I n  Let the bedding department also occupy the area formerly occupied by the café
rs
 Relocate the bedding department next to the furniture department on the ground floor
Fi
 Adopt a policy of product line pricing on beds
 Adopt a policy of relevant cost pricing on beds
46 One of the directors has argued that one argument for keeping the café is that it increases the
overall level of customer satisfaction with the store. Which of the following is the most helpful
measure of the customer satisfaction generated by the café?
 New items added to the café’s menu
 Length of queues in the café
 % occupancy of the tables in the café
 Profits made by the café
CHEMCO
Chemco imports different grades of fertiliser which it sells in bulk to farmers. All products currently
make a profit. Chemco has now decided to consider refining the fertilisers by further processing, in
order to sell it to individuals for domestic use.
The quantities and associated costs are as follows:
Medium
Fertiliser Basic grade Premium
Current monthly sales quantity 100 kg 40 kg 60 kg
Current sales price per kg (farmers) $5 $7 $10
After further processing:
Sales price per kg (individual customers) $5.5 $8 $13
Further processing cost per kg $0.60 $0.80 $2
47 The following statements have been made about the fertilisers:

1 The basic fertiliser should only ever be sold in bulk to farmers.
2 If Chemco can obtain additional supplies, medium grade fertiliser should be sold to both
farmers and to individuals for domestic use.
Fir
Co
st I pyri
 1 only
ntu ght
 2 only
 Neither 1 nor 2
itio
 Both 1 and 2
48
n2
Assume the available quantity of fertiliser that Chemco can obtain is limited each month by
017
import quotas, but that there are no restrictions on sales demand.
To which type or types of customer should each fertiliser be sold, in order to maximise
profits?
Basic Medium grade Premium

Farmers   
Individual customers   
49 Chemco has just gained a new contract. The fertiliser it has agreed to supply needs a chemical
added as part of the refining process. The chemical is in stock but is in short supply and is also
needed by the company on an existing contract. Since the chemical is relatively unstable, any
excess inventory has to be disposed of after six months.
What is the total relevant cost of the chemical required for the new contract?
 The replacement cost of the chemical
 The price at which the chemical could be sold in the outside market
 The contribution (excluding chemical cost) foregone from using the chemical in the
existing contract
 The disposal cost of the chemical
50 Another fertiliser that Chemco sells requires two chemicals as part of the refining process. To
produce 100 kg of the fertiliser, a standard input mix of 6 litres of Chemical A and 14 litres of
Chemical B is required.
Chemical A has a standard cost of $30 per litre and Chemical B has a standard cost of $40 per litre.
During last month, the actual results showed that 5,000 kg of the fertiliser X were produced,
using a total input of 31,000 litres of Chemical A and 72,500 litres of Chemical B (103,500 litres
in total).
The actual costs of Chemicals A and B were at the standard cost of $20 and $25 per litre respectively.
Calculate the materials mix variance.
Adverse Favourable
$...................  
51 In which of the following circumstances would it NOT be reasonable to calculate a materials mix
variance?
 Proportions in the mix are changeable.
 Proportions in the mix can be controlled.
 The chemicals used in the mix are discrete.
 The usage variance of individual chemicals is of limited value.
ht 7
r i g 0 1
2
52
y
p ion
Which of the following statements about uncertainty in decision-making is/are true?
o
C uit
True False
t
Mystery shopping may be used to reduce the  
I n
uncertainty associated with making changes to an
t
existing product or launching a new one.
Fi rs
Sensitivity involves identifying a number of possible  
outcomes that may arise if the project goes ahead.
Focus groups are used to provide qualitative data  
about new products.
Pay-off tables record all possible outcomes.  
53 Tree Co is considering employing a sales manager. Market research has shown that a good sales
manager can increase profit by 30%, an average one by 20% and a poor one by 10%. Experience
has shown that the company has attracted a good sales manager 35% of the time, an average
one 45% of the time and a poor one 20% of the time.
The company’s normal profits are $180,000 per annum and the sales manager’s salary would be
$40,000 per annum.
Based on the expected value criterion, which of the following represents the correct advice
which Tree Co should be given?
 Do not employ a sales manager as profits would be expected to fall by $1,300
 Employ a sales manager as profits will increase by $38,700
 Employ a sales manager as profits are expected to increase by $100
 Do not employ a sales manager as profits are expected to fall by $39,900
54 The Mobile Sandwich Co prepares sandwiches which it delivers and sells to employees at local
businesses each day. Demand varies between 325 and 400 sandwiches each day. As the day
progresses, the price of the sandwiches is reduced and, at the end of the day, any sandwiches
not sold are thrown away. The company has prepared a regret table to show the amount of
profit which would be foregone each day at each supply level, given the varying daily levels of
demand.
Regret table
Daily supply of sandwiches (units)
325 350 375 400
325 $0 $21 $82 $120
Daily demand 350 $36 $0 $44 $78
for sandwiches (units) 375 $82 $40 $0 $34
400 $142 $90 $52 $0
Applying the decision criterion of minimax regret, how many sandwiches should the company
decide to supply each day?
 325
 350
 375
 400
55
Fir Co
Which THREE of the following statements about the use of Expected values (EV) are correct?
st I pyri
 They are useful because they take account of the spread of possible returns
 They can be used for one-off investment decisions

ntu ght
The average value generated may not actually represent a possible outcome
itio
 They allow different possible outcomes to be built into a decision
 They represent a long-run average if an event is repeated many times

n2
The probabilities of different possible outcomes are usually easy to estimate
THREE PRODUCTS 017

The matrix below shows the various contribution outcomes for three products, X, Y, and Z, depending
on whether the product price is $10 or the product price is $15.
Profit
Product P = $10 P = $15
X 60 80
Y -28 160
Z 50 90
56 Using expected values, which product should be chosen?

 Project X
 Project Y
 Project Z
 It is impossible to say
57 If the two product prices are equally likely to occur, which product or products should be chosen?
 Product X
 Product Y
 Product Z
 Either Project X or Project Z
58 If the variable cost of Product X is $7, calculate the fall in the number of units sold if the Product
price is $15 compared with if it is $10.
units
59 If the quantity sold of Product Z was 10 when the price was $10 and 9 when the price was $15,
what would be the demand function for Product Z?
 5 – 0.2Q
 50 – 0.2Q
 50 – 5Q
 60 – 5Q
t
60 Which of the following is/are disadvantages of using marginal cost plus pricing?
i g h 1 7 Disadvantage Not disadvantage
y r 2 0
It ignores fixed costs.  
o p ion
The mark-up % cannot be varied.  
C uit
Budgeted output volume needs to be established.  
t
The basis it uses for absorption of fixed overheads is  
I n
arbitrary.
rst
Fi
SANDRUNNER
Sandrunner golf club is setting its annual membership fee, which will affect the number of members.
The forecast annual cash inflows from membership fees are shown below.
Membership fees
Membership fee Low Average High
$000 $000 $000
$300 180 210 270
$400 200 220 240
$450 180 205 245
$500 160 190 210
61 If the maximax decision-making technique is applied the fee set would be:
 $300
 $400
 $450
 $500
62 Which TWO of the following are criticisms of using the maximax technique?
 It presupposes an attitude of risk aversion.
 It ignores the probabilities of different outcomes.
 It ignores outcomes that are less than the best possible.
 It assumes there are opportunity losses.
63 If the minimax regret decision making technique is applied the fee set would be:
 $300
 $400
 $450
 $500
64 The committee has now decided to set the fee at $300 or $400 for the next year. For both
outcomes the probabilities are Low 0.5 Average 0.3 High 0.2. A golf club member who is a
marketing consultant has offered to carry out a survey of possible members to determine with
certainty what the outcome will be.
Calculate the maximum amount that the marketing consultant should be paid for his work.
Co
$
Fir
65
st I pyri
Over the longer-term, the committee are concerned with the increased costs of running the golf
ntu ght
club. It believes that it may be able to maximise cash flow from members by introducing
differential membership fees, so that the fees members pay will depend to some extent on how
itio
frequently they use facilities offered by the club.
n2
Which TWO of the following is the committee MOST likely to take into account when
considering whether to introduce differential membership fees?



The profits made by the club shop 017
The subscriptions charged by other golf clubs in the area
The amount of usage of the course at weekends (the busiest time of the week)
 The number of members using the club’s restaurant facilities
MYLO (SECTION B, SEPTEMBER 2016)

The following scenario relates to Questions 66 – 70. Each question is worth 2 marks.
Mylo runs a cafeteria situated on the ground floor of a large corporate office block. Each of the five
floors of the building are occupied and there are in total 1,240 employees.
Mylo sells lunches and snacks in the cafeteria. The lunch menu is freshly prepared each morning and
Mylo has to decide how many meals to make each day. As the office block is located in the city centre,
there are several other places situated around the building where staff can buy their lunch, so the level
of demand for lunches in the cafeteria is uncertain.
Mylo has analysed daily sales over the previous six months and established four possible demand
levels and their associated probabilities. He has produced the following payoff table to show the daily
profits which could be earned from the lunch sales in the cafeteria:
Demand level Probability Supply level
450 620 775 960
$ $ $ $
450 0·15 1,170 980 810 740
620 0·30 1,170 1,612 1,395 1,290
775 0·40 1,170 1,612 2,015 1,785
960 0·15 1,170 1,612 2,015 2,496
66
ht
If Mylo adopts a maximin approach to decision-making, which daily supply level will he choose?
7
i g 1
 450 lunches
y

r 2 0
620 lunches
o p ion
 775 lunches
C uit
 960 lunches
67
I n t
If Mylo adopts a minimax regret approach to decision-making, which daily supply level will he
t
choose?
Fi rs
 450 lunches
 620 lunches
 775 lunches
 960 lunches
68 Which of the following statements is/are true if Mylo chooses to use expected values to assist in
his decision-making regarding the number of lunches to be provided?
1 Mylo would be considered to be taking a defensive and conservative approach to his
decision
2 Expected values will ignore any variability which could occur across the range of possible
outcomes
3 Expected values will not take into account the likelihood of the different outcomes
occurring
4 Expected values can be applied by Mylo as he is evaluating a decision which occurs many
times over
 1, 2 and 3
 2 and 4
 1 and 3
 4 only
69 The human resources department has offered to undertake some research to help Mylo to
predict the number of employees who will require lunch in the cafeteria each day. This
information will allow Mylo to prepare an accurate number of lunches each day.
What is the maximum amount which Mylo would be willing to pay for this information (to the
nearest whole $)?
 $191
 $359
 $478
 $175
70 Mylo is now considering investing in a speciality coffee machine. He has estimated the following
daily results for the new machine:
$
Sales (650 units) 1,300
Variable costs (845)
Contribution 455
Incremental fixed costs (70)
Profit 385
Which of the following statements are true regarding the sensitivity of this investment?
1
Fir Co
The investment is more sensitive to a change in sales volume than sales price
2
st I pyri
If variable costs increase by 44% the investment will make a loss
ntu ght
3 The investment’s sensitivity to incremental fixed costs is 550%
itio
4 The margin of safety is 84·6%
 1, 2 and 3
 2 and 4
n2
017
 1, 3 and 4
 3 and 4
174 R e v i s i o n q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA F5 Question Bank

1 Which of the following statements about budgeting is/are true?
True False
A rolling budget is a budget that starts at nil every  
period and requires managers to justify every item of
expenditure.
A cash flow budget is a good example of feed-forward  
control.
An incremental budget is a budget which, having been  
established at the beginning of a period is then
constantly amended and extended on account of
developing circumstances.
An advantage of activity-based budgets is that they  
enable more efficient improvement programmes to be
implemented.
2
ht 7
Match the following examples of information to the category of information to which they relate.
r i g 2 0 1
y
Internal External Internal External
p ion
historic historic anticipated anticipated
o Government inflation    
C uitstatistics
t
Purchases made by    
t I n
customers
rs
Cash flow forecast for    
Fi
the next five years
Inventory movement    
records
3 Match the following descriptions of standards to the standards which they describe
Attainable Basic Ideal Current

Kept unchanged over a    
period of time
Makes no allowance for    
normal losses, waste and
machine downtime
Assumes an efficient level of    
operation, but includes
allowances for normal loss,
waste and machine
downtime
Based on working conditions    
and prices that apply now
ACCA F5 Question Bank Revision questions: 3: Budgeting and control 175
4 Which of the following statements about changing budgetary systems is/are true?
True False
The costs of implementation may outweigh the benefits.  
Employees will always welcome any new system which  
improves planning and control within the organisation.
The time and cost involved in the system transition may initially  
lead to control being worse not better.
Employees will adapt easily to the new system and this will  
increase their motivation.
5 Which of the following statements about the master budget is/are true?
True False
It sets out the timetable for budget preparation.  
It is usually prepared before the functional budgets.  
It includes a budgeted statement of profit or loss,  
statement of financial position and cash budget.
It is always prepared on a top-down basis.  
6
Fir Co
Which of the following statements about zero based budgeting is/are true?
st I pyri True False
ntu ght
It makes it easier for employees to artificially inflate  
budgets.
It facilitates improvements in processes.
itio  
n2
Employees will focus on eliminating wasteful  
expenditure.
Short-term benefits could be emphasised over long-
term benefits. 017  
7 Which FOUR of the following are purposes of budgeting?

 Co-ordination
 Communication
 Quantification
 Motivation
 Quality control
 Authorisation
8 Jen Co operates in a dynamic environment.

Which budgeting approach is most likely to be suitable for Jen Co?
 Fixed budgets
 Incremental budgeting
 Bottom-up budgeting
 Zero-based budgeting
9 RS has recently introduced an activity based budgeting system. RS manufactures two products,
details of which are given below:
Product R Product S
Budgeted production per annum (units) 80,000 60,000
Batch size (units) 100 50
Machine set-ups per batch 3 3
Processing time per unit (minutes) 3 5
The budgeted annual costs for two activities are as follows:
Machine set-up $180,000 Processing $108,000
What is the budgeted processing cost per unit of Product R, to the nearest $0.01?
10 Which TWO of the following are advantages of flexible budgeting?

 It is useful for decision-making purposes.
 It is quicker to carry out than fixed budgeting.
 It provides appropriate benchmarks for cost control.
 It encourages the organisation to review the value of all its activities.
ht 7
KENNETH CO
r i g 2 0 1
y
p ion
o
C uit
Kenneth Co makes many products, one of which is Product Z. Kenneth Co is considering making
t
various changes to the way it approaches the budgeting process, including adopting an activity-based
I n
costing approach in place of the current practice of absorbing overheads using direct labour hours.
t
The main budget categories and cost driver details for October are set out below, excluding direct
rs
material costs:
Fi Budget category
Direct labour
Set-up costs
$
128,000
22,000
Cost driver details
8,000 direct labour hours
88 set-ups each month
Quality testing costs* 34,000 40 tests each month
Other overhead costs 32,000 absorbed by direct labour hours
* A quality test is performed after every 75 units produced
The following data for Product Z is also provided:
 Direct materials: budgeted cost of $21·50 per unit
 Direct labour: budgeted at 0·3 hours per unit
 Batch size: 30 units
 Set-ups: 2 set-ups per batch
 Budgeted volume for October: 150 units
11 Calculate, to the nearest $0.01, the budgeted unit cost of Product Z for October using a direct
labour-based absorption method for all overheads.
$
12 Calculate, to the nearest $0.01, the budgeted unit cost of Product Z for October using an
activity-based costing approach for all overheads.
13 Kenneth Co is currently using an incremental approach to budgeting, but its Finance Director
wishes to switch to a zero-based approach.
Which of the following are advantages of the incremental approach to budgeting?
Advantage Not advantage

It encourages managers to spend up to the maximum  
allowed in the budget.
It is a straightforward approach for inexperienced  
managers to apply.
It is suitable for organisations where historic costs are  
a good guide to future costs.
It forces employees to avoid wasteful expenditure.  
14 Which of the following describes a zero-based budgeting approach?


Fir Co
Updating the budget regularly and controlling performance with the use of variance
st I pyri
analysis that analyses variances into planning and operational variances
 Using the current year’s results as a starting point and updating the budget for changes in
ntu ght
activity or inflation
 Analysing the cost of each activity, identifying alternative ways of performing the activity
itio
and assessing the consequences of performing the activity at different levels or not at all
Using an adaptive management process to prepare budgets that are focused on cash
n2

flows rather than cost control
15 017
Which TWO of the following are disadvantages of the zero-based approach to budgeting?
 Zero-based budgeting does not respond to changes in the economic environment.
 It is difficult to rank activities that have qualitative rather than quantitative benefits.
 It restricts management from changing plans once the budget has been approved.
 Operational managers will become less motivated if zero-based budgeting is introduced,
as they will not be involved in the budgeting process.

16 The total costs for a factory’s first four month’s production are as follows:
Month Output Total cost
(units) ($)
January 11,000 12,000
February 15,000 17,500
March 10,000 12,500
April 13,000 16,000
If a = total fixed costs and b = variable cost per unit, the values of a and b determined by the
high-low method are as follows:
a$
b$
17 A worker takes 2 hours to produce the first unit of a product, but gets faster so that after a total
of 11.664 hours, 8 units have been completed in total.
What is the learning rate, to the nearest 0.1%?
ht 7
g 1
18 A company’s production process involves a learning effect but the Production Manager has
r i 0
indicated this will cease after 200 units have been made for the following reasons:
y 2
p ion
I Restrictions on availability of other resources e.g. machine time
o
C uit
II
III
Staff working at maximum physical capacity
Lack of incentives to encourage further improvement
I n t
Which of the above are valid reasons for reaching a steady state or production?
t
 I only
Fi rs
 I and II only
 II and III only
19 A learning curve would be expected to apply in the production of items which exhibit which of
the following features?
Apply Not apply

Simple to make  
Made largely by labour efforts  
Mass-produced  
New product  
Continuous production  
20 The following table shows the number of clients who attended a particular accountancy practice
over the last four weeks and the total costs incurred during each of the weeks:
Week Number of clients Total cost
$
1 400 36,880
2 440 39,840
3 420 36,800
4 460 40,000
Applying the high low method to the above information, which of the following could be used
to forecast total cost ($) from the number of clients expected to attend (where x = the
expected number of clients)?
 7,280 + 74x
 16,080 + 52x
 3,200 + 80x
 40,000/x
21 Tech World is a company which manufactures mobile phone handsets. From its past
experiences, Tech World has realised that whenever a new design engineer is employed, there
is a learning curve with a 75% learning rate which exists for the first 15 jobs.
Co
A new design engineer has just completed his first job in five hours.
Fir
Note: At the learning rate of 75%, the learning factor (b) is equal to –0·415.
st I pyri
How long would it take the design engineer to complete the sixth job?
ntu ght
 2·377 hours
 1·442 hours
 2·564 hours
itio
n2
 5 hours
COMFYNAP CO 017
Comfynap Co manufactures beds and other types of recliners.
The company has been developing a new bed, designed to give extra comfort. The estimated time for
the first bed is 15 hours but the Production Director expected a learning curve of 80% to apply to the
first 32 units produced, meaning that the cumulative total time for 32 units is expected to be 157.25
hours.
The cost of labour is $60 per hour.
22 Calculate the expected labour cost of the 32nd unit to the nearest $.
$
23 32 units of the bed have now been produced. The first bed actually took 25 hours to make and the
total time for the first 32 beds was 110 hours, at which point the learning effect came to an end.
Calculate the actual rate of learning that occurred, to the nearest 0.1%.
24 Comfynap Co has also been developing a lounge recliner. The Production Director had assumed
that a learning rate of 75% would apply to the manufacture of the recliner. However, after
initial production had been completed, it was found that a learning rate of 83% had applied.
Which TWO of the following statements could explain the difference between the expected
learning rate and the actual learning rate?
 Assembly of the recliner was labour-intensive and repetitive.
 There was high staff turnover during the initial phase of production.
 There were a number of delays in the production process.
 The design of the recliner was changed once the initial phase of production was over.
25 Comfynap Co is also developing a garden recliner. The Production and Sales Directors are trying
to formulate a budget for this product. The Production Director has guaranteed that production
will be matched to demand, but demand is uncertain.
ht 7
The directors have identified the following as possible outcomes.
r i g 2 0 1 Demand Probability
y
(units)
o p ion
Worst possible outcome 15,000 0.2
C uit
Most likely outcome 28,000 0.7
Best possible outcome 50,000 0.1
I n t
The selling price will be $100. The variable cost is $40 for any production level up to 20,000
t
units. If production is higher than 20,000 units, then the variable cost per unit will fall to $35.
rs
The $35 variable cost will be expected to apply to all units at that level.
Fi
Expected fixed costs are $200,000.
Using probabilistic budgeting, calculate the expected budgeted contribution of the product.
26 The Head Office of Comfynap Co is concerned about the number of problems that have
occurred with the budgets that managers have prepared using spreadsheets.
Which of the following is/are significant disadvantages with using spreadsheets for budgeting?
Disadvantage Not disadvantage

It can be difficult to manipulate information on  
spreadsheets.
It can be difficult to identify errors in formulae used in  
spreadsheets.
Spreadsheets only take account of qualitative  
information.
It is very difficult to set common standards for the use  
of spreadsheets for budgeting by managers.
Standard costing
27 Which of the following statements about different types of standards in standard costing
systems is/are true?
True False
Basic standards provide the best basis for budgeting because  
they represent an achievable level of productivity.
Ideal standards are short-term targets and useful for day-to-day  
control purposes.
An attainable standard is always based on current efficiency  
levels and costs.
Current standards are particularly useful when inflation is high.  
CORFE CO (SECTION B, SEPTEMBER 2016)

The following scenario relates to Questions 28 – 32. Each question is worth 2 marks.
Corfe Co is a business which manufactures computer laptop batteries and it has developed a new
battery which has a longer usage time than batteries currently available in laptops. The selling price of
the battery is forecast to be $45.
Fir Co
The maximum production capacity of Corfe Co is 262,500 units. The company’s management
st I pyri
accountant is currently preparing an annual flexible budget and has collected the following
information so far:
ntu ght
Production (units) 185,000 200,000 225,000
$ $ $
itio
Material costs 740,000 800,000 900,000
Labour costs 1,017,500 1,100,000 1,237,500
n2
Fixed costs 750,000 750,000 750,000
017
In addition to the above costs, the management accountant estimates that for each increment of
50,000 units produced, one supervisor will need to be employed. A supervisor’s annual salary is
$35,000.
The production manager does not understand why the flexible budgets have been produced as he has
always used a fixed budget previously.
28 Assuming the budgeted figures are correct, what would the flexed total production cost be if
production is 80% of maximum capacity?
 $2,735,000
 $2,770,000
 $2,885,000
 $2,920,000
29 The management accountant has said that a machine maintenance cost was not included in the
flexible budget but needs to be taken into account.
The new battery will be manufactured on a machine currently owned by Corfe Co which was
previously used for a product which has now been discontinued. The management accountant
estimates that every 1,000 units will take 14 hours to produce. The annual machine hours and
maintenance costs for the machine for the last four years have been as follows:
Machine Maintenance
time costs
(hours) ($’000)
Year 1 5,000 850
Year 2 4,400 735
Year 3 4,850 815
Year 4 1,800 450
What is the estimated maintenance cost if production of the battery is 80% of maximum
capacity (to the nearest $’000)?
 $575,000
 $593,000
 $500,000
 $735,000
30
ht 7
In the first month of production of the new battery, actual sales were 18,000 units and the sales
i g 1
revenue achieved was $702,000. The budgeted sales units were 17,300.
y r 2 0
Based on this information, which of the following statements is true?
o p ion
 When the budget is flexed, the sales variance will include both the sales volume and sales
C uit
price variances
t
 When the budget is flexed, the sales variance will only include the sales volume variance
I n
 When the budget is flexed, the sales variance will only include the sales price variance
rst  When the budget is flexed, the sales variance will include the sales mix and quantity
Fi
variances and the sales price variance
31 Which of the following statements relating to the preparation of a flexible budget for the new
battery are true?
1 The budget could be time-consuming to produce as splitting out semi-variable costs may
not be straightforward
2 The range of output over which assumptions about how costs will behave could be
difficult to determine
3 The flexible budget will give managers more opportunity to include budgetary slack than
a fixed budget
4 The budget will encourage all activities and their value to the organisation to be reviewed
and assessed
 1 and 2
 1, 2 and 3
 1 and 4
 2, 3 and 4
32 The management accountant intends to use a spreadsheet for the flexible budget in order to
analyse performance of the new battery.
Which of the following statements are benefits regarding the use of spreadsheets for
budgeting?
1 The user can change input variables and a new version of the budget can be quickly
produced
2 Errors in a formula can be easily traced and data can be difficult to corrupt in a
spreadsheet
3 A spreadsheet can take account of qualitative factors to allow decisions to be fully
evaluated
4 Managers can carry out sensitivity analysis more easily on a budget model which is held
in a spreadsheet
 1, 3 and 4
 1, 2 and 4
 1 and 4
 2 and 3
Co
Fir
st I pyri
33 Which of the following statements about materials variances is/are true?
True False
ntu ght
Mix and yield variances are most appropriate where a product  
itio
requires a set amount of different types of material.
The materials yield variance assesses whether the finished  
n2
output was greater or less than expected, given the amount of
material that was input.
017
Mix and yield variances are most appropriate where the input
proportions of the materials used in a product can be varied
without substantially changing the nature of the output.
 
The materials mix variance assesses the impact of varying the  

proportions of the different materials used in a product.
34 To produce 19 litres of product X, a standard input mix of 8 litres of chemical A and 12 litres of
chemical B is required.
Chemical A has a standard cost of $20 per litre and chemical B has a standard cost of $25 per
litre.
During September, the actual results showed that 1,850 litres of product X were produced,
using a total input of 900 litres of chemical A and 1,100 litres of chemical B (2,000 litres in total).
The actual costs of chemicals A and B were at the standard cost of $20 and $25 per litre
respectively.
It was expected that an actual input of 2,000 litres would yield an output of 1,900 litres (95%).
The actual yield for September was only 1,850 litres, which was 50 litres less than expected.
For the total materials mix variance and total materials yield variance, was there a favourable
or adverse result in September?
 The total mix variance was adverse and the total yield variance was favourable.
 The total mix variance was favourable and the total yield variance was adverse.
 Both variances were adverse.
 Both variances were favourable.
35 Isaacs Co has a process in which the standard mix for producing 1 unit of output is as follows:
$
5 litres of R at $8 per litre 40.00
3 litres of S at $10 per litre 30.00
4 litres of T at $2 per litre 8.00
During November 2,000 units were produced and usage was:
9,700 litres of R
6,300 litres of S
7,400 litres of T
What was the materials yield variance for November?
Adverse Favourable
t
$...................  
i g h 1 7
36
y r 2 0
Product GX consists of a mix of three materials, J, K and L. The standard material cost of a unit
p ion
of GX is as follows:
o
C uit Material J 5 kg at $4 per kg
$
20
I n t
Material K
Material L
2 kg at $12 per kg
3 kg at $8 per kg
24
24
rst
Fi
During March, 3,000 units of GX were produced, and actual usage was:
Material J 13,200 kg
Material K 6,500 kg
Material L 9,300 kg
What was the materials yield variance for March?
 $6,800 favourable
 $6,800 adverse
 $1,000 adverse
ROMEO CO (SECTION B, DECEMBER 2016)

The following scenario relates to questions 37 – 41. Each question is worth 2 marks.
Romeo Co is a business which makes and sells fresh pizza from a number of mobile food vans based at
several key locations in the city centre. It offers a variety of toppings and dough bases for the pizzas
and has a good reputation for providing a speedy service combined with hot, fresh and tasty food to
customers.
Each van employs a chef who is responsible for making the pizzas to Romeo Co's recipes and two sales
staff who serve the customers. All purchasing is done centrally to enable Romeo Co to negotiate bulk
discounts and build relationships with suppliers.
Romeo Co operates a standard costing and variances system and the standard cost card for Romeo
Co's basic tomato pizza is as follows:
Ingredient Weight Price
kg $ per kg
Dough 0.20 7.60
Tomato sauce 0.08 2.50
Cheese 0.12 20.00
Herbs 0.02 8.40
0.42
Fir Cop
In Month 3, Romeo Co produced and sold 90 basic tomato pizzas and actual results were as follows:
Kgs brought Actual cost
st I yri
Ingredient and used per kg
Dough 18.9 6.50
ntu ght
Cheese 14.5 21.00
itio
Herbs 2.0 8.10
42
n2
37
017
What was the total favourable material price variance for Month 3 (to 2 decimal places)?
38 What was the total adverse materials mix variance for Month 3?
 $38.14
 $41.92
 $42.88
 $81.02
39 In Month 4, Romeo Co produced and sold 110 basic tomato pizzas. Actual results were as
follows:
Kgs brought Actual cost
Ingredient and used per kg
Dough 21.3 6.60
Cheese 14.2 20.00
Herbs 2.0 8.50
45
What was the total materials yield variance for Month 4? (Calculate all workings to 2 decimal
places).
 $11.63 favourable
 $12.21 favourable
 $9.75 adverse
 $21.95 adverse
40 In Month 5, Romeo Co reported a favourable materials mix variance for the basic tomato pizza.
Which of the following statements would explain why this variance has occurred?
 The proportion of the relatively expensive ingredients used in production was less than
the standard.
 The prices paid for the ingredients used in the mix were lower than the standard prices.
 Each pizza used less of all the ingredients in actual production than expected.
 More pizzas were produced than expected given the level of ingredients input.
41 In Month 6, 100 basic tomato pizzas were made using a total of 42 kg of ingredients. A new chef
at Romeo Co used the expected amount of dough and herbs but used less cheese and more
tomato sauce per pizza than the standard. It was noticed that the sales of the basic tomato
pizza had declined in the second half of the month.
ht 7
Based on the above information, which TWO of the following statements are correct?

r i g 0 1
The actual cost per pizza in Month 6 was lower than the standard cost per pizza.
2
y
p ion
 The sales staff should lose their Month 6 bonus because of the reduced sales.
o
C uit


The value of the ingredients usage variance and the mix variance are the same.
The new chef will be responsible for the material price, mix and yield variances.
I n t
t
rs
Fi
42 Which of the following statements about materials and sales mix variances is/are true?
True False
Sales mix and quantity variances are only meaningful when the  
company’s products are independent of each other.
The sales mix variance considers how the profit has been affected  
by selling products in a different ratio than initially expected.
The materials mix variance can be calculated by taking the  
difference between the actual quantity in the standard mix and
the actual quantity in the actual mix, then multiplying it by the
actual cost per kg.
The materials mix variance arises because there is a difference  
between what the input should have been for the output
achieved and the actual output.
43 If a budget for a single product is flexed, which of the following variances will be the sales
variance?
 Price variance
 Quantity variance
 Mix variance
 Yield variance
CUT CO
Cut Co produces and sells disposable razors and non-disposable razors with replaceable blades.
Its monthly budget is as follows:
Non-disposable Pack of Disposable
razors blades razors
Sales volume (units) 1,000 2,000 500
Selling price/unit ($) 15 8 5
Variable cost/unit ($) 8 3 2
Fir Cop
Actual results for July are:
Non-disposable Pack of Disposable
razors blades razors
Sales volume (units)
st I yri
900 2,600 700
ntu ght
Selling price/unit ($) 16 8 4.50
Variable cost/unit ($) 8 3 2
itio
n2
44 The following statements have been made about July:
1 As Cut Co sold 100 more non-disposable razors at $1 more per item and 200 more
2 017
disposable razors at $0.50 less per item, there is no overall price variance.
The total sales volume variance was favourable.
Which of the above statements are true?
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
45 What was the total sales mix variance in July?
Adverse Favourable
$...................  
46 What was the total sales quantity variance in July?
Adverse Favourable
$...................  
47 Which of the following is/are possible causes of the sales mix variance?
Possible cause Not possible cause

The size of the market for non-disposable razors  
increased.
The production costs were as budgeted.  
Price-conscious customers switched to cheaper  
disposable razors.
A close competitor withdrew its non-disposable razor  
after safety concerns.
48 Which of the following statements about pricing strategies is/are true:
True False
If product prices are set based on standard costs, then a  
business will be unable to pass the cost of production
inefficiencies on to the customer.
The prices of complementary products cannot be set  
independently.
If a company is using target costing, the price set will be  
t
determined by the target cost.
h 7
Price discrimination can be achieved by setting different  
r i g 0 1
prices for different versions of the same product.
2
y
p ion
o
C uit
t
49 Conrad Co budgeted that it would sell 10,000 units based on an expected total market of
t I n
200,000 units. However, after producing the budget there was a 10% increase in industry
demand due to better economic forecasts.
i r s Which of the following is this most likely to give rise to?
F 

A favourable sales price variance
A favourable sales mix variance
 A favourable market share variance
 A favourable market size variance
50 Which of the following statements about variances is/are true?
True False
The use of planning and operational variances splits  
responsibility for performance between managers in charge of
day-to-day activities and decisions and those in charge of
budgeting.
The revision of budgets for operational difficulties that have  
been experienced is likely to lead to more meaningful variance
analysis.
Splitting variances into planning and operational variances will  
always make operational managers more receptive to variance
analysis.
Those in charge of budgeting are not always responsible for  
planning variances.
51 The following data relate to Product Z and its raw material content for September.
Budget
Output 11,000 units of Z
Co
Standard materials content 3 kg per unit at $4.00 per kg
Fir
st I pyri
Actual output 10,000 units of Z
Materials purchased and used 32,000 kg at $4.80 per kg
ntu ght
It has now been agreed that the standard price for the raw material purchased in September
itio
should have been $5 per kg.
What were the following variances for September?
n2
...................
Adverse

Favourable
 017
Materials operational usage variance
Adverse Favourable
...................  
52 PlasBas Co uses recycled plastic to manufacture shopping baskets for local retailers. The
standard price of the recycled plastic is $0·50 per kg and standard usage of recycled plastic is 0·2
kg for each basket. The budgeted production was 80,000 baskets.
Due to recent government incentives to encourage recycling, the standard price of recycled
plastic was expected to reduce to $0·40 per kg. The actual price paid by the company was $0·42
per kg and 100,000 baskets were manufactured using 20,000 kg of recycled plastic.
What is the materials operational price variance?
 $400 adverse
 $320 adverse
FEDIA CO
Fedia Co makes a specialist chemical product. The original prime costs for each canister, based on
budgeted production of 12,000 canisters, are as follows:
$
Materials 2.5kg @ $30 per kg 75
Labour 3hrs @ $20 per hour 60
Prime cost 135
Before the period started, Fedia’s supplier announced that it was closing down. Fedia Co was forced to
find a new supplier and purchased better quality replacement material at a price of $80 for each
canister. Fedia produced 11,000 canisters of the product and spent $809,600 on 25,300 kg of material.
53 The following statements have been made about the total material variances:
1 The total material price variance is $50,600 adverse.
2 The total material usage variance is $70,400 favourable.
 1 only

ht 2 only
7
i g 1
 Neither 1 nor 2
y

r 2 0
Both 1 and 2
o p ion
C uit
54 Calculate the material price planning variance. You should calculate this using the actual
quantity purchased.
rst $...................  
Fi 55 Calculate the material usage variance. You should calculate this using the original standard cost
per kg.
Adverse Favourable
$...................  
56 Assuming there are no changes to budgeted costs and revenues other than material costs,
which of the following variances is likely to be favourably affected by use of better quality
materials?
 Labour rate
 Sales yield
 Variable overhead expenditure
 Fixed overhead volume
57 Which of the following is/are advantages of having a system of planning and operational
variances in place?
Advantage Not an advantage

The system will highlight non-controllable operational  
variances.
Managers can justify variances as being due to bad  
planning.
Planning variances can highlight out-of-date  
standards.
The system will be based on realistic standards that  
are easy to establish.
58 Which of the following statements about both standard costing and total quality management
is/are true?
True False
They focus on assigning responsibility solely to senior  
managers.
Fir Cop
They work well in rapidly changing environments.  
The philosophy of continuous improvement behind TQM is  
st I yri
incompatible with predetermined standards.
 
ntu ght
Standard costs may allow for a predetermined level of scrap,
whereas TQM aims for no scrap.
59 itio
A profit centre manager claims that the poor performance of her division is entirely due to
n2
factors outside her control. She has submitted the following table along with notes from a
017
market expert, which she believes explains the cause of the poor performance:
Budget Actual Actual
Category this year this year last year Market expert notes
Sales volume (units) 500 300 400 The entire market has
decreased by 25% compared
to last year. The product will
be obsolete in four years
Sales revenue $50,000 $28,500 $40,000 Rivalry in the market saw
selling prices fall by 10%
Total material cost $10,000 $6,500 $8,000 As demand for the raw
materials is decreasing,
suppliers lowered their
prices by 5%
After adjusting for the external factors outside the manager’s control, in which
category/categories is there evidence of poor performance?
 Material cost only
 Sales volume and sales price
 Sales price and material cost
 Sales price only
192 R e v i s i o n q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA F5 Question Bank

1 Match the descriptions of how the system is used to the system being described.
Transaction Executive Enterprise
processing information resource planning
system system system
Captures all the day-to-day routine   
transactions within a business
Integrated system overseen centrally   
Provides summary information for   
strategic decisions
Includes data analysis and modelling   
tools
2 Which of the following statements about Management information systems is/are true?
True False
t
They are designed to provide information for internal and  
h 7
external use.
r i g 0 1
They provide information for planning, control and decision
2
 
y
making.
o p ion
They are designed to report on existing operations.  
C uitThey are designed to integrate an organisation’s processes to  
t
provide a single system for the whole organisation.
t I n
rs
3 The following statements have been made about planning and control as described in the three
Fi
tiers of Robert Anthony’s decision-making hierarchy:
1 Strategic planning is concerned with making decisions about the efficient and effective
use of existing resources.
2 Operational control is about ensuring that specific tasks are carried out efficiently and
effectively.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
4 A manufacturer and retailer of kitchens introduces an enterprise resource planning system.

Which of the following is NOT likely to be a potential benefit of introducing this system?
 Schedules of labour are prepared for manufacturing
 Inventory records are updated automatically
 Sales are recorded into the financial ledgers
 Critical strategic information can be summarised
ACCA F5 Question Bank Revision questions: 4: Performance measurement and control 193

5 Scowen Co decided to employ a researcher on a part-time contract to undertake a telephone
survey into the preferences of consumers for a variety of different packaging.
Which TWO of the following costs that Scowen Co has incurred are costs of data collection?
 Cost of telephone calls
 Cost of researcher
 Cost of time spent analysing results of survey
 Costs of disseminating results to managers and staff
6 Which of the following is/are internal sources of management accounting information and
which are external sources?
Internal External
Value of sales, analysed for each customer  
Value of purchases, analysed for each supplier  
Prices of similar products, analysed for each  
competitor company
Hours worked, analysed for each employee  
Fir Co
st I pyri
Management reports
ntu ght
7 Which of the following control(s) help to ensure the security of highly confidential information?
itio
Don’t ensure
Ensure security security
n2
Logical access controls  
017
Database controls  
Hierarchical passwords  
Range checks  
8 XYZ Co creates archive copies of its database regularly.

What is the purpose of this type of control?
 Ensure the accuracy of the data
 Preserve data confidentiality
 Prevent unauthorised access to the data
 Minimise the risk of data loss
9 A government department generates information which should not be disclosed to anyone who
works outside of the department. There are many other government departments working
within the same building.
Which of the following would NOT be an effective control procedure for the generation and
distribution of the information within the government department?
 If working from home, departmental employees must use a memory stick to transfer
data, as laptop computers are not allowed to leave the department
 All departmental employees must enter non-disclosed and regularly updated passwords
to access their computers
 All authorised employees must swipe an officially issued, personal identity card at the
entrance to the department before they can gain access
 All hard copies of confidential information must be shredded at the end of each day or
locked overnight in a safe if needed again

10 The following statements have been made about short-termism:
1 A focus solely on non-financial performance measures is likely to encourage short-
termism
t
2 Investing in R&D is an example of a decision which is intended to improve long-term
i g h 1 7
profitability
y r 2 0
o p ion
 1 only
C uit
 2 only
t
 Neither 1 nor 2
I n
 Both 1 and 2
rst
Fi
11 Which of the following statements about performance frameworks is/are true?
True False
In the balanced scorecard the set of indicators which measure  
whether value is being added to the shareholders is known as
the innovation and learning perspective.
The balanced scorecard looks at both internal and external  
matters concerning the organisation.
The Building Blocks model focuses solely on non-financial  
measures.
The Building Blocks model considers competitiveness, resource  
utilisation and flexibility as dimensions of performance.
12 A company has had some problems with staff motivation and retention and has decided to
introduce some targets.
Which target is it likely to face the biggest potential difficulty setting?
 Staff turnover rate
 Level of absenteeism
 Number of working hours
 Level of staff satisfaction
13 A company’s sales and cost of sales figures have remained unchanged for the last two years.
The following information has been noted:
Year ended 31 May 2015 31 May 2014
Inventory turnover period 45 days 38 days
Payables payment period 40 days 35 days
Receivables payment period 60 days 68 days
Current ratio 1·1 1·3
Quick ratio 1·3 1·4
The following statements have been made about the company’s performance for the most
recent year:
1 Customers are taking longer to pay and this may have contributed to the decline in the
company’s current ratio.
Fir Co
st I pyri
2 Inventory levels have increased and this may have contributed to the decline in the
company’s quick ratio.
ntu ght
itio
 1 only
2 only
n2

 Both 1 and 2
017
 Neither 1 nor 2
BUS CO
Bus Co is a large bus operator, operating long-distance bus services across the country. There are three
other national operators in the country. Last month, an independent survey of 40,000 passengers was
carried out, the results of which are shown in the table below:
Table: Bus passenger satisfaction % by national operator
Value for
Operator money Punctuality Journey time
Bus 68 80 82
Prime 58 80 83
Express 67 76 85
Transit 62 78 86
Based on feedback that it has had from a recent survey it has undertaken of its own customers, Bus Co
has calculated a rating for overall customer satisfaction, based on a weighted average which, it asserts,
reflects the importance customers surveyed placed on each of the three criteria above. The weightings
used were as follows:
Value for money 40%
Punctuality 32%
Journey time 28%
ht 7
The managing director (MD) of Bus Co made a public statement saying that: ‘Independent research
i g 1
has shown that our customers are the most satisfied of any national bus operator. Independent
y r 2 0
research confirms that we lead our competitors on what matters most to customers. We are ahead of
p ion
them on value for money and punctuality. We are also striving to lower our environmental footprint. ’
o
C uit
In order to improve customer satisfaction, the MD has proposed that Bus Co should introduce an
greater variety of tickets. Currently all four operators offer standard daily single or return, or weekly
n t
tickets, on particular routes. The MD has proposed that Bus Co should introduce Rover tickets,
I
allowing unlimited daily or weekly travel on all routes in certain areas, and off-peak fares, which would
rst
apply to certain routes outside the rush hours. He has also proposed the introduction of Smartcard
Fi
tickets on the busiest routes, allowing customers to swipe their tickets on electronic readers as they
enter and leave the bus.
14 Using the customer satisfaction criteria calculated by Bus Co, rank the four bus operators, with
the operator with the highest customer satisfaction ranked first.
Bus
Prime
Express
Transit
15 State which of the following assertions made by the managing director are true and which are
false.
True False
Independent research has shown that Bus Co’s passengers  
are the most satisfied of any national bus operators.
Independent research confirms that Bus Co leads its  
competitors on what matters most to customers.
Independent research confirms that Bus Co is ahead of its  
competitors on value for money.
Independent research confirms that Bus Co is ahead of its  
competitors on punctuality.
16 Match the following measures to the value for money criteria of Economy, Efficiency and
Effectiveness.

Occupancy rate of buses   
Utilisation rate for drivers   
Percentage of customers satisfied with cleanliness of   
Co
buses
Fir
st I pyri
Percentage of carbon emissions relative to target set   
ntu ght
17 Which of the following is least likely to improve punctuality on Bus Co’s routes?
itio
 No longer accepting cash on buses and only accepting prepaid tickets
 Amending the timetable to allow for longer journey times on certain routes during busy
n2
periods
017
 Introducing a greater range of tickets on some routes
 Allowing customers to use Smartcard tickets on busiest routes
18 Which of the following Building Block dimensions proposed by Fitzgerald and Moon is the
introduction of off-peak fares least likely to address?
 Competitiveness
 Quality
 Resource utilisation
 Flexibility
JAMAIR CO
Jamair was founded in September 20X1 and is one of a growing number of airlines in the country of
Shania. Jamair’s strategy is to operate as a low-cost, high efficiency airline.
The airline was given an ‘on time arrival’ ranking of seventh best by Shania’s aviation authority, who
rank all 50 of the country’s airlines based on the number of flights which arrive on time at their
destinations. 48 Jamair flights were cancelled in 20X7 compared to 35 in 20X6. This increase was due
to an increase in the staff absentee rate at Jamair from 3 days per staff member per year to 4·5 days.
The average ‘ground turnaround time’ for airlines in Shania is 50 minutes, meaning that, on average,
planes are on the ground for cleaning, refuelling, etc for 50 minutes before departing again. Jamair has
increased the number of cleaners and also the number of spot checks of cleaners’ work
The number of passengers carried by the airline has grown from 300,000 passengers on a total of
3,428 flights in 20X1 to 920,000 passengers on 7,650 flights in 20X7.
Media reports suggest that other aircraft companies may be interested in bidding for Jamair Co.
19 Which TWO of the following strategies are likely to aid Jamair Co’s objective of operating as a
low-cost, high efficiency airline?
t
 Operating mostly in capital cities to reduce landing costs

i g h 7
Using only one type of aircraft
1
r 0
 Having Premium, Business and Economy seat classes
y
p ion

2
Focusing on e-commerce with customers booking tickets and checking in for flights online
20 o
C uit Match the following objectives of Jamair Co to the perspective of the balanced scorecard to
t
which they relate.
t I n Financial Customer Internal Learning
Fi rs
Ensuring flights are on time    
Using fewer planes to transport    
customers
Improving turnaround times    
Improving cleanliness of planes by    
spot checks
21 Match the following performance measures used by Jamair Co to the perspective of the
balanced scorecard to which they relate.
Financial Customer Internal Learning

Absentee rates of employees    
Planes’ lease costs per customer    
Revenue per passenger mile    
Number of flights cancelled    
22 Which FOUR of the following are disadvantages with using the balanced scorecard?
 It steers Jamair away from solely focusing on financial measures.
 It cannot resolve conflicts between short-term and long-term objectives.
 An improvement in one perspective of the balanced scorecard can be made without
affecting the other three perspectives.
 It can be difficult to gain an overall impression of the results provided.
 There is no direct link between the overall results of the scorecard and the creation of
shareholder value.
 The balanced scorecard will be of limited effectiveness if Jamair’s strategy is unclear.
23 The following statistics are available about Jamair and two of its principal competitors.
Jamair Competitor Competitor

1 2
Profit attributable to shareholders ($ million) 371 546 286
Share price at year-end ($) 9.0 6.0 4.5
Shares in issue at year-end (million) 520 1,100 600
Fleet size (number of aircraft) 17 29 25
Kilometres flown (million) 56 92 65
Fir Co
Are the following statement relating to the data above true or false?
st I pyri True False
ntu ght
Jamair Co has a higher P/E ratio than its competitors, which  
may reflect the rumours about a takeover
itio
Competitor 2 appears to do a greater proportion of long-haul  
flights than Jamair or Competitor 1.
n2
24
017
Which of the following statements about transfer pricing is/are true?
True False
Cost-based transfer prices are most appropriate where there is  
an intermediate market for the product.
When the producing division is operating at full capacity, an  
opportunity cost based approach should be used for the transfer
price.
The maximum transfer price is the sum of the supplying  
division’s marginal cost and opportunity cost of the item
transferred.
25 Which of the following statements about divisional performance measures is/are true?
True False
Residual income is better for comparing divisions of different  
sizes.
Return on investment may cause a manager to reject a project  
that exceeds the head office target, if the project will earn less
than the division’s existing Return on investment.
A disadvantage of Residual income is that it requires an estimate  
of cost of capital.
A disadvantage of both Return on investment and Residual  
income is that they may appear to improve as a division’s assets
get older.
26 On the last day of the financial year a division has net assets with a total carrying amount of
$720,000. The return on investment for the division is 15%. The division manager is considering
selling a non-current asset immediately prior to the year end. The non-current asset has a
carrying amount of $36,000 and will sell for a profit of $14,000.
What would be the division’s return on investment (ROI) immediately after the sale of the asset
at the end of the year, to the nearest 0.1%?
ht 7
%
r i g 2 0 1
27
y
p ion
A division is considering investing in capital equipment costing $2·7m. The useful economic life
o
of the equipment is expected to be 50 years, with no resale value at the end of the period. The
C uit
forecast return on the initial investment is 15% per annum before depreciation. The division’s
cost of capital is 7%.
I n t
What is the expected annual residual income of the initial investment?
rst $
Fi 28 Tom has been questioned about the performance of his division, which has been worse than his
Chief Executive expected. Tom has submitted the following comments on the performance of
his division:
Category Budget Actual last Actual this
this year year year
Sales volume (units) 6,000 5,000 4,200 There has been a 20%
decrease in the market
compared with last year.
Sales revenue $600,000 $450,000 $317,000 Market selling prices have
fallen by 15% compared
with last year.
Material cost $113,400 $105,000 $81,600 Suppliers have increased
their prices by 5%
compared with last year.
Material usage (kgs) 16,200 15,000 11,500 Changes in production have
meant that each unit
produced used 10% less
material than last year.
After taking account of the factors that are not under Tom’s control, in which categories did
his division perform poorly (defined as performing below budget AND performing below what
would have been expected, based on Tom’s comments)?
Poor Not poor

performance performance
Sales volume  
Sales price  
Material cost  
Material usage  
29 At the end of 20X1, an investment centre has net assets of $1m and annual operating profits of
$190,000. However, the bookkeeper forgot to account for the following:
A machine with a net book value of $40,000 was sold at the start of the year for $50,000 and
replaced with a machine costing $250,000. Both the purchase and sale are cash transactions. No
depreciation is charged in the year of purchase or disposal. The investment centre calculates
return on investment (ROI) based on closing net assets.
Assuming no other changes to profit or net assets, what is the return on investment (ROI) for
the year?
Fir Co
 18·8%
st I pyri
 19·8%
 15·1%
ntu ght
 15·9%
itio
n2
017
CARDALE CO
Cardale Industrial Metal Co (CIM Co) is a large supplier of industrial metals, that is split into a number
of divisions. Each division operates separately as an investment centre, with each one having full
control over its non-current and current assets. Head Office imposes common accounting policies
including monthy rates of depreciation.
Each divisional manager is paid a salary of $120,000 per annum plus an annual performance-related
bonus, based on the return on investment (ROI) achieved by their division for the year. Each divisional
manager is expected to achieve a minimum ROI for their division of 10% per annum. If a manager only
meets the 10% target, they are not awarded a bonus. However, for each whole percentage point
above 10% which the division achieves for the year, a bonus equivalent to 2% of annual salary is paid,
subject to a maximum bonus equivalent to 40% of annual salary.
The following figures relate to Division N for the year ended 31 August 20X5:
Division N
$’000
Sales 8,700
Net profit 1,286
Non-current assets 14,980
Inventory, cash and trade receivables 3,260
Trade payables 1,400
ht 7
Net profit is stated after deducting $684,000 apportioned Head Office costs.
r i g 0 1
Division N’s manager is concerned that his bonus may be lower in comparison with the manager of
2
y
p ion
Division F, a smaller division than Division N. He has found out that the manager of Division F has
o
achieved a return on investment of 28.5% for the year ended 31 August 20X5, which Division N’s
C uit
manager regards as very high.
t
Division F’s manager has stated that his figures are good because he runs his department very
I n
efficiently and is always looking to improve the decision-making process. To that end he invested in a
t
strategic executive information system just before 31 August 20X5.
Fi rs
Division N’s manager believes that it would be better if Cardale Co switched to basing its bonus system
on the size of residual income generated by each Division, based on a cost of capital of 10%.
30 Calculate, to the nearest 0.1%, the return on investment for Division N for the year ended 31
August 20X5.
31 Calculate the bonus that the manager of Division F will be paid for the year ended 31 August
20X5.
$
32 Which of the following is/are possible reasons why the manager of Division F has achieved a
high ROI for the year ended 31 August 20X5?
Possible Not possible

reason reason
Division F’s manager has kept cash balances high.  
The accumulated depreciation on Division F’s non-current  
assets is low.
Division F’s manager invested in the strategic management  
information system just before the year-end.
33 For which TWO of the following reasons might Division F’s manager be concerned about the
fairness of basing bonus on RI in the way proposed by Division N’s manager?
 Division F is smaller than Division N.
 It reduces the incentive for Division F to undertake investments where the benefits may
be marginal.
 Division F has a lower risk profile than Division N.
 Division F’s manager is more likely to be penalised for taking decisions that are in the
best interests of Cardale Co.
Fir Co
34 For which of the following reasons is the manager of Division F most likely to have invested in a
st I pyri
strategic executive information system?
 The system lists in detail all the accounting information relating to his department.
ntu ght
 The system allows easier access to external sources of information.
 The system will help integrate information needs across Cardale Co.

itio
The system provides expert knowledge and assistance in decision-making in areas where
n2
the manager lacks expertise.
ANDOVER AND WINCHESTER 017

Andover and Winchester are divisions within Petersfield Co, a large diversified business. The Andover
division was only created last year. The following performance statements are available for the year:
Andover Winchester
$000 $000
Revenue 200 450
Variable costs (60) (200)
Fixed costs (25) (70)
Divisional profit before central costs 115 180
Apportioned central costs (60) (120)
Divisional net assets (@NBV) 375 200
The overall cost of financing for the company is 10%. The managers have full discretion over incurring
fixed costs.
35 What is the correct RI (in $000) for appraising the managers of the two divisions?
Andover
$ 000
Winchester
$ 000
Andover Winchester
 $77.5 $160
 $102.5 $230
 $17.5 $40
 $23 $46
36 The following statements have been made:

1 Andover division’s ROI is less than half that of Winchester division
2 One reason Winchester division appears to be performing better could be due to the fact
that it is significantly older than Andover division

ht1 only
7
i g 1
 2 only
y

r 2 0
Both 1 and 2
o p ion
 Neither 1 nor 2
C uit
t
37 Which of the following options shows the words that correctly fill in the gaps in the sentence?
t I n The managers of Andover and Winchester divisions should be assessed on costs, revenue and
rs
investments that are ............... their division. To promote goal-congruent behaviour by the two
Fi
divisions, .............. should be used to compare them. Efficiency variances ............... be used to
assess the managers of the two centres.
 controllable by/RI/can
 incurred by/RI/cannot
 controllable by/ROI/can
 incurred by/ROI/cannot
38 One of the non-executive directors at Petersfield Co has queried the means for rewarding the
managers of its divisions. He wonders whether managers can increase their rewards by trying to
manipulate the short-term results of their divisions.
Which of the following measures would be MOST effective in addressing the possible
problems of short-term manipulation of results?
 Rewarding managers for the performance of their division only
 Linking manager rewards to the overall performance of the company and not divisional
results
 Rewarding managers if they fulfil a number of financial and non-financial targets
 Only rewarding managers by means of a basic salary and not providing any rewards for
short-term performance
39 The board has agreed that the performance of each division should be partly judged by
customer satisfaction.
Which of the following measures is MOST likely to be an indication of how satisfied customers
are?
 The number of items rejected by internal quality control processes
 The level of staff turnover
 The number of new products launched by the division
 The % of on-time deliveries

40 Which of the following is LEAST suitable as a method of evaluating the performance of a public
sector organisation?
 Assessing Value-for-money
 Measuring actual performance in relation to financial targets
 Appointment of a regulator to undertake monitoring
 Conducting a survey of the users of the service
Co
41 A government is trying to assess schools by using a range of financial and non-financial factors.
Fir
One of the chosen methods is the percentage of students passing five exams or more.
st I pyri
Which of the three Es in the value for money framework is being measured here?
ntu ght
 Economy
Efficiency
itio

 Effectiveness
n2
 Expertise
SEATOWN COUNCIL
017
Seatown is located on the coast. The town’s main industry is tourism, with an emphasis on family
holidays. Consequently, the cleanliness of the town’s beaches is a major factor in the town’s success.
The town council has a cleaning department that is responsible for keeping the beaches clean and tidy.
Early every morning the beaches are swept using equipment that is towed behind tractors. Most litter
takes the form of paper and plastic packaging, but it can include glass bottles and aluminium cans.
To try to prevent litter being left on the beach the town council also places bins on the beaches above
the high water mark. Litter bins need to be emptied regularly, otherwise holidaymakers pile their
rubbish beside the bins. This leads to litter being spread by the wind or by seabirds scavenging for food
scraps.
The cost of cleaning the beaches is a major expense for the town council. The management team of
the town council has asked the internal audit department to investigate whether the town is getting
good “value for money” from this expenditure.
42 Which TWO of the following could be used as performance measures of the efficiency of the
beach cleaning operations?
 Tractor running costs
 How much time is spent sweeping the sands
 Amount of litter collected
 How frequently bins are being emptied
43 Which THREE of the following could be used as performance measures of the effectiveness of
the beach cleaning operations?
 Spot checks on litter bins by council officers
 The number of litter bins used
 Time spent by employees on each area of the beaches
 Ratings of beaches by external agencies
 Complaints by visitors
 Amount of vehicle miles covered by tractors
44 To help with its analysis, the council wishes to estimate the number of visitors to Seatown annually.
Which of the following is likely to be the least reliable indicator of the number of visitors to
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Seatown during the year?

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Number of people on beaches ascertained by regular spot counts
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Number of hotel rooms in Seatown
2

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 Number of users of car parks
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 Number of visitors to tourist information centres
45
I n t
Which of the following would be a difficulty/difficulties in analysing the effectiveness of beach
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and litter bin cleaning activities compared with each other and over the year?
Fi rs
Difficulty Not a difficulty
Some refreshment kiosks will only be open at certain  
times of the year.
The number of visitors will be less in winter.  
Certain areas of Seatown’s beaches are more difficult  
to sweep.
Sweeping should pick up litter that poses a threat to  
beach user safety.
46 Seatown Council is considering using Fitzgerald and Moon’s Building Block model as well as
Value for Money analysis.
Which of the following completes this paragraph?
The variation in frequency of sweeping beaches during the year is a measure of _____, whereas
the number of visitors compared with other resorts is a measure of ______.
 resource usage/service quality
 flexibility/service quality
 resource usage/competitiveness
 flexibility/competitiveness

47 The performance of an organisation can be influenced by internal and external factors. Which of
the following are internal factors and which are external factors?
Internal External
Growth in the economy  
Director leaves to join a competitor  
Market shortage of labour  
New health and safety regulations  
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PART 2 REVISION QUESTIONS: Long form
1 THE TELEPHONE CO (Q1, DECEMBER 2011)

The Telephone Co (T Co) is a company specialising in the provision of telephone systems for
commercial clients. There are two parts to the business:
 Installing telephone systems in businesses, either first time installations or replacement
installations;
 Supporting the telephone systems with annually renewable maintenance contracts.
T Co has been approached by a potential customer, Push Co, who wants to install a telephone system
in new offices it is opening. While the job is not a particularly large one, T Co is hopeful of future
business in the form of replacement systems and support contracts for Push Co. T Co is therefore keen
to quote a competitive price for the job. The following information should be considered:
(1)
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One of the company’s salesmen has already been to visit Push Co, to give them a demonstration
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of the new system, together with a complimentary lunch, the costs of which totalled $400.
(2) The installation is expected to take one week to complete and would require three engineers,
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each of whom is paid a monthly salary of $4,000. The engineers have just had their annually
renewable contract renewed with T Co. One of the three engineers has spare capacity to
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complete the work, but the other two would have to be moved from contract X in order to
complete this one. Contract X generates a contribution of $5 per engineer hour. There are no
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other engineers available to continue with Contract X if these two engineers are taken off the
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job. It would mean that T Co would miss its contractual completion deadline on Contract X by
one week. As a result, T Co would have to pay a one-off penalty of $500. Since there is no other
work scheduled for their engineers in one week’s time, it will not be a problem for them to
complete Contract X at this point.
(3) T Co’s technical advisor would also need to dedicate eight hours of his time to the job. He is
working at full capacity, so he would have to work overtime in order to do this. He is paid an
hourly rate of $40 and is paid for all overtime at a premium of 50% above his usual hourly rate.
(4) Two visits would need to be made by the site inspector to approve the completed work. He is
an independent contractor who is not employed by T Co, and charges Push Co directly for the
work. His cost is $200 for each visit made.
(5) T Co’s system trainer would need to spend one day at Push Co delivering training. He is paid a
monthly salary of $1,500 but also receives commission of $125 for each day spent delivering
training at a client’s site.
(6) 120 telephone handsets would need to be supplied to Push Co. The current cost of these is
$18.20 each, although T Co already has 80 handsets in inventory. These were bought at a price
of $16.80 each. The handsets are the most popular model on the market and frequently
requested by T Co’s customers.
(7) Push Co would also need a computerised control system called ‘Swipe 2’. The current market
price of Swipe 2 is $10,800, although T Co has an older version of the system, ‘Swipe 1’, in
inventory, which could be modified at a cost of $4,600. T Co paid $5,400 for Swipe 1 when it
ordered it in error two months ago and has no other use for it. The current market price of
Swipe 1 is $5,450, although if T Co tried to sell the one they have, it would be deemed to be
‘used’ and therefore only worth $3,000.
(8) 1,000 metres of cable would be required to wire up the system. The cable is used frequently by
T Co and it has 200 metres in inventory, which cost $1.20 per metre. The current market price
for the cable is $1·30 per metre.
(9) You should assume that there are four weeks in each month and that the standard working
week is 40 hours long.
Required:
(a) Prepare a cost statement, using relevant costing principles, showing the minimum cost that T Co
should charge for the contract. Make DETAILED notes showing how each cost has been arrived
at and EXPLAINING why each of the costs above has been included or excluded from your cost
statement. (14 marks)
(b) Explain the relevant costing principles used in part (a) and explain the implications of the
minimum price that has been calculated in relation to the final price agreed with Push Co.
(6 marks)
(20 marks)
Cost volume analysis
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2 HAIR CO (Q1, DECEMBER 2012 AMENDED)
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Hair Co manufactures three types of electrical goods for hair: curlers (C), straightening irons (S) and
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dryers (D.) The budgeted sales prices and volumes for the next year are as follows.
C uit C S D
t
Selling price $110 $160 $120
Units
t I n 20,000 22,000 26,000
rs
Each product is made using a different mix of the same materials and labour. Product S also uses new
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revolutionary technology for which the company obtained a ten-year patent two years ago. The
budgeted sales volumes for all the products have been calculated by adding 10% to last year’s sales.
The standard cost card for each product is shown below.
C S D
$ $ $
Material 1 12 28 16
Material 2 8 22 26
Skilled labour 16 34 22
Unskilled labour 14 20 28
Both skilled and unskilled labour costs are variable.
The general fixed overheads are expected to be $640,000 for the next year.
Required:
(a) Calculate the weighted average contribution to sales ratio for Hair Co.
Note: round all workings to TWO decimal places. (6 marks)
(b) Calculate the total break-even sales revenue for the next year for Hair Co.
Note: round all workings to TWO decimal places. (2 marks)
(c) Rank the products according to their C/S ratios. Calculate the revenue and profit for each
product, and the cumulative revenues and profits on the basis that the product with the highest
C/S ratio is sold first. (5 marks)
(d) Briefly comment on your findings in (c). (4 marks)
(e) Explain how a multi-product profit-volume (PV) chart may assist a business in its decision-
making. (3 marks)
(20 marks)
Limiting factors
3 CSC CO (Q32, SEPTEMBER 2016)

CSC Co is a health food company producing and selling three types of high-energy products: cakes,
shakes and cookies, to gyms and health food shops. Shakes are the newest of the three products and
were first launched three months ago. Each of the three products has two special ingredients, sourced
from a remote part the world. The first of these, Singa, is a super-energising rare type of caffeine. The
second, Betta, is derived from an unusual plant believed to have miraculous health benefits.
CSC Co’s projected manufacture costs and selling prices for the three products are as follows:
Fir Cop
Cakes Cookies Shakes
Per unit $ $ $
Selling price
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5·40 4·90 6·00
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Costs:
Ingredients: Singa ($1·20 per gram) 0·30 0·60 1·20
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Ingredients: Betta ($1·50 per gram) 0·75 0·30 1·50
Other ingredients 0·25 0·45 0·90
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Labour ($10 per hour) 1·00 1·20 0·80
Variable overheads 0·50 0·60 0·40
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Contribution 2·60 1·75 1·20
For each of the three products, the expected demand for the next month is 11,200 cakes, 9,800
cookies and 2,500 shakes.
The total fixed costs for the next month are $3,000.
CSC Co has just found out that the supply of Betta is going to be limited to 12,000 grams next month.
Prior to this, CSC Co had signed a contract with a leading chain of gyms, Encompass Health, to supply it
with 5,000 shakes each month, at a discounted price of $5·80 per shake, starting immediately. The
order for the 5,000 shakes is not included in the expected demand levels above.
Required:
(a) Assuming that CSC Co keeps to its agreement with Encompass Health, calculate the shortage of
Betta, the resulting optimum production plan and the total profit for next month. (6 marks)
One month later, the supply of Betta is still limited and CSC Co is considering whether it should breach
its contract with Encompass Health so that it can optimise its profits.
Required:
(b) Discuss whether CSC Co should breach the agreement with Encompass Health.
Note: No further calculations are required. (4 marks)
Several months later, the demand for both cakes and cookies has increased significantly to 20,000 and
15,000 units per month respectively. However, CSC Co has lost the contract with Encompass Health
and, after suffering from further shortages of supply of Betta, Singa and of its labour force, CSC Co has
decided to stop making shakes at all. CSC Co now needs to use linear programming to work out the
optimum production plan for cakes and cookies for the coming month. The variable ‘x’ is being used to
represent cakes and the variable ‘y’ to represent cookies.
The following constraints have been formulated and a graph representing the new production
problem has been drawn:
Singa: 0·25x + 0·5y ≤ 12,000
Betta: 0·5x + 0·2y ≤ 12,500
Labour: 0·1x + 0·12y ≤ 3,000
x ≤ 20,000
y ≤ 15,000
x, y ≥ 0
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Required:
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(c)
(i) Explain what the line labelled ‘C = 2·6x + 1·75y’ on the graph is and what the area
represented by the points 0ABCD means. (4 marks)
(ii) Explain how the optimum production plan will be found using the line labelled ‘C = 2·6x +
1·75y’ and identify Explain what the line labelled ‘C = 2·6x + 1·75y’ on the graph is and
what the area represented by the points 0ABCD means.the optimum point from the
graph. (2 marks)
(iii) Explain what a slack value is and identify, from the graph, where slack will occur as a
result of the optimum production plan. (4 marks)
Note: No calculations are needed for part (c).
(20 marks)
Pricing decisions
4 HEAT CO (Q2, JUNE 2011)

Heat Co specialises in the production of a range of air conditioning appliances for industrial premises.
It is about to launch a new product, the ‘Energy Buster’, a unique air conditioning unit which is capable
of providing unprecedented levels of air conditioning using a minimal amount of electricity. The
technology used in the Energy Buster is unique so Heat Co has patented it so that no competitors can
enter the market for two years. The company’s development costs have been high and it is expected
that the product will only have a five-year life cycle.
Heat Co is now trying to ascertain the best pricing policy that they should adopt for the Energy Buster’s
launch onto the market. Demand is very responsive to price changes and research has established
that, for every $15 increase in price, demand would be expected to fall by 1,000 units. If the company
set the price at $735, only 1,000 units would be demanded.
The costs of producing each air conditioning unit are as follows.
$
Direct materials 42
Labour 12 (1.5 hours at $8 per hour. See note below)
Fixed overheads 6 (Based on producing 50,000 units per annum)
Co
Total cost 60
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Note
The first air conditioning unit took 1.5 hours to make and labour cost $8 per hour. A 95% learning
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curve exists, in relation to production of the unit, although the learning curve is expected to finish
after making 100 units. Heat Co’s management have said that any pricing decisions about the Energy
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Buster should be based on the time it takes to make the 100th unit of the product. You have been told
that the learning co-efficient, b = -0.0740005.
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All other costs are expected to remain the same up to the maximum demand levels.
Required:
(a)
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(i) Establish the demand function (equation) for air conditioning units; (3 marks)
(ii) Calculate the marginal cost for each air conditioning unit after adjusting the
labour cost as required by the note above; (6 marks)
(iii) Equate marginal cost and marginal revenue in order to calculate the optimum price and
quantity, (3 marks)
(b) Explain what is meant by a ‘penetration pricing’ strategy and a ‘market skimming’ strategy and
discuss whether either strategy might be suitable for Heat Co when launching the Energy
Buster. (8 marks)
(20 marks)
5 ROBBER CO (Q1, JUNE 2012)

Robber Co manufactures control panels for burglar alarms, a very profitable product. Every product
comes with a one-year warranty offering free repairs if any faults arise in this period.
It currently produces and sells 80,000 units per annum, with production of them being restricted by
the short supply of labour. Each control panel includes two main components – one keypad and one
display screen. At present, Robber Co manufactures both of these components in-house. However, the
company is currently considering outsourcing the production of keypads and/or display screens.
A newly established company based in Burgistan is keen to secure a place in the market, and has
offered to supply the keypads for the equivalent of $4.10 per unit and the display screens for the
equivalent of $4.30 per unit. This price has been guaranteed for two years.
The current total annual costs of producing the keypads and the display screens are as follows.
Display
Keypads screens
$000 $000
Direct materials 160 116
Direct labour 40 60
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Heat and power costs 64 88
Machine costs
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26 30
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Depreciation and insurance costs 84 96
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Total annual production costs 374 390
Notes:
o p ion
(1)
C uit Materials costs for keypads are expected to increase by 5% in six months’ time; materials costs
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for display screens are only expected to increase by 2%, but with immediate effect.
(2)
t I n Direct labour costs are purely variable and not expected to change over the next year.
Fi rs
(3) Heat and power costs include an apportionment of the general factory overhead for heat and
power as well as the costs of heat and power directly used for the production of keypads and
display screens. The general apportionment included is calculated using 50% of the direct labour
cost for each component and would be incurred irrespective of whether the components are
manufactured in-house or not.
(4) Machine costs are semi-variable; the variable element relates to set up costs, which are based
upon the number of batches made. The keypads’ machine has fixed costs of $4,000 per annum
and the display screens’ machine has fixed costs of $6,000 per annum. Whilst both components
are currently made in batches of 500, this would need to change, with immediate effect, to
batches of 400.
(5) 60% of depreciation and insurance costs relate to an apportionment of the general factory
depreciation and insurance costs; the remaining 40% is specific to the manufacture of keypads
and display screens.
Required:
(a) Advise Robber Co whether it should continue to manufacture the keypads and display screens
in-house or whether it should outsource their manufacture to the supplier in Burgistan,
assuming it continues to adopt a policy to limit manufacture and sales to 80,000 control panels
in the coming year. (8 marks)
(b) Robber Co takes 0.5 labour hours to produce a keypad and 0.75 labour hours to produce a
display screen. Labour hours are restricted to 100,000 hours and labour is paid at $1 per hour.
Robber Co wishes to increase its supply to 100,000 control panels (i.e. 100,000 each of keypads
and display screens).
Advise Robber Co as to how many units of keypads and display panels they should either
manufacture and/or outsource in order to minimise their costs. (7 marks)
(c) Discuss the non-financial factors that Robber Co should consider when making a decision about
outsourcing the manufacture of keypads and display screens. (5 marks)
(20 marks)
Risk and uncertainty in decision making
6 CEMENT CO (Q1, JUNE 2011)

Cement Co is a company specialising in the manufacture of cement, a product used in the building
industry. The company has found that when weather conditions are good, the demand for cement
increases since more building work is able to take place. Last year, the weather was so good, and the
demand for cement was so great, that Cement Co was unable to meet demand. Cement Co is now
trying to work out the level of cement production for the coming year in order to maximise profits.
Co
The company doesn’t want to miss out on the opportunity to earn large profits by running out of
Fir
cement again. However, it doesn’t want to be left with large quantities of the product unsold at the
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end of the year, since it deteriorates quickly and then has to be disposed of. The company has received
the following estimates about the probable weather conditions and corresponding demand levels for
the coming year:
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Weather Probability Demand
Good 25% 350,000 bags
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Average 45% 280,000 bags
Poor 30% 200,000 bags
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Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has
to be disposed of at a cost of $0.50 per bag.
Cement Co has decided to produce at one of the three levels of production to match forecast demand.
It now has to decide which level of cement production to select.
Required:
(a) Construct a pay-off table to show all the possible profit outcomes. (8 marks)
(b) Decide the level of cement production the company should choose, based on the following
decision rules:
(i) Maximin (1 mark)
(ii) Maximax (1 mark)
(iii) Expected value (4 marks)
You must justify your decision under each rule, showing all necessary calculations.
(c) Describe the ‘maximin’ and ‘expected value’ decision rules, explaining when they might be used
and the attitudes of the decision makers who might use them. (6 marks)
(20 marks)
1 NEWTOWN SCHOOL (Q5, JUNE 2013)

Newtown School’s head teacher has prepared the budget for the year ending 31 May 2014. The
government pays the school $1,050 for each child registered at the beginning of the school year, which
is June 1, and $900 for any child joining the school part-way through the year. The school does not
have to refund the money to the government if a child leaves the school part-way through the year.
The number of pupils registered at the school on 1 June 2013 is 690, which is 10% lower than the
previous year. Based on past experience, the probabilities for the number of pupils starting the school
part-way through the year are as follows.
Probability No. of pupils joining late
0.2 50
0.3 20
0.5 26
The head teacher admits to being ‘poor with numbers’ and does not understand probabilities so, when
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calculating budgeted revenue, he just calculates a simple average for the number of pupils expected to
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join late. His budgeted revenue for the year ending 31 May 2014 is therefore as follows:
i
y r 2 0 Rate per Total
p ion
Pupils pupil income
o
$ $
C uit
Pupils registered at beginning of school year 690 1,050 724,500
t
Average expected number of new joiners 32 900 28,800
I n
753,300
rst
The head teacher uses incremental budgeting to budget for his expenditure, taking actual expenditure
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for the previous year as a starting point and simply adjusting it for inflation, as shown below.
Actual cost for Inflationary Budgeted cost for
Note y/e 31 May 2013 adjustment y/e 31 May 2014
$ $
Repairs and maintenance 1 44,000 +3% 45,320
Salaries 2 620,000 +2% 632,400
Capital expenditure 3 65,000 +6% 68,900
Total budgeted expenditure 746,620
Budget surplus 6,680
Notes
(1) $30,000 of the costs for the year ended 31 May 2013 related to standard maintenance checks
and repairs that have to be carried out by the school every year in order to comply with
government health and safety standards. These are expected to increase by 3% in the coming
year. In the year ended 31 May 2013, $14,000 was also spent on redecorating some of the
classrooms. No redecorating is planned for the coming year.
(2) One teacher earning a salary of $26,000 left the school on 31 May 2013 and there are no plans
to replace her. However, a 2% pay rise will be given to all staff with effect from 1 December
2013.
(3) The full $65,000 actual costs for the year ended 31 May 2013 related to improvements made to
the school gym. This year, the canteen is going to be substantially improved, although the
extent of the improvements and level of service to be offered to pupils is still under discussion.
There is a 0·7 probability that the cost will be $145,000 and a 0·3 probability that it will be
$80,000. These costs must be paid in full before the end of the year ending 31 May 2014.
The school’s board of governors, who review the budget, are concerned that the budget surplus has
been calculated incorrectly. They believe that it should have been calculated using expected income,
based on the probabilities provided, and using expected expenditure, based on the information
provided in notes 1 to 3. They believe that incremental budgeting is not proving a reliable tool for
budget setting in the school since, for the last three years, there have been shortfalls of cash despite a
budget surplus being predicted. Since the school has no other source of funding available to it, these
shortfalls have had serious consequences, such as the closure of the school kitchen for a considerable
period in the last school year, meaning that no hot meals were available to pupils. This is thought to
have been the cause of the 10% fall in the number of pupils registered at the school on 1 June 2013.
Required:
(a) Considering the views of the board of governors, recalculate the budget surplus/deficit for the
year ending 31 May 2014. (6 marks)
(b) Discuss the advantages and disadvantages of using incremental budgeting. (4 marks)
(c) Briefly outline the three main steps involved in preparing a zero-based budget. (6 marks)
Fir Co
(d) Discuss the extent to which zero-based budgeting could be used by Newtown School to improve
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the budgeting process. (4 marks)
(20 marks)
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Quantitative analysis
2 MIC CO (Q3, DECEMBER 2013) n2

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Mic Co produces microphones for mobile phones and operates a standard costing system. Before
production commenced, the standard labour time per batch for its latest microphone was estimated
to be 200 hours. The standard labour cost per hour is $12 and resource allocation and cost data were
therefore initially prepared on this basis.
Production of the microphone started in July and the number of batches assembled and sold each
month was as follows:
Month No of batches assembled and sold
July 1
August 1
September 2
October 4
November 8
The first batch took 200 hours to make, as anticipated, but, during the first four months of production,
a learning effect of 88% was observed, although this finished at the end of October. The learning
formula is shown on the formula sheet and at the 88% learning rate the value of b is – 0·1844245.
Mic Co uses ‘cost plus’ pricing to establish selling prices for all its products. Sales of its new
microphone in the first five months have been disappointing. The sales manager has blamed the
production department for getting the labour cost so wrong, as this, in turn, caused the price to be too
high. The production manager has disclaimed all responsibility, saying that, ‘as usual, the managing
director prepared the budgets alone and didn’t consult me and, had he bothered to do so, I would
have told him that a learning curve was expected.’
Required:
(a) Calculate the actual total monthly labour costs for producing the microphones for each of the
five months from July to November. (9 marks)
(b) Discuss the implications of the learning effect coming to an end for Mic Co, with regard to
costing, budgeting and production. (4 marks)
(c) Discuss the potential advantages and disadvantages of involving senior staff at Mic Co in the
budget setting process, rather than the managing director simply imposing the budgets on
them. (7 marks)
(20 marks)
Standard costing
3 NOBLE (Q3, JUNE 2011)

Noble is a restaurant that is only open in the evenings, on SIX days of the week. It has eight restaurant
and kitchen staff, each paid a wage of $8 per hour on the basis of hours actually worked. It also has a
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restaurant manager and a head chef, each of whom is paid a monthly salary of $4,300. Noble’s budget
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and actual figures for the month of May was as follows.
i
y r 2 0 Budget Actual
p ion
Number of meals 1,200 1,560
o
C uit $ $ $ $
t
Revenue: Food 48,000 60,840
n
Drinks 12,000 11,700
t I 60,000 72,540
rs
Variable costs:
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Staff wages (9,216) (13,248)
Food costs (6,000) (7,180)
Drink costs (2,400) (5,280)
Energy costs (3,387) (3,500)
(21,003) (29,208)
Fixed costs:
Manager’s and chef’s pay (8,600) (8,600)
Rent, rates and depreciation (4,500) (13,100) (4,500) (13,100)
Operating profit 25,897 30,232
The budget above is based on the following assumptions.

(1) The restaurant is only open six days a week and there are four weeks in a month. The average
number of orders each day is 50 and demand is evenly spread across all the days in the month.
(2) The restaurant offers two meals: Meal A, which costs $35 per meal and Meal B, which costs
$45 per meal. In addition to this, irrespective of which meal the customer orders, the average
customer consumes four drinks each at $2.50 per drink. Therefore, the average spend per
customer is either $45 or $55 including drinks, depending on the type of meal selected. The
May budget is based on 50% of customers ordering Meal A and 50% of customers ordering
Meal B.
(3) Food costs represent 12.5% of revenue from food sales.
(4) Drink costs represent 20% of revenue from drinks sales.

(5) When the number of orders per day does not exceed 50, each member of hourly paid staff is
required to work exactly six hours per day. For every incremental increase of five in the average
number of orders per day, each member of staff has to work 0.5 hours of overtime for which
they are paid at the increased rate of $12 per hour.
You should assume that all costs for hourly paid staff are treated wholly as variable costs.
(6) Energy costs are deemed to be related to the total number of hours worked by each of the
hourly paid staff, and are absorbed at the rate of $2.94 per hour worked by each of the eight
staff.
Required:
(a) Prepare a flexed budget for the month of May, assuming that the standard mix of customers
remains the same as budgeted. (12 marks)
(b) After preparation of the flexed budget, you are informed that the following variances have
arisen in relation to total food and drink sales:
Sales mix contribution variance $1,014 Adverse
Sales quantity contribution variance $11,700 Favourable
Required:
Co
BRIEFLY describe the sales mix contribution variance and the sales quantity contribution
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variance. Identify why each of them has arisen in Noble’s case. (4 marks)
(c)
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Noble’s owner told the restaurant manager to run a half-price drinks promotion at Noble for the
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month of May on all drinks. Actual results showed that customers ordered an average of six
drinks each instead of the usual four but, because of the promotion, they only paid half of the
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usual cost for each drink. You have calculated the sales margin price variance for drink sales
alone and found it to be a worrying $11,700 adverse. The restaurant manager is worried and
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concerned that this makes his performance for drink sales look very bad.
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Required:
BRIEFLY discuss TWO other variances that could be calculated for drinks sales or food sales in
order to ensure that the assessment of the restaurant manager’s performance is fair. These
should be variances that COULD be calculated from the information provided above although
no further calculations are required here. (4 marks)
(20 marks)
4 BLOCK CO (Q4, JUNE 2013)

Block Co operates an absorption costing system and sells three types of product – Commodity 1,
Commodity 2 and Commodity 3. Like other competitors operating in the same market, Block Co is
struggling to maintain revenues and profits in face of the economic recession which has engulfed the
country over the last two years. Sales prices fluctuate in the market in which Block Co operates.
Consequently, at the beginning of each quarter, a market specialist, who works on a consultancy basis
for Block Co, sets a budgeted sales price for each product for the quarter, based on his expectations of
the market. This then becomes the ‘standard selling price’ for the quarter. The sales department itself
is run by the company’s sales manager, who negotiates the actual sales prices with customers. The
following budgeted figures are available for the quarter ended 31 May 2013.
Budgeted production Standard selling price Standard variable
Product and sales units per unit production costs per unit
Commodity 1 30,000 $30 $18
Commodity 2 28,000 $35 $28.40
Commodity 3 26,000 $41.60 $26.40
Block Co uses absorption costing. Fixed production overheads are absorbed on the basis of direct
machine hours and the budgeted cost of these for the quarter ended 31 May 2013 was $174,400.
t
Commodity 1, 2 and 3 use 0.2 hours, 0.6 hours and 0.8 hours of machine time respectively.
g h 1 7
The following data shows the actual sales prices and volumes achieved for each product by Block Co
i
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for the quarter ended 31 May 2013 and the average market prices per unit.
y
p ion 2 Actual production and Actual selling price Average market price
o
Product sales units per unit per unit
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Commodity 1 29,800 $31 $32·20
t
Commodity 2 30,400 $34 $33·15
I n
Commodity 3 25,600 $40·40 $39·10
rst
The following variances have already been correctly calculated for Commodities 1 and 2:
Fi
Sales price operational variances
Commodity 1: $35,760 Adverse
Commodity 2: $25,840 Favourable
Sales price planning variances
Commodity 1: $65,560 Favourable
Commodity 2: $56,240 Adverse
Required:
(a) Calculate, for Commodity 3 only, the sales price operational variance and the sales price
planning variance. (4 marks)
(b) Using the data provided for Commodities 1, 2 and 3, calculate the total sales mix variance and
the total sales quantity variance. (11 marks)
(c) Briefly discuss the performance of the business and, in particular, that of the sales manager for
the quarter ended 31 May 2013. (5 marks)
(20 marks)
5 TRUFFLE CO (Q2, DECEMBER 2012)

Truffle Co makes high quality, handmade chocolate truffles which it sells to a local retailer. All
chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer. The standard
cost of labour for each batch is $6.00 and the standard labour time for each batch is half an hour. In
November, Truffle Co had budgeted production of 24,000 batches; actual production was only 20,500
batches. 12,000 labour hours were used to complete the work and there was no idle time. All workers
were paid for their actual hours worked. The actual total labour cost for November was $136,800.
The Production Manager at Truffle Co has no input into the budgeting process.
At the end of October, the Managing Director decided to hold a meeting and offer staff the choice of
either accepting a 5% pay cut or facing a certain number of redundancies. All staff subsequently
agreed to accept the 5% pay cut with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change was
implemented immediately and made the chocolates more difficult to shape. When recipe changes
such as these are made, it takes time before the workers become used to working with the new
ingredient mix, making the process 20% slower for at least the first month of the new operation.
The standard costing system is only updated once a year in June and no changes are ever made to the
Co
system outside of this.
Fir
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Required:
(a) Calculate the total labour rate and total labour efficiency variances for November, based on the
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standard cost provided above. (4 marks)
(b) Analyse the total labour rate and total labour efficiency variances into component parts for
itio
planning and operational variances in as much detail as the information allows. (8 marks)
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(c) Assess the performance of the production manager for the month of November. (8 marks)
017
(20 marks)
6 STICKY WICKET (Q2, JUNE 2010)

Sticky Wicket (SW) manufactures cricket bats using high quality wood and skilled labour using mainly
traditional manual techniques. The manufacturing department is a cost centre within the business and
operates a standard costing system based on marginal costs.
At the beginning of April 2010 the production director attempted to reduce the cost of the bats by
sourcing wood from a new supplier and de-skilling the process a little by using lower grade staff on
parts of the production process. The standards were not adjusted to reflect these changes.
The variance report for April 2010 is shown below (extract).
Variances Adverse Favourable
$ $
Material price 5,100
Material usage 7,500
Labour rate 43,600
Labour efficiency 48,800
Labour idle time 5,400
The Production Director pointed out in his April 2010 board report that the new grade of labour
required significant training in April and this meant that productive time was lower than usual. He
accepted that the workers were a little slow at the moment but expected that an improvement would
be seen in May 2010. He also mentioned that the new wood being used was proving difficult to cut
cleanly, resulting in increased waste levels.
Sales for April 2010 were down 10% on budget and returns of faulty bats were up 20% on the previous
month. The sales director resigned after the board meeting stating that SW had always produced
quality products but the new strategy was bound to upset customers and damage the brand of the
business.
Required:
(a) Assess the performance of the Production Director using all the information above, taking into
account both the decision to use a new supplier and the decision to de-skill the process.
(7 marks)
In May 2010 the budgeted sales were 19,000 bats and the standard cost card is as follows.
Std cost Std cost
$ $
Materials (2kg at $5/kg) 10
Labour (3hrs at $12/hr) 36
Marginal cost 46
Selling price 68
t
Contribution 22
i g h 1 7
In May 2010 the following results were achieved.
y r 2 0
40,000kg of wood were bought at a cost of $196,000, this produced 19,200 cricket bats. No inventory
o p ion
of raw materials is held. The labour was paid for 62,000 hours and the total cost was $694,000. Labour
C uit
worked for 61,500 hours.
t
The sales price was reduced to protect the sales levels. However, only 18,000 cricket bats were sold at
I n
an average price of $65.
rst
Required:
Fi
(b) Calculate the materials, labour and sales variances for May 2010 in as much detail as the
information allows. You are not required to comment on the performance of the business.
(13 marks)
(20 marks)
1 SQUARIZE (Q2, JUNE 2013)

Squarize is a large company which, for many years, operated solely as a pay-tv broadcaster. However,
five years ago, it started product bundling, offering broadband and telephone services to its pay-tv
customers. Customers taking up the offer were then known in the business as ‘bundle customers’ and
they had to take up both the broadband and telephone services together with the pay-tv service.
Other customers were still able to subscribe to pay-tv alone but not to broadband and telephone
services without the pay-tv service.
All contracts to customers of Squarize are for a minimum three-month period. The pay-tv box is sold to
the customer at the beginning of the contract; however, the broadband and telephone equipment is
only rented to them.
In the first few years after product bundling was introduced, the company saw a steady increase in
profits. Then, Squarize saw its revenues and operating profits fall. Consequently, staff bonuses were
not paid, and staff became dissatisfied. Several reasons were identified for the deterioration of results:
(1)
Fir Co
In the economy as a whole, discretionary spending had been severely hit by rising
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unemployment and inflation. In a bid to save cash, many pay-tv customers were cancelling their
contracts after the minimum three-month period as they were then able to still keep the pay-tv
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box. The box comes with a number of free channels, which the customer can still continue to
receive free of charge, even after the cancellation of their contract.
(2)
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The company’s customer service call centre, which is situated in another country, had been the
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cause of lots of complaints from customers about poor service, and, in particular, the number of
calls it sometimes took to resolve an issue.
(3)
017
Some bundle customers found that the broadband service that they had subscribed to did not
work. As a result, they were immediately cancelling their contracts for all services within the 14-
day cancellation period permitted under the contracts.
In a response to the above problems and in an attempt to increase revenues and profits, Squarize
made the following changes to the business:
(1) It made a strategic decision to withdraw the pay-tv–broadband–telephone package from the
market and, instead, offer each service as a standalone product.
(2) It guaranteed not to increase prices for a 12-month period for each of its three services.
(3) It transferred its call centre back to its home country and increased the level of staff training
given for call centre workers.
(4) It investigated and resolved the problem with customers’ broadband service.
It is now one year since the changes were made and the Finance Director wants to use a balanced
scorecard to assess the extent to which the changes have been successful in improving the
performance of the business.
Required:
(a) For each perspective of the balanced scorecard, identify two goals (objectives) together with a
corresponding performance measure for each goal which could be used by the company to
assess whether the changes have been successful. Justify the use of each of the performance
measures that you choose. (16 marks)
(b) Discuss how the company could reduce the problem of customers terminating their pay-tv
service after only three months. (4 marks)
(20 marks)
2 JUNGLE CO (Q31, SEPTEMBER 2016)

Jungle Co is a very successful multinational retail company. It has been selling a large range of
household and electronic goods for some years. One year ago, it began using new suppliers from the
country of Slabak, where labour is very cheap, for many of its household goods. In 20X4, Jungle Co also
became a major provider of ‘cloud computing’ services, investing heavily in cloud technology. These
services provide customers with a way of storing and accessing data and programs over the internet
rather than on their computers’ hard drives.
All Jungle Co customers have the option to sign up for the company’s ‘Gold’ membership service,
which provides next day delivery on all orders, in return for an annual service fee of $40. In September
t
20X5, Jungle Co formed its own logistics company and took over the delivery of all of its parcels,
h 7
instead of using the services of international delivery companies.
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Over the last year, there has been worldwide growth in the electronic goods market of 20%. Average
y
p ion
growth rates and gross profit margins for cloud computing service providers have been 50% and 80%
o
respectively in the last year. Jungle Co’s prices have remained stable year on year for all sectors of its
C uit
business, with price competitiveness being crucial to its continuing success as the leading global
t
electronic retailer.
I n
The following information is available for Jungle Co for the last two financial years:
t
rs
Notes 31 August 20X6 31 August 20X5
Fi
$’000 $’000
Revenue 1 94,660 82,320
Cost of sales 2 (54,531) (51,708)
Administration expenses 3 (2,760) (1,720)
Distribution expenses (13,420) (13,180)
Other operating expenses (140) (110)
Net profit 23,809 15,602
Notes
(1) Breakdown of revenue
31 August 20X6 31 August 20X5
$’000 $’000
Household goods 38,990 41,160
Electronic goods 41,870 32,640
Cloud computing services 12,400 6,520
Gold membership fees 1,400 2,000
94,660 82,320
(2) Breakdown of cost of sales

$’000 $’000
Household goods 23,394 28,812
Electronic goods 26,797 21,216
Cloud computing services 4,240 1,580
Gold membership fees 100 100
54,531 51,708
(3) Administration expenses
Included in these costs are the costs of running the customer service department ($860,000 in
20X5; $1,900,000 in 20X6.) This department deals with customer complaints.
(4) Non-financial data
Percentage of orders delivered on time 74% 92%
No. of customer complaints 1,400,000 320,000
No. of customers 7,100,000 6,500,000
Percentage of late ‘Gold’ member deliveries 14·00% 2·00%
Required:
Discuss the financial and non-financial performance of Jungle Co for the year ending 31 August 20X6.
Co
Note: There are 7 marks available for calculations and 13 marks available for discussion.
Fir
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(20 marks)

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3 PROTECT AGAINST FIRE CO (Q4, DECEMBER 2013)
017
Protect Against Fire Co (PAF Co) manufactures and sells fire safety equipment and also provides fire
risk assessments and fire safety courses to businesses. It has been trading for many years in the
country of Calana, where it is the market leader.
Five years ago, the directors of PAF Co established a similar operation in its neighbouring country,
Sista, renting business premises at various locations across the country. The fire safety market in Sista
has always been dominated by two other companies, and when PAF Co opened the Sista division, its
plan was to become market leader there within five years. Both the Calana division (Division C) and the
Sista division (Division S) usually restrict themselves to a marketing budget of $0.5 million per annum
but in 2013, Division S launched a $2m advertising campaign in a final push to increase market share.
It also left its prices for products and services unchanged in 2013 rather than increasing them in line
with its competitors.
Although the populations of both countries are similar, geographically, the country of Sista is twice as
large as Calana and its customers are equally spread across the country. The products and services
offered by the two divisions to their customers require skilled staff, demand for which is particularly
high in Sista. Following the appointment of a new government in Sista at the end of 2012, stricter fire
safety regulations were immediately introduced for all companies. At the same time, the government
introduced a substantial tax on business property rents which landlords passed on to their tenants.
International shortages of fuel have led to a 20% increase in fuel prices in both countries in the last
year.
Summary statements of profit or loss for the two divisions for the two years ended 30 November 2012
and 30 November 2013 are shown below.
Division S Division S Division C Division C

2013 2012 2013 2012
$000 $000 $000 $000
Revenue 38,845 26,937 44,065 40,359
Material costs (3,509) (2,580) (4,221) (3,385)
Payroll costs (10,260) (6,030) (8,820) (7,700)
Property costs (3,200) (1,800) (2,450) (2,320)
Gross profit 21,876 16,527 28,574 26,954
Distribution and marketing costs (10,522) (7,602) (7,098) (5,998)
Administrative overheads (7,024) (6,598) (12,012) (11,974)
Operating profit 4,330 2,327 9,464 8,982
Employee numbers 380 241 420 385
Market share 30% 25% 55% 52%
Required:
Using all the information above, assess the financial performance of Division S in the year ended
30 November 2013. State clearly where further information might be required in order to make more
reasoned conclusions about the division’s performance.
Note: Up to 7 marks are available for calculations.
(20 marks)
ht
4 BISCUITS AND CAKES (Q5, JUNE 2012)
7
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y
The Biscuits division (Division B) and the Cakes division (Division C) are two divisions of a large,
p ion
manufacturing company. While both divisions operate in almost identical markets, each division
o
operates separately as an investment centre. Each month, operating statements must be prepared by
C uit
each division and these are used as a basis for performance measurement for the divisions.
I n t
Last month, senior management decided to recharge head office costs to the divisions. Consequently,
each division is now going to be required to deduct a share of head office costs in its operating
rst
statement before arriving at ‘net profit’, which is then used to calculate return on investment (ROI).
Fi
Prior to this, ROI has been calculated using controllable profit only. The company’s target ROI,
however, remains unchanged at 20% per annum. For each of the last three months, Divisions B and C
have maintained ROIs of 22% per annum and 23% per annum respectively, resulting in healthy
bonuses being awarded to staff. The company has a cost of capital of 10%.
The budgeted operating statement for the month of July is shown below.
B C
$000 $000
Sales revenue 1,300 1,500
Less variable costs (700) (800)
Less controllable fixed costs (134) (228)
Controllable profit 466 472
Less apportionment of head office costs (155) (180)
Net profit 311 292
Divisional net assets $23.2m $22.6m

Required:
(a) Calculate the expected annualised Return on Investment (ROI) using the new method as
preferred by senior management, based on the above budgeted operating statements, for each
of the divisions. (2 marks)
(b) The divisional Managing Directors are unhappy about the results produced by your calculations
in (a) and have heard that a performance measure called ‘residual income’ may provide more
information.
Calculate the annualised residual income (RI) for each of the divisions, based on the net profit
figures for the month of July. (3 marks)
(c) Discuss the expected performance of each of the two divisions, using both ROI and RI, and
making any additional calculations deemed necessary. Conclude as to whether, in your opinion,
the two divisions have performed well. (6 marks)
(d) Division B has now been offered an immediate opportunity to invest in new machinery at a cost
of $2.12 million.
The machinery is expected to have a useful economic life of four years, after which it could be
sold for $200,000. Division B’s policy is to depreciate all of its machinery on a straight-line basis
over the life of the asset. The machinery would be expected to expand Division B’s production
capacity, resulting in a 10% increase in contribution per month.
Co
Recalculate Division B’s expected annualised ROI and annualised RI, based on July’s budgeted
Fir
operating statement after adjusting for the investment. State whether the Managing Director
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will be making a decision that is in the best interests of the company as a whole if ROI is used as
the basis of the decision. (5 marks)
(e)
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Explain any behavioural problems that will result if the company’s senior management insist on
using solely ROI, based on net profit rather than controllable profit, to assess divisional
performance and reward staff.
itio (4 marks)
n2 (20 marks)
5 MAN CO (Q4 MARCH/JUNE 2016 AMENDED) 017

A manufacturing company, Man Co, has two divisions: Division L and Division M. Both divisions make a
single standardised product. Division L makes component L, which is supplied to both Division M and
external customers. Division M makes product M using one unit of component L and other materials. It
then sells the completed product M to external customers. To date, Division M has always bought
component L from Division L.
The following information is available:
Component L Product M
$ $
Selling price 40 96
Direct materials:
Component L (40)
Other (12) (17)
Direct labour (6) (9)
Variable overheads (2) (3)
Selling and distribution costs (4) (1)
Contribution per unit before fixed costs 16 26
Annual fixed costs $500,000 $200,000

Annual external demand (units) 160,000 120,000
Capacity of plant 300,000 130,000
Division L charges the same price for component L to both Division M and external customers.
However, it does not incur the selling and distribution costs when transferring internally.
Division M has just been approached by a new supplier who has offered to supply it with component L
for $37 per unit. Prior to this offer, the cheapest price which Division M could have bought component
L for from outside the group was $42 per unit.
It is head office policy to let the divisions operate autonomously without interference at all.
Required:
(a) Calculate the incremental profit/(loss) per component for the group if Division M accepts the
new supplier’s offer and recommend how many components Division L should sell to Division M
if group profits are to be maximised. (3 marks)
(b) Using the quantities calculated in (a) and the current transfer price, calculate the total annual
profits of each division and the group as a whole. (6 marks)
(c) Discuss the problems which will arise if the transfer price remains unchanged and advise the
divisions on a suitable alternative transfer price for component L. (6 marks)
The Finance Director of Man Co is about to introduce balanced scorecard reporting to Division L and
Division M. As there have been queries from the divisions about how the balanced scorecard will work,
in particular the three non-financial perspectives, he will need to provide more guidance before the
approach can be implemented.
t
Required:
(d)
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Explain the significance of the three non-financial perspectives in the balanced scorecard
i
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approach to performance measurement. (5 marks)
y
p ion 2 (20 marks)
o
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I n t
rst
Fi
AC C A F 5 Q u e s t i o n B a n k Revision answers: 1: Specialist cost and management accounting techniques 229
PART 2 REVISION ANSWERS: Objective test and Scenario

1
True False
ABC can only be used within a manufacturing  
environment.
ABC assumes that most overhead costs are incurred at  
the product level.
A cost driver is a factor which causes a change in the  
cost of an activity.
Traditional absorption costing tends to under-estimate  
overhead costs for high volume products.
ABC can be used for manufacturing and service businesses. Traditional absorption costing assumes
Co
that most overhead costs are incurred at the product level and overestimates costs for high value
Fir
items. ABC considers more of the overheads relate to batch and product sustaining activities.
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2 $ 46.25
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Set-up costs per production run = $140,000/28 = $5,000
n2
Cost per inspection = $80,000/8 = $10,000
Other overhead costs per labour hour = $96,000/48,000 = $2
017
Overheads costs of product D:
$
Set-up costs (15 × $5,000) 75,000
Inspection costs (3 × $10,000) 30,000
Other overheads (40,000 × $2) 80,000
185,000
Overhead cost per unit = 185,000/4,000 = $46·25
3 $ 49.00
Total material budget = (5,000 × $20) + (4,000 × $25) = $200,000

Fixed overheads related to materials = $150,000
OAR = $150,000/$200,000 = $0.75 per $ of material
Lou material fixed overhead = $0.75 × $20 = $15
Total labour budget = (5,000 × $40) + (4,000 × $60) = $440,000
General fixed overheads = $374,000
OAR = $374,000/$440,000 = $0.85 per $ of labour
Lou general fixed overhead = $0.85 × $40 = $34
Total fixed overhead cost per unit of Lou = $15 + $34 = $49
230 Revision answers: 1: Specialist cost and management accounting techniques AC C A F5 Q u e s t i o n B a n k
4  $120
Total material budget ((1,000 units × $10) + (2,000 units × $20)) = $50,000
Fixed costs related to material handling = $100,000
OAR = $2/$ of material
Product B = $2 x $20 = $40
Total labour budget ((1,000 units × $5) + (2,000 units x $20) = $45,000
General fixed costs = $180,000
OAR = $4/$ of labour
Product B = $4 × $20 = $80
Total fixed overhead cost per unit of Product B ($40 + $80) = $120
WASH CO
5 $ 298
Total overhead costs = $877,620

Total machine hours = (3,200 × 2) + (5,450 × 1) = 11,850
t
Overhead absorption rate = $877,620/11,850 = $74.06
i g h 1 7
Overhead cost for S = 2 × $74.06 = $148.12
y r 2 0 Product S
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$
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Materials cost
Labour cost (at $12 per hour)
117.00
6.00
t
Overhead costs 148.12
I n
Total cost 271.12
t
10% mark-up 27.11
Fi rs
Transfer price using machine hours 298.23
6 $ 138
Machine set up costs: driver = number of production runs

30 + 12 = 42
Therefore, cost per set up = $306,435/42 = $7,296.07
Machine maintenance costs: driver = machine hours: 11,850 as above
$415,105/11,850 = $35.03
Product S Per unit
$
Machine set-up costs ($7,296.07 × 30/3,200) 218,882 68.40
Machine maintenance costs ($35.03 × 3,200 × 2/3,200) 224,192 70.06
Total overheads absorbed 443,074 138.46
7 $ 16
Ordering costs: driver = number of purchase orders

82 + 64 = 146
Therefore, cost per order = $11,680/146 = $80
Delivery costs: driver = number of deliveries.
64 + 80 = 144
Therefore, cost per delivery = $144,400/144 = $1,002.78
Product R Per unit
$
Ordering costs ($80 × 64/5,450) 5,120 0.94
Delivery costs ($1,002.78 × 80/5,450) 80,222 14.72
Total overheads absorbed 85,342 15.66
8
True False
Environmental ABC will be concerned with prevention  
Fir Cop
activities as well as detection and correction activities.
Environmental ABC helps identify environment-driven  
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costs, which may be hidden within general overheads.
Volume of emissions may be a cost driver in  
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environmental ABC.
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Environmental ABC can measure cost savings resulting  
from measures to reduce environmental impact.
All the statements are true.

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9 
017
Input/output analysis aims to identify residual or waste.
 Environment-related costs are connected with activities for which costs can be directly
traced.
Flow cost accounting has a third category – System – that relates to in-house handling of materials.
Environmental life cycle costing also considers costs of clean-up and decommissioning after
production has ceased.
Target costing
10
True False
Target costing is a market driven approach to pricing.  
Using target costing to set selling prices guarantees  
that a company will make a profit on its products.
Unlike traditional costing methods, in ABC production  
overheads are not absorbed across product units.
An organisation which switches to ABC may find that  
some of its existing products, which require minimal
labour hours, no longer appear profitable.
Using target costing to set selling prices will only result in a profit if the company ensures that it
can actually produce the product for less than the selling price.
ABC, like traditional costing methods, attempts to absorb production overheads across product
units. However, this is done in a different way, using cost drivers, rather than labour or machine
hours, to establish an overhead absorption rate. This can result in quite different product costs.
t
25
h
11 $
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Profit required = 40% × $200 = $80. Hence target cost = $120
y
p ion 2
Product cost = $55 + $75 + $15 = $145
o
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So cost gap = $25
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t
12
rs
Characteristic Not characteristic
Fi
Homogenity  
Intangibility  
Perishability  
Spontaneity  
Typically, the services provided will differ according to the customer so heterogeneity/variability
rather than homogeneity is normally a characteristic of a service industry.
13  Use a lower grade of labour

 Reduce the time spent in terms of labour hours
In most service industries the majority of the cost is likely to be related to labour.
14  Substitute current raw materials with cheaper versions

15 $ 362.50
Return: $500,000 × 30% = $150,000

Total sales revenue: $550 × 800 = $440,000
Therefore, total cost = $440,000 – $150,000 = $290,000
Unit cost = $290,000/800 = $362.50
16  Variance analysis
Variance analysis is not relevant to target costing as it is a technique used for cost control at the
production phase of the product life cycle. It is a feedback control tool by nature and target
costing is feedforward.
Value analysis can be used to identify where small cost reductions can be applied to close a cost
gap once production commences.
Functional analysis can be used at the product design stage. It ensures that a cost gap is reached
or to ensure that the product design is one which includes only features which customers want.
Activity analysis identifies and describes activities in an organisation and evaluates their impact
on operations to assess where improvements can be made.
Fir Co
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HELOT CO
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17  2 and 4
Target costing does encourage looking at customer requirements early on so that features
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valued by customers are included, so Statement 2 is correct. It will also force the company to
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closely assess the design and is likely to be successful if costs are designed out at this stage
rather than later once production has started, so Statement 4 is correct.
017
Statement 1 explains a benefit of flow cost accounting. Statement 3 explains the concept of
throughput accounting.
18  $2.05
Target price is $45 and the profit margin is 35% which results in a target cost of $29·25. The
current estimated cost is $31·20 which results in a cost gap of $2·05.
19  2 and 4
EXAM SMART
The word ‘appropriate’ in the requirement is important here – the methods chosen should
not impact on the target selling price.
Using more standardised components and using its own websites for marketing will reduce
processing and marketing costs.
Using cheaper materials and trainee designers will reduce costs but could impact the quality
and customer perception of the product which would impact the target price.
20  The target cost will remain the same and the cost gap will increase.
The change in the learning rate will increase the current estimated cost which will increase the
cost gap.
The target cost will be unaffected as this is based on the target selling price and profit margin;
neither of which are changing.
21  Labour resource usage is high in services relative to material requirements.

Services do use more labour relative to materials.
The other three statements are incorrect as uniformity is not a characteristic of services, there is
no transfer of ownership and although it is difficult to standardise a service due to the human
influence, target costing can still be used.
Life cycle costing

22  A disadvantage of life cycle costing is that it may be difficult, at the start of a product’s
life, to arrive at a realistic estimate of the product’s costs over a number of years.
 Life cycle costing is particularly suitable for innovative organisations which incur high
ht
costs during the early stages of a product's life cycle.
7
r i g 0 1
Life cycle costing is better for organisations that develop products with short lives. Life cycle
2
y
costing is concerned with product costs over a number of periods, and is not concerned with
p ion
the split of costs between each year.
o
C uit
t

n
23 Target costing
t I
Fi rs
24
True

False

It focuses on the short-term by identifying costs at the
beginning of a product’s life cycle.
It identifies all costs which arise in relation to the  
product each year and then calculates the product’s
profitability on an annual basis.
It accumulates a product’s costs over its whole life time  
and works out the overall profitability of a product.
It allocates costs to each stage of a product’s life cycle  
and writes them off at the end of each stage.
Life cycle costing goes beyond the short-term by looking at a product’s whole life cycle and
looks at costs for the entire period, not on an annual basis and not writing costs off at the end
of each stage.
25  $27.40
OAR for fixed production overheads ($72 million/96 million hours) = $0·75 per hour
Total manufacturing costs (300,000 units × $20) = $6,000,000
Total design, depreciation and decommissioning costs = $1,320,000
Total fixed production overheads (300,000 units × 4 hours × $0·75) = $900,000 Total life-cycle
costs = $8,220,000
Life-cycle cost per unit ($8,220,000/300,000 units) = $27·40
FIT CO
26
Included Not included
Research and development costs  
Product design costs  
Marketing costs  
 
Fir Cop
Distribution costs
Selling costs  
st I yri
Administration costs  
ntu ght
All the costs listed are part of the life cycle cost calculation.
 itio
n2
27 It gives a good indication of the success of research and development and design
activities.

017
It matches initial costs to the revenues that the product finally earns.
Life cycle costing is not primarily concerned with splitting costs into periods, but a single set of
costs over a product’s whole lifetime.
It cannot normally prevent a product entering a decline stage as most products will reach that
point at some stage.
28  Products with a short life

 Products being launched in a competitive environment where time to market is very
important
Life cycle costing is particularly useful where products have a short life, since costs and revenues
can be estimated fairly accurately upfront. Life cycle costing also means that launch costs
incurred to speed up the launch are accounted for fairly.
Life cycle costing is less useful where the spread of costs is even, because it addresses the
problems of the mismatching of costs and revenues over time. It is also of limited use if
products are simple, since upfront costs are unlikely to be significant.
29 $ 790 000
Total labour time for first 100 units = 35.56 hours
Time for 99th unit
y = 0.5 × 99–0·074
= 0.3559 hours per unit.
Therefore total hours for 99 units = 35.23 hours.
Therefore, time for 100th unit = 35.56 hours – 35.23 hours = 0.33 hours
Total labour cost over life of product
Year 2
100 units 36 hours
99,900 at 0.33 hours per unit 32,967 hours
Total hours 33,003 hours
at $24 per hour $792,072
30 $ 550 000
Total revenue = 300,000 × $85 = $25,500,000
t
Total desired costs = $25,500,000 × 80% = $20,400,000
i g h 1 7
Reduction in manufacturing costs = $12,600,000 × 25% = $3,150,000
y r 2 0
Total costs before extra R and D/design costs = $23,000,000 – $3,150,000 = $19,850,000
o p ion
Maximum R and D/design costs = $20,400,000 – $19,850,000 = $550,000
C uit
I n t
rst
Fi
31
True False
Throughput accounting is based on the concept that  
there is a finite capacity at certain critical points in an
organisation’s production schedule.
Throughput accounting treats labour as a fixed cost in the  
short-term.
Throughput accounting focusses on improving efficiency  
by using all production facilities to their maximum
capacity.
The aim of throughput accounting is to increase the  
speed with which products move through an organisation
in order to maximise profit.
Only the bottleneck resources will be used to maximum capacity.

32
A 2
B 3
C 1
A B C
$ $ $
Throughput contribution 159 130 120
Throughput/Limiting factor 159/12 130/10 120/7
13.25 13 17.14
nd rd
Ranking 2 3 1st
33  1.33
Return per factory hour = ($130 – $50)/4 hours = $20
Factory costs per hour = $20 + $40/4 = $15
Co
TAR = $20/$15 = 1·33
Fir
34
st I pyri
ntu ght
True False
 
itio
Inventory levels should be kept to a minimum.
All machines within a factory should be 100% efficient,  
n2
with no idle time.
 
017
The distinction between direct and indirect costs is not
useful.
Labour should be treated as a fixed cost that is part of  
total factory cost.
Throughput accounting discourages production for inventory purposes and is often used in a
just in time environment.
In throughput accounting it is the bottleneck resource which should be 100% efficient which
actually may mean unused capacity and idle time elsewhere.
35  Increasing the efficiency of the maintenance routine for Process 2

Throughput is determined by the bottleneck resource. Process 2 is the bottleneck as it has
insufficient time to meet demand.
The only option to improve Process 2 is to improve the efficiency of the maintenance routine.
All the other three options either increase the time available on non-bottleneck resources or
increase demand for an increase in supply which cannot be achieved.
SWEET TREATS BAKERY

36  Mixing
Available Total minutes
Process Brownies Muffins Cupcakes
minutes required
Weighing 240 60 45 100 205
Mixing 180 80 48 60 188
Baking 1,440 480 330 600 1,410
The bottleneck is the mixing process as 188 minutes are required to meet maximum demand
but there are only 180 minutes available.
Note: Four batches of brownies need to be made in order to have sufficient cakes to meet
maximum demand as the cakes must be made in their batch sizes.
37  80 brownies, 30 muffins, 100 cupcakes

Throughput contribution ($) 50 37.5 35
Mixing minutes 20 16 12
t
Throughput per mixing minute ($) 2.50 2.34 2.91
Ranking
i g h 1 7
2 3 1
y r 2 0
Optimal production plan
o p ion Number of Mixing
C uit
Fulfil customer order
cakes minutes
t
1 batch of cupcakes 20 12
I n
1 batch of brownies 40 20
r st1 batch of muffins 30 16
Fi
General production (based on ranking)
4 batches of cupcakes 80 48
1 batch of brownies 40 20
Therefore the bakery should produce 80 brownies, 30 muffins and 100 cupcakes.
38  A bulk discount on flour and sugar is available from suppliers.

 The rent of the premises has been reduced for the next year.
Reduction in rent and discounts on materials will reduce costs and will improve the TPAR.
Giving a customer a loyalty discount will reduce sales revenue and as a result the TPAR. Demand
for cupcakes can increase but it will not impact the TPAR as demand is not the restriction.
39  $95.00
Each oven has a capacity of eight hours and each cupcake batch takes two hours so four extra
batches can be made.
Extra throughput = four batches x $35 = $140
Less the hire costs will result in an additional profit of $95.
40
True False
The bakery’s operating costs exceeded the total throughput  
contribution generated from the three products.
Less idle time in the mixing department would have  
improved the TPAR
Improved efficiency during the weighing process would have  
improved the TPAR.
As the TPAR exceeds 1 then the throughput contribution exceeds operating costs so Statement
1 is false.
Less idle time on a non-bottleneck process would not improve the TPAR, so Statement 2 is false.
Improving efficiency during the weighing process would improve the TPAR, as any actions to
Fir Co
improve throughput on a bottleneck will improve the TPAR so Statement 3 is true.
st I pyri
ntu ght
itio
41
n2
True False
The majority of environmental costs are already  
017
captured within a typical organisation’s accounting
system. The difficulty lies in identifying them.
Input/output analysis divides material flows within an  
organisation into three categories: material flows,
system flows. and delivery and disposal flows.
Input/output analysis enables classification of output  
as finished production, scrap and waste.
Environmental life cycle costing enables analysis of  
clean-up and disposal activities relating to a product.
Flow cost accounting enables analysis into material flows, system flows and delivery and
disposal flows.
42  I, II, and III only

As specified by the United Nations Division for Sustainable Development (2003).
43  Flow cost accounting

Under a system of flow cost accounting material flows are divided into three categories –
material, system, and delivery and disposal.
240 R e v i s i o n a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s AC C A F5 Q u e s t i o n B a n k

1
True False
Decisions should always be based on future  
incremental accounting profits.
When a required resource is in scarce supply, the  
opportunity cost of the next best alternative use
needs to be considered.
Sunk costs are irrelevant to decision making as the  
expenditure has already been incurred.
Depreciation may be a relevant cost if it is incremental  
to the project being considered.
Decisions should always be based on future incremental cash flows which are more objective
than accounting profits.
t
Depreciation is never relevant as it is not a cash flow.
i g h 1 7
y r 2 0
p ion
2 $ 3900
o
C uit
Cost of the quantity to be bought = 200 × $4.50 = $900
t
Opportunity cost of quantity in hand = 800 × $3.75 = $3,000
t I n
Total relevant cost = $3,900
Fi 3 rs Relevant Not relevant

The total sales value of the fruit currently picked and  
paid for by customers
The cost of growing the fruit  
The cost of hiring staff to pick and package the fruit  
The total sales value of the fruit if it is picked and  
packaged by staff instead
The cost of growing the fruit is not relevant since it is a common cost.
AC C A F 5 Q u e s t i o n B a n k Revision answers: 2: Decision-making techniques 241
LOSMETIC CO
4 $ 76000
Silk powder: (15,000 × $2.50) + Aloe vera: (15,000 × $2) + (5,000 × $1.70) = $76,000
5 $ 8600
Skilled labour – overtime will required for employees at $12 × 150% = $18, therefore better to
bring in workers from outside, 500 hours × $16 = $8,000
Unskilled labour – 250 hours required. If they worked a 40 hour week for the next three weeks,
total hours would be 40 × 3 × 2 = 240 hours. They are guaranteed payment for 30 × 3 × 2 = 180
hours. Therefore cost = (8 × 1.5 × (250 – 240)) + (8 × (240 – 180)) = $600
Total labour cost = $8,000 + $600 = $8,600
6 $ 1950
Co
(750 × $1.60) + (15 × $40 × 125%) = $1,950
Fir
st I pyri
The salary element is excluded but the full overtime payment is included.
7 
ntu ght
The overheads should be excluded because they are not incremental costs.
itio
The overheads are excluded as they do not arise specifically as a result of the order. Not all
n2
relevant costs are opportunity costs. The fact that the costs are production costs is not a factor,
and we’re told that the pricing is based on relevant costs, not all costs.
8 017
True False
All cash expenses are relevant costs, all non-cash  
expenses are non-relevant costs.
Notional costs are never relevant costs.  
Fixed costs are never relevant costs.  
Not all future costs are relevant costs.  
Non-cash expenses are non-relevant costs, but some cash expenses (for example past expenses)
are not relevant. Notional costs are not cash flows, so are not relevant. Fixed costs may relate
specifically to the decision, so may be relevant. Some future costs may be incurred whatever
decision is taken, so are not relevant.

9
True False
CVP can help a company assess how sensitive its profits  
might be to below budget performance.
CVP analysis uses a total absorption costing approach.  
CVP analysis is flexible enough to deal with changes in  
both variable and fixed costs at different levels of activity.
Break-even analysis can only be used for a single product  
or for multiple products which are sold in a constant mix.
CVP focuses on contribution which is a marginal costing approach.

A limitation of CVP analysis is that it assumes constant variable costs per unit and a constant
fixed cost.
10 4500
Current sales volume = $43,500/$3 = 14,500 units
ht 7
Contribution per unit = 60% × $3 = $1.80
r i g 0 1
Break-even = $18,000/$1.80 = 10,000 units
2
y
p ion
Hence margin of safety = 14,5000 – 10,000 = 4,500 units
o
C uit
t
11  18,636 units
t I n
Number of units required to make target profit = fixed costs + target profit/contribution per unit
rs
of P1.
Fi
Fixed costs = ($1·2 × 10,000) + ($1 × 12,500) – $2,500 = $22,000
Contribution per unit of P = $3·20 + $1·20 = $4·40
($22,000 + $60,000)/$4·40 = 18,636 units
12
Required Not required
Product mix ratio  
Contribution to sales ratio for each product  
General fixed costs  
Method of apportioning general fixed costs  
The method of apportioning general fixed costs is not required to calculate the break-even sales
revenue.
13 32000
Contribution per each ‘package’ of 4 units (3 sara 1 cristina) = (3 × $12) + $7 = $43

Contribution required for $75,000 profit = $269,000 + $75,000 = $344,000
Number of ‘packages’ required = $344,000/$43 = 8,000
Number of units required = 8,000 × 4 = 32,000
14  22,500
Two units of Y and one unit of X would give total contribution of $18.
Weighted average contribution per unit = $18/3 units = $6
Sales units to achieve target profit = ($90,000 + $45,000)/$6 = 22,500
HARE EVENTS
15  47.7%
Total fixed costs = $385,000
Fir Co
st I pyri
Contribution per marathon entry ($55 – $18.20) = $36.80
ntu ght
BEP = 10,462
Margin of safety (20,000 - 10,462)/20,000 = 47.7%
itio
16  $592,000
n2
$98.80/$152 = 65%
BER = $385,000/65% = $592,308
017
Weighted average C/S ratio = ((2 x $36.80) + (1.4 x $18.00))/((2 x $55) + (1.4 x $30)) =
17  Full marathon: 17,915 entries Half marathon: 12,540 entries

Weighted average C/S ratio = 65%
Revenue to achieve target profit = $885,000/65% = $1,361,538
Marathon revenue = ($110/$152) x $1,361,538 = $985,324
Number of entries = $985,324/$55 = 17,915 entries
Half marathon revenue ($42/$152) x $1,361,538 = $376,214
Number of entries = $376,214/$30 = 12,540 entries
18  Break-even volume will remain unchanged but break-even revenue will increase by 10%.
Current contribution = $12
Current BEV = $48,000/$12 = 4,000 entries
Current BER = $48,000/($12/$20) = $80,000
Revised contribution = (($20 x1.1) + ($8 x 1.1)) = $13.20
Revised fixed costs = $48,000 x 1.1 = $52,800
Revised BEV = $52,800/$13.20 = 4,000 entries
Revised BER = $52,800/($13.20/$22) = $88,000
The BEV hasn't changed but the BER has increased by 10%.
19  Statements (i) and (ii)

CVP analysis assumes no movement in inventory and the C/S ratio can be used to indicate the
relative profitability of different products so Statements (i) and (ii) are correct.
Limiting factors
ht 7
i g 1
EXAM SMART
y r 2 0
p ion
Although you won’t have to draw a graph for linear programming questions in the exam,
o
sketching a graph in questions like this can help you see what’s happening.
C uit
I n t
t
20
rs
X 400
Fi Y
Constraints are:
1100
Material 2x + y ≤ 2,000
Unskilled labour: x + y ≤ 1,500
and x ≥ 400
For material:
Point where x is maximum possible, y is minimum is x = 1,000 y = 0
Point where x is minimum possible (ie 400), y is maximum possible is x = 400 y = 1,200
For unskilled labour:
Point where x is maximum possible, y is minimum is x = 1,500 y = 0
Point where x is minimum possible, y is maximum possible is x = 400 y = 1,100
Feasible points per these constraints are: x = 1,000 y = 0, x = 400 y = 1,100
Other boundaries of feasible region are:

x = 400, y = 0, which can be ignored as lower than x = 1,000 y = 0
x = 500, y = 1,000, point that solves material and labour simultaneous equations
Applying objective function 8x + 12y
x = 1,000 y = 0: (8 × 1,000) = 8,000
x = 400 y = 1,100: (8 × 400) + (12 × 1,100) = 16,400
x = 500 y = 1,000: (8 × 500) + (12 × 1,000) = 16,000
2,000
1,500
Co
1,000
Fir
st I pyri
ntu ght
500
itio
n2
017
Objective function 500 1,000 1,500 x
21
Objective function Material constraint Labour constraint
 5x + 11y 4x + 3y ≤ 3,200 2x + y ≤ 2,000
Contribution per unit: A = $30-$25 = $5 and B = $25-$14 = $11
As resources are limited, the constraints are of the “less than or equal” variety.
22  Increase of $56
By definition, a shadow price is the amount by which contribution will increase if an extra kg of
material becomes available. 20 × $2·80 = $56.
23
P1 1
P2 3
P3 2
P1 P2 P3
Labour hours per unit 1 2 1.1
$ $ $
Add back fixed costs 6 9 12
Contribution per unit 50 60 38
Contribution per labour hour 50 30 34.55
st rd nd
Ranking 1 3 2
24  1 only
If the values for R and N are substituted into the constraints:
Labour required = (3 × 500) + (2 × 400) = 2,300 hours which is less than what is available so
t
there is slack.
g h 1 7
Machine time required = (0·5 × 500) + (0·4 × 400) = 410 hours which is exactly what is available
i
r 0
and so there is no slack.
p y n 2
C C o i t i o
u
HIGGINS O
I n t
25
rst $ 780000
Fi
Contribution per cue
Snooker
Pool cue cue
$ $
Selling price 41.00 69.00
Material cost at $43.20/kg (10.80) (10.80)
Craftsmen cost at $18/hr (9.00) (13.50)
Other variable cost (1.20) (4.70)
Contribution per cue 20.00 40.00
Total contribution = (15,000 × 20) + (12,000 × 40) = $780,000
26 21600
0.5P + 0.75S =12,000 (1)

0.25P + 0.25S = 5,400 (2)
0.5P + 0.5S = 10,800 (2) × 2 = (3)
0.25S = 1,200 (1) – (3)
S = 4,800
Substituting in (2)
0.25P + (0.25 × 4,800) = 5,400
0.25P = 4,200
P = 16,800
Total number of cues = 4,800 + 16,800 = 21,600
27  Labour would remain a constraint but ash would no longer be a constraint.

Ash required = (0.25 × 15,000) + (0.25 × 12,000) = 6,750, less than the 7,000 kg available, so ash
is no longer a constraint.
Labour required = (0.5 × 15,000) + (0.75 × 12,000) = 16,500, more than the 16,000 hours
available so labour remains a constraint.
28 $ 50
Maximum demand S = 12,000 (1)

Labour 0.5P + 0.75S = 12,001 (2)
Fir Co
Substituting S = 12,000 in equation (2)
st I pyri
0.5P + (0.75 × 12,000) = 12,001
0.5P + 9,000 = 12,001
0.5P = 3,001
ntu ght
P = 6,002
itio
n2
Number of extra cues = 6,002 – 6,000 = 2
017
Increase in contribution = 2 × $25 = $50
29
True False
The objective function is the function relating to the  
limitation of the scarce resource.
The constraints in graphical linear programming  
analysis are drawn as straight lines.
The shadow price is only significant for constraints  
that are binding.
There will be slack if less than the maximum amount  
available of a limited resource is needed.
The objective function relates to the solution to the problem, it is formulated in terms of
maximising or minimising.
Pricing decisions
30
True False
If PED < 1, total revenue will rise if the selling price of  
the product is increased.
If PED >1, the demand is said to be inelastic.  
PED may be at different levels at different points on  
the demand curve.
If a downward demand curve changes to become  
steeper, demand is becoming more elastic.
If PED >1, the demand is said to be elastic. If the curve becomes steeper, demand is becoming
more inelastic.
31
Quantity 312
Price $ 18.40
ht 7
P = 34 – 0.05Q so MR = 34 – 0.1Q
r i g 0 1
Up to Q = 199, MC = 3
2
y
p ion
Let MR = MC: 34 – 0.1Q = 3
o
31 = 0.1Q, so Q = 310
C uit At this volume, cost discounts apply so MC becomes 2.8
I n t
34-0.1Q = 2.8
t
31.2 = 0.1Q
Fi rs
Q = 312 and P = 34 – 0.05(312) = $18.40
32
A   
B   
Demand will be much more price sensitive in market A than market B.

33
True False
Target costing results in a market driven selling price.  
Cost-plus pricing only works if the % mark-up is  
applied to total absorption costing.
A cost-plus pricing policy will always result in a profit  
for the company.
Penetration pricing aims to recover the high initial  
costs of product development.
In cost-plus pricing the % mark-up can be applied to a number of different costs.

A cost-plus pricing policy will only result in a profit for the company if demand at the chosen
price is enough to cover total costs.
Price skimming aims to recover the high initial costs of product development.
34  There are significant economies of scale.

 The firm wishes to discourage new entrants to the market.
Penetration pricing will be the preferred policy if demand is elastic and the product life cycle is long.
Co
35  Both 1 and 2
Fir
st I pyri
Penetration pricing involves setting a low price when a product is first launched in order to
obtain strong demand.
ntu ght
It is particularly useful if significant economies of scale can be achieved from a high volume of
output and if demand is highly elastic and so would respond well to low prices.
itio
ALG CO
n2
36 $ 800000
017
Variable overhead cost using high-low method: ($1,850,000 – $1,400,000)/(350,000 – 200,000)
= $3 per unit.
Fixed costs = $1,400,000 – (200,000 × $3) = $800,000
37  P = 310 – 0·001x
Demand function is P = a – bx, where P = price and x = quantity, therefore find a value for a and
b firstly.
B = ΔP/ΔQ = 2/2,000 = 0·001 (ignore the minus sign as it is already reflected in the formula
P = a – bx)
Therefore P = a – 0·001x
Find value for ‘a’ by substituting in the known price and demand relationship from the question,
matching ‘p’ and ‘x’ accordingly.
60 = a – (0·001 × 250,000)
60 = a – 250
310 = a
P = 310 – 0·001x
38 $ 14300000
Identify MC
MC = $20
State MR
MR = 240 – 0·002x
Equate MC and MR to find Q
20 = 240 – 0·002x
0·002x = 220
x = 110,000
Substitute x into demand function to find P
P = 240 – (0·001 × 110,000)
P = $130
Sales revenue = 110,000 × $130 = $14,300,000
39  Customers are prepared to pay high prices to obtain a new product.

 Barriers to entry deter competitors.
ht 7
Market skimming is charging a high price initially, which a company is more likely to do if there
r i g 0 1
is high initial demand and lack of competitive pressure. It is more likely to be associated with
y 2
products with a short life cycle, in order to maximise returns quickly. Economies of scale will
p ion
drive down costs, which may drive down price as well.
o
C uit
t
40
I n
Skimming Penetration
rst The level of demand is unknown.  
Fi
Demand is expected to be elastic.  
ALG Co can discourage competitors from entering  
the market.
ALG has excess production capacity.  
High prices (skimming) are more likely to be charged if there is uncertainty about the demand.
Low Prices (penetration) are more likely to be charged if demand is elastic and sensitive to
prices levels. Low prices and hence low profits may deter competitors. Low prices can ensure
that a substantial market share is gained quickly, using spare production capacity to cope with
the demand.

41  B only
The marginal cost of making A is $12 per unit and of making B is $18 per unit. It is the marginal
cost which is the relevant cost for the make or buy decision since the fixed costs will be incurred
anyway. Therefore, it is cheaper to make A ($12 marginal cost CF $14 buy in cost) but it is
cheaper to buy in B ($17 buy in cost CF $18 make cost).
THREE DEPARTMENTS
Assuming the fixed overheads will be incurred anyway, the café makes a $3,000 contribution to
fixed costs and therefore profit without the café would be lower, not higher.
43 $ 16300
Without the café: Bedding Furniture Total

$ $ $
Sales (10% of bedding lost) 22,500 50,000 72,500
Variable costs 11,700 29,000 40,700
Contribution 10,800 21,000 31,800
Fixed shop overheads 15,500
($3,500 saved)
Profit 16,300
44  Customers have to go through the bedding department to get to the café.

Shutting the café would reduce the footfall through the bedding department. The bedding and
Fir Co
café products are not linked strongly, so cannot be said to be complementary.

st I pyri
ntu ght
45 Relocate the bedding department next to the furniture department
Customers looking for new furniture may also be considering buying a new bed and this will
itio
make it easier for them to view both together. A product line pricing policy relates to offering
for sale several related products, which would probably not apply to the bedding department. A
n2
relevant cost pricing strategy is a minimum pricing strategy that is unlikely to help here.
46  % occupancy of the tables in the cafe

017
% occupancy should be a reliable measure if taken over time. New items added to the menu
won’t show customer satisfaction unless customers actually buy them. Length of queues in the
café may show how popular the café is, but may ultimately be self-defeating as customers get
fed up with waiting in queues. Profits made by the café will depend on the pricing policy as well
as the number of customers.
CHEMCO
47  Both 1 and 2
Basic fertiliser is not worth processing further, as the additional costs exceed the additional income.
Medium grade fertiliser is worth processing further. If there are limited quantities it should be
sold in the individual market as the contribution is increased, but if there are unlimited supplies,
both markets are profitable.
Fertiliser Basic Medium grade Premium
Current Sales price per kg (farmers) $5 $7 $10
After further processing:
Additional sales price per kg $0.50 $1.00 $3
Further processing cost per kg $0.60 $0.80 $2
Net additional contribution $(0.10) $0.20 $1
48
Basic Medium grade Premium
Farmers   
Individual customers   
ht 7
g 1

i
49 The contribution foregone from using the chemical in the existing contract
y r 2 0
When a required resource is in scarce supply, the opportunity cost of the next best alternative
p ion
use needs to be considered.
o
C uit
t
50
I n
Adverse Favourable
rst $500  
Fi Should
6/20
A
31,050
14/20
B
72,450
Total
103,500
Did 31,000 72,500 103,500
50 F 50 A
$30 $40
$1,500 F $2,000 A $500 A
SM: A = 0.3 and B = 0.7
AQ = 31,000 + 72,500 = 103,500
AQSM: A = 0.3 × 103,500 = 31,050 litres; B = 0.7 × 103,500 = 72,450 litres
The Mix Variance is given by: T2 – T1 = $500 Adverse
51  The chemicals used in the mix are discrete.

This means the amounts used of each chemical are independent of each other and it is not
relevant to think in terms of controlling the proportion of each.

52
True False
Mystery shopping may be used to reduce the uncertainty  
associated with making changes to an existing product or
launching a new one.
Sensitivity involves identifying a number of possible  
outcomes that may arise if the project goes ahead.
Focus groups are used to provide qualitative data about  
new products.
Pay-off tables record all possible outcomes.  
Simulation involves identifying a number of possible outcomes that may arise if the project goes
ahead.
Sensitivity involves seeing how much the estimates used to make the original decision can
change before the decision becomes incorrect.
53  Do not employ a sales manager as profits would be expected to fall by $1,300
Fir Co
New profit figures before salary paid:
st I pyri
Good manager: $180,000 × 1·3 = $234,000
Average manager: $180,000 × 1·2 = $216,000
Poor: $180,000 × 1·1 = $198,000
ntu ght
itio
EV of profits = (0·35 × $234,000) + (0·45 × $216,000) + (0·2 × $198,000) = $81,900 + $97,200 +
$39,600 = $218,700
Deduct salary cost and EV with manager = $178,700
n2
017
Therefore do not employ manager as profits will fall by $1,300.
54  375
EXAMINER’S COMMENT
Candidates often struggle with minimax regret questions as the concept can be a little difficult to
understand. Taking each corresponding level of supply and demand, it is necessary to work out
the regret from choosing one supply level rather than another, taking into account the actual
demand level. This is why, when the supply and demand levels are the same, there is always a
value of $0 as there is no regret because exactly the correct level of supply was anticipated. In
order to decide on the optimum supply level using minimax regret as the decision criterion, the
business should firstly identify what the highest regret is for each level of supply. Then, it should
choose the minimum of those maximum regrets in order to decide the appropriate level of supply.
So, in this question, the maximum regret at each supply level is as follows:
At 325: $142
At 350: $90
At 375: $82
At 400: $120
The minimum of these is $82 at 375, therefore the answer is C.
The maximum regret at each supply level is as follows:

At 325: $142
At 350: $90
At 375: $82
At 400: $120
The minimum of these is $82 at 375.
55  The average value generated may not actually represent a possible outcome
 They allow different outcomes to be built into a decision
 They represent a long-run average if an event is repeated many times
Risk and uncertainty
THREE PRODUCTS
56  It is impossible to say
ht 7
Without the probabilities to assign, it is impossible to calculate the expected value of each
i g 1
project.
y r 2 0
57
o p ion
 Either Product X or Product Z
C uit If the prices are equally likely then EV of Product X = $70 ,Y = $66 and Z = $70
I n t
rst 10
Fi
58 units
Q1 is quantity sold at $60 profit
60 = Q1 (10 – 7)
Q1 = 20
Q2 is quantity sold at $60 profit
80 = Q2 (15 – 7)
Q2 = 10
Q1 – Q2 = 10 units
59  60 – 5Q
P = a – bQ and when P = 10, Q = 10, so 10 = a – 10b
b = change in price/change in quantity = 5/1 = 5
10 = a – (5 ×10)
10 = a – 50, so a = 60
60
It ignores fixed costs.  
The mark-up % cannot be varied.  
Budgeted output volume needs to be established.  
The basis it uses for absorption of fixed overheads is  
arbitrary.
The mark-up % can be varied with marginal costing. Marginal cost plus pricing does not need to
budgeted volume of output to be established. Absorption does not take place when marginal
costing is used.
SANDRUNNER
61  $300
The best possible outcome is a cash inflow of $270,000 when a fee of $300 is set.
Co

Fir
62 It ignores the probabilities of different outcomes.
st I pyri
 It ignores outcomes that are less than the best possible.
Maximax presupposes an attitude of risk seeking, not risk aversion.
ntu ght
Opportunity losses are to do with the minimax regret technique.
itio
n2
63  $300
017
Regret matrix is constructed based on the fact that the best fee for each membership level will
have a regret of zero:
Membership fees
Membership fee Low Average High Maximum regret
$000 $000 $000
$300 20 10 0 20
$400 0 0 30 30
$450 20 15 25 25
$500 40 30 60 60
To minimise maximum regret, set fee at $300.
64 $ 6000
Expected value of $300 = (180 × 0.5) + (210 × 0.3) + (270 × 0.2) = $207,000
Expected value of $400 = (200 × 0.5) + (220 × 0.3) + (240 × 0.2) = $214,000
Therefore choose $400 on EV basis.
With perfect information Expected value = (200 × 0.5) + (220 × 0.3) + (270 × 0.2) = $220,000
Value of perfect information = $220,000 – $214,000 = $6,000
65  The subscriptions charged by other golf clubs in the area

 The amount of usage of the course at weekends (the busiest time of the week)
The committee will have to consider the possibility that members could go to other clubs if they
do not like the fee package being offered. One means of differentiation would be to charge a
lower fee to members who only use the course at quieter times (during the week). The profits
made by the club shop may affect the level of subscriptions, but not how subscriptions are
differentiated. Members are most likely to be charged separately for the food and drink they
consume in the restaurant facilities – it is not likely to affect their level of subscriptions.
MYLO
66  450 lunches
The maximin rule selects the maximum of the minimum outcomes for each supply level. For
Mylo the minimum outcomes are:
450 lunches – $1,170
620 lunches – $980
775 lunches – $810
960 lunches – $740
ht 7
The maximum of these is at a supply level of 450 lunches.
r i g 2 0 1
y
p ion
o
67  960 lunches
C uit The minimax regret rule selects the minimum of the maximum regrets.
I n t
Demand level Supply level
t
450 620 775 960
rs
$ $ $ $
Fi
450 – 190 360 430
620 442 – 217 322
775 845 403 – 230
960 1,326 884 481 –
Max regret 1,326 884 481 430
The minimum of the maximum regrets is $430, so suggests a supply level of 960 lunches.
EXAM SMART
Note that probabilities affect the expected value calculation, but the result of the expected
value calculation does not tell you the range of possible outcomes or the probability of
undesirable results.
68  2 and 4
Expected values do not take into account the variability which could occur across a range of
outcomes; a standard deviation would need to be calculated to assess that, so Statement 2 is
correct.
Expected values are particularly useful for repeated decisions where the expected value will be
the long-run average, so Statement 4 is correct.
Expected values are associated with risk-neutral decision-makers. A defensive or conservative
decision-maker is risk averse, so Statement 1 is incorrect.
Expected values will take into account the likelihood of different outcomes occurring as this is
part of the calculation, so Statement 3 is incorrect.
EXAM SMART
Remember that the expected value with perfect information assumes that you pick the
supply level that will maximise profits whatever the demand level.
Co
69  $191
Fir
st I pyri
This requires the calculation of the value of perfect information (VOPI).
Expected value with perfect information = (0·15 × $1,170) + (0·30 × $1,612) + (0·40 × $2,015) +
ntu ght
(0·15 x $2,496) = $1,839·50
Expected value without perfect information would be the highest of the expected values for the
itio
supply levels = $1,648·25 (at a supply level of 775 lunches).
n2
The value of perfect information is the difference between the expected value with perfect
information and the expected value without perfect information = $1,839·50 – $1,648·25 =
$191·25, therefore $191 to nearest whole $.
017
70  3 and 4
The investment’s sensitivity to fixed costs is 550% ((385/70) × 100), so Statement 3 is correct.
The margin of safety is 84·6%. Budgeted sales are 650 units and BEP sales are 100 units (70/0·7),
therefore the margin of safety is 550 units which equates to 84·6% of the budgeted sales, so
Statement 4 is therefore correct.
The investment is more sensitive to a change in sales price of 29·6%, so Statement 1 is incorrect.
If variable costs increased by 44%, it would still make a very small profit, so Statement 2 is
incorrect.
258 R e v i s i o n a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

1
True False
A rolling budget is a budget that starts at nil every  
period and requires managers to justify every item of
expenditure.
A cash flow budget is a good example of feed-forward  
control.
An incremental budget is a budget which, having been  
established at the beginning of a period is then
constantly amended and extended on account of
developing circumstances.
An advantage of activity-based budgets is that they  
enable more efficient improvement programmes to be
implemented.
ht
A zero-based budget is a budget that starts at nil every period and requires managers to justify
r i g 1 7
every item of expenditure.
0
y 2
A rolling budget is a budget which, having been established at the beginning of a period is then
p ion
constantly amended and extended on account of developing circumstances.
o
C uit
An incremental budget is a budget that is based on the existing budget adjusted for changes in
factors such as inflation.
I n t
rst
Fi
2
Internal External Internal External
historic historic anticipated anticipated
Government inflation    
statistics
Purchases made by    
customers
Cash flow forecast for the    
next five years
Inventory movement    
records
AC C A F 5 Q u e s t i o n B a n k Revision answers: 3: Budgeting and control 259
3
Attainable Basic Ideal Current
Kept unchanged over a period    
of time
Makes no allowance for normal    
losses, waste and machine
downtime
Assumes an efficient level of    
operation, but includes
allowances for normal loss,
waste and machine downtime
Based on working conditions    
and prices that apply now
4
True False
The costs of implementation may outweigh the benefits.  
Employees will always welcome any new system which improves  
planning and control within the organisation.
Co
 
Fir
The time and cost involved in the system transition may initially
lead to control being worse not better.
st I pyri
Employees will adapt easily to the new system and this will  
ntu ght
increase their motivation.
Employees may take time to adapt to change and may need training/persuasion to overcome
itio
any resistance to new methods.
n2
017
5
True False
It sets out the timetable for budget preparation.  
It is usually prepared before the functional budgets.  
It includes a budgeted statement of profit or loss, statement of  
financial position and cash budget.
It is always prepared on a top-down basis.  
The budget manual sets out the timetable for the preparation of the budget. The master budget
is usually prepared after the functional budgets and may be prepared on a bottom-up basis.
6
True False
It makes it easier for employees to artificially inflate budgets.  
It facilitates improvements in processes.  
Employees will focus on eliminating wasteful expenditure.  
Short-term benefits could be emphasised over long-term  
benefits.
A zero-based budget is more likely to detect an inflated budget.

7  Co-ordination
 Communication
 Motivation
 Authorisation
Quantification is part of budgeting but not why budgeting is undertaken. Quality control is
generally separate from budgeting.
8  Zero-based budgeting
Budgets will need to be flexible and reflect the current environment.
9 $ 0.60
Product R Product S Total

Budgeted production per annum (units) 80,000 60,000 140,000
Number of batches 800 1,200 2,000
Number of machine set-ups 2,400 3,600 6,000
Total processing time (minutes) 240,000 300,000 540,000
ht
Cost driver rate = $108,000 / 540,000 = $0.20
r i g 0 1 7
Total processing costs = $0.20 × 240,000 = $48,000
y
p ion 2
Processing costs per unit = $48,000 / 80,000 = $0.60
o
C uit
t
10  It is useful for decision-making purposes.
t I n
 It provides appropriate benchmarks for cost control.
rs
Flexible budgeting is likely to take longer than fixed budgeting because of the need to analyse
Fi
fixed and variable costs separately. Encouraging the organisation to review the value of all its
activities is an advantage of zero-based budgeting.
KENNETH CO
11 $ 29.60
Total overhead cost ($22,000 + $34,000 + $32,000) $88,000

Direct labour hours 8,000
Direct labour cost per hour ($128,000/8,000) $16
Absorption rate $11 per direct labour hour
Budgeted unit cost for product Z for October is:
$
Direct materials 21.50
Direct labour (0.3 × $16) 4.80
Overhead costs (0.3 × $11) 3.30
Total unit cost 29.60
12 $ 55.50
Cost driver rates are needed:

Set-ups ($22,000/88) $250 per set-up
Quality tests ($34,000/40) $850 per test
Other overheads ($32,000/8,000) $4 per direct labour hour
(note this is not a true cost driver)
$
Direct materials 21.50
Direct labour (0.3 × $16) 4.80
Set-up costs (2 × $250/30) 16.67
Quality tests ($850/75) 11.33
Other overhead costs (0.3 × $4) 1.20
Activity-based cost for October 55.50
13
Advantage Not advantage
It encourages managers to spend up to the maximum  
allowed in the budget.
Co
It is a straightforward approach for inexperienced  
managers to apply.
Fir
st I pyri
It is suitable for organisations where historic costs are  
a good guide to future costs.
It forces employees to avoid wasteful expenditure.
ntu ght  
itio
Encouraging managers to spend up to the maximum allowed is a disadvantage of incremental
n2
budgeting. Forcing employees to avoid wasteful expenditure is an advantage of zero-based
budgeting. If wasteful expenditure has been built into the budget, incremental budgeting can
017
ensure it is perpetuated.
14  Analysing the cost of each activity, identifying alternative ways of performing the activity
and assessing the consequences of performing the activity at different levels or not at all.
Zero-based budgeting is more than updating; it requires a reassessment of what should be
incurred every time it is undertaken. This complex process should mean that planning variances
are not a regular feature of analysis.
Using the current year’s results as a starting point and updating the budget for changes in
activity or inflation is a description of incremental budgeting.
Using an adaptive management process to prepare budgets that are focused on cash flows
rather than cost control is a description of Beyond Budgeting.
15  It is difficult to rank activities that have qualitative rather than quantitative benefits.
 It restricts management from changing plans once the budget has been approved.
Zero-based budgeting involves ranking activities by their benefits, and if these benefits are
qualitative they may be difficult to assess. Zero-based budgeting is a complex process, so can
only be undertaken periodically. As such, it is less flexible when there are subsequent changes in
circumstances that affect the benefits produced by different activities.
Zero-based budgeting encourages managers to take account of changes in the economic
environment. Because of their knowledge, operational managers must be involved in the zero-
based budgeting process, so lack of participation is not a demotivating factor. (They may not
like however the pressure that zero-based budgeting puts on them.)

16
a $ 2500
b $ 1
Highest output is 15,000 units in Feb, costing $7,500.
t
Lowest output is 10,000 units in March, costing $12,500
i g h 1 7
(NB we take highest and lowest output and their associated cost, not the highest and lowest
y r 2 0
cost ─ here the lowest cost is actually $12,000).
p ion
Using the high-low method to establish values for a and b:
o
C uit Variable cost per unit =
$(17,500−12,500)
(15,000−10,000)
$5,000
= 5,000 𝑢𝑛𝑖𝑡𝑠 = $1 per unit = b
I n t
Fixed costs can be calculated by reference to the total costs when output is 15,000 units in
t
February and total cost is $17,500.
rs
Total cost = $17,500 = Fixed cost + (15,000 units × $1)
Fi
Fixed cost = $17,500 - $15,000 = $2,500 = a = 2,500
17 90.0 %
Units Total time Ave time/unit

1 2hrs 2 hrs
2 2×L
4 2 × 𝐿2
8 11.664 hrs 1.458 hrs
1.458 = 2 × 𝐿3, so 𝐿3 = 1.458/2 = 0.729

Learning rate = 0.9
18  All of the above

19
Apply Not apply
Simple to make  
Made largely by labour efforts  
Mass-produced  
New product  
Continuous production  
20  16,080 + 52x
460 – 400 = 60 clients
$40,000 – $36,880 = $3,120
VC per unit = $3,120/60 = $52
Therefore FC = $40,000 – (460 × $52) = $16,080
EXAM SMART
You could get the same answer for fixed costs by using the data for the low level of clients,
as follows:
 FC = 36,880 – (400 × $52) = $16,080
Fir Co
21  1.442 hours
st I pyri
Y = ax b
ntu ght
itio
Average time for six jobs: 5 × 6–0·415 = 2.377 hours
n2
Total time required for six jobs = 6 × 2.377 hours = 14.262 hours
Average time for five jobs: 5 x 5–0·415 = 2.564 hours
017
Total time required for five jobs = 5 × 2.564 hours = 12.820 hours
Time required to perform the 6th job = Total time required for six jobs – total time required for
five jobs.
Therefore, time required to perform the 6th job = 14.262 hours – 12.820 hours = 1.442 hours
COMFYNAP CO
22 $ 201
Learning curve formula y = axb

b = log 0.8/log 2 = - 0.322
Cumulative total time for 32 units = 157.25 hours
Cumulative average time for 31 units = 15 × 31-0.322 = 4.9645 hours
Cumulative total time for 31 units = 31 × 4.9645 hours = 153.90 hours
Incremental time for 32 units = 157.25 hours – 153.90 hours = 3.35 hours
Total labour cost for 32nd unit = 3.35 × $60 = $201.00
23 67.2 %
Cumulative
Cumulative average hours
Cumulative number of beds produced total hours per unit
1 25 25
2
4
8
16
32 110 3.4375
1-32 is five doublings.
25LR5 = 3.4375
LR5 = 0.1375
LR = 0.672 or 67.2%
24  There was high staff turnover during the initial phase of production.
 There were a number of delays in the production process.
New staff not being used to the process and delays meaning production is non-continuous will
both mean that production takes longer and learning is reduced. The fact the production is
t
labour-intensive and repetitive should lead to a greater learning effect. Changes in design
h 7
during the initial phase would explain slower learning, not changes once the initial phase had
i g 1
been completed.
y r 2 0
o p ion 1779000
C uit
25 $
Contribution Total Expected
t
Demand (units) per unit contribution Probability contribution
I n
$ $ $
rst
15,000 60 900,000 0.2 180,000
Fi
28,000 65 1,820,000 0.7 1,274,000
50,000 65 3,250,000 0.1 325,000
1,779,000
26
It can be difficult to manipulate information on  
spreadsheets.
It can be difficult to identify errors in formulae used in  
spreadsheets.
Spreadsheets only take account of qualitative  
information.
It is very difficult to set common standards for the use  
of spreadsheets for budgeting by managers.
Errors in formulae may result in answers that are not obviously wrong and may only be found
by inspecting the spreadsheet in detail and comparing the formulae with other information.
The ease of manipulating information on spreadsheets is one of the main advantages of using
them. Spreadsheets only take account of quantitative, not qualitative information. Head office
should easily be able to specify the formats and level of detail that budgets use.
Standard costing
27
True False
Basic standards provide the best basis for budgeting  
because they represent an achievable level of
productivity.
Ideal standards are short-term targets and useful for  
day-to-day control purposes.
An attainable standard is always based on current  
efficiency levels and costs.
Current standards are particularly useful when  
inflation is high.
Basic standards are unlikely to be the best basis because they remain unchanged over the years.
Ideal standards are long-term targets and are not useful for day-to-day control. An attainable
standard may be higher than the standard currently being achieved.
CORFE CO
Fir Co
st I pyri
28  $2,920,000
ntu ght
An 80% activity level is 210,000 units.
Material and labour costs are both variable. Material is $4 per unit and labour is $5·50 per unit.
itio
Total variable costs = $9·50 × 210,000 units = $1,995,000
n2
Fixed costs = $750,000
017
Supervision = $175,000 as five supervisors will be required for a production level of 210,000
units. Total annual budgeted cost allowance = $1,995,000 + $750,000 + $175,000 = $2,920,000
29  $593,000
Variable cost per hour ($850,000 – $450,000)/(5,000 hours – 1,800 hours) = $125 per hour
Fixed cost ($850,000 – (5,000 hours × $125)) = $225,000
Number of machine hours required for production = 210 batches × 14 hours = 2,940 hours
Total cost ($225,000 + (2,940 hours × $125)) = $592,500, therefore $593,000 to the nearest
$’000.
30  When the budget is flexed, the sales variance will only include the sales price variance.
If the budget is flexed, then the effect on sales revenue of the difference between budgeted and
actual sales volumes is removed and the variance which is left is the sales price variance.
31  1 and 2
Flexible budgeting can be time-consuming to produce as splitting out semi-variable costs could
be problematic, so Statement 1 is correct.
Estimating how costs behave over different levels of activity can be difficult to predict, so
Statement 2 is correct. A flexible budget will not encourage slack compared to a fixed budget, so
Statement 3 is incorrect.
It is a zero-based budget, not a flexible budget, which assesses all activities for their value to the
organisation, so Statement 4 is incorrect.
32  1 and 4
Spreadsheets can be used to change input variables and new versions of the budgets can be
more quickly produced, so Statement 1 is correct.
Sensitivity analysis is also easier to do as variables are more easily changed and manipulated to
assess their impact, so Statement 4 is correct.
A common problem of spreadsheets is that it is difficult to trace errors in a spreadsheet and
data can be easily corrupted if a cell is changed or data is input in the wrong place, so Statement
2 is incorrect.
t
Spreadsheets do not show qualitative factors; they show predominantly quantitative data, so
h 7
Statement 3 is incorrect.
r i g 2 0 1
y
p ion
o
33
C uit
I n t True False
t
 
rs
Mix and yield variances are most appropriate where a product
Fi
requires a set amount of different types of material.
The materials yield variance assesses whether the finished  
output was greater or less than expected, given the amount of
material that was input.
Mix and yield variances are most appropriate where the input  
proportions of the materials used in a product can be varied
without substantially changing the nature of the output.
The materials mix variance assesses the impact of varying the  
proportions of the different materials used in a product.
Separate price and usage variances are most appropriate where a product requires a set
amount of different types of material.
34  The total mix variance was favourable and the total yield variance was adverse.
AM (w1) AQSM (w2) SQSM
Materials AQ SP AQ SP SQ SP
A 900 18,000 800 16,000 779 15,580
B 1,100 27,500 1,200 30,000 1,168 29,200
Total T1 = 45,500 T2 = 46,000 T3 = 44,780
SM: A = 0.4 and B = 0.6
(w1) AQSM: A = 0.4 × 2,000 = 800 litres; B = 0.6 × 2,000 = 1,200 litres
(w2) SQSM: A = 0.4 × 1,947 = 779 litres; B = 0.6 × 1,947 = 1,168 litres
Actual production of 1,850 litres requires an input of 1,947 litres (1,850 × 0.95) in total of A and
B. Therefore, the SQ = 1,947 litres.
The Mix Variance is given by: T2 – T1 = $500 Favourable
The Yield Variance is given by: T3 – T2 = $1,220 Adverse
35
Adverse Favourable
$3900  
Co
Standard cost per unit = $40 + $30 + $8= $78
Fir
st I pyri
Number of litres used = 9,700 + 6,300 + 7,400 = 23,400
Units
ntu ght
Actual yield 2,000
Standard yield 23,400 /12 1,950
itio
VARIANCE in units 50 (F)
Valued at the standard cost per unit $78
n2
36  $6,800 favourable
3,000 units should use 10 kg each (3,000 × 10) = 30,000 kg
017
3,000 units did use = 29,000 kg
Difference = 1,000 kg favourable
Valued at $6·80 per kg ($68/10 kg)
Variance = $6,800 favourable
ROMEO CO
37 $ 7.22
Dough 18.9 kg × ($7.60 – $6.50) = $20.79 favourable

Tomato sauce 6.6 kg × ($2.50 – $2.45) = $0.33 favourable
Cheese 14.5 kg × ($20.00 – $21.00) = $14.50 adverse
Herbs 2 kg × ($8.40 – $8.10) = $0.60 favourable
Total material price variance = $7.22 favourable
38  $38.14
AQSM AQAM Difference Std Cost Variance
kg kg kg $ $
Dough 20 18.9 1.1F 7.60 8.36F
Sauce 8 6.6 1.4F 2.50 3.50F
Cheese 12 14.5 2.5A 20.00 50.00A
Herbs 2 2 - 8.40 -
42 42 38.14A
ht 7
39 
r i g 0 1
$12.21 favourable
2
y
p ion
SQSM AQSM Difference Std Cost Variance
o
kg kg kg $ $
C uit
Dough 22 21.43 0.57F 7.60 4.33F
t
Sauce 8.8 8.57 0.23F 2.50 0.58F
I n
Cheese 13.2 12.86 0.34F 20.00 6.80F
t
Herbs 2.2 2.14 0.06F 8.40 0.50F
rs
46.2 45 12.21F
Fi 40  The proportion of the relatively expensive ingredients used in production was less than
the standard.
A favourable mix variance indicates that a higher proportion of cheaper ingredients were used
in production compared to the standard mix.
41  The actual cost per pizza in Month 6 was lower than the standard cost per pizza.
 The value of the ingredients usage variance and the mix variance are the same.
The actual cost per pizza will be lower than the standard cost per pizza because expensive
cheese has been replaced with cheaper tomato sauce.
The usage variance equals the mix and yield variances combined. The yield variance is zero as
100 pizzas used 42 kg so the mix and usage variances will be the same.
Sales staff should not automatically lose their bonus as the reduced sales could be a result of
the change in mix affecting the quality of the pizza. The new chef will only be responsible for the
mix and yield variances as they have no control over the purchase costs of ingredients.

42
True False
Sales mix and quantity variances are only meaningful when the  
company’s products are independent of each other.
The sales mix variance considers how the profit has been affected  
by selling products in a different ratio than initially expected.
The materials mix variance can be calculated by taking the  
difference between the actual quantity in the standard mix
and the actual quantity in the actual mix, then multiplying it
by the actual cost per kg.
The materials mix variance arises because there is a difference  
between what the input should have been for the output
achieved and the actual output.
Sales mix and quantity variances are only meaningful when the company’s products are
interdependent or linked in some way.
The difference between actual quantity in standard mix and the actual quantity in the actual
mix is valued at the standard cost per kg, not the actual cost.
Fir Co
The difference between what the input should have been for the output achieved and the
st I pyri
actual output is the definition of the yield variance.
43  Price variance
ntu ght
itio
The budget will be flexed for sales quantity, so quantity variance will not apply. Mix and yield
n2
variances will only apply if more than one product is produced.
017
CUT CO
The following workings apply to the next three answers.
Sales price
R B D Total
Actual sales 900 2,600 700 4,200
Actual selling price 16 8 4.50
Budgeted selling price 15 8 5
Unit difference 1(F) nil 0.50 (A)
VARIANCE in $ 900 (F) Nil 350 (A) 550(F)
Sales volume
R B D Total
Actual sales 900 2,600 700 4,200
Budget sales 1,000 2,000 500 3,500
VARIANCE in units 100 (A) 600 (F) 200 (F)
Valued at the standard contribution 7 5 3
VARIANCE in $ 700 (A) 3,000 (F) 600 (F) 2,900 (F)
Sales mix
R B D Total
Actual sales @ std mix 1,200 2,400 600 4,200
Actual sales @ actual mix 900 2,600 700 4,200
t
VARIANCE in units 300(A) 200(F) 100(F) NIL
g h 7
Valued at the standard contribution 7 5 3
y r i
VARIANCE in $
2 0 1 2,100(A) 1,000(F) 300(F) 800(A)
o p ion
C uit
44  2 only
t
The price variance is calculated based on the actual quantity sold, not the change in quantity.
I n
(See workings above)
rst
Fi
45
Adverse Favourable
$800  
46
Adverse Favourable
$3700  
Weighted average budget contribution per unit = (1,000 × $7) + (2,000 × $5) + (500 × $3)/3,500
= $5.29 per unit
Variance in units = 4,200 – 3,500 = 700 favourable
Variance in $ = 700 × $5.29 = $3,700 favourable
47
Possible cause Not possible cause
The size of the market for non-disposable razors  
increased.
The production costs were as budgeted.  
Price-conscious customers switched to cheaper  
disposable razors.
A close competitor withdrew its non-disposable razor  
after safety concerns.
The size of the market increasing and a competitor withdrawing its razor would affect sales
volume. The production costs being as budgeted would not impact on sales.
48
True False
If product prices are set based on standard costs, then  
a business will be unable to pass the cost of
production inefficiencies on to the customer.
The prices of complementary products cannot be set  
Fir Co
independently.
st I pyri
If a company is using target costing, the price set will  
be determined by the target cost.
ntu ght
Price discrimination can be achieved by setting  
different prices for different versions of the same
itio
product.
n2
Inefficiencies will be reflected in actual costs, not standard costs, so prices based on standard
costs won’t reflect production inefficiencies.
for one will affect demand for both products. 017

Complementary products are linked products whose demand is not independent, so a price rise
With target costing, the target cost is determined by the price that the market will tolerate, not
the other way round.
Price discrimination by versions of product can be achieved if there is a basic model with a
variety of optional add on features.

49  A favourable market size variance
The market size has increased.
50
True False
The use of planning and operational variances splits responsibility  
for performance between managers in charge of day-to-day
activities and decisions and those in charge of budgeting.
The revision of budgets for operational difficulties that have been  
experienced is likely to lead to more meaningful variance analysis.
Splitting variances into planning and operational variances will  
always make operational managers more receptive to variance
analysis.
Those in charge of budgeting are not always responsible for  
planning variances.
Budgets should only be revised for known planning issues otherwise the operational managers
will not be allocated responsibility for the results of their operational decisions. Operational
managers may resist variance analysis whatever form it takes.
Some planning variances may be outside the control of the organisation, for example changes in
external conditions.
t
51 Materials planning price variance
i g h 1 7
Adverse Favourable
r 0
 
y 2
$32000
o p ion
32,000 × ($4·00 – $5·00) = $32,000 adverse
C uit
Materials operational usage variance
t
$8000  
i r s [30,000 – 32,000] × $4·00 = $8,000 adverse
F 52  $400 adverse
An operational variance compares revised price to actual price.
20,000 kg should cost $0·40 per kg at the revised price (20,000 kg × $0·40) = $8,000
20,000 kg did cost $0·42 per kg (20,000 kg × $0·42) = $8,400
Variance = $400 adverse
FEDIA CO
53  1 only
Material price variance = $809,600 – (25,300kg @$30) = $50,600 adverse
Materials usage variance = 25,300kg – (11,000@2.5kg) = 2,200kg favourable @ $30 = $66,000
favourable
54
Adverse Favourable
$50600  
Price per kg = $80/2.5 = $32

Variance = 25,300 × ($32 – $30) = $50,600 adverse
This approach uses the Examiner’s preferred method of calculating the variance. The variance
could be calculated using the revised quantity according to the flexed budget, rather than the
actual quantity purchased.
55
Adverse Favourable
$66000  
kg
Revised usage (11,000 × 2.5) 27,500
Did use 25,300
Variance in kg 2,200(F)
Valued at STANDARD COST $30
Co
Fir
st I pyri
This approach uses the Examiner’s preferred method of calculating the variance. The variance
could be calculated using the revised price rather than the original standard price.
ntu ght
itio
56  Fixed overhead volume
n2
Use of better quality materials should lead to greater efficiency. The fixed overhead volume
variance is the only variance that has an efficiency element.
57 017
Advantage Not an advantage
The system will highlight non-controllable operational  
variances.
Managers can justify variances as being due to bad  
planning.
Planning variances can highlight out-of-date  
standards.
The system will be based on realistic standards that  
are easy to establish.
Planning and operational variances will highlight non-controllable planning variances. Managers
justifying variances as being due to bad planning can be a weakness, as they could be hiding
operational failures. Realistic standards may not necessarily be easy to establish – they may
involve subjective estimates.
58
True False
They focus on assigning responsibility solely to senior  
managers.
They work well in rapidly changing environments.  
The philosophy of continuous improvement behind  
TQM is incompatible with predetermined standards.
Standard costs may allow for a predetermined level of  
scrap, whereas TQM aims for no scrap.
Staff generally have responsibility under both systems. Standard costing works best in a stable
environment.
59  Material cost only

The material price when flexed is higher than budget whilst the external environment shows
that prices are reducing. This indicates that although suppliers lowered their prices, the
manager has still overspent which indicates poor performance.
ht 7
r i g 2 0 1
y
p ion
o
C uit
I n t
rst
Fi
AC C A F 5 Q u e s t i o n B a n k Revision answers: 4: Performance measurement and control 275

1
Transaction Executive Enterprise
processing information resource planning
system system system
Captures all the day-to-day routine   
transactions within a business
Integrated system overseen   
centrally
Provides summary information for   
strategic decisions
Includes data analysis and   
modelling tools
Fir Cop
2
True False
st I yri
They are designed to provide information for internal  
ntu ght
and external use.
They provide information for planning, control and  
itio
decision making.
They are designed to report on existing operations.  
They are designed to integrate an organisation’s
n2  
017
processes to provide a single system for the whole
organisation.
MIS are designed to provide information for internal use by management. Not all MIS provide a
single system for the whole organisation, this is a feature specifically of enterprise resource
planning systems.
3  2 only
4  Critical strategic information can be summarised

The tracking and summarising of critical strategic information is done by an Executive
Information System (EIS).
The other three options are all likely to be potential benefits which would result from the
introduction of an ERPS.
276 R e v i s i o n a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l AC C A F5 Q u e s t i o n B a n k

5  Cost of telephone calls
 Cost of researcher
Analysis and dissemination costs are management costs.
6
Internal External
Value of sales, analysed for each customer  
Value of purchases, analysed for each supplier  
Prices of similar products, analysed for each  
competitor company
Hours worked, analysed for each employee  
Management reports
7
ht 7
Ensure security Don’t ensure
i g 1
security
y r 2 0
Logical access controls  
p ion
 
o
Database controls
C uit
Hierarchical passwords  
t
Range checks  
t I n
Fi rs
8  Minimise the risk of data loss
9  If working from home, departmental employees must use a memory stick to transfer
data, as laptop computers are not allowed to leave the department
A memory stick is much more likely to get mislaid and compromise security than a password
protected laptop. It is likely that memory sticks could get lost or that information is left on home
computers.
In the context of the scenario all the other options are good practice.

10  2 only
A focus solely on financial performance measures is likely to encourage short-termism.
11
True False
In the balanced scorecard the set of indicators which measure  
whether value is being added to the shareholders is known as
the innovation and learning perspective.
The balanced scorecard looks at both internal and external  
matters concerning the organisation.
The Building Blocks model focuses solely on non-financial  
measures.
The Building Blocks model considers competitiveness, resource  
utilisation and flexibility as dimensions of performance.
In the balanced scorecard the set of indicators which measure whether value is being added to
the shareholders is known as the Financial perspective.
The Building Block model of appraising performance takes account of financial and non-financial
performance measures.
12  Level of staff satisfaction

This is much more subjective.
Fir Co
st I pyri
ntu ght
The first statement is wrong because customers are actually paying more quickly.
The second statement is wrong because the quick ratio excludes inventory.
itio
n2
It would have been easy to make a mistake on this question as firstly, if customers were taking
017
longer to pay, it would contribute to the decline in the current ratio. Remember: question every
aspect of what the statements are telling you. Similarly, as regards statement 2, although the quick
ratio has declined inventory is excluded from the quick ratio, so this makes the statement false.
Again, it would have been easy to slip up by not questioning every aspect of the statement.
BUS CO
14
Bus 1
Prime 4
Express 2
Transit 3
Bus: (40% × 68) + (32% × 80) + (0.28 × 82) = 75.76%

Prime: (40% × 58) + (32% × 80) + (0.28 × 83) = 72.04%
Express: (40% × 67) + (32% × 76) + (0.28 × 85) = 74.92%
Transit: (40% × 62) + (32% × 78) + (0.28 × 86) = 73.84%
t
15
i g h 1 7
True False
r 0
 
y 2
Independent research has shown that Bus Co’s passengers
p ion
are the most satisfied of any national bus operators.
o
Independent research confirms that Bus Co leads its  
C uit
competitors on what matters most to customers.
t
Independent research confirms that Bus Co is ahead of its  
I n
competitors on value for money.
r st Independent research confirms that Bus Co is ahead of its  
i
competitors on punctuality.
F Independent research does not provide any overall ranking of customer satisfaction. Only if Bus
Co was ahead of all its competitors in all categories (which it isn’t) could it make this claim.
Similarly there is no independent evidence of which criteria matter most to customers. Bus Co is
ahead of all its competitors on value for money, but has the same rating as Prime for punctualiy,
so is not ahead on that criteria.
16
Occupancy rate of buses   
Utilisation rate for drivers   
Percentage of customers satisfied with cleanliness   
of buses
Percentage of carbon emissions relative to target   
set
17  Introducing a greater range of tickets on some routes

A greater range of tickets is likely to result in more passenger queries when they buy tickets,
delaying the departure of buses. No longer allowing cash and allowing Smartcards will eliminate
passenger time spent buying tickets when they get on buses. Amending the timetable is a
method that has worked for some transport companies, although it is likely to mean a fall in the
journey time measure of satisfaction.
18  Quality
The ticket options available are not linked to the quality of service. Bus Co will aim to score over
its competitors by providing more flexible ticket arrangements. Introducing cheaper fares for
off-peak services should mean that more passengers use buses at times where there are more
spare seats.
JAMAIR CO
19  Using only one type of aircraft
Co
 Focusing on e-commerce with customers both booking tickets and checking in for flights
Fir
online
st I pyri
Using only one type of aircraft should reduce maintenance and operational costs. Focusing on e-
commerce should mean a reduction in time spent dealing with bookings and check-ins.
ntu ght
Landing costs are likely to be higher in capital cities than in other cities. Having more than one
itio
class of seat may lead to booking problems, more queries and increased complications because
of providing different services for different passengers during flights.
n2
20
Financial 017
Customer Internal Learning
Ensuring flights are on time    
Using fewer planes to transport    
customers
Improving turnaround times    
Improving cleanliness of planes    
by spot checks
21
Financial Customer Internal Learning
Absentee rates of employees    
Planes’ lease costs per customer    
Revenue per passenger mile    
Number of flights cancelled    
22  It cannot resolve conflicts between short-term and long-term objectives.

 It can be difficult to gain an overall impression of the results provided.
 There is no direct link between the overall results of the scorecard and the creation of
shareholder value.
 The balanced scorecard will be of limited effectiveness if Jamair’s strategy is unclear.
One of the balanced scorecard’s advantages is that it should steer Jamair the business away
from solely focusing on financial measures. The balanced scorecard emphasises links between
the different perspectives.
23
True False
Jamair Co has a higher P/E ratio than its competitors, which  
may reflect the rumours about a takeover.
Competitor 2 appears to do a greater proportion of long-haul  
flights than Jamair or Competitor 1.
P/E ratios
Jamair (520 × 9)/371 = 12.61
t
Competitor 1 (1,100 × 6)/546 = 12.09
i g h 1 7
Competitor 2 (600 × 4.5)/286 = 9.44
y r 2 0
Thus Jamair Co has a higher P/E ratio than its competitors, and an explanation could be the
p ion
takeover rumours.
o
C uit
Average kilometres (million) per plane
t
Jamair 56/17 = 3.29
t I n Competitor 1 92/29 = 3.17
rs
Competitor 2 65/25 = 2.60
Fi
Competitor 2 has a lower number of kilometres per plane, suggesting that it specialises more in
short-haul flights.

24
True False
Cost-based transfer prices are most appropriate where there is  
an intermediate market for the product.
When the producing division is operating at full capacity, an  
opportunity cost based approach should be used for the transfer
price.
The maximum transfer price is the sum of the supplying division’s  
marginal cost and opportunity cost of the item transferred.
Cost-based transfer prices are most appropriate where there is NO intermediate market for the
product. The sum of the supplying division’s marginal cost and opportunity cost of the item
transferred is the minimum transfer price, not the maximum.
25
True False
Residual income is better for comparing divisions of  
different sizes.
Return on investment may cause a manager to reject a  
project that exceeds the head office target, if the
project will earn less than the division’s existing
Return on investment.
A disadvantage of Residual income is that it requires  
an estimate of cost of capital.
A disadvantage of both Return on investment and  
Residual income is that they may appear to improve as
a division’s assets get older.
Residual income is not good for comparing divisions of different sizes as inevitably a bigger
division will have a bigger RI figure.
26 16.6 %
$
Fir Co
Original profits $720,000 × 15% 108,000
st I pyri
Profit on sale 14,000
Revised profit 122,000
ntu ght
$
Original net asset value 720,000
itio
Less carrying amount of asset sold (36,000)
Plus cash received from sale of asset 50,000
n2
734,000
017
Revised ROCE after sale of asset = ($122,000/$734,000) × 100% = 16.6%
27 $ 162000
Divisional profit before depreciation = $2·7m × 15% = $405,000 per annum.

Less depreciation = $2·7m × 1/50 = $54,000 per annum.
Divisional profit after depreciation = $351,000
Imputed interest = $2·7m × 7% = $189,000
Residual income = $162,000
28
Poor Not poor
performance performance
Sales volume  
Sales price  
Material cost  
Material usage  
Sales volume
Sales are less than the (optimistic) budgeted figure of 6,000. Expected sales volume based on
last year’s figures = 5,000 × 0.8 = 4,000. 4,200 sold is better than this.
Sales price
Budgeted figure = $600,000/6,000 = $100 per unit
15% reduction on last year = ($450,000/5,000) × 0.85 = $76.50 per unit
Average sale price achieved = $317,000/4,200 = $75.48 per unit, below both figures
Material cost
Both budgeted figure and cost last year = $7 per kg ($113,400/16,200 and $105,000/15,000)
t
Expected cost this year = 11,500 × $7 × 1.05 = $84,525. Actual cost = $81,600, better than
h 7
expected
r i g 0
Material usage
2 1
y
p ion
Material usage last year = 15,000/5,000 = 3 kg per unit
o
C uit
Expected figure based on last year and taking account of production changes = 3 kg × 0.9 = 2.7
kg. This is the same as the budgeted figure (16,200 kg/6,000)
I n t
Actual usage = 11,500 kg/4,200 = 2.74 kg, higher than expected.
rst
Fi
Firstly, a machine with NBV of $40k was sold for $50k. This will reduce non-current assets by
$40k and, as we are told this was a cash transaction, increase cash by $50k – increasing net
assets by $10k. As a profit has been made on disposal, it will also increase profits by $10k.
Secondly, another machine was purchased for $250k. This will increase non-current assets
by $250k, but as this was also a cash transaction, decrease cash by $250k, so no net effect.
As no depreciation is charged on either machine there is no further effect.
The net effect is therefore +10k to both profit and net assets, so the ROI is ($200k/$1,010k) ×
100%=19.8%. Therefore answer B.
18.8% was obtained by omitting the profit on disposal from profits – ($190k/$1,010k) =18.8%.
15.1% was obtained by omitting the profit on disposal and increasing net assets by the
$250k machine purchase but not subtracting the cash – ($190/$1,260k) =15.1%.
15.9% was obtained with the correct profit figure but the incorrect net assets of $1,260k –
($200/$1,260) =15.9%.
29  19.8%
Revised annual profit = $190,000 + $10,000 profit on the sale of the asset = $200,000
Revised net assets = $1,000,000 – $40,000 NBV + $50,000 cash – $250,000 cash + $250,000
asset = $1,010,000
ROI = ($200,000/$1,010,000) x 100 = 19·8%
CARDALE CO
30 11.7 %
Controllable profit = $1,970k
Total assets less trade payables = $14,980k + $3,260k – $1,400k = $16,840k
ROI = 11·7%
31 $ 43200
Bonus to be paid for each percentage point = $120,000 × 2% = $2,400

Maximum bonus = $120,000 × 0·4 = $48,000
Fir Co
Division F: ROI = 28·5% = 18 whole percentage points above minimum ROI of 10%.
st I pyri
18 × $2,400 = $43,200
This is below the maximum and so Division F’s manager will be paid this amount.
ntu ght
itio
32
Possible Not possible
n2 reason reason
017
Division F’s manager has kept cash balances high.  
The accumulated depreciation on Division F’s non-current  
assets is low.
Division F’s manager invested in the strategic management  
information system just before the year-end.
High cash balances will mean current assets are higher and return on investment is lower. A
low accumulated depreciation figure will mean that non-current assets are high, depressing the
ROI. Using surplus cash at the year-end to buy a new information system will be exchanging one
asset (cash) for another (strategic management information system). The depreciation of the
newly-acquired asset is unlikely to be significant as it is being charged monthly.
33  Division F is smaller than Division N.

 Division F has a lower risk profile than Division N.
If Division F is smaller, its profits and hence its residual income are likely to be lower. If it has a
lower risk profile, it should be allowed to use a lower cost of capital than Division N.
Marginal investments may have a positive RI, but be rejected on the grounds that they run the risk of
lowering ROI. Similarly, the use of RI and an appropriate cost of capital should provide incentives to
undertake any investments with a positive RI, which would be in the interest of Cardale Co.
34  The system allows easier access to external sources of information.

The system described should have an external focus and allow the manager of Division F to
integrate internal and external sources of information.
The manager will want a summary of the detailed information that relates to his department,
not to have to wade through the information himself.
As the manager appears to be taking the investment decision himself, integration with other
departments is unlikely to be most important – a decision about a system that integrates
information across Cardale Co is likely to be made centrally.
Expert assistance may help the manager make a limited number of decisions but it appears that
he invested in something that would help him generally.
ANDOVER AND WINCHESTER

35 Andover
$ 77.5 000
Winchester
t
$ 160 000
i g h 1 7
Division manager assessment should be based on controllable profits:
y r 2 0
Andover 115 – (10% × 375) = 77.5
o p ion
Winchester 180 – (10% × 200) = 160
C uit
36
I n t
 Both 1 and 2
t
Divisional ROI is based on divisional net profit:
Fi rs
Andover = 55/375 = 14.7% and Whitchurch = 60/200 = 30%
Andover was set up recently, so its assets will be less depreciated than those of Whitchurch,
which will reduce its ROI.
37  controllable by/RI/can
The managers of Andover and Winchester divisions should be assessed on costs, revenue and
investments that are controllable by their division. To promote goal-congruent behaviour by
the two divisions, RI should be used to compare them. Efficiency variances can be used to
assess the managers of the two centres.
38  Rewarding managers if they fulfil a number of financial and non-financial targets

Both sorts of target can be short-term and long-term, and often non-financial targets link well
to longer-term performance. Managers need to have some incentive to improve their
performance - paying a basic salary or linking to company-wide performance which they may
not be able to influence much won’t provide enough incentive. Only rewarding managers for
the performance of their division is at the heart of the problem that’s been identified.
39  The % of on-time deliveries

Customers can clearly see performance here and it will influence their views. What matters to
customers on quality is not what happens before they see the products, but the poor quality
products that they see (internal quality control may pick up a number of faulty products, but
may equally miss others). Customers may be influenced by the level of staff turnover, but only if
it clearly links to poor performance. The number of new products is a good measure of
innovation, but customers may not buy them.

40  Measuring actual performance in relation to financial targets
Non-financial targets are more likely to be appropriate.
41  Effectiveness
Exam success will be a given objective of a school, so it is a measure of effectiveness.
SEATOWN COUNCIL
Fir Co
42 
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How much time is spent sweeping the sands
ntu ght
 How frequently bins are being emptied
itio
Tractor running costs are likely to be used in measuring economy. The amount of litter collected
will not itself indicate efficiency, as the council will be concerned with the resources used to
n2
collect the litter.
43 

Spot checks on litter bins by council officers
Ratings of beaches by external agencies
017
 Complaints by visitors
Agency ratings and complaints provide external indications of the effectiveness of operations.
Spot checks on litter bins will show whether rubbish is piling up beside bins.
The number of litter bins, the time spent by employees and the amount of vehicle miles are all
measures of usage of resources, not whether resources used have produced results.
44  Number of hotel rooms in Seatown

The number of hotel rooms is not an indication by itself of the number of visitors – the council
would need to know occupancy rates. Also perhaps a large number of visitors would not stay in
hotels.
45  Certain areas of Seatown’s beaches are more difficult to sweep.
Difficulty Not a difficulty

Some refreshment kiosks will only be open at certain  
times of the year.
The number of visitors will be less in winter.  
Certain areas of Seatown’s beaches are more difficult  
to sweep.
Sweeping should pick up litter that poses a threat to  
beach user safety.
Records of time spent on sweeping different areas should mean that this is taken into account
when considering efficiency, but ultimately all litter has to be picked up from these areas
throughout the year.
Refreshment kiosks only being open at certain times and fewer visitors coming in winter will be
seasonal variations in litter generated, which it might be difficult to estimate for analysis over
the year. Finding hazardous litter on the beach is a qualitative aspect of the effectiveness of
sweeping that may be difficult to measure, but is relevant to the council’s ultimate
responsibilities for the beaches – the council cannot just rely on the public disposing of
hazardous waste in the litter bins.
ht 7
g 1
46  flexibility/competitiveness
y r i 2 0
The variation in frequency of sweeping beaches during the year is a measure of flexibility,
p ion
whereas the number of visitors compared with other resorts is a measure of competitiveness.
o
C uit
Analysis of variations will show whether the council is able to commit more resources at busier
times of the year when more litter is being generated. It will not show whether resources are
n t
being used fully.
t I Comparison of number of visitors is a measure of how popular the resort is compared with
Fi rs
other resorts, so is a measure of competitiveness that will concern the council. It may be partly
determined by service quality, but there will be other issues influencing visitor numbers as well.

47
Internal External
Growth in the economy  
Director leaves to join a competitor  
Market shortage of labour  
New health and safety regulations  
PART 2 REVISION ANSWERS: Long form
1 THE TELEPHONE CO
This was a nice, straightforward relevant costing question, which should have been well-
answered by most people. This was definitely not the case, however, and it proved to be one
of the most poorly answered questions on the paper.
Part (a) asked candidates to prepare a cost statement using relevant costing principles,
showing the minimum cost that a company should charge for a contract. The requirement
also asked for detailed notes to explain the numbers being used. It is very easy in this type of
question to focus purely on the numbers, without giving adequate weight to the words. This
Co
would have been a mistake, because the words were actually worth eight marks compared
Fir
to the six marks for the numbers. Some candidates definitely fell into this trap. However, the
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biggest problem with this question was that many candidates clearly don’t understand
relevant costing, so they simply couldn’t get either the numbers or the words right anyway.
ntu ght
Out of all the scripts that I personally looked at, and this was a lot, I only saw two candidates
score full marks on part (a).
Common errors included:
itio

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Erroneously including the lost contribution from Contract X when calculating the three
017
engineers’ costs. The only relevant cost here was the $500 fine for delayed completion
of Contract X. The contribution from this contract was never going to be lost as the
contract was only delayed and not lost altogether.
 Including the 120 telephone handsets that were held in inventory at their historical cost
of $16.80 each, rather than the replacement cost of $18.20. Historical costs are never
relevant because they are sunk. This was a really basic error.
 Erroneously including the site inspector’s costs of $400. The note stated that the site
inspector charged the client directly for the work rather than invoicing the company in
question. This error was down to poor reading.
 Few candidates managed to work out the cost of the computerised control system. It
was simply a question of comparing the total lost sale proceeds and modification cost
of Swipe 1 to the cost of buying the new Swipe 2, and selecting the cheapest option for
the company.
Apart from these common errors, another problem was that the notes given by candidates
didn’t explain the figures being used well enough. Many candidates just wrote down that a
cost was included because it was ‘relevant’ but didn’t say why. This is not an explanation and
didn’t score marks.
EXAM SMART
It is really important to take heed of the Examiner’s warnings here. If more of the marks are
going for why have you included or excluded a cost then the marker will expect to see a
good explanation. The question requirement quite clearly asked for detailed notes and
explanations, so there was no excuse for not giving them.
For example:
Site visits – This is not a cash outflow for T Co but for its customer Push Co. Therefore, it is
not a relevant cash flow for Push Co and is ignored in the costing statement.
Handsets – The required handsets are in regular use by T Co. The 80 handsets in inventory, if
used, will have to be replaced at the prevailing market price to fulfil future contracts with
other customers. The balance of 40 handsets will have to be purchased on the open market.
This will cause a relevant cost of: (40 + 80) × $18.20 = $2,184 because undertaking the Push
Co contract causes T Co to incur an incremental cash outflow.
The words ‘because’ and ‘therefore’ (as well as words like ‘so’, ‘since’, ‘means that’, ‘results
in’, ‘causing’ etc), force you to try to explain yourself and add value.
In the exam, think what was it that made me think that the cost was relevant or not
relevant. Then write it down!
t
EXAM SMART
i g h 1 7
r 0
If you struggle with deciding how to utilise the numbers, think about the actual cash flows
y 2
that will happen if:

o p ion
The project is accepted
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 The project is rejected
t
For example:
t I n
Control system
Fi rs
 Cash flow if project is accepted:
Swipe 1 modification cost ($4,600)
 Cash Flow if project is rejected:
Swipe 1 sales proceeds $3,000
 Net difference (future incremental cash flow) ($7,600)
(a) Cost statement

$ Note
Lunch 0 1
Engineers’ costs 500 2
Technical advisor 480 3
Site visits 0 4
Training costs 125 5
Handsets 2,184 6
Control system 7,600 7
Cable 1,300 8
12,189
Notes
Note 1: Lunch
This past cost is a ‘sunk cost’ and should therefore be excluded from the cost statement. It has
already arisen and is therefore not incremental.
Note 2: Engineers’ costs
Since one of the engineers has spare capacity, the relevant cost of his hours is Nil. This is
because relevant costs must arise as a future consequence of the decision, and since his wage
will be paid regardless of whether he now works on the contract for Push Co, it is not an
incremental cost.
EXAM SMART
Read the whole question first! If you just look at note 2 and do your calculations before you
read note 9 – you will miss key information. One idea is to annotate the question paper as
you read through with rough workings. You can always change your mind before writing up
your final answer. Otherwise, in this scenario, you may make some complicated
assumptions and calculations about working hours before you stumble across note 9!
Co
The situation for the other two engineers is slightly different. Their time is currently fully utilised
Fir
and earning a contribution of $5 per hour each. This is after deducting their hourly cost which,
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given a salary of $4,000 per month each, is $25 per hour ($4,000/4 × 40). However, in one
week’s time – when they would otherwise be idle – they can complete Contract X and earn the
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contribution anyway. Therefore, the only relevant cost is the penalty of $500 that will be
payable for the delay on Contract X.
Note 3: Technical advisor
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Since the advisor would have to work overtime on this contract, the relevant cost is the
017
overtime rate of $60 ($40 × 1.5) per hour. This would total $480 for the whole job.
Note 4: Site visits
This is a cost paid directly by Push Co to a third party. Since it is not a relevant cost for T Co,
it has been excluded.
Note 5: Training costs
Since the trainer is paid a monthly salary irrespective of what work he does, this element of his
cost is not relevant to the contract, since it is not incremental. However, the commission of
$125 will arise directly as a consequence of the decision and must therefore be included.
Note 6: Handsets
Although T Co has 80 of the 120 handsets required already in inventory, they are clearly in
regular use in the business. Therefore, if the 80 are used on this contract, they will simply need
to be replaced again. Consequently, the relevant cost for both the 40 that need to be bought
and the 80 already in inventory is the current purchase price of $18.20 each. 120 × $18.20 =
$2,184.
Note 7: Control system
The historic cost of Swipe 1, $5,400, is a ‘sunk’ cost and not relevant to this decision. However,
since the company could sell it for $3,000 if it did not use it for this contract, the $3,000 is an
opportunity cost here. The current market price for Swipe 1 of $5,450 is totally irrelevant to the
decision as T Co has no intention of replacing Swipe 1, since it was bought in error. In addition
to the $3,000, there is a modification cost of $4,600, bringing the total cost of converting Swipe
1 to $7,600. This is still a cheaper option than buying Swipe 2 for $10,800, therefore the
company would choose to do the modification to Swipe 1. The cost of $10,800 of a new Swipe 2
system is therefore irrelevant now.
Note 8: Cable
The cable is in regular use by T Co, therefore all 1,000 metres should be valued at the current
market price of $1.30 per metre. The $1·20 per metre is a sunk cost and not relevant.

Part (b) asked for an explanation of the costing principles used in (a) and of the implications
of the minimum price that had been calculated. Answers to both parts of this requirement
were poor. All that candidates had to do for the first part was explain that a relevant cost is a
‘future incremental cash flow’, saying what each one of those three words meant. Then, as
regards the implications of the minimum price, the question just required the candidate to
identify that this price didn’t include a profit element and a mark-up needed potentially to
be added. Also, it could have been stated that the customer might expect this low price in
the future etc. Again, out of all the scripts I saw, few candidates scored full marks here.
(b) Relevant costing principles

Relevant costs are those costs that change as a result of making a particular decision. In simple
ht 7
terms, a relevant cost is a future cash flow arising as a direct consequence of a decision. In order
i g 1
for a cost to be relevant to a decision, it must therefore meet all three of these criteria.
y r 2 0
Future – any costs which have already been incurred are regarded as ‘sunk’ costs and will
p ion
prevent a cost from being considered relevant.
o
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Cash flow – the cost must be a cash flow and not just an accounting adjustment, such as a
provision for a debt or depreciation. Also, cash flows that are the same for all alternatives are
t
not relevant.
t I n Direct consequence – this criterion means that the cash flow must be incremental. For example,
rs
if a cost has already been committed to, then it will arise irrespective of whether the decision
Fi
goes ahead. It will not therefore meet the ‘direct consequence’ criterion.
Opportunity cost – this is the value of the best alternative that is foregone as a result of making
a decision. In the case of the telephone system that Push Co needs for the contract, the
foregone sales proceeds of $3,000 are an example of an opportunity cost since, by using the
system for this contract, Push Co foregoes these sales proceeds.
[Examiner’s note: candidates would not be required to write all of this for the available marks.]
Significance of minimum price calculated
The cost calculated in part (a) is a starting point only, showing the minimum cost that could be
charged to the customer. If T Co charged this price, it would be no better or worse off than if it
did not carry out the work, i.e. it would make no profit or loss. This means that T Co would not
be rewarded for the risk that it takes in completing the work, unless some kind of a mark-up is
also incorporated.
Also, other costs – such as the lunch of $400 – while not incremental to the decision now, have
been incurred. Ideally, therefore, T Co should seek to recover them.
It could also be that, for example, in one week’s time, when the engineers are busy completing
the delayed contract X, another opportunity comes up that the company has to reject because
the engineers are busy on Contract X. Therefore, with hindsight, it would be seen that there was
an opportunity cost associated with using the engineers on this work and delaying Contract X.
Furthermore, none of the business’s overheads have been considered in the cost statement
and, in the long term, these would need to be covered.
It is clear, therefore, that the relevant cost calculated in part (a) is only a starting point for T Co
to use when deciding how to price the contract. The purpose of accepting contracts is to make
profit and increase shareholder wealth. This will only be done if a price higher than the relevant
cost of the contract is charged. In setting this price, however, T Co also needs to give
consideration to the fact that it hopes to attract future work from Push Co. The price needs to
be attractive enough for the customer to return in the future.
EXAM SMART
Pay careful attention to the marking guide for part (b). For six marks in total there are
eleven points in the Examiner’s marking guide. The question is also split between:
 Relevant costing principles and
 Pricing implications.
Therefore, aim to make at least six good points spread across these two sub-requirements.
Even if you can think of four relevant costing principle issues and only two pricing
implications, the marking guide has been adjusted to allow for this!
The Examiner has been very flexible in the marking guide. You could have scored a maximum of four
marks on either part of the sub answer with the overall maximum marks available being six.
Fir Co
Marking guide Marks
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(a) Costing statement
Lunch 1
Engineer costs 3
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Technical advisor 1
Site visits 1
Training costs
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Handsets 2
Control system 3
017
Cable 1
14
(b) Explanation
Relevant costing
Future cost / sunk cost 1
Cash flow not accounting adjustment 1
Incremental 1
Committed cost 1
Opportunity cost 1
Max 4
Price to be charged
Doesn’t incorporate profit 1
Doesn’t cover all costs 1
Ignores fixed costs 1
Contract X – engineer’s time 1
Starting point only 1
Need to make a profit 1
Need to attract future work 1
Maximum for price Max 4
Maximum for (b) overall 6
Cost volume analysis
2 HAIR CO
Part (a) of this question required candidates to calculate the weighted average contribution
to sales ratio for Hair Co. Using the most simple approach for this, firstly then, it was
necessary to calculate the individual contribution for each of the products. From this, the
total contribution could be calculated by applying the sales volumes to the unit
contributions. Then, the total sales figure could be calculated, finishing with the calculation
of the ratio by dividing the first figure by the second.
The majority of candidates were able to calculate the unit contributions, which is obviously a
very basic F2 skill.
However, many students seemed unclear where to go from here. The most common error
was that candidates then simply added together the three unit contributions, added
together the three unit selling prices, and divided the former by the latter, giving a
contribution to sales ratio of 36.9%. The problem with this calculation is that it does not take
into account the relative sales volume of each product and it is not therefore a weighted
t
average contribution to sales ratio but rather just an average contribution to sales ratio.
i g h 1 7
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EXAM SMART
y
p ion 2
o
In part (a) you assume that the budgeted sales volumes of the three products represent the
C uit
standard sales mix. This provides the ‘weightings’ for the contribution to sales ratio.
I n t
t
(a) Weighted average contribution to sales ratio (WA C/S ratio) = total contribution/total sales
rs
revenue.
Fi
Per unit: C S D
$ $ $
Material 1 (12) (28) (16)
Material 2 (8) (22) (26)
Skilled labour (16) (34) (22)
Unskilled labour (14) (20) (28)
Sales units 20,000 22,000 26,000

Total sales revenue $2,200,000 $3,520,000 $3,120,000
Total contribution $1,200,000 $1,232,000 $728,000
WA C/S ratio = ($1,200,000 + $1,232,000 + $728,000)/($2,200,000 + $3,520,000 + $3,120,000)
= $3,160,000/$8,840,000 = 35.75%

Part (b) asked candidates to calculate the break-even sales ratio for the company. This is a
very simple calculation and was answered correctly by about half of candidates. Follow-on
marks were given for using the ratio calculated in part a, even if this ratio was incorrect. All
that needed to be done to calculate the break-even sales revenue was for the fixed costs of
$640,000 to be divided by the ratio.
EXAM SMART
The importance of keeping going in an exam is evident here. Even if you got stuck on part
(a), then marks can still be achieved here using your calculations in part (a) even if it is
wrong.
(b) Breakeven sales revenue = fixed costs/C/S ratio

Therefore, breakeven sales revenue = $640,000/35.75% = $1,790,209.70
EXAM SMART
Co
Once the products have been ranked according to their C/S ratios you will need workings for.

Fir
Cumulative revenue (starting from NIL).
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 Cumulative profit (starting from a loss equal to the fixed costs ($640k) since if you sell
nothing you will make a loss equal to your fixed costs).
ntu ght
(c)
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Calculate the individual C/S ratio for each product then rank them according to the highest one
n2
first.
017
Per unit C S D
$ $ $
C/S ratio 0.55 0.35 0.23

Ranking 1 2 3
Product Revenue Cumulative revenue Profit Cumulative profit

$ $ $ $
0 0 0 (640,000) (640,000)
Make C 2,200,000 2,200,000 1,200,000 560,000
Make S 3,520,000 5,720,000 1,232,000 1,792,000
Make D 3,120,000 8,840,000 728,000 2,520,000

Answers to this were weak. The main point to identify was the fact that the company would
break even earlier if it sold products in order of their CS ratios first. The reality is, however,
that the company would neither sell the products in a constant mix or in order of their
profitability, therefore the true break-even point would really lie somewhere in the middle
of the two.
(d) If the products are sold in order of the highest ranking first, breakeven can be worked out by
taking the fixed costs of $640,000 and dividing them by Product C’s C/S ratio of 0.55, i.e. the
exact BEP is $1,163,636. This is substantially earlier than the breakeven point which occurs if the
products are all sold in a constant mix, which is $1,790,209, as calculated in (b) above.
The reason for this is obviously because the more profitable product, C, contributes more per
unit to fixed costs when being sold on its own, than when a mix of products C, S and D are sold.
The weighted average C/S ratio of all three products is only 35.75%, compared to C’s C/S ratio of
55%. Obviously, then, breakeven will occur earlier if C is sold in priority.
In reality, however, the mix of sales will vary throughout the year and Hair Co can neither
assume that the products are sold in a constant mix, nor that the most profitable can be sold
first.
(e) A multi-product P/V chart shows clearly the minimum the business has to do to breakeven, on
the assumption that it sells first the products with the highest C/S ratio.
By highlighting the products with the highest C/S ratios and plotting what each product
contributes to profit, the P/V chart can help the business decide which products’ production can
be expanded and which products may be discontinued.
The P/V chart can be used for comparison purposes. It can show the impact of different levels of
selling price and sales volume on the business’s breakeven point.
Marking guide Marks
(a)
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Weighted average C/S ratio
i g 1
Individual contributions 3
y r 2 0
Total sales revenue 1
p ion
Total contribution 1
o
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Ratio
(b) Breakeven revenue
1
2
6
2
(c)
I n t
Individual CS ratios 1½
t
Ranking 1½
Fi rs
Profit and revenue workings 2 5
(d) Discussion
General comments re assumptions (max 2 marks) 1
Each valid point re BEP 1 Max 4
(e) Each valid point re multi-product profit-volume (PV) chart 1 Max 3
Limiting factors
3 CSC CO
The first part of the question was a typical single limiting factor question, requiring
candidates to formulate an optimal production plan and calculate maximum profit.
Responses to this question were surprisingly poor given the fairly straightforward nature of
the question. The most common errors were firstly ignoring the fact that the company had
entered into a contract, and therefore these requirements should be produced first.
Secondly there was a requirement to calculate the shortage of material – this was often
omitted. Thirdly, many candidates used the dollar value of the limiting material to calculate
their production plan, rather than the quantities.
These errors didn’t seem to come from a lack of understanding, more a lack of care. It’s possible
that candidates were running short of time by this point, meaning that the requirements and
scenarios weren’t read properly. This highlights the importance of good time management
during the exam – ensuring that some of the more straightforward marks can be obtained.
Fir Co
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EXAM SMART
ntu ght
Markers often see students running out of time on the last question of an exam, and the
examiner’s comments here highlight how rushing a question like this can affect
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performance. You need for (a) to take a little time to plan out the stages of your calculation.
There are three questions to answer:
 Is there a shortage and how big is it?
n2
017
 If there is a shortage, in what order should we be producing the products?
 How many of each product should be produced?
(a) (Step 1) Calculate the shortage of Betta for the year

Total requirements in grams:
Cakes: grams used per cake 0·5
Expected demand 11,200
Total required: 5,600
Cookies: grams used per cookie 0·20

Shakes: grams used per shake 1
Overall total required: 15,060
Less available: 12,000
Shortage: 3,060
(Step 2) Contribution per gram of Betta and ranking

Shakes
Cakes Cookies Shakes (contract)
$ $ $ $
Contribution per unit 2·60 1·75 1·20 1·00
Grams of Betta per unit 0·5 0·2 1 1
$ $ $ $
Contribution per gram 5·20 8·75 1·20 1·00
Rank 2 1 3 4
(Step 3) Optimum production plan
Number Total Contri- Total
Product To be Grams Grams Cumulative bution Contri-
produced per unit per unit grams Per unit bution
Shakes (contract) 5,000 1 5,000 5,000 1·00 5,000
Cookies 9,800 0·20 1,960 6,960 1·75 17,150
Cakes 10,080 0·5 5,040 12,000 2·60 26,208
Total contribution 48,358
Less fixed costs (3,000)
Profit 45,358
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g 1
The second part of this question was a discussion about whether the business should breach
r i 0
the contract they have to supply another business. In general responses were disappointing
y 2
– candidates focussed purely on the financial factors. Easy marks could be picked up here for
o p ion
realising that breaching a contract will have legal, reputational and ethical issues. Many also
C uit
wasted their own time by ignoring the note in the requirement – “No further calculations are
required.”
I n t
rst
Fi
EXAM SMART
This part highlights very clearly that you sometimes need to think beyond the numbers and
financial factors in F5.
(b) Breach of contract with Encompass Health (EH)

It would be bad for business if CSC Co becomes known as a supplier who cannot be relied on to
stick to the terms of its agreements. This could make future potential customers reticent to deal
with them.
Even more seriously, there could be legal consequences involved in breaching the contract with
EH. This would be costly and also very damaging to CSC Co’s reputation.
If CSC Co lets EH down and breaches the contract, EH may refuse to buy from them anymore
and future sales revenue would therefore be lost. Just as importantly, these sales to EH are
currently helping to increase the marketability of CSC Co’s shakes. This will be lost if these sales
are no longer made.
Therefore, taking these factors into account, it would not be advisable to breach the contract.
EXAMINER’S COMMENTS: PART (C)

The final part of the question moved on to linear programming with multiple limiting factors.
This is generally a popular topic and this was overall well answered. Many candidates
attempted this part of the question before any other part of Section C – good examination
technique especially when under time pressure.
What this question demonstrated well was that most candidates are comfortable with the
steps involved in linear programming; however there is a lack of in depth understanding of
how it works. For example, virtually all candidates could identify the iso-contribution line
and feasible region when given on a graph, but few could explain what they meant. Many
explained what they were for (finding the optimum point), but not that the iso-contribution
line shows all points giving the same contribution, or that the feasible region shows all
possible production plans that meet all of the constraints. Similarly, most could define slack
in the context of scarce resources, but found it harder to identify slack variables from a
completed graph.
EXAM SMART
The examiner’s comments for (c) highlight the need for revision if you struggled here, also
Fir Co
what you need to revise.
st I pyri
ntu ght
(c)
(i) This line is what is called the ‘iso-contribution line’ and it is plotted by finding two
itio
corresponding x and y values for the ‘objective function’. At any point along this line, the
mix of cakes and cookies will provide the same total contribution, ‘C’.
n2
Since each cake provides a contribution of $2·60 and each cookie provides a contribution
017
of $1·75, the objective function has been defined as ‘C = 2·6x + 1·75y’. This means that
the total contribution will be however many cakes are made (represented by ‘x’) at $2·60
each plus however many cookies are made (represented by ‘y’) at $1·75 each.
The area 0ABCD is called the ‘feasible region’. Any point within this region could be
selected and would show a feasible mix of production of cakes and cookies. However, in
order to maximise profit, the optimum production mix will be at a point on the edge of
the feasible region, not within it.
(ii) The further the iso-contribution line is moved away from the origin, 0, the greater the
contribution generated will be. Therefore, a ruler will be laid along the line, making sure
it stays at exactly the same angle as the line, and the ruler will then be moved outwards
to the furthest vertex (intersection between two constraints) on the feasible region, as
represented by either point A, B, C or D. In this case, the optimum point is ‘C’, the
intersection of the ‘labour’ constraint and the ‘demand for cakes’ constraint.
(iii) A ‘slack’ value could arise either in relation to a resource or in relation to production of a
product. It means that a resource is not being fully utilised or that there is unfulfilled
demand of a product. Since the optimum point is the intersection of the labour and the
demand for cakes lines, this means that there will be three slack values. First, there will
be a slack value for cookies. This means that there will be unsatisfied demand for cookies
since the optimum point does not reach as far as the ‘demand for cookies’ line on the
graph. Also, there will be slack values for Betta and Singa, which means that both of
these materials are not actually the binding constraints, such that there will be more
material available than is needed.
Marking guide Marks

(a) Calculating shortage of Betta 1-5
Contribution per gram of Betta 1
Ranking 0-5
Optimum production plan 2
Profit 1
6
(b) Each valid point 1 4
(c) (i) Identification and explanation of the iso-contribution line 2
Identification and explanation of the feasible region 2 4
(ii) Explaining how to use line for identification of optimum point 1-5
Identification of optimum point 0-5 2
(iii) Explaining what slack values are 1
Identifying Betta as slack 1
Identifying Singa as slack 1
Identifying slack demand for cookies 1
4
Pricing decisions
ht 7
4 HEAT CO
r i g 2 0 1
y
p ion
o
C uit
n t
The requirement to calculate the optimum price and quantity in part (a) was new to the
I
t
syllabus in June 2011 and about half of candidates seemed not to have revised it and could
rs
not attempt it. Many candidates managed to score one or two marks for establishing the
Fi
demand function. It was really pleasing to see some good attempts at part (a) (ii) which
tested the ability to adjust the labour cost for the learning effect. Quite a few answers were
perfect.
Probably the most common mistake was including the fixed cost in the cost of the air
conditioning unit when it was the marginal cost which was being tested.
At this level it is expected that candidates will have a good understanding of what ‘marginal’
means.
EXAM SMART
Clear assumptions are given credit. The stated omission of fixed overheads from marginal
cost is something that the examiner is looking for!
Notice how a methodical approach is not only efficient, but also likely to lead to good marks.
For example in (a) (iii), a clear step-by-step approach is taken – the logic being clearly stated
as the answer is built up.
 Step 1: Establish the MR function. This will have twice the gradient of whatever price
function has been derived in (a)(i). If P = a – bQ then MR = a – 2bQ (given on the
formula sheet).
 Step 2: Establish the marginal cost – this will be whatever answer you have derived in
(a) (ii).
 Step 3: Equate the MR and MC together in order to establish Q
 Step 4: Whatever Q you derive – substitute into whatever demand function you have
arrived at in (a)(i). This will give your answer for P.
Full marks are given even when your previous answers may be erroneous. It is the method
that the markers are looking at.
(a) Profit
In order to ascertain the optimum price, you must use the formula P = a─ bQ
Where P = price; Q = quantity; a = intersection (price at which quantity demanded will be nil);
b = gradient of the demand curve.
The approach is as follows.
(i) Establish the demand function
b = change in price/change in quantity = $15/1,000 = 0.015
We know that if price = $735, quantity = 1,000 units
Establish ‘a’ by substituting these values for P, Q and b into our demand function:
735 = a - 0.015Q
Fir Co
st I pyri
15 + 735 = a
ntu ght
Therefore, a = 750.
itio
Demand function is therefore P = 750 – 0.015Q
(ii) Establish marginal cost
n2
The labour cost of the 100th unit needs to be calculated as follows.
Formula: y = axb.
a = 1.5 017
Therefore, if x = 100 and b= -0.0740005, then y = 1.5 × 100–0·0740005 = 1.0668178
Therefore, cost per unit = 1.0668178 × $8 = $8.5345
Total cost for 100 units = $853.45.
EXAM SMART
You can also do all your workings in hours and then convert to cost at the end of the
question.
Remember that in the formula y = axb, ‘y’ represents the AVERAGE time per unit, so to get a
total time you then need to multiply by the number of units. The total time for 99 units then
needs to be deducted from the total for 100 in order to get the time for the 100th unit.
 Time for 100th unit = Total for 100 units – Total for 99 units
 Time for 100th unit = (1.0668178 × 100) – (1.0676115 × 99) = 0.9882 hrs
 Labour cost for the 100th unit = 0.9882 × $8 = $7.91 (rounding)
If x = 99, y = 1.5 × 99–0.0740005 = 1.0676115

Therefore, cost per unit = $8.5408
Total cost for 99 = $845.55
Therefore, cost of 100th unit = $853.45 ─ $845.55 = $7.90
Therefore, total marginal cost = $42 + $7.90 = $49.90
Fixed overheads have been ignored as they are not part of the marginal cost.
(iii) Find profit
(1) Establish the marginal revenue function
MR = a ─ 2bQ
MR = 750 ─ 0.03Q
(2) Equate MC and MR
49.90 = 750 – 0.03Q
0.03Q = 700.1
Q = 23,337
(3) Find optimum price
P = 750 – (0.015 × 23,337)
= $399.95

ht 7
r i g 2 0 1
y
Part (b) was really well-answered, with most candidates being able to describe both pricing
p ion
strategies and suggest a suitable one.
o
C uit
A good, logical approach was adopted by most: explain market skimming, explain
penetration pricing and then explain which one would be most appropriate for Heat Co.
I n t
rs
(b)
t
Fi
(i) Penetration pricing
With penetration pricing, a low price would initially be charged for the Energy Buster. The
idea behind this is that the price will make the product accessible to a larger number of
buyers and therefore the high sales volumes will compensate for the lower prices being
charged. A large market share would be gained and possibly, the Energy Buster might
become accepted as the only industrial air conditioning unit worth buying.
The circumstances that would favour a penetration pricing policy are:
 Highly elastic demand for the Energy Buster i.e. the lower the price, the higher the
demand. The preliminary research does suggest that demand is elastic.
 If significant economies of scale could be achieved by Heat Co, then higher sales
volumes would result in sizeable reductions in costs. This is not the case here,
since learning ceases at 100 units.
 If Heat Co was actively trying to discourage new entrants into the market. In this
case, new entrants cannot enter the market anyway, because of the patent.
 If Heat Co wished to shorten the initial period of the Energy Buster’s life cycle so as
to enter the growth and maturity stages quickly. We have no evidence that this is
the case for Heat Co, although it could be.
From the above, it can be seen that this could be a suitable strategy in some respects but
it is not necessarily the best one.
(ii) Market skimming

With market skimming, high prices would initially be charged for the Energy Buster rather
than low prices. This would enable Heat Co to take advantage of the unique nature of the
product, thus maximising sales from those customers who like to have the latest
technology as early as possible. The most suitable conditions for this strategy are:
 The product is new and different. This is indeed the case with the Energy Buster.
 The product has a short life cycle and high development costs that need to be
recovered quickly. The life cycle is fairly short and high development costs have
been incurred.
 Since high prices attract competitors, there needs to be barriers to entry in order
to deter competitors. In Heat Co’s case, there is a barrier, since it has obtained a
patent for the Energy Buster.
 The strength and sensitivity of demand are unknown. Again, this is not the case
here.
Once again, the Energy Buster meets only some of the conditions which would suggest that
although this strategy may be suitable the answer is not clear cut. The fact that high
development costs have been incurred and the life cycle is fairly short are fairly good reasons
to adopt this strategy. While we have demand curve data, we do not really know just how
reliable this data really is, in which case a skimming strategy may be a safer option.
Marking guide
Fir Cop Marks
st I yri
(a) Profit using demand-based approach
ntu ght
(i) Establish demand function:
Find b 1
itio
Find a 1
Write out demand function 1 3
(ii) Find MC:
n2
017
Average cost of 100 1
Total cost of 100 1
Average cost of 99 1
Total cost of 99 1
Difference 1
Correct total MC excluding fixed cost 1 6
(iii) Establish MR function 1
Equate MC and MR to find Q 1
Find optimum price 1 3
(b) Market based strategies
Penetration pricing Each valid point 1
Max 4
Market skimming Each valid point 1
Max 4 Max 8
5 ROBBER CO
This question tested relevant costing within a ‘make or buy’ context. Part (a) asked
candidates to advise whether the company in question should manufacture its own
components for its burglar alarms or whether it should outsource their supply to Burgistan.
It was quite pleasing to see many candidates making a decent attempt at it.
In the suggested solution, the $4k and $6k machine costs are treated as specific fixed costs
and are therefore included in the relevant cost of manufacturing in-house, together with the
depreciation. However, is acceptable to assume these costs to be general fixed costs and
therefore excluded them for their manufacture cost together with the depreciation.
EXAM SMART
Watch out for the following when working out the relevant costs of making the components.
 For keypads the price rise in materials is due to happen half way through the year so
half the units produced would be at the old price and half at the new price.
t

h
Be careful with heat and power to make sure that you strip out the apportionment of
i g 1 7
general factory overhead as this can be assumed to going to be incurred regardless of
r 0
any decision to purchase externally.

y
p ion 2
For the variable element of the machine costs, firstly calculate what the variable cost
o
per set up is and then scale this for the fact that there will now be more set ups overall
C uit
(since batch size is being reduced more batches will be needed). Previously 160 set ups
t
(80,000/500) were required and now 200 set ups (80,000/400) will be needed. You
n
therefore need to scale by a factor of 200/160 (or 500/400 as the examiner has shown
t I
as it amounts to exactly the same thing)
rs
 Make sensible assumptions about the general factory depreciation and insurance.
Fi (a)
Display
Keypads screens
Variable costs $ $
Materials ($160k × 6/12) + ($160k × 1.05 × 6/12) 164,000
($116k × 1.02) 118,320
Machine set-up costs
($26k – $4k) × 500/400 27,500
($30k – $6k) × 500/400 30,000
231,500 208,320
Attributable fixed costs
Heat and power ($64k – $20k)/($88k – $30k) 44,000 58,000
Fixed machine costs 4,000 6,000
Depreciation and insurance ($84/$96k × 40%) 33,600 38,400
81,600 102,400
Total incremental costs of making in-house 313,100 310,720
Cost of buying (80,000 × $4.10/$4.30) 328,000 344,000

Total saving from making 14,900 33,280
Robber Co should therefore make all of the keypads and display screens in-house
(Note: It has been assumed that the fixed set-up costs only arise if production takes place.)
Alternative method
Display
Keypads screens
Relevant costs $ $
Direct materials
($160,000/2) + $160,000/2 × 1.05 164,000
$116,000 × 1.02 118,320
Heat and power
$64,000 – (50% × $40,000) 44,000
$88,000 – (50% × $60,000) 58,000
Machine set up costs:
Avoidable fixed costs 4,000 6,000
Activity related costs (W1) 27,500 30,000
Avoidable depreciation and insurance costs:
40% × $84,000/$96,000 33,600 38,400
Total relevant manufacturing costs 313,100 310,720
Relevant cost per unit: 3.91375 3.884
Cost per unit of buying in 4.1 4.3
Co
Incremental cost of buying in 0.18625 0.416
Fir
As each of the components is cheaper to make in-house than to buy in, the company should
st I pyri
continue to manufacture keypads and display screens in-house.
ntu ght
Working 1
Current no. of batches produced: 80,000/500 = 160
itio
New no. of batches produced: 80,000/400 = 200
n2
Current cost per batch for keypads: ($26,000 - $4,000)/160 = $137.5
Therefore new activity related batch cost: 200 × $137.5 = $27,500
017
Current cost per batch for display screens: ($30,000 - $6,000)/160 = $150
Therefore, new activity related batch cost: 200 × $150 = $30,000

Part (b) was more challenging and required candidates to work out the incremental saving
per unit from making the two components and then, using key factor analysis, calculate how
many of which product should be bought in rather than made in order to increase
production.
It produced weaker answers but many candidates were at least able to work out the
shortage of hours and the number of units that needed to bought in (without going through
the process of ranking the two components), for which they could earn nearly half of the
total marks available.
(b) The attributable fixed costs remain unaltered irrespective of the level of production of keypads
and display screens, because as soon as one unit of either is made, the costs rise. We know that
we will make at least one unit of each component as both are cheaper to make than buy.
Therefore they are an irrelevant common cost.
Display
Keypads screens
$ $
Buy 4.1 4.3
Variable cost of making ($231,500/80,000) 2.89
($208,320/80,000) 2.6
Saving from making per unit 1.21 1.7
Labour hour per unit 0.5 0.75
Saving from making per unit of limiting factor 2.42 2.27
Priority of making 1 2
Total labour hours available = 100,000.
Make maximum keypads i.e. 100,000, using 50,000 labour hours (100,000 x 0.5 hours)
Make 50,000/0.75 display screens, i.e. 66,666 display screens.
Therefore, buy in 33,334 display screens (100,000 – 66,666).
EXAM SMART
In the answer to part (b) above it is not unreasonable to have assumed that the heat &
t
power costs that were not an apportionment of general factory overhead were also part of
h 7
the variable cost. Including these as part of the variable cost of making would have the
i g 1
following results compared to the Examiner’s answer.

y r 2 0
Keypads, VC of making = 2.89 + 0.55 = $3.44, where the $0.55 heat and power per unit
o p ion
is calculated as the total cost per unit of $0.8 less $0.25 (being 50% of the labour direct
C uit
cost per unit).
 Display screens, VC of making = 2.6 + 0.73 = $3.33, where the $0.73 is calculated as the
n t
total cost per unit of $1.1 less $0.375 (being 50% of the direct labour cost per unit).
t I Display
rs
Keypads screens
Fi
$ $
Buy 4.1 4.3
Variable cost of making (per above) 3.44 3.33
Saving from making per unit 0.66 0.97
Labour hour per unit 0.5 0.75
Saving from making per unit of limiting factor 1.32 1.29
Priority of making 1 2
As you can see the order of priority is unaffected and so the rest of the solution remains as
per the Examiner’s answer.

Part (c) was a straightforward knowledge requirement about the non-financial factors to be
considered when outsourcing. The majority of candidates answered very well scoring full
marks here although a significant number of candidates brought in financial factors into their
answers despite the requirement asking for non- financial factors.
Good points that were raised included consideration of the following:
 Reliability and skills of the suppliers - can they sustain quality standards?
 What if there are any future changes / models, would the suppliers be able to cope?
 Ability of the suppliers to deliver on time; if late, how will this affect customer relations
and goodwill?
 Will the suppliers maintain confidentiality? The designs are IPR - Intellectual Property
Rights, which, if copied, will affect Robber Company's market share.
 What about government pressure / power / policies? The decision to outsource could
result in a number of redundancies which might make the government bring sanctions
against Robber Company.
 Loss of the rationale of Robber's existence - if they outsource is this the start of the
decline of the manufacturing business?
 Exchange rate risks and losses for Robber Co.
EXAM SMART
It is so important to follow the clues given by an Examiner. Non-financial factors requires
you to think of issues that, although they may ultimately have a financial impact, in
themselves are not measured purely in $!
As usual, it is important not just to state the factor but to add value and clarity. You might
want to think of the ‘so what?’ factor. I have stated a fact – so what? Why is it important?
For example:
 Robber needs any new supplier to be flexible and able to meet Robber’s needs (fact). If
Fir Co
the new supplier were not able to cope with sudden increased demand by Robber for
st I pyri
keypads and display screens, then Robber’s production could be delayed causing lost
goodwill with its own customers (so what / value added).
ntu ght
itio
(c) Non-financial factors
 The company offering to supply the keypads and display screens is a new company. This
n2
would make it extremely risky to rely on it for continuity of supplies. Many new
017
businesses go out of business within the first year of being in business and, without these
two crucial components, Robber Co would be unable to meet demand for sales of control
panels.
 Robber Co would need to consider whether there are any other potential suppliers of the
components. This would be useful as both a price comparison now and also to establish
the level of dependency that would be committed to if this new supplier is used. If the
supplier goes out of business, will any other company be able to step in? If so, at what
cost?
 The supplier has only agreed to these prices for the first two years. After this, it could put
up its prices dramatically. By this stage, Robber Co would probably be unable to begin
easily making its components in house again, as it would probably have sold off its
machinery and committed to larger sales of control panels.
 The quality of the components could not be guaranteed. If they turn out to be poor
quality, this will give rise to problems in the control panels, leading to future loss of sales
and high repair costs under warranties for Robber Co. The fact that the supplier is based
overseas increases the risk of quality and continuity of supply, since it has even less
control of these than it would if it was a UK supplier.
 Robber Co would need to establish how reliable the supplier is with meeting promises for
delivery times. This kind of information may be difficult to establish because of the fact
that the supplier is a new company. Late delivery could have a serious impact on
Robber Co’s production and delivery schedule.
Marking guide Marks

(a) Incremental cost of buying in
Direct materials ½
Direct labour ½
Heat and light ½
Set-up costs 3
Depreciation and insurance 1
Total cost of making ½
Total cost of buying ½
Saving ½
Conclusion 1
8
Or alternative method
Direct materials ½
Direct labour ½
Heat and power ½
Avoidable fixed costs ½
Activity related costs (W1) 3
Avoidable depreciation and insurance ½
Total relevant manufacturing costs ½
Relevant cost per unit ½
ht
Incremental cost of buying in ½
i
Conclusion
r g 0 1 7 1
2
8
y
p ion
(b) If 100,000 control panels made
o
Variable cost of making per unit 1
C uit
Saving from making 1
t
Saving per labour hour 1
I n
Ranking 1
t
Make 100,000 keypads 1
Fi rs
Make 66,666 display screens 1
Buy 33,334 display screens 1 7
(c) Non-financial factors
Per factor 1 or 2 Max 5
Risk and uncertainty
6 CEMENT CO
Part (a) should have been easy but only about 5% of candidates got this completely correct.
A vast number of candidates applied the probabilities to the profit figures before including
the amounts in the table. Many tables were not clearly labelled and few candidates grasped
the fact that any unsold bag of cement produces a loss of $4.50 in total ($4 buy-in cost and
$0.50 disposal cost).
EXAM SMART
Pay-off tables have to be carefully constructed.
 You must calculate the expected returns at each level of supply and each possible
demand level. This will involve nine separate calculations. Remember that if you
supply, say, 350,000 bags yet demand is only poor (200,000 bags) then some 150,000
will go unsold, losing $4.50 per bag.
 It is very frustrating for markers where elementary mistakes are made. Therefore,
question practice is key!
(a) Pay-off table

SUPPLY (no. of bags)
Prob.* 350,000 280,000 200,000
Weather $000 $000 $000
DEMAND
Good 350k 0.25 1,750 (1) 1,400 1,000

Average 280k 0.45 1,085 (2) 1,400 1,000
Poor 200k 0.30 325 640 1,000
* [Tutorial note: The probability column is only shown so as to help in part (b) (iii)’s calculations.]
Profit per bag sold in coming year = $9 - $4 = $5
Fir
Loss per bag disposed of = $4 + $0.50 = $4.50
Co
st I pyri
(1) 350,000 × $5 = $1,750,000
ntu ght
(2) [280,000 × $5] - [70,000 × $(4.50)] = $1,085,000 etc
itio
EXAM SMART
n2
For completeness the remaining workings are shown below.
017
Supply Demand $000
350,000 200,000 (200,000 × $5) – (150,000 × $4.50) 325
280,000 350,000 (280,000 × $5) 1,400
280,000 280,000 (280,000 × $5) 1,400
280,000 200,000 (200,000 × $5) – (80,000 × $4.50) 640
200,000 350,000 (200,000 × $5) 1,000
200,000 280,000 (200,000 × $5) 1,000
200,000 200,000 (200,000 × $5) 1,000
In the exam you don’t need to show workings for all nine outcomes but show enough that
the marker can clearly see that you know what you are doing.
EXAMINER’S COMMENTS: PARTS (b) (i), (ii)

Parts (b) (i) and (ii) were fairly well attempted (identifying the level of production using
maximin and maximax) but even then, most correct answers were not justified as requested
and only therefore scored half marks. It didn’t matter whether justification had been given
by either words or numbers ─ but usually, there was neither.
EXAM SMART
For the maximin and maximax parts of the question, clearly demonstrate why you have
made a choice. If, for example, you made a mistake in part (a), you can still get full credit if
you correctly use and demonstrate your decision here in part (b). Notice how the Examiner
has shown the key numbers and workings for each decision as a clear basis for the answer.
The expected value part of the question is fully explained by clear workings. ‘Think on
paper!’
Avoid fundamental mistakes too. You have to work out each possible outcome in part (a) for
the three possible supply levels. It is only the supply levels that Cement Co can control – the
probabilities relate to the uncertain demand at the various levels
(b)
(i) Maximin – identify the worst outcome for each level of supply and choose the highest of
these worst outcomes.
350,000 280,000 200,000
$000 $000 $000
Worst 325 640 1,000
ht
The highest of these is $1,000,000 therefore choose to supply only 200,000 bags to meet
r i g 1 7
poor conditions.
0
y 2
(ii) Maximax – identify the best outcome for each level of supply and choose the highest of
p ion
these best outcomes.
o
C uit 350,000
280,000 200,000
I n t $000 $000 $000
t
Best 1,750 1,400 1,000
Fi rs
The highest of these is $1,750,000, therefore choose to supply 350,000 bags to meet
good conditions.
EXAMINER’S COMMENTS: PART (b) (iii)

The requirement to calculate the expected value in part (b) (iii) was worth the most marks
and it was really surprising to see that 90% of candidates could not do this.
They seemed to think that the expected value could be calculated by working out the
expected demand level (by applying the probabilities to the three demand levels) and then
applying this to an expected profit figure. They were confusing the scenario given, where a
decision has to be about how much of a product to supply given three alternative levels of
supply, to a scenario where there is only supply level available (e.g. a one off event) but
there are two sets of uncertainties (e.g. different demand levels and different profit levels.)
In the latter situation, the expected value can be calculated by working out the expected
demand and the expected profit, but where there are three potential supply levels, there
will be three expected values to calculate, with the highest then being selected.
Candidates are clearly confused in this area and need to study it further.
(iii) Expected value – use the probabilities provided in order to calculate the expected value
of each of the supply levels.
Good (0.25 × $1,750,000) + (0.45 × $1,085,000) + (0.30 × $325,000) = $1,023,250
Average (0.7 × $1,400,000) + (0.3 × $640,000) = $1,172,000
Poor 1 × $1,000,000 = $1,000,000
The expected value of producing 280,000 bags when conditions are average is the
highest at $1,172,000, therefore this supply level should be chosen.

The discursive part of this question was answered well in relation to maximin and poorly in
relation to expected value, again because of the fundamental misunderstanding described
above.
(c) Maximin and expected value decision rules

The ‘maximin’ decision rule looks at the worst possible outcome at each supply level and then
selects the highest one of these.
It is used when the outcome cannot be assessed with any level of certainty. The decision maker
Co
therefore chooses the outcome which is guaranteed to minimise his losses. In the process, he
Fir
loses out on the opportunity of making big profits. It is often seen as the pessimistic approach to
st I pyri
decision making (assuming that the worst outcome will occur) and is used by decision makers
who are risk averse. It can be used for one-off or repeated decisions.
ntu ght
The ‘expected value’ rule calculates the average return that will be made if a decision is
itio
repeated again and again. It does this by weighting each of the possible outcomes with their
relative probability of occurring. It is the weighted arithmetic mean of the possible outcomes.
n2
Since the expected value shows the long run average outcome of a decision which is repeated
017
time and time again, it is a useful decision rule for a risk neutral decision maker. This is because
a risk neutral person neither seeks risk nor avoids it; they are happy to accept an average
outcome. The problem often is, however, that this rule is often used for decisions that only
occur once. In this situation, the actual outcome is unlikely to be close to the long run average.
For example, with Cement Co, the closest actual outcome to the expected value of $1,172,000 is
the outcome of $1,085,000. This is not too far away from the expected value but many of the
others are really different.
Marking guide Marks

(a) Pay-off table
Calculation of profit 1
Calculation of loss 1
‘Demand’ label ½
‘Supply’ label ½
Weather column ½
Supply column – 350,000 1½
Supply column – 280,000 1½
Supply column – 200,000 1½ 8
(b) Decision criterion
(i) Maximin
Selecting highest of the low 1 1
(ii) Maximax
Selecting highest of the high 1 1
(iii) Expected value
Calculating EV when good 1
Calculating EV average 1
Calculating EV when poor 1
t
Selecting highest 1 4
(c)
i g h
Maximin and EV
1 7
y r 2 0
Describe maximin 1
p ion
Used when outcome cannot be assessed with any certainty 1
o
Risk averse / pessimistic 1
C uit
One-off / repeated decisions 1
t
Describe EV 2
t I n
Risk neutral 1
rs
Repeated decisions 1 Max 6
Fi
1 NEWTOWN SCHOOL
The last question on the paper covered budgeting. It was a mix of calculations and discussion
but with the majority of the marks being available for the latter. On the whole, it was well
answered.
In part (a) candidates had to recalculate the budget deficit for the year making several
adjustments to the figures provided. The calculations were quite straightforward and most
candidates scored decent marks on this part of the question. The main error that arose was
in relation to the salaries’ cost. Many candidates were unable to split the year into two
halves, deduct one staff member’s cost and then apply the pay rise to only half of the year.
Co
But, even if they had managed to do that, many candidates then went on to erroneously
Fir
inflate the resultant cost of $599,940 by the rate given in the question, even though the pay
st I pyri
rise was the relevant increment not the inflation.
ntu ght
EXAM SMART
itio
This should have provided students with many opportunities to score high marks as it tests
areas that have been tested in a similar way before and covers basic theoretical knowledge
as well.
n2
(a) Budget deficit/surplus 017
Budgeted income:
Income from pupils registered on 1 June 2013: $724,500 (given in question)
Expected number of new joiners: (0.2 × 50) + (0.3 × 20) + (0.5 × 26) = 29
Expected income from new joiners at $900 each = $26,100
Total expected income = $750,600.
Budgeted expenditure:
Repairs and maintenance: $30,000 × 1.03 = $30,900.
Salaries: [($620,000 – $26,000)/2] + [($620,000 – $26,000 × 1.02)/2]
= $297,000 + $302,940 = $599,940.
Expected capital expenditure = (0.7 × $145,000) + (0.3 × $80,000) = $125,500.
Total expected expenditure = $756,340.
Budget deficit = $5,740.

Part (b) was a simple knowledge requirement asking for the advantages and disadvantages
of using incremental budgeting. This resulted in a lot of answers scoring full marks.
(b) Discussion of estimates

Advantages
 Incremental budgeting is very easy to perform. This makes it possible for a person
without any accounting training to build a budget.
 Incremental budgeting is also very quick compared to other budgeting methods.
 The information required to complete it is also usually readily available.
Disadvantages
 On the other hand, incremental budgeting encourages inefficiency because it does not
question the preceding year’s figures on which it is based. No-one asks how those figures
could be reduced.
 Similarly, in some organisations, it encourages slack because departmental managers
may attempt to use their entire budget up for one year, even if they do not need to, just
t
to ensure that that cash is available again the next year.

i g h 1 7
Errors from one year are carried to the next, since the previous year’s figures are not
r 2 0
questioned.
y
p ion
o
C uit
Part (c) was again simple knowledge asking for the main steps involved in preparing zero-based
n t
budgets. This was again really well answered with lots of answers worth full or nearly full marks.
I
rst
Fi
(c) Zero-based budgeting (ZBB)
The three main steps involved in preparing a zero-based budget are as follows:
(1) Activities are identified by managers. Managers are then forced to consider different
ways of performing the activities. These activities are then described in what is called a
‘decision package’, which:
 Analyses the cost of the activity;
 States its purpose;
 Identifies alternative methods of achieving the same purpose;
 Establishes performance measures for the activity;
 Assesses the consequence of not performing the activity at all or of performing it
at different levels.
As regards this last point, the decision package may be prepared at the base level,
representing the minimum level of service or support needed to achieve the
organisation’s objectives. Further incremental packages may then be prepared to reflect
a higher level of service or support.
(2) Management will then rank all the packages in the order of decreasing benefits to the
organisation. This will help management decide what to spend and where to spend it.
This ranking of the decision packages happens at numerous levels of the organisation.
(3) The resources are then allocated, based on order of priority up to the spending level.

Finally, part (d) was where the higher level marks were in this question. Candidates had to
discuss the extent to which zero-based budgeting could be used by Newtown School to
improve the budgeting process. Answers here were weaker but there were still some decent
attempts. The main issues arose because candidates didn’t answer the question and instead
just wrote about the advantages of the school using ZBB.
(d) Use of ZBB at Newtown School

There is definitely a place for ZBB at Newtown School. At the moment, incremental budgeting is
responsible for recurring unexpected cash shortages, which is deterring new pupils from joining
the school. Had a deficit been predicted for the year ended 31 May 2013, perhaps $65,000
would not have been spent on improving the school gym, and then it would not have been
necessary to close the school kitchen. ZBB would be good to establish the way cash is spent on
those activities that are, to a certain extent, discretionary.
For example, although there is a need for pupils to have somewhere to eat lunch, it is not
essential for children to have a cooked meal every day. It is essential that children do have
somewhere to eat though and, as a bare minimum, they would need an area where they could
eat their sandwiches and have access to fresh water. ZBB could be used to put together decision
Co
packages which reflect the different levels of service available to the children. For example, the
Fir
most basic level of service could be the provision of an area for the children to eat a lunch
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brought from home. The next level would be the provision of some cold and maybe hot food for
the children, but on a self-service basis. Finally, the highest level of service would be a
ntu ght
restaurant for the children where they get served hot meals at tables. At Newtown School the
catering manager could prepare the decision packages and they would then be decided upon by
itio
the head teacher, who would rank them accordingly.
n2
Similarly, although some level of sports education is needed, the extent of the different
activities offered is discretionary. ZBB could be used to create decision packages for each of
017
these services in order to prioritise them better than they are currently being prioritised.
ZBB takes a long time to implement and would not be appropriate to all categories of
expenditure at the school. Much of the budgeting is very straightforward. Incremental
budgeting could still be used as a starting point for essential expenditure such as salary costs,
provided that changes in staff numbers are also taken into account. There is an element of
essential, recurring expenditure in relation to repairs and maintenance too, since the costs of
the checks and repairs needed to comply with health and safety standards seem to largely stay
the same each year, with an inflationary increase.
Marking guide Marks
(a) Budgeted income 2
Repairs and maintenance 1
Teachers’ salaries 1½
Capital expenditure 1
Deficit ½
6
(b) Advantages and Disadvantages
Two advantages 2
Two disadvantages 2
4
Marking guide Marks

(c) Zero-based budgeting
Step 1 2
Step 2 2
Step 3 2
6
(d) Use of ZBB to Newtown School
Each point made 1
4
Quantitative analysis
2 MIC CO
(a) Monthly costs
Cumulative Actual
Cumulative average Incremental labour
number of hours per Cumulative number of Incremental cost per
Month batches batch total hours batches total hours month $
July 1 200 200 1 200 2,400
t
August (W1) 2 176 352 1 152 1,824
h 7
September 4 154.88 619.52 2 267.52 3,210.24
r i g 0 1
October 8 136.294 1,090.352 4 470.832 5,649.60
y 2
November (W2) 16 124.4 1,990.36 8 900.008 10,800.096
o p ion
Working 1: Calculations for August
C uit
Cumulative average hours per batch: 200 × 0·88 = 176 hours
t
Cumulative total hours = 2 × 176 = 352 hours
t I n Incremental number of batches = cumulative no. of 2 batches for August less cumulative
rs
number of 1 batch for July = 1 batch
Fi
Incremental total hours = cumulative total hours of 352 for August – 200 for July = 152 hours
Actual labour cost = incremental total hours of 152 × $12 per hour = $1,824
Working 2
Time for 7th batch:
Y = axb = 200 × 7 – 0·1844245
= 139.693 hours
Total time for 7 batches = 136·693 × 7 = 977.851 hours
Total time for 8 batches = 1,090.352 hours.
Therefore, 8th batch took 112·501 hours (1,090.352 – 977.851)
Time for batches 8 – 16 = 112·501 × 8 = 900·008 hours
Therefore, cumulative average time for batches 0 – 16 = 1,090.352 + 900.008 = 1,990.36 hours
Cumulative average time for 16 batches = 1,990·36/16 = 124.4 hours per batch.
Note: The labour costs for November could be arrived at quickly simply by taking the 112.501
hours for the 8th batch, multiplying it by 8 batches and applying this number to the $12 per hour
labour cost. This quick calculation is totally sufficient to earn full marks.
EXAM SMART
This requirement takes you back to the basic principles of learning curves and as the
Examiner points out, there are a few ways of arriving at the correct answer. A tabular
approach (as above) works well here as we have to find information for consecutive months
when output is doubling on a cumulative basis each month. If you are quick at applying the
formula for learning curves then it may be faster to use it but either way this should have
proven to be a popular requirement.
(b) Implications of end of learning period

The learning period ended at the end of October. This means that from November onwards the
time taken to produce each batch of microphones is constant. Therefore, in future, when
Mic Co makes decisions about allocating its resources and costing the microphones, it should
base these decisions on the time taken to produce the 8th batch. The resource allocations and
cost data prepared for the last six months will have been inaccurate since they were based on a
standard time per batch of 200 hours.
Mic Co could try to improve its production process so that the learning period could be
extended. It may be able to do this by increasing the level of staff training provided.
Alternatively, it could try and motivate staff to work harder through payment of bonuses,
Co
although the quality of production needs to be maintained.
Fir
st I pyri
(c) Involving senior staff at Mic Co in the budget-setting process
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EXAM SMART
itio
A good opportunity to show your learnt knowledge of the pro’s and con’s of a top down
(imposed) style of budgeting. There are no excuses for not being able to score well in this
n2
requirement.
Advantages 017
 Since they are based on information from staff who are most familiar with the
department, they are more likely to improve the accuracy of the budget. In Mic Co’s case,
the selling price could have been set more accurately and sales may have been higher if
the Production Manager had been consulted.
 Staff are more likely to be motivated to achieve any targets as it is ‘their’ budget and they
therefore have a sense of ownership and commitment. The Production Manager at
Mic Co seems resigned to the fact that he is not consulted on budgetary matters.
 Morale amongst staff is likely to improve as they feel that their experience and opinions
are valued.
 Knowledge from a spread of several levels of management is pooled.
 Co-ordination is improved due to the number of departments involved in the budget
setting process.
Disadvantages
 The whole budgeting process is more time consuming and therefore costly.
 The budgeting process may have to be started earlier than a non-participative budget
would need to start because of the length of time it takes to complete the process.
 Managers may try to introduce budgetary slack, i.e. making the budget easy to achieve so
that they receive any budget-based incentives.
 Disagreements may occur between the staff involved, which may cause delays and
dissatisfaction. In Mic Co’s case, however, the fact that the Production Manager was not
consulted has led to disagreement after the event.
 Can support ‘empire building’ by subordinates.
Marking guide Marks
(a) Monthly costs
Per monthly cost: July–October 1½
November 3
Max 9
(b) End of learning period
Each point discussed – maximum 2
Max 4
(c) Advantages and disadvantages
Each advantage – maximum 2
Each disadvantage – maximum 2
Max 7
ht 7
i g 1
Standard costing
y r 2 0
3 NOBLE
o p ion
C uit
t
t I n
rs
Many candidates answered this well and easily scored nine out of the 12 marks available,
Fi
tripping up only on the staff wages and energy costs calculations. There were some candidates
who had no idea what a flexed budget was but these were definitely in the minority.
When you prepare a flexed budget, its format should replicate the original budget that it
relates to. So, for example, if the original budget totals up variable costs, so should the
flexed budget. This makes it easier to compare like with like. Some candidates did not do this
but again, they were in the minority and on the whole, the answers were good.
EXAM SMART
Each exam is bound to give some unusual aspects to a question that you will never have
seen before. When this happens, take your time to carefully work your way through the
requirement. A good example is the staff wages:
 Core wages of $9,216 will be paid to staff provided the number of orders does not exceed 50.
 For every extra five customers over this level – half an hour of overtime has to be
worked by each staff member. In this scenario the average number of orders is 65,
some 15 more orders than the 50. His means that 15 ÷ 5 = 3 extra ½ hour shifts have to
be worked by all the staff.
 The extra cost of this will be 8 staff × 1½ hours × 6 days × 4 weeks × $12/hour = $3,456.
 The total cost for wages becomes $9,216 + $3,456 -= $12,672
(a) Flexed budget

Number of meals 1,560
$ $
Food sales (1) 62,400
Drink sales (1) 15,600
Total revenue 78,000
Variable costs:
Staff wages (2) (12,672)
Food costs (3) (7, 800)
Drink costs (4) (3,120)
Energy costs (5) (4,234)
(27,826)
Contribution 50,174
Fixed costs:
Manager’s and chef’s pay (8,600)
Rent, rates and depreciation (4,500)
(13,100)
Operating profit 37,074
(1) Food revenue

Food revenue = 1,560 × $40 = $62,400
Fir Co
Drinks revenue = 1,560 × ($2.50 × 4) = $15,600.
st I pyri
(2) Staff wages
Average number of orders per day = 1,560/(6 days × 4 weeks) = 65 per day
ntu ght
Therefore, extra orders = 15 per day
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8 staff × 1.5 hours × 6 days × 4 weeks = 288 extra hours
n2
At $12 per hour = $3,456 extra wages.
017
Total flexed wages = $9,216 + $3,456 = $12,672
(3) Food costs
Food costs = 12.5% × $62,400 = $7,800
(4) Drink costs
Drinks costs = $15,600 × 20% = $3,120
(5) Energy costs
Standard total hours worked = (8 × 6) × 6 days × 4 weeks = 1,152 hours
Extra hours worked = 288 (working 2)
Total hours = 1,152 + 288 = 1,440
At $2.94 per hour = $4,234

In part (b) candidates were provided with the sales mix contribution variance and the sales
quantity contribution variance and asked to describe each of them and identify why they
had arisen. Many candidates confused the sales mix with the materials mix and talked about
the latter. Also many candidates could not describe the quantity variance or identify why it
had arisen.
There is clearly a lack of understanding about variances, with candidates perhaps learning
formulae in order to churn out calculations but not really understanding what variances
mean to a business. This area needs more work by the majority of students.
(b) The sales mix contribution variance measures the effect on profit of changing the mix of actual
sales from the standard mix.
The sales quantity contribution variance measures the effect on profit of selling a different total
quantity from the budgeted total quantity.
The mix variance is adverse here. Since meal B generates a higher contribution than meal A, the
adverse variance shows that more of meal A must have been sold, relative to B, than budgeted.
Since the quantity variance is favourable, this means that the total quantity of meals sold (in the
standard mix) was higher than expected, as evidenced by the number of meals sold being 1,560
t
rather than the budgeted 1,200.
i g h 1 7
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y
p ion 2
o
Part (c) was the higher skills marks on the paper. Only a few candidates were able to show
C uit
that planning and operational variances needed to be calculated, so that the manager would
t
only be assessed on results that were within his control.
EXAM SMART
t I n
Fi rs
The examiners often set differentiating requirements in the last part of any question. The
key here is to have a go! In part (b) you are told about sales mix and sales quantity
variances. Think about what other two sales variances you may know (sales volume, sales
price and then potentially analysing these into planning and operational variances).
 Sales margin price variances could be subdivided into planning and operational
elements. We are told that Noble’s owner told the restaurant manager to run the half-
price promotion. It is likely that most of the adverse sales margin price variance can be
attributed to a planning variance in that it was outside the control of the restaurant
manager.
 Similarly the sales margin volume variance for drinks could be calculated and split also
into planning and operational elements. Possibly a sales margin mix variance might
identify whether the restaurant manager had been able to sell more of the higher
margin drinks – even at the half-price discount.
(c) Two other variances

Drink sales
As well as the price variance for drinks sales, the sales margin volume variance could be
calculated. This will examine the difference between the standard volume of sales that would
ordinarily be expected for this number of customers (1,560 × 4 drinks) compared to the actual
volume of drinks sold because of the drinks promotion (1,560 × 6 drinks). Since the variance is
calculated by applying the increase in volume to the standard margin, this variance will be
favourable.
In addition, the total sales margin price variance for drinks sales could be split into an
operational and a planning variance.
The manager is only responsible for any operational variance and any part of the sales margin
variance that relates to a planning error (i.e. the last minute decision by the owner to run the
drinks promotion) should be separated out. This way, the manager will not be held accountable
for matters outside of his control.
Food sales
By running the half price drinks offer promotion, more customers have been attracted to the
restaurant. Drinks have been treated as a ‘loss leader’ i.e. sold at a low price in order to entice
customers. It would therefore be relevant to calculate some variances in relation to food sales
in order to show how the drinks promotion has increased food sales. The most obvious one to
calculate would be the sales margin volume variance for food sales.
[Examiner’s note: Candidates only needed to mention two variances.]
Marking guide Marks
(a) Flexed budget
Co
Food sales 1
Fir
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Drink sales 1
Total revenue 1
ntu ght
Staff wages 1½
Food costs 1
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Drinks costs 1
Energy costs 1½
n2
Variable costs total 1
017
Contribution 1
Manager’s and chef’s pay ½
Rent & Rates ½
Operating profit 1 12
(b) Explanation of variances 2
Suggestions of reason for variances 2 4
(c) Variance discussions
Each variance 2 Max 4
4 BLOCK CO
This was a variance question which included some of the trickier variances for sales quantity
and sales mix.
Part (a) asked for calculations of the sales price operational and sales price planning variances.
This was really well answered with the majority of candidates scoring the full four marks.
(a) Sales price operational variance: (actual price – market price) × actual quantity
Commodity 3: ($40.40 – $39.10) × 25,600 = $33,280 F
Sales price planning variance: (standard price – market price) × actual quantity
Commodity 3: ($41.60 – $39.10) × 25,600 = $(64,000) A
An alternative approach to the variance calculations for Commodity 3 would be as follows.
Sales price operational variance
t
Commodity 3
g h 1 7
Should now $39.10
r i 0
Did $40.40
y 2
Difference $1.30 F
o p ion
Actual sales quantity 25,600
C uit
Variance $33,280 F
EXAM SMART
I n t
rst
You may be more familiar with the following layout for your variances (sales price variance
Fi
here shown for illustration. The answer is exactly the same as the Examiner’s:
Sales price operational variance
25,600 units sold Commodity 3
Should now (@$39.10) 1,000,960
Did ($40.40) 1,034,240
Variance ($) 33,280 F
Sales price planning variance

Commodity 3
Should now $39·10
Should $41·60
Difference $2·50 A
Actual sales quantity 25,600
Variance $64,000 A

Part (b) tested the sales mix and sales quantity variances. This was well answered by some
candidates, with about one third of them scoring full or nearly full marks. The main error that
did arise, however, was the failure to realise that the company was using absorption costing,
which meant that the variances should have been based on the profit margins of each product
rather than the contribution margins. Where candidates made this error, however, they only
stood to lose two marks so they could still gain high marks on the question.
In the model answers, profit margins are based on the standard selling prices of each
product. However, it was equally acceptable to have based calculations on revised profit
margins using the revised selling prices, so full credit was given for using this latter approach.
Apart from using contribution rather than profit to work out the variances, quite a few
candidates had calculated their variances using selling prices rather than profit margins.
Finally, another common error was to calculate the sales volume variance rather than the
sales quantity variance.
This is an error in understanding, since the sales volume variance is the total variance which
breaks down into its two component parts of sales mix and sales quantity.
EXAM SMART
Fir Co
An alternative layout for the mix and quantity variances is shown for illustration purposes as
st I pyri
follows:
ntu ght
Sales mix
The budget shows total sales of 84,000 units (30,000+28,000+26,000) and as such the standard
itio
mix is in the proportions 30/84:28/84:26/84 for the commodities 1, 2 and 3 respectively.
Calculations of the standard profit per unit are as per the examiners workings below.
Comm1
n2
Comm2 Comm3 Total
017
85,800 actual units sold
At the standard mix (30/84:28/84:26/84) 30,643 28,600 26,557 85,800
At the actual mix (i.e. given in question) 29,800 30,400 25,600 85,800
Variance (units) 843 (A) 1,800 (F) 957 (A) 0
Variance ($) @ std profit/unit $9,442 (A) $7,560 (F) $11,484 (A) $13,366 (A)
($11.2:$4.2:$12)
Sales quantity
Comm1 Comm2 Comm3 Total
Actual sales at the standard mix

(30/84:28/84:26/84) 30,643 28,600 26,557 85,800
Budget sales (i.e. given in question) 30,000 28,000 26,000 84,000
Variance (units) 643 (F) 600 (F) 557 (F) 1,800
Variance ($) @ std profit/unit $7,202 (F) $2,520 (F) $6,684 (F) $16,406 (F)
($11.2:$4.2:$12)
(b) Sales mix variance:

(Actual sales quantity in actual mix at standard margin) – (actual sales quantity in standard mix
at standard margin) = $768,640 (w1 & 2) – $782,006 (w3) = $13,366 adverse.
Working 1: Standard margins per unit:
Budgeted machine hours = (30,000 × 0.2) + (28,000 × 0.6) + (26,000 × 0.8) = 43,600.
Overhead absorption rate = $174,400/43,600 = $4 per hour.
Product Commodity 1 Commodity 2 Commodity 3
$ $ $
Standard selling price 30 35 41.60
Variable production costs (18) (28.40) (26.40)
Fixed production overheads (0.8) (2.4) (3.2)
Standard profit margin 11.20 4.20 12
Working 2: Actual sales quantity in actual mix at standard profit margin:

Actual quantity Standard
Product in actual mix profit
$ $
Commodity 1 29,800 11.20 333,760
Commodity 2 30,400 4.20 127,680
Commodity 3 25,600 12 307,200
t
85,800 768,640
i g h 1 7
Working 3: Actual sales quantity in standard mix at standard profit margin:
y r 2 0 Standard
o p ion
Product Actual quantity in standard mix profit
C uit
$ $
Commodity 1 85,800 × 30/84 = 30,643 11.20 343,202
t
Commodity 2 85,800 × 28/84 = 28,600 4.20 120,120
I n
Commodity 3 85,800 × 26/84 = 26,557 12 318,684
rst
85,800 782,006
Fi
The sales quantity variance = (actual sales quantity in standard mix at standard margin) –
(budgeted sales quantity in standard mix at standard profit margin) = $782,006 (w3 above) –
$765,600 (w4) = $16,406 favourable.
Working 4: Budgeted sales quantity in standard mix at standard profit margin:
Standard
Product Quantity profit
$ $
Commodity 1 30,000 11.20 336,000
Commodity 2 28,000 4.20 117,600
Commodity 3 26,000 12 312,000
84,000 765,600
(c) The calculations above have shown that, as regards the sales price, there is a $23,360
favourable operational variance and a $54,680 adverse planning variance. In total, these net off
to a sales price variance of $31,320 adverse. The sales manager can only be responsible for a
variance to the extent that he controls it. Since the standard selling prices are set by a
consultant, rather than the sales manager, the sales manager can only be held responsible for
the operational variance. Given that this was a favourable variance of $23,360, it appears that
he has performed well, achieving sales prices which, on average, were higher than the market
prices at the time. The consultant’s predictions, however, were rather inaccurate, and it is these
that have caused an adverse variance to occur overall in relation to sales price.
As regards sales volumes, the mix variance is $13,366 adverse and the quantity variance is
$16,406 favourable, meaning that the total volume variance is $3,040 favourable. This is
because total sales volumes were higher than expected, although it is apparent that the
increased sales related to the lower margin Commodity 2, with sales of Commodity 1 and
Commodity 3 actually being lower than budget.
The total variance relating to sales is $28,280 adverse. This looks poor but, as identified above,
it is due to the inaccuracy of the sales price forecasts made by the consultant. We know that
Block Co is facing tough market conditions because of the economic recession and therefore it is
not that surprising that market prices were actually a bit lower than originally anticipated.
This could be due to the recession hitting even harder in this quarter than in previous ones.
Marking guide Marks
(a) Planning and operational variances
Operational variance 2
Planning variance 2
4
(b) Mix and quantity variances
Standard profit per unit 4
Mix variance 4
Quantity variance 3
11
(c) Discussion
Each valid comment
Fir Co 1
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5

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5 TRUFFLE CO
017
This was a straight forward variance question. It should have been well-answered but it
wasn’t, apart from part (a). In part (a), the requirement asked for calculations of the total
labour rate and total efficiency variances. These were very simple calculations on which
about half of candidates scored full marks. The most common error that occurred was that
candidates used a standard cost of $6 an hour rather than the correct standard cost of $12
per hour. The $6 given in the question was the standard cost of labour for each batch, but
given that a batch only takes half an hour, it was necessary to identify that this figure needed
to be doubled to arrive at the standard cost per hour rather than per batch. It is really
important to read the question carefully when picking up key information.
(a) Basic variances

Standard cost of labour per hour = $6/0.5 = $12 per hour.
Labour rate variance = (actual hours paid × actual rate) – (actual hours paid × std rate)
Actual hours paid × std rate = $136,800/0.95 = $144,000
Therefore, rate variance = $144,000 – $136,800 = $7,200 F
Labour efficiency variance = (actual production in std hours – actual hours worked) × std rate
[(20,500 × 0.5) – 12,000] × $12 = $21,000 A
EXAM SMART
These variances could alternatively be presented as follows.
Labour rate variance $
12,000hrs paid
Should cost ($12/hr) 144,000
Did cost 136,800
Variance 7,200 (F)
Labour efficiency variance hrs

20,500 batches produced
Should take (0.5hrs) 10,250
Did take 12,000
Variance 1,750
@ std cost/hr $12
$21,000 (A)

Part (b) was more difficult, with a requirement to analyse each of the variances from part (a)
t
into component parts for planning and operational variances. There were some poor
h 7
attempts here, with a substantial number of candidates writing about planning and
r i g 0 1
operational variances rather than performing the calculations. This was surprising, given that
2
y
the requirement was very clear as to what was expected. Only a very small minority of
o p ion
candidates attempted to produce a total planning variance and a total operational variance,
C uit
without splitting it between rate and efficiency as the question required.
(b)
I n t
rst
Fi
Labour rate planning variance
(Revised rate – std rate) × actual hours paid = [$12 – ($12 × 0.95)] × 12,000 = $7,200 F
Labour rate operational variance
There is no labour rate operational variance.
(Revised rate – actual rate) × actual hours paid = $11.40 ─ $11.40 × 12,000 = 0
Labour efficiency planning variance
(Standard hours for actual production ─ revised hours for actual production) × std rate
(10,250 ─ (20,500 × 0.5 × 1.2)) × $12 = $24,600 A
Labour efficiency operational variance
(Revised hours for actual production – actual hours for actual production) × std rate
(12,300 ─ 12,000) × $12 = $3,600 F
EXAM SMART: PART (c)

A range of points that are well discussed should score well. If a point made is factual but
brief, it will not generally score as well as a point that is developed and expanded. It is not
just a matter of quantity of your answer, but quality too.
Compare the following two possible answers:
 The Production Manager should only be assessed on operational variances which are
controllable.
with
 The Production Manager should only be assessed on operational variances which are
controllable. Therefore, he cannot claim credit for the favourable labour rate variance
($7,200) since the pay cut was decided centrally and was outside the Manager’s
control.
The second point is longer but adds value and elaborates/develops the first point made.
(c) Discussion
When looking at the total variances alone, it looks like the Production Manager has been
extremely poor at controlling his staff’s efficiency, since the labour efficiency variance is
Co
$21,000 adverse. It also looks, at a glance, like he has managed to secure labour at a lower rate.
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In order to assess the Production Manager’s performance fairly, however, only the operational
variances should be taken into account. This is because planning variances reflect differences
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that arise because of factors that are outside the control of the production manager. The
operational variance for the labour rate was $0, which means that the labour force were paid
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exactly what was agreed at the end of October: their reduced rate of $11.40 per hour. The
manager clearly did not have to pay anyone for overtime, for example, which would have been
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expected to push this rate up. The rate reduction was secured by the company and was not
within the control of the Production Manager, so he cannot take credit for the favourable rate
017
planning variance of $7,200. The company is the source of this improvement.
As regards labour efficiency, the planning and operational variances give us more information
about the total efficiency variance of $21,000 (A). When this is broken down into its two parts,
it becomes clear that the operational variance, for which the Manager does have control, is
actually $3,600 favourable. This is because, when the recipe is changed as it has been in
November, the chocolates usually take 20% longer to make in the first month while the workers
are getting used to handling the new ingredient mix. When this is taken into account, it can
therefore be seen that workers took less than the 20% extra time that they were expected to
take, hence the positive operational variance. The planning variance, on the other hand, is
$24,600 adverse. This is because the standard labour time per batch was not updated in
November to reflect the fact that it would take longer to produce the truffles. The Manager
cannot be held responsible for this.
Overall, then, the Manager has performed well, given the change in the recipe.
Marking guide Marks

(a) Rate and efficiency variances
Rate variance 2
Efficiency variance 2 4
(b) Planning and operational variances
Labour rate planning variance 2
Labour rate operational variance 2
Labour efficiency planning variance 2
Labour efficiency operational variance 2 8
(c) Discussion
Only operational variances controllable 1
No labour rate operating variance 1
Planning variance down to company, not Manager 2
Labour efficiency total variance looks bad 2
Manager has performed well as regards efficiency 2
Standard for labour time was to blame 2
Conclusion 2 Max 8
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7
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6 STICKY W
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ICKET
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I n t
It was good to see an improvement in the variance analysis discussion that was performed in
rst
part (a) of the question this time round, compared to December 2009’s variance analysis
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question. Fewer candidates made meaningless comments such as “the material price
variance is favourable, which is good.”
Good comments tended to be along the lines of “whilst there has been a favourable material
price variance, this is because cheaper, lower quality materials were used, which, in turn, has
led to an adverse material usage variance” (although admittedly, few answers were quite as
succinctly constructed as this, but the understanding was there!)
EXAM SMART
Questions where you have to assess performance of an individual require you to focus on
the individual and what they have control or influence over. Here the Production Director
has decided to use lower-quality material and labour. There are bound to be knock-on
effects on a multitude of variances.
For example, the use of inferior material will lead obviously to a favourable material price
variance. However, the material usage variance is likely to have been affected by the
increased wastage that is likely. Possibly the labour efficiency variance will be influenced by
the increased difficulty in working the lower-quality wood.
You will not know for certain if your answer is right but you need to hypothesise. Try to
push the point.
Using words in your written answer such as:

 because
 means that
 could cause
 so that
 therefore
 resulting in …
…usually force you to think about why something has happened and what the consequences can be.
If you just write a narrative about the variances and fail to focus on the individual manager
then you will not score well even if your points are factually sound.
(a) The performance of the Production Director could be looked at considering each decision in turn.
The new wood supplier:
The wood was certainly cheaper than the standard saving $5,100 on the standard the concern
though might be poor quality. The usage variance shows that the waste levels of wood are
worse than standard. It is possible that the lower grade labour could have contributed to the
waste level but since both decisions rest with the same person the performance consequences
are the same. The overall effect of this is an adverse variance of $2,400, so taking the two
variances together it looks like a poor decision. As the new labour is trained it could be that the
Fir Co
wood usage improves and so we will have to wait to be sure.
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The impact that the new wood might have had on sales cannot be ignored. No one department
within a business can be viewed in isolation to another. Sales are down and returns are up. This
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could easily be due to poor quality wood inputs. If SW operates at the high quality end of the
market then sourcing cheaper wood is risky if the quality reduces as a result.
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The lower grade of labour used:
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SW uses traditional manual techniques and this would normally require skilled labour. The
labour was certainly paid less, saving the company $43,600 in wages. However, with adverse
017
efficiency and idle time of a total of $54,200 they actually cost the business money overall in the
first month. The efficiency variance tells us that it took longer to produce the bats than
expected. The new labour was being trained in April 2010 and so it is possible that the situation
will improve next month. The learning curve principle would probably apply here and so we
could expect the average time per bat to be less in May 2010 than it was in April 2010.

Part of the skill in part (b) was in identifying the variances that needed to be calculated. It
was good to see that most candidates were able to do this, although a few missed the labour
idle time variance.
The calculations were performed with a reasonable degree of accuracy as well, showing that
candidates were far better prepared than in previous sitting.
(b) Variance for May 2010:

Material price variance ($196,000/40,000 ─5) × 40,000 = $4,000 Fav
Material usage variance (40,000 ─ (19,200 × 2)) × $5/kg = $8,000 Adv
Labour rate variance ($694,000/62,000 - 12) × 62,000 = 50,000 Fav
Labour efficiency variance (61,500 ─ 57,600) × 12 = 46,800 Adv
Labour idle time variance 500 × 12 = 6,000 Adv
Sales price variance (68 ─ 65) × 18,000 = 54,000 Adv
Sales volume contribution variance (18,000 ─ 19,000) × 22 = 22,000 Adv
EXAM SMART
Variances could be presented as:
Material price variance $
40,000kg purchased
Should cost ($5/kg) 200,000
Did cost 196,000
Variance 4,000 (F)
Material usage variance kg

19,200 bats produced
Should use (2kg) 38,400
Did use 40,000
Variance 1,600
@ std cost/kg $5
$8,000 (A)
Labour rate variance $

62,000hrs paid
Should cost ($12/hr) 744,000
Did cost 694,000
ht
Variance 50,000 (F)
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Labour efficiency variance hrs
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19,200 bats produced
o
Should take (3hrs) 57,600
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Did take 61,500
t
Variance 3,900
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@ std cost/hr $12
t
$46,800 (A)
Fi rs
Labour idle time variance
Hours paid
hrs
62,000
Hours worked 61,500
Variance 500
@ std cost/hr $12
$6,000 (A)
Sales price variance $

18,000 bats sold
Should sell for ($68) 1,224,000
Did sell for ($65) 1,170,000
Variance 54,000 (A)
Sales volume variance

Budget sales 19,000
Actual sales 18,000
Variance (units) 1,000
Std contribution $22
Variance ($) $22,000 (A)
Marking guide Marks

(a) Assessment of wood decision 2½
Assessment of labour decision 2½
Sales consequences 2 7
(b) MPV 2
MUV 2
LRV 2
LEV 2
LIT 1
SPV 2
SVCV 2 13
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1 SQUARIZE
The scenario was about a company which sold broadband, telephone and pay-tv services.
It had made the decision to stop selling its three products together in a bundle and instead
to start selling them separately. In part (a) of the requirements, candidates were asked to
identify two goals and two performance measures for each perspective of the balanced
scorecard that would help the company assess whether the changes had been successful.
The requirement also read ‘justify the use of each performance measure that you choose.’
The reason that this last bit of the requirement was put in was so that candidates would not
simply write generic performance measures such as ‘compare net profit margin’ without
actually thinking about what was relevant for this company.
t
There were three main problems with answers. Firstly, by far the biggest issue was that
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candidates simply made no attempt to answer the requirement given. They didn’t write any
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objectives or performance measures at all, they simply wrote pages and pages of words
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about the company, discussing how it was performing and the issues it faced. This was really
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disappointing. When candidates did answer the requirement, they often did a really good
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job of it. Many of them laid out their answers using each perspective as a heading and then
in columns, showing a goal in the left hand column and a performance measure in the right.
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Then, underneath each pair they would state their reason for choosing the performance
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measure. This was a great format as it made sure that answers were focused and covered
rst
each part of the requirement. This question gave candidates an opportunity to use the
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techniques referred to an article on how to answer written questions in F5 which you can
find on the ACCA website: always break down a requirement and underline the instruction
and the content. Here, there were three pieces of content required: goal, measure and
reason. If this approach had been used, answers could have been better.
This brings me on to the second issue. Many candidates who had made a proper attempt at
answering the actual requirement simply did not read the requirement carefully enough and
therefore did not bother to give their reasons for selecting their performance measure.
This meant that they could only score about two thirds of the marks available for this
requirement.
The third issue was that a number of candidates simply wrote everything that they knew
about the balanced scorecard. Since this was an application not a knowledge requirement,
such candidates scored very low marks.
(a) Goals and measures

Goals Performance Measures Reason
Financial perspective
Increase revenue Percentage increase in total The changes have been implemented partly
revenue in an attempt to increase revenues, so it is
sensible to measure the extent to which
revenues have actually increased.
Increase operating profit Percentage increase in The changes have been implemented partly
margin operating profit in an attempt to increase operating profit,
so it is sensible to measure the extent to
which operating profit has actually
increased.
Customer perspective
Increase customer Total sales to new customers The fourth change (to standalone products)
acquisition was made in an attempt to attract new
customers. This measure will help to assess
whether the change has been successful.
Reduce loss of customers Customer churn rate The first three of the four changes made
were made in an attempt to retain
customers. This performance measure will
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help to assess whether the changes have
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been successful.
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Internal business
perspective
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Reduce number of Number of broadband This performance measure will enable
broadband contracts contracts cancelled Squarize to assess whether the improved
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cancelled broadband service has resulted in a
reduction of the number of contracts
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cancelled.
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Increase after sales service Percentage of customer Squarize transferred its call centre back to
quality requests that are handled its home country. This measure will assess
with a single call whether that has improved the service
quality to customers as a result.
Learning and growth
perspective
Increase call centre workers’ Number of training hours per This measure will improve the likelihood of
skill levels employee customers receiving an improved service. A
better public image should result, leading to
increased revenues as new customers are
attracted to the business.
Increase employees’ Percentage decrease in staff This measure will also help to improve
satisfaction turnover customer service, thereby improving
company image, attracting new customers
and increasing revenues in the long term.
[Other reasonable suggestions will be equally acceptable.]


Part (b) asked for a discussion of how the company could reduce the problem of customers
terminating the pay-tv service after only three months. The question was really looking for
candidates to identify the fact that firstly, the length of the contract period should be
increased and secondly, the equipment should be rented to customers like the broadband
and telephone equipment, rather than sold outright to them. Some candidates identified
these points straight away whilst others seemed to miss them altogether.
(b) Pay-tv customers currently own the boxes, meaning that a certain number of customers appear
to cancel their contract after the first three months and just keep the set-top box with its free
channels. Squarize may want to consider loaning the boxes rather than selling them to the
customers at the beginning of the contract.
The company only has a minimum contract period of three months. This seems very short and
perhaps the company could consider increasing it to 12 months. Unnecessary administration
costs must be arising because it takes time, and therefore money, to set up new customers.
If these customers then leave three months later, the company has not had much opportunity
to earn profits from the customers generating these costs.
Marking guide Marks
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(a) Balanced scorecard
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Identifying the four perspectives 2
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Each goal ½
r 2 0
Each performance measure ½
Each reason
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16
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(b) Customer retention issue
Each point discussed – 2 marks 4
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C t I
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2 JUNGLE O
rs
Question 31 was a ‘traditional’ performance assessment question requiring candidates to
discuss the financial and non-financial performance of a business. The scenario gave
information about the business, along with any key changes or decisions made by the business
over the period. Financial information was given, along with pertinent non-financial statistics.
The key with these questions is to -. Marks will be awarded for explaining WHY something
has changed, along with how it might affect other aspects of the business.
Marks are split between calculation and discussion on these questions – the split is usually
given in the requirement, and weighted towards the discussion. However, in order to make a
meaningful point, calculations are essential. Many candidates were able to pick up a high
percentage of the calculation marks available through knowledge of performance measures
such as gross and net profit margin. In a question of this type, percentage change is a key
measure of performance.
It is worth noting that percentage change will be awarded marks, absolute change will not.
The reason for this is that the statement “Revenue has increased by $10m” doesn’t tell me
anything about the business’ performance. Is $10m a large change, or insignificant? If last
year’s revenue was $50m, a $10m increase (20%) would seem significant. If the prior year
revenue was $1,000m, this change is not nearly so impressive (1%).
When it comes to the discussion, use the calculations to guide you to the key areas to
focus on. If administrative expenses have increased by 0.2%, don’t waste any time worrying
about why – it’s not significant. Use the scenario and any non-financial information you
might have to help explain the performance. If, for example, revenue has increased by 10%,
see why that might be. Does the scenario mention average industry growth? If this was 20%
then a 10% growth in revenue actually represents a poor performance and a loss in market
share. Making these points will add value (and marks!) to your answer. A large reduction in
staff training costs (for example) will boost profit margins, but you may find that non-
financial performance may suffer (customer complaints, time to provide service).
The most common mistake made by candidates was not applying the above. Most
candidates were comfortable calculating percentage movement, but added no value to their
calculations. Points such as “Cost of sales has decreased by 18%. This is a good
performance.” were common, but apart from the calculation scored no marks. Answers
which looked into why cost of sales might have decreased, or what impact that might have
had, scored many more marks. In this case, the decrease in cost of sales could partly be put
down to a fall in revenue, but the main point is that the scenario explains how the company
changed to a cheaper supplier – this would have a direct effect on their cost of sales. Even
better answers would discuss how the rise in customer complaints may have been caused by
the poor quality of these supplies.
Another common error was to offer the business advice. The requirement clearly stated
“discuss the performance,” and marks could not be given for advice. It is really important to
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read the requirement carefully and answer the question being asked.
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Having said all of this, many candidates scored highly by backing up their calculations with sensible
commentary, and using the information in the scenario to add weight to their discussion.
EXAM SMART
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Key points in the examiner’s comments are highlighted above. The calculations should
highlight which areas you spend most time discussing.
017
The most important skill in the discussion is using all the information in the scenario
effectively, to explain the changes in the figures. You also need to see what other areas the
changes in figures may affect – eg cost of sales falling because of cheaper materials being
used, resulting in a rise in complaints and a fall in demand.
Sales volumes
Since prices have remained stable year on year, it can be assumed that changes to revenue are as a
result of increases or decreases in sales volumes. Overall, revenue has increased by 15%, which is a
substantial increase. In order to understand what has happened in the business, it is necessary to
consider sales by looking at each of the different categories.
Household goods
Although this was the largest category of sales for Jungle Co last year, this year it has decreased by 5%
and has now been overtaken by electronic goods. The company changed suppliers for many of its
household goods during the year, buying them instead from a country where labour was cheap. It may
be that this has affected the quality of the goods, thus leading to decreased demand.
Electronic goods
Unlike household goods, demand for electronic goods from Jungle Co has increased dramatically by
28%. This is now Jungle Co’s leading revenue generator. This is partly due to the fact that the
electronic goods market has grown by 20% worldwide. However, Jungle Co has even outperformed
this, meaning that it has secured a larger segment of the market.
Cloud computing service

This area of Jungle Co’s business is growing rapidly, with the company seeing a 90% increase in this
revenue stream in the last year. Once again, the company has outperformed the market, where the
average growth rate is only 50%, suggesting that the investment in the cloud technology was
worthwhile.
Gold membership fees
This area of the business is relatively small but has shrunk further, with a decrease in revenue of 30%.
This may be because customers are dissatisfied with the service that they are receiving. The number of
late deliveries for Gold members has increased from 2% to 14% since Jungle Co began using its own
logistics company. This has probably been at least partly responsible for the massive increase in the
number of customer complaints.
Gross profit margins
Overall, the company’s gross profit margin (GPM) has increased from 37% to 42%. Whilst the GPM for
electronic goods has only increased by 1 percentage point, the margin for household goods has
increased by 10 percentage points. This is therefore largely responsible for the increase in overall
GPM. This has presumably occurred because Jungle Co is now sourcing these products from new,
cheaper suppliers.
Gold membership fees constitute only a small part of Jungle Co’s income, so their 2 percentage point
fall in GPM has had little impact on the overall increase in GPM. Cloud computing services, on the
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other hand, now make up over $12m of Jungle Co’s sales revenue. For some reason, the GPM on these
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sales has fallen from 76% to 66%. This is now 14 percentage points less than the market average gross
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profit margin of 80%. More information is needed to establish why this has happened. It has
2
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prevented the overall increase in GPM being higher than it otherwise would have been.
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Administration expenses/customer complaints
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These have increased by 60% from $1·72m to $2·76m. This is a substantial increase. The costs of the
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customer service department are in here. Given the number of late deliveries increase from 2% to
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14%, and the corresponding increase in customer complaints from 5% to 20%, it is not surprising that
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the administration costs have increased. As well as being concerned about the impact on profit of this
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increase of over $1m, Jungle Co should be extremely worried about the effect on its reputation. Bad
publicity about reliable delivery could affect future business.
Distribution costs
Despite an increase in sales volumes of 15%, distribution expenses have increased by less than 2
percentage points. They have gone down from $0·16 to $0·14 per $ of revenue. Although this means
that Jungle Co has been successful in terms of saving costs, as discussed above, the damage which late
deliveries are doing to the business cannot be ignored. The company needs to urgently address the
issue of late deliveries.
Net profit margin
This has increased from 19% to 25%. This means that, all in all, Jungle Co has had a successful year,
with net profit having increased from $15·6m to $23·8m. However, the business must address its
delivery issues if its success is to continue.
Gross profit margins 31 August 20X6 31 August 20X5

Household goods 40·00% 30·00%
Electronic goods 36·00% 35·00%
Cloud computing services 65·81% 75·77%
Gold membership fees 92·86% 95·00%
Overall 42·39% 37·19%
Net profit margin 25·15% 18·95%
Increase/decrease in revenue
Household goods –5·27%
Electronic goods 28·28%
Cloud computing services 90·18%
Gold membership fees –30·00%
Total revenue increase 14·99%
Increase/decrease in cost of sales
Household goods –18·80%
Electronic goods 26·31%
Cloud computing services 168·35%
Gold membership fees 0·00%
Total cost of sales increase 5·46%
Increase in administration expenses Increase in distribution 60·47%
expenses Increase in other operating expenses 1·82%
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Increase in costs of customer service department 27·27%
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([$1,900,000 – $860,000]/$860,000) 120·93%
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Customer complaints as % customers 19·72% 4·92%
Delivery cost per $ of revenue $0·14 $0·16
Marking guide
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Sales volumes (up to 2 marks per revenue stream)
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COS and gross margins
Administration expenses/customer complaints
Distribution costs/late deliveries
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3
2
Net profit margin 2
3 PROTECT AGAINST FIRE CO

Ratio analysis
Division S Division C
Year on year Year on year
Increase in revenue 44% 9%

Increase in material costs 36% 25%
Increase in payroll costs 70% 15%
Increase in property costs 78% 6%
GPM in 2013 56% 65%
GPM in 2012 61% 67%
Increase in D & M costs 38% 18%
Increase in admin costs 6% 0%
NPM in 2013 11% 21%
NPM in 2012 9% 22%
Revenue per employee in 2013 $102,224 $104,917
Revenue per employee in 2012 $111,772 $104,828
Payroll cost per employee in 2013 $27,000 $21,000
Payroll cost per employee in 2012 $25,020 $20,000
ht
Total market size ($ revenue) in 2013 (w.1) $129.48m $80.12m
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Total market size ($ revenue) in 2012 (w.1) $107.75m $77.61m
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Working 1 for market size
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Division S 2013: $38,845m/30% = $129.48m Division C 2013: $44,065m/55% = $80.12m
C uit
Division S 2012: $26,937/25% = $107.75m Division C 2012: $40,359m/52% = $77.61m
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Note: Percentages have been calculated to the nearest 1%.
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EXAM SMART
Fi You would not be expected to perform all the calculations above for seven marks. It would
be sensible to try and do calculations that allow you to discuss a range of different areas
rather than be too narrow.
Remember that when discussing the figures you should try to add some value by considering
why the results might have arisen as well as what the implications might be.
Give your answer some structure by making sure you use sensible sub headings and keep
your paragraphs nice and short (3-4 lines).
Commentary
General overview
Overall, Division S has performed well in 2013, although it has not managed to meet its objective of
becoming market leader despite its $2m advertising campaign. Since it has 30% of the market in 2013
and there are only two competitors holding 70% of the market between them, at least one of those
competitors must hold 35% or more of the market.
Revenue and market share
This has increased by a huge 44% in the last year. This compares to an increase of only 9% in
Division C. However, part of the reason that this has been achieved is because the changes in fire
safety laws introduced by the government at the end of 2012 have caused the market for fire products
and services to increase from $107.75m to $129.48m. Part of Division S’s success is therefore down to
increased opportunity. However, Division S has also increased its market share by a further five
percentage points compared to 2012. Division C has only managed a three percentage point increase
in its market share, so this is a good result by Division S. One can assume that this is at least partly as a
result of the advertising campaign carried out by Division S. However, this did cost a large amount,
$2m, and it did not quite enable the Division to achieve its aim of becoming market leader.
Materials costs
The increase in materials costs is 36%, compared to an increase in revenue of 44%. It is difficult to say
whether this is good or bad since the increase in revenue includes revenue from services, for which no
materials costs would be expected to arise. Further information is needed on the split of revenue
between products and services.
Payroll costs, revenue per employee and cost per employee
Payroll costs have increased by a massive 70% and far more than Division C’s 15% increase. This is
largely due to the fact that Division S’s employee numbers increased from 241 in 2012 to 380 in 2013.
This is a really big increase in employee numbers and has been accompanied by a fall in revenue per
employee from $111,772 in 2012 to $102,224 in 2013. It is possible that Division S over-recruited as it
hoped to secure a greater level of business than it did through its advertising campaign. Division S’s
payroll cost per employee also increased from $25,020 in 2012 to $27,000 in 2013. Presumably, this is
because of the fact that there is high demand for staff skilled in this area and Division S has probably
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had to increase pay in order to attract the calibre of staff which it needs.
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Increase in property costs
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In percentage terms, the biggest increase in costs which Division S has suffered is in relation to its
property costs. They have increased by 78%, compared to Division C’s 6% increase. It would appear
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that this increase is due to the increased rent charged by Division S’s landlords on its business
premises. However, it is not possible to quantify this precisely without further information on rent
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increases.
017
Gross profit margin
This has actually fallen from 61% to 56%. Division C has also seen a fall in its GPM, but only a two
percentage point fall as opposed to Division S’s 5 percentage point fall. The reasons for Division S’s
lower GPM are the higher material, payroll and property costs. Also, Division S did not try to pass on
any of its increased costs to its customers in the form of higher prices.
Distribution and marketing costs
These have increased by 38% compared to Division C’s 18%. However, when you take out the
advertising costs in both years’ figures and work out the cost increase without them
($8.522m – $7.102m/$7.102m), it leaves an increase of only 20%. This increase would be expected
given the 20% increase in world fuel prices which occurred. Division S has to deliver to a wider
geographical spread of customers than Division C, so it would be expected to feel the full brunt of fuel
price increases.
Administrative costs
These have increased by 6% compared to Division C’s less than 1% increase (0% when rounded down
to the nearest percent). Further information is needed about the items included in these cost figures
to explain why this increase has arisen.
Net profit margin
Despite challenging cost increases in all categories, Division S has still managed to increase its NPM
from 9% to 11%. However, this is substantially lower than the NPM in Division C, which has fallen
slightly but is still 21%, almost twice that in Division S. As we have seen, Division S’s GPM is lower than
Division C’s anyway and, on top of that, Division C has not suffered a big increase in advertising costs
like Division S; nor have administrative costs risen inexplicably.
Head Office
There is no information given about Head Office. If the Calana Division is also the Head Office, there
could be Head Office costs included in Calana’s figures, which would affect the comparisons being
made. Further information is required here.
Marking guide Marks
½ mark per calculation 7
Per comment – maximum 2
4 BISCUITS AND CAKES

This was a straightforward performance measurement question in a divisional context. This
type of question is just as core as, for example, the traditional performance measurement
question (A T Co) in December 2010’s paper, or the transfer pricing question (Bath Co) in
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December 2011’s paper. ROI and RI came up in June 2011’s paper too and so this should not
g h
have posed problems.
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The question required candidates to calculate ‘annualised’ return on investment and
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residual income for two divisions. The annualisation caused a problem for many candidates.
o
All candidates had to do in order to annualise the ROI and RI was multiply the monthly net
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profit figure by 12, to reflect the fact that there are twelve months in a year. Many
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candidates didn’t do this, but they still managed to score the majority of marks available,
I n
since a candidate is only ever penalised once for an error.
rst
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(a) ROI and RI
Return on investment = net profit/net assets
Division B
$311,000 × 12/$23,200,000 = 16.09%
Division C
$292,000 × 12/$22,600,000 = 15.5%
(b) Residual income
B C
$000 $000
Net profit 3,732 3,504
Less: imputed interest charge
$22.6 × 10% (2,260)
$23.2m × 10% (2,320)
Residual income 1,412 1,244

In part (c), stronger candidates realised that, in order to discuss the performance of the divisions
well, they needed to recalculate the ROI and/or RI using controllable profit. Where candidates did
this, they generally accompanied it with some good discussion and scored full marks.
Weaker answers performed other calculations on the two divisions and gave some general
commentary, even though the question asked for a discussion ‘using both ROI and RI’.
(c) Performance of the two divisions

ROI
Divisions B and C have ROIs of 16.09% and 15.5% respectively, compared to the target of 20%.
This suggests that the divisions have not performed well, but the reason for this is that now,
uncontrollable head office costs are being taken into effect before calculating the ROI. The
target ROI has not been reduced to reflect the change in the method being used to calculate it.
Using the old method, ROI would have been as follows.
B: ($311,000 + $155,000) × 12/$23.2m = 24.1%
C: ($292,000 + $180,000) × 12/$22.6m = 25.06%
From this it can be seen that both divisions have actually improved their performance, rather
Co
than it having become worse.
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RI
From the residual income figures, it can clearly be seen that both Division B and C have
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performed well, with healthy RI figures of $1.4m and $1.2m respectively, even when using net
profit rather than controllable profit as bases for the calculations. The cost of capital of the
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company is significantly lower than the target return on investment that the company seeks,
making the residual income figure show a more positive position.
EXAM SMART
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017
Much of this paper is about signalling and behaviour. Think with this sort of requirement as
to how an individual is likely to react to the performance indicators that they are assessed
on. If managers are incentivised to attain certain targets (here the ROI levels) then if those
incentives are generous enough, the managers will act in a way to protect that position.
This may not be goal congruent but is human nature. If a manager suspects that their bonus is
under threat from taking on the new investment, then they will not take on that investment!
Here for example, you could, in theory, just calculate the ROI of the project and see that if it is
lower than the existing ROI, the new project will always be rejected. The manager’s and staff
bonus could be reduced in the future. However you were required to calculate the total
annual(ised) ROI including the new investment – therefore follow the examiner’s instructions.
This requirement again highlights the potential problems of using ROI as a divisional performance tool.
(d) Division B’s ROI with investment

Depreciation = 2,120,000 ─ 200,000/48 months = $40,000 per month.
Net profit for July = 311k + ($600k × 10%) - $40k = $331k
Annualised net profit: $331k × 12 = $3,972k
Opening net assets after investment = $23,200k + $2,120k = $25,320k.
ROI = $3,972k/25,320k = 15.69%
Therefore, Division B will not proceed with the investment, since it will cause a decrease in its ROI.
If RI is calculated with the investment, the result is as follows.

B
$000
Annualised Net Profit 3,972
Less: imputed interest charge
$25.32m at 10% (2,532)
Residual income 1,440
This calculation shows that, if the investment is undertaken, RI is actually higher than without
the investment. The suggestion is, therefore, that the investment should have been proceeded
with. So, use of ROI has resulted in behaviour by Division B’s manager that is not good for the
company as a whole.
EXAMINER’S COMMENTS: PART (e)

In part (e) candidates were supposed to identify the fact that changing the basis for
calculating ROI and using this for performance measurement without changing the target
ROI would cause managers to be demotivated.
Many candidates answered this well, although some simply discussed the general problems
encountered when using ROI, which were relevant to a degree ─ but shouldn’t have been
the sole answer.
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(e) Behavioural issues
y
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The staff in both divisions have been used to meeting targets and getting rewarded
o
appropriately. Suddenly, they will find that even though in reality divisional performance has
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improved, neither division is meeting its ROI target. This will purely be as a result of the
inclusion of the head office costs. The whole basis of being assessed on uncontrollable
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apportioned costs is questionable in the first place. However, if it is going to be done this way,
t
at the least the target ROI must be revised.
Fi rs
Staff are likely to become frustrated with a new system which is inherently unfair. This could
give rise to staff organising themselves together in order to oppose the system. At the least,
they are likely to become quickly demotivated, working slower than possible and perhaps
withdrawing things like voluntary overtime. The cost to the company as a whole is likely to be
high and the situation needs to be resolved as quickly as possible.
Marking guide Marks

(a) ROI/RI calculations
ROI for B 1
ROI for C 1 2
(b) ROI/RI discussion
RI for B 1½
RI for C 1½ 3
(c) Discussion
ROI discussion 2
RI discussion 2
Extra ROI calculation under old method 1
Valid conclusion drawn 1 6
(d) ROI/RI after investment
ROI calculation 2
RI calculation 1
Comments and conclusion 2 5
(e) Behavioural issues
ROI of investment Per valid point 1 Max 4
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5 MAN CO
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In part (a) candidates had to calculate the incremental loss per component for the group if the
buying division bought from the external supplier in future. It was a really simple calculation:
017
external buying cost less internal production cost, but most candidates got this wrong.
Perhaps it was because they expected it to be more difficult than it was. They also had to work
out how many components the supplying division should sell to the buying division if group
profits were to be maximised. Again, the answer was simple: all of them. Many candidates got
this part correct. It’s worth noting that if a requirement is only worth 3 marks, like this one,
the calculations required will be quite short. Some candidates wrote several pages of complex
calculations here but should have realised that they were doing something wrong given that
the question was only worth 3 marks.
EXAM SMART
The tip from the examiner that the number of marks indicates how complex the calculation
will be is worth remembering. It’s possible to waste quite a lot of time on a calculation that’s
much complex than the examiner requires.
(a) Maximising group profit

Division L has enough capacity to supply both Division M and its external customers with
component L.
Therefore, incremental cost of Division M buying externally is as follows:
Cost per unit of component L when bought from external supplier: $37
Cost per unit for Division L of making component L: $20.
Therefore incremental cost to group of each unit of component L being bought in by Division M
rather than transferred internally: $17 ($37 – 20).
From the group’s point of view, the most profitable course of action is therefore that all
120,000 units of component L should be transferred internally.

Part (b) involved some profit calculations for the divisions and the group, most candidates
made a decent attempt at this.
(b) Calculating total group profit

Total group profits will be as follows:
Division L:
Contribution earned per transferred component = $40 – $20 = $20
Profit earned per component sold externally = $40 – $24 = $16
$
120,000 x $20 2,400,000
160,000 x $16 2,560,000
t
4,960,000
h 7
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Profit
g 2 0 1 4,460,000
y
p ion
Division M:
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Profit earned per component sold externally = $27 – $1 = $26
$
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120,000 x $26 3,120,000
I
rst Profit 2,920,000
Fi
Total profit 7,380,000

Part (c) involved some discussion of the problems arising if the transfer price wasn’t
changed. Candidates were supposed to identify the fact that, if the transfer price wasn’t
changed, the buying division would buy from the external supplier as the divisions had
autonomy. However, some candidates failed to notice this point and discussed how
demotivating it would be for the buying division instead.
EXAM SMART
The situation where the buying division can buy the component from an external supplier for
less than the transfer price is quite common in transfer pricing questions, with the
dysfunctional consequences discussed in the answer. Here taking account of internal costs of
transfer being lower solves the problem. If you do P5, you may come across situations where
the solution to this situation is less easy.
(c) Problems with current transfer price and suggested alternative

The problem is that the current transfer price of $40 per unit is now too high. Whilst this has
not been a problem before since external suppliers were charging $42 per unit, it is a problem
now that Division M has been offered component L for $37 per unit. If Division M now acts in its
own interests rather than the interests of the group as a whole, it will buy component L from
the external supplier rather than from Division L. This will mean that the profits of the group will
fall substantially and Division L will have significant unused capacity.
Consequently, Division L needs to reduce its price. The current price does not reflect the fact
that there are no selling and distribution costs associated with transferring internally, i.e. the
cost of selling internally is $4 less for Division L than selling externally. So, it could reduce the
price to $36 and still make the same profit on these sales as on its external sales. This would
therefore be the suggested transfer price so that Division M is still saving $1 per unit compared
to the external price. A transfer price of $37 would also presumably be acceptable to Division M
since this is the same as the external supplier is offering.

Part (d) was a purely written requirement asking candidates to describe the balanced
scorecard approach to performance management. Although it was asked in the context of a
company, the question was really generic in nature.
Fir Co
There were some really good answers to this, although the structure of answers could have
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been better. It is really hard to mark a question like this where candidates’ answers are just a
‘sea of words’ i.e. one or two sides of tightly written text with no headings and often not
even any paragraphs.
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It was appropriate to give a short introduction and then say a little bit about each perspective
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under its heading. By this stage, candidates need to start writing more professionally,
otherwise they are going to be ill-prepared for the Professional level papers, where marks will
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be specifically allocated for professional writing and well-formatted answers.
017
Whilst professional marks are not available at this level, candidates should realise that it’s far
easier to earn more marks where the candidate clearly separates out the points he or she is
making.
EXAM SMART
Think of the markers!
Moving on from the Examiner’s commentary, think of the marker facing two answers from two
candidates. One candidate has gone for the seas of words or the wall-of-writing approach. The
marker sees a piece of paper filled up from top to bottom and side to side with writing. The
only choice the marker has is to wade through the mass of text looking for the relevant points
to mark. This takes time and can potentially annoy the marker….not a good move!
The other script has taken time to set out each element of the balanced scorecard under a
heading. It will have spaced each section with a blank line between each paragraph. The
marker will find this script a lot easier to mark!
You can’t get away here with just listing out the three non-financial perspectives of the
scorecard. You need to explain why the four perspectives are relevant as well as the
principles behind the scorecard design.
(d) Customer perspective

The customer perspective considers how Man Co appears to customers. Man Co should ask
itself: ‘to achieve our vision, how should we appear to our customers?’.
The customer perspective should identify the customer and market segments in which the
divisions will compete. There is a strong link between the customer perspective and the
revenue objectives in the financial perspective. If customer objectives are achieved, revenue
objectives should be too.
Internal perspective
The internal perspective requires Man Co to ask itself the question – ‘what must we excel at to
achieve our financial and customer objectives? It must identify the internal business processes
that are critical to the implementation of its strategy.
Learning and growth perspective
The learning and growth perspective requires Man Co to ask itself whether it can continue to
improve and create value.
If it is to continue having loyal, satisfied customers and make good use of its resources, it must
keep learning and developing. It is critical that it invests in its infrastructure – i.e. people,
systems and organisational procedures – in order to provide the capabilities that will help the
other three perspectives to be accomplished.
t
Marking guide Marks
(a)
i g h 1 7
Maximising group profits
y r 2 0
Calculating incremental cost per unit 2
p ion
Recommendations 1
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(b) Profit
3
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Profit of L
I
3
t
Profit of M 2
rs
Total profit 1
Fi
6
(c) Discussion
Transfer price is too high 2
Division M will not buy 1
Profits for group will fall 1
S/D costs should mean lower TP anyway 2
Suggested transfer price 1
6
(d) Customer perspective 2
Internal perspective 2
Learning and growth perspective 2
Max 5
345
Practice Exam
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017
346 ACCA F5 Question Bank
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347
ACCA
Practice Examination (2016 Specimen)
Paper F5
Fir Co
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ON THE FOLLOWING PAGES YOU WILL FIND THE PAPER BASED VERSION OF THE ACCA 2016 SPECIMEN
BASED VERSION OF THIS SPECIMEN ON THE ACCA WEBSITE: 017

EXAM. IF YOU ARE TAKING THE COMPUTER BASED EXAM, YOU WILL FIND THE LATEST COMPUTER
https://sampletds1.pearsonvue.com/Minerva/startDelivery?sessionUUID=e9d2538e-a34f-4137-9e10-
9bca83a3867a
You will also find some additional constructed response questions to work through on the ACCA website.
IF YOU ARE TAKING THE COMPUTER BASED EXAM, IT IS VITAL THAT YOU WORK THROUGH THE
COMPUTER BASED VERSION OF THE SPECIMEN.
Time allowed: 3 hours 15 minutes
This paper is divided into three sections:
Section A – ALL FIFTEEN questions are compulsory and MUST be attempted.

Section B – ALL FIFTEEN questions are compulsory and MUST be attempted.
Section C – BOTH questions are compulsory and MUST be attempted.
348 P r a c t i c e e x a m q u e s t i o n s ( 2 0 1 6 S p e c i m e n p a p e r ) ACCA F5 Question Bank
Section A
ALL 15 questions are compulsory and MUST be attempted.
1 A company manufactures two products, C and D, for which the following information is
available:
Product C Product D Total
Budgeted production (units) 1,000 4,000 5,000
Labour hours per unit/in total 8 10 48,000
Number of production runs required 13 15 28
Number of inspections during production 5 3 8
Total production set up costs $140,000

Total inspection costs $80,000
Other overhead costs $96,000
Other overhead costs are absorbed on a labour hour basis.
Using activity-based costing, what is the budgeted overhead cost per unit of Product D?
A $43·84
B $46·25
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C $131·00
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D $140·64 (2 marks)
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2
y
p ion
The selling price of Product X is set at $550 for each unit and sales for the coming year are
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What is the target cost for each unit of Product X?
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A $385·00
i r s B $165·00
F C
D
$187·50
$362·50 (2 marks)
3 P Co makes two products, P1 and P2. The budgeted details for each product are as follows:
P1 P2
$ $
Selling price 10·00 8·00
Cost per unit:
Direct materials 3·50 4·00
Direct labour 1·50 1·00
Variable overhead 0·60 0·40
Fixed overhead 1·20 1·00
Profit per unit 3·20 1·60
Budgeted production and sales for the year ended 30 November 20X5 are:
The fixed overhead costs included in P1 relate to apportionment of general overhead costs only.
However, P2 also included specific fixed overheads totalling $2,500.
ACCA F5 Question Bank Practice exam questions (2016 Specimen paper) 349
If only product P1 were to be made, how many units (to the nearest whole unit) would need
to be sold in order to achieve a profit of $60,000 each year?
A 25,625 units
B 19,205 units
C 18,636 units
D 26,406 units (2 marks)
4 Which of the following statements regarding environmental cost accounting are true?
1 The majority of environmental costs are already captured within a typical organisation’s
accounting system. The difficulty lies in identifying them
2 Input/output analysis divides material flows within an organisation into three categories:
material flows; system flows; and delivery and disposal flows
3 One of the cost categories used in environmental activity-based costing is environment-
driven costs which is used for costs which can be directly traced to a cost centre
4 Environmental life-cycle costing enables environmental costs from the design stage of
the product right through to decommissioning at the end of its life to be considered
A 1, 2 and 4
B 1 and 4 only
C 2, 3 and 4
Fir Co
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D 2 and 3 only (2 marks)
5
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To produce 19 litres of Product X, a standard input mix of 8 litres of chemical A and 12 litres of
chemical B is required.
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Chemical A has a standard cost of $20 per litre and chemical B has a standard cost of $25 per
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litre.
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During September, the actual results showed that 1,850 litres of Product X were produced,
using a total input of 900 litres of chemical A and 1,100 litres of chemical B.
The actual costs of chemicals A and B were at the standard cost of $20 and $25 per litre
respectively.
Based on the above information, which of the following statements is true?
A Both variances were adverse
B Both variances were favourable
C The total mix variance was adverse and the total yield variance was favourable
D The total mix variance was favourable and the total yield variance was adverse (2 marks)
6 A budget is a quantified plan of action for a forthcoming period. Budgets can be prepared using
a variety of different approaches.
Which of the following statements regarding approaches to budgeting are correct?
1 Incremental budgeting builds previous inefficiencies into the budget whereas zero-based
budgeting encourages employees to avoid wasteful expenditure
2 Beyond budgeting uses adaptive management processes and plans on a rolling basis
3 Activity-based budgeting ensures that the budget is continually updated by adding a new
budget period once the most recent budget period has ended
4 Flexible budgeting recognises different cost behaviour patterns and so takes into account
the organisation’s overall strategy during the budget process
A 1 and 2 only
B 1, 2 and 4
C 3 and 4
D 1 and 3 (2 marks)
7 A leisure company owns a number of large health and fitness resorts, but one is suffering from
declining sales and is predicted to make a loss in the next year. As a result management have
identified a number of possible actions:
1 Shut down the resort and sell off the assets
2
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Undertake a major upgrade to facilities costing $4·5m
7
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3 Undertake a minor upgrade to facilities costing $2m
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The upgrades are predicted to have variable results and the probability of good results after a
p ion
major upgrade is 0·8, whereas the probability of good results after a minor upgrade is 0·7.
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The company is risk neutral and has prepared the following decision tree.
I n t
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Which decision should the company make?

A Shutdown and sell
B Undertake the major upgrade
C Undertake the minor upgrade
D Undertake the major upgrade if results are good (2 marks)
8 A company has the following production planned for the next four weeks. The figures reflect the
full capacity level of operations. Planned output is equal to the maximum demand per product.
Product A B C D
$ per unit $ per unit $ per unit $ per unit
Selling price 160 214 100 140
Raw material cost 24 56 22 40
Direct labour cost 66 88 33 22
Variable overhead cost 24 18 24 18
Fixed overhead cost 16 10 8 12
Profit 30 42 13 48
Planned output 300 125 240 400
It has now been identified that labour hours available in the next four weeks will be limited to
4,000 hours.
In what order should the products be manufactured, assuming that the company wants to
maximise profits in the next four weeks?
A D, A, C, B
B D, B, A, C
C B, A, D, C
Co
D D, C, A, B (2 marks)
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9
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Def Co provides accounting services to government departments. On average, each staff
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member works six chargeable hours per day, with the rest of their working day being spent on
non-chargeable administrative work. One of the company’s main objectives is to produce a high
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level of quality and customer satisfaction.
Def Co has set its targets for the next year as follows:
1 Cutting departmental expenditure by 5%
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2
3
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Increasing the number of chargeable hours handled by advisers to 6·2 per day
Obtaining a score of 4·7 or above on customer satisfaction surveys
Which of the following options allocates the above targets to the correct value for money
performance category?
A 1 3 2
B 2 1 3
C 3 2 1
D 1 2 3
(2 marks)
10 Different types of information systems provide the information which organisations need for
strategic planning, management and operational control.
Which of the following statements are correct?
1 Management information systems (MIS) summarise internal data into periodic reports
2 Transaction processing systems (TPS) facilitate the immediate processing of data
3 Executive information systems (EIS) utilise dashboard facilities and interactive graphics
4 Enterprise resource planning systems (ERPS) can be set up with extranet links to suppliers
and customers
A 1, 2 and 3 only
B 1 and 3 only
C 2 and 4 only
D 1, 2, 3 and 4 (2 marks)
11 The following are all types of costs associated with management information:
1 Use of bar coding and scanners
2 Payroll department’s processing of personnel costs
3 Completion of timesheets by employees
4
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Input of data into the production system
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Which of the above are examples of direct data capture costs?
2
A
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1 and 3 only
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B
C
1, 3 and 4
2 and 3
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D
t 1 and 4 only (2 marks)
rst
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12 Which of the following statements regarding life-cycle costing are correct?
1 It can be applied not only to products but also to an organisation’s customers
2 It includes any opportunity costs associated with production
3 The maturity phase is characterised by a rapid build-up in demand
4 Often between 70% to 90% of costs are determined early in the product life cycle
A 1, 2 and 4
B 3 and 4
C 1 and 4 only
D 2 and 3 (2 marks)
13 A company manufactures a product which requires four hours per unit of machine time.
Machine time is a bottleneck resource as there are only ten machines which are available for 12
hours per day, five days per week. The product has a selling price of $130 per unit, direct
material costs of $50 per unit, labour costs of $40 per unit and factory overhead costs of $20
per unit. These costs are based on weekly production and sales of 150 units.
What is the throughput accounting ratio?
A 1·33
B 2·00
C 0·75
D 0·31 (2 marks)
14 Ox Co has two divisions, A and B. Division A makes a component for air conditioning units which
it can only sell to Division B. It has no other outlet for sales.
Current information relating to Division A is as follows:
Marginal cost per unit $100
Transfer price of the component $165
Total production and sales of the component each year 2,200 units
Specific fixed costs of Division A per year $10,000
Co
Cold Co has offered to sell the component to Division B for $140 per unit. If Division B accepts
Fir
this offer, Division A will be closed.
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If Division B accepts Cold Co’s offer, what will be the impact on profits per year for the group
as a whole?
A Increase of $65,000
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B Decrease of $78,000
C Decrease of $88,000
D Increase of $55,000
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15 017
Which of the following statements regarding Fitzgerald and Moon’s Building Blocks model are
correct?
1 The determinants of performance are quality, innovation, resource utilisation and
competitiveness
2 Standards are targets for performance and should be fair, achievable and controllable
3 Rewards encourage staff to work towards the standards and should be clear, motivating
and controllable
4 It is a performance measurement framework particularly suitable for service
organisations
A 1, 2 and 3
B 2 and 3 only
C 3 and 4
D 1, 2 and 4 (2 marks)
(30 marks)
Section B
ALL 15 questions are compulsory and MUST be attempted.
GLAM CO
The following scenario relates to questions 16–20.
Glam Co is a hairdressing salon which provides both ‘cuts’ and ‘treatments’ to clients. All cuts and
treatments at the salon are carried out by one of the salon’s three senior stylists. The salon also has
two salon assistants and two junior stylists.
Every customer attending the salon is first seen by a salon assistant, who washes their hair; next, by a
senior stylist, who cuts or treats the hair depending on which service the customer wants; then finally,
a junior stylist who dries their hair.
The average length of time spent with each member of staff is as follows:
Cut Hours Treatment Hours
Assistant 0·1 0·3
Senior stylist 1·0 1·5
Junior stylist 0·6 0·5
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The salon is open for eight hours each day for six days per week. It is only closed for two weeks each
7
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year. Staff salaries are $40,000 each year for each senior stylist, $28,000 each year for each junior
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stylist and $12,000 each year for each of the assistants. The cost of cleaning products applied when
y 2
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washing the hair is $1·50 per client. The cost of all additional products applied during a ‘treatment’ is
o
$7·40 per client. Other salon costs (excluding labour and raw materials) amount to $106,400 each
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year.
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Glam Co charges $60 for each cut and $110 for each treatment.
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The senior stylists’ time has been correctly identified as the bottleneck activity.
Fi 16rs What is the annual capacity of the bottleneck activity?

Cuts Treatments
A 2,400 1,600
B 4,800 4,800
C 7,200 4,800
D 9,600 9,600
17 The salon has calculated the cost per hour to be $42·56.

What is the throughput accounting ratio (TPAR) for both services?
Cuts Treatments
A 1·37 1·58
B 1·41 2·38
C 1·37 1·61
D 1·41 2·41
18 Which of the following activities could the salon use to improve the TPAR?
1 Increase the time spent by the bottleneck activity on each service
2 Identify ways to reduce the material costs for the services
3 Increase the level of inventory to prevent stock-outs
4 Increase the productivity of the stage prior to the bottleneck
5 Improve the control of the salon’s total operating expenses
6 Apply an increase to the selling price of the services
A 1, 2 and 4
B 2, 3 and 5
C 2, 5 and 6
D 1, 4 and 6
19 What would be the effect on the bottleneck if the salon employed another senior stylist?
A The senior stylists’ time will be a bottleneck for cuts only
B The senior stylists’ time will be a bottleneck for treatments only
C The senior stylists’ time will remain the bottleneck for both cuts and treatments
Co
D There will no longer be a bottleneck
Fir
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20 Which of the following statements regarding the theory of constraints are correct?
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1 It focuses on identifying stages of congestion in a process when production arrives more
quickly than the next stage can handle
2
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It is based on the concept that organisations manage three key factors – throughput,
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operating expenses and inventory
3 It uses a sequence of focusing steps to overcome a single bottleneck, at which point the
4
improvement process is complete
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It can be applied to the management of all limiting factors, both internal and external,
which can affect an organisation
A 1 and 2 only
B 1, 2 and 3
C 2, 3 and 4
D 1, 3 and 4
CHAIR CO
Chair Co has in development several new products. One of them is a new type of luxury car seat. The
estimated labour time for the first unit is 12 hours but a learning curve of 75% is expected to apply for
the first eight units produced. The cost of labour is $15 per hour.
The cost of materials and other variable overheads is expected to total $230 per unit. Chair Co plans
on pricing the seat by adding a 50% mark-up to the total variable cost per seat, with the labour cost
being based on the incremental time taken to produce the 8th unit.
21 What is the labour cost of the 8th unit?

A $45·65
B $75·94
C $4·32
D $3·04
22 The first phase of production has now been completed for the new car seat. The first unit
actually took 12·5 hours to make and the total time for the first eight units was 34·3 hours, at
which point the learning effect came to an end.
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Chair Co are planning on adjusting the price to reflect the actual time it took to complete the
i g
8th unit.
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What was the actual rate of learning which occurred?
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A
B
65·7%
58·6%
I n
C
t 70·0%
t
D 76·5%
Fi
23
rs Another product which Chair Co has in development is a new design of high chair for feeding
young children. Based on previous experience of producing similar products, Chair Co had
assumed that a learning rate of 85% would apply to the manufacture of this new design but
after the first phase of production had been completed, management realised that a learning
rate of 80% had been achieved.
Which of the following statements could explain why the actual rate of learning differed from
the rate which was expected?
1 Staffing levels were stable during the first manufacturing phase
2 There were machine breakdowns during production
3 Assembly of the chairs was manual and very repetitive
4 There was high staff turnover during this period
5 There were minimal stoppages in the production process
6 The design of the chair was changed several times at this early phase
A 2, 3 and 4
B 1, 3 and 5
C 1, 5 and 6
D 2, 4 and 6
24 Chair Co uses cost-plus pricing.

Which of the following statements regarding cost-plus pricing strategies are correct?
1 Marginal cost-plus pricing is easier where there is a readily identifiable variable cost
2 Full cost-plus pricing requires the budgeted level of output to be determined at the
outset
3 Cost-plus pricing is a strategically focused approach as it accounts for external factors
4 Cost-plus pricing requires that the profit mark-up applied by an organisation is fixed
A 1, 2 and 4
B 1 and 2 only
C 3 and 4
D 1 and 3
25 Chair Co has also developed a new type of office chair and management is trying to formulate a
budget for this product. They have decided to match the production level to demand, however,
demand for this chair is uncertain.
Management have collected the following information:
Demand Probability
Fir Cop
(units)
Worst possible outcome 10,000 0·3
Most likely outcome 22,000 0·5
Best possible outcome
st I yri
35,000 0·2
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The selling price per unit is $25. The variable cost per unit is $8 for any production level up to
25,000 units. If the production level is higher than 25,000 units, then the variable cost per unit
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will decrease by 10% and this reduction will apply to all the units produced at that level.
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Total fixed costs are estimated to be $75,000.
017
Using probabilistic budgeting, what is the expected budgeted contribution of the product?
A $282,000
B $357,000
C $287,600
D $362,600
HI LIFE CO
The Hi Life Co (HL Co) makes sofas. It has recently received a request from a customer to provide a
one-off order of sofas, in excess of normal budgeted production. The order would need to be
completed within two weeks. The following cost estimate has already been prepared:
$
Direct materials:
2 2
Fabric 200 m at $17 per m 3,400
2 2
Wood 50 m at $8·20 per m 410
Direct labour:
Skilled 200 hours at $16 per hour 3,200
Semi-skilled 300 hours at $12 per hour 3,600
Factory overheads 500 hours at $3 per hour 1,500
Total production cost 12,110
General fixed overheads as 10% of total production cost 1,211
Total cost 13,321
A quotation now needs to be prepared on a relevant cost basis so that HL Co can offer as competitive a
price as possible for the order.
ht 7
g 1
26 The fabric is regularly used by HL Co. There are currently 300 m2 in inventory, which cost $17
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per m2. The current purchase price of the fabric is $17·50 per m2.
y 2
p ion
The wood is regularly used by HL Co and usually costs $8·20 per m2. However, the company’s
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current supplier’s earliest delivery time for the wood is in three weeks’ time. An alternative
supplier could deliver immediately but they would charge $8·50 per m2. HL Co already has 500
t
m2 in inventory but 480 m2 of this is needed to complete other existing orders in the next two
t I nweeks. The remaining 20 m2 is not going to be needed until four weeks’ time.
rs
What is the cost of the fabric and the wood which should be included in the quotation?
Fi
Fabric Wood
A $3,500 $419
B $3,400 $419
C $3,500 $255
D $0 $255
27 The skilled labour force is employed under permanent contracts of employment under which
they must be paid for 40 hours per week’s labour, even if their time is idle due to absence of
orders. Their rate of pay is $16 per hour, although any overtime is paid at time and a half. In the
next two weeks, there is spare capacity of 150 labour hours.
There is no spare capacity for semi-skilled workers. They are currently paid $12 per hour or time
and a half for overtime. However, a local agency can provide additional semi-skilled workers for
$14 per hour.
What cost should be included in the quotation for skilled labour and semi-skilled labour?
Skilled Semi-skilled
A $3,600 $4,200
B $1,200 $4,200
C $3,600 $5,400
D $1,200 $5,400
28 Of the $3 per hour factory overheads costs, $1·50 per hour reflects the electricity costs of
running the cutting machine which will be used to cut the fabric and wood for the sofas. The
other $1·50 per hour reflects the cost of the factory supervisor’s salary. The supervisor is paid
an annual salary and is also paid $15 per hour for any overtime he works.
He will need to work 20 hours’ overtime if this order is accepted.
Fir Co
What is the cost which should be included in the quotation for factory overheads?
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A $1,050
B $1,800
C
D
$750
$300 ntu ght
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29
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Which statement correctly describes the treatment of the general fixed overheads when
preparing the quotation?
A
B
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The overheads should be excluded because they are a sunk cost
The overheads should be excluded because they are not incremental costs
C The overheads should be included because they relate to production costs
D The overheads should be included because all expenses should be recovered
30 Which of the following statements about relevant costing are TRUE?

1 An opportunity cost will always be a relevant cost even if it is a past cost
2 Fixed costs are always general in nature and are therefore never relevant
3 Committed costs are never considered to be relevant costs
4 An opportunity cost represents the cost of the best alternative forgone
5 Notional costs are always relevant as they make the estimate more realistic
6 Avoidable costs would be saved if an activity did not happen and so are relevant
7 Common costs are only relevant if the viability of the whole process is being assessed
8 Differential costs in a make or buy decision are not considered to be relevant
A 2, 3, 4 and 6
B 1, 2, 5 and 7
C 3, 4, 6 and 7
D 1, 5, 6 and 8
(30 marks)
Section C
BOTH questions are compulsory and MUST be attempted
31 CARAD CO
Carad Co is an electronics company which makes two types of television – plasma screen TVs and LCD
TVs. It operates within a highly competitive market and is constantly under pressure to reduce prices.
Carad Co operates a standard costing system and performs a detailed variance analysis of both
products on a monthly basis. Extracts from the management information for the month of November
are shown below:
Note
Total number of units made and sold 1,400 1
Material price variance $28,000 A 2
Total labour variance $6,050 A 3
Notes
(1) The budgeted total sales volume for TVs was 1,180 units, consisting of an equal mix of plasma
screen TVs and LCD screen TVs. Actual sales volume was 750 plasma TVs and 650 LCD TVs.
Standard sales prices are $350 per unit for the plasma TVs and $300 per unit for the LCD TVs.
ht
The actual sales prices achieved during November were $330 per unit for plasma TVs and $290
7
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per unit for LCD TVs. The standard contributions for plasma TVs and LCD TVs are $190 and $180
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per unit respectively.
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(2) The sole reason for this variance was an increase in the purchase price of one of its key
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components, X. Each plasma TV made and each LCD TV made requires one unit of component X,
for which Carad Co’s standard cost is $60 per unit. Due to a shortage of components in the
t
market place, the market price for November went up to $85 per unit for X. Carad Co actually
t I npaid $80 per unit for it.
rs
(3) Each plasma TV uses 2 standard hours of labour and each LCD TV uses 1·5 standard hours of
Fi
labour. The standard cost for labour is $14 per hour and this also reflects the actual cost per
labour hour for the company’s permanent staff in November. However, because of the increase
in sales and production volumes in November, the company also had to use additional
temporary labour at the higher cost of $18 per hour. The total capacity of Carad’s permanent
workforce is 2,200 hours production per month, assuming full efficiency. In the month of
November, the permanent workforce were wholly efficient, taking exactly 2 hours to complete
each plasma TV and exactly 1·5 hours to produce each LCD TV. The total labour variance
therefore relates solely to the temporary workers, who took twice as long as the permanent
workers to complete their production.
Required:
(a) Calculate the following for the month of November, showing all workings clearly:
(i) The sales price variance and sales volume contribution variance; (4 marks)
(ii) The material price planning variance and material price operational variance; (2 marks)
(iii) The labour rate variance and the labour efficiency variance. (5 marks)
(b) Explain the reasons why Carad Co would be interested in the material price planning variance
and the material price operational variance. (9 marks)
(20 marks)
32 THATCHER INTERNATIONAL PARK (TIP)

Thatcher International Park (TIP) is a theme park and has for many years been a successful business,
which has traded profitably. About three years ago the directors decided to capitalise on their success
and reduced the expenditure made on new thrill rides, reduced routine maintenance where possible
(deciding instead to repair equipment when it broke down) and made a commitment to regularly
increase admission prices. Once an admission price is paid customers can use any of the facilities and
rides for free.
These steps increased profits considerably, enabling good dividends to be paid to the owners and
bonuses to the directors. The last two years of financial results are shown below.
20X4 20X5
$ $
Sales 5,250,000 5,320,000
Less expenses:
Wages 2,500,000 2,200,000
Maintenance – routine 80,000 70,000
Repairs 260,000 320,000
Directors’ salaries 150,000 160,000
Directors’ bonuses 15,000 18,000
Other costs (including depreciation) 1,200,000 1,180,000
Net profit 1,045,000 1,372,000
Fir Cop
Book value of assets at start of year 13,000,000 12,000,000
Dividend paid 500,000 650,000
Number of visitors
st I yri
150,000 140,000
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TIP operates in a country where the average rate of inflation is around 1% per annum.
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Required:
(a) Assess the financial performance of TIP using the information given above. (14 marks)
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During the early part of 20X4 TIP employed a newly qualified management accountant. He quickly
017
became concerned about the potential performance of TIP and to investigate his concerns, he started
to gather data to measure some non-financial measures of success. The data he has gathered is shown
below:
Table 1
20X4 20X5
Hours lost due to breakdown of rides (see note 1) 9,000 hours 32,000 hours
Average waiting time per ride 20 minutes 30 minutes
Note 1: TIP has 50 rides of different types. It is open 360 days of the year for 10 hours each day
Required:
(b) Assess the QUALITY of the service which TIP provides to its customers using Table 1 and any
other relevant data and indicate the RISKS it is likely to face if it continues with its current
policies. (6 marks)
(20 marks)
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363
ACCA
Practice Examination (2016 Specimen)
Paper F5
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Answers n2
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364 P r a c t i c e e x a m a n s w e r s ( 2 0 1 6 S p e c i m e n p a p e r ) ACCA F5 Question Bank
Section A
1 B $46·25
Set-up costs per production run = $140,000/28 = $5,000
Cost per inspection = $80,000/8 = $10,000
Other overhead costs per labour hour = $96,000/48,000 = $2
Overhead costs of product D:
$
Set-up costs (15 x $5,000) 75,000
Inspection costs (3 x $10,000) 30,000
Other overheads (40,000 x $2) 80,000
185,000
Overhead cost per unit = $185,000/4,000 units = $46·25
2 D $362·50
t
Return: $500,000 × 30% = $150,000
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Total sales revenue = $550 × 800 = $440,000
i
y r 2 0
Therefore, total cost = $440,000 – $150,000 = $290,000
o p ion
Unit cost = $290,000/800 = $362·50
C uit
3
I n
C
t 18,636 units
rst The number of units required to make a target profit = (fixed costs + target profit)/contribution
Fi
per unit of P1.
Fixed costs = ($1·20 × 10,000) + ($1·00 × 12,500) – $2,500 = $22,000
Contribution per unit of P = $3·20 + $1·20 = $4·40
($22,000 + $60,000)/$4·40 = 18,636 units
4 B 1 and 4 only
Most organisations do collect data about environmental costs but find it difficult to split them
out and categorise them effectively.
Life-cycle costing does allow the organisation to collect information about a product’s
environmental costs throughout its life cycle.
The technique which divides material flows into three categories is material flow cost
accounting, not input/output analysis.
ABC does categorise some costs as environment-driven costs, however, these are costs which
are normally hidden within total overheads in a conventional costing system. It is environment-
related costs which can be allocated directly to a cost centre.
ACCA F5 Question Bank Practice exam answers (2016 Specimen paper) 365
5 D The total mix variance was favourable and the total yield variance was adverse
Mix variance:
Material AQSM AQAM Difference Standard cost Variance
(litres) ($/litre) ($)
A 800 900 100 A 20 2,000 A
B 1,200 1,100 100 F 25 2,500 F
2,000 2,000 500 F
Yield variance:
Material SQSM AQSM Difference Standard cost Variance
(litres) ($/litre) ($)
A 779 800 21 A 20 420 A
B 1,168 1,200 32 A 25 800 A
1,947 (W1) 2,000 1,220 A
(W1) 1,850 litres of output should use 1,947 litres of input (1,850/0·95)
6 A 1 and 2 only
An incremental budget builds from the previous year’s figures and so any inefficiencies will be
Co
carried forward and zero-based budgeting starts from scratch with each item justified for its
Fir
inclusion in the budget and so should encourage the identification of waste and non-value
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adding activities, so Statement 1 is correct.
Beyond budgeting attempts to move away from conforming to a rigid annual budget and uses
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adaptive processes to encourage management to be responsive to current situations which
facilitates the use of rolling forecasts, so Statement 2 is correct.
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Rolling budgeting are budgets which are continuously updated throughout the year and so
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forces managers to reassess plans more regularly, whereas activity-based budgeting involves
defining the activities which underpin the financial figures and using the activity to allocate
resources for the budget, so Statement 3 is incorrect.
017
Flexible budgets are designed to show the changes in financial figures based on different activity
levels and so will recognise different cost behaviour patterns, however, it is activity-based
budgeting which ensures that the overall strategy is taken into account because it attempts to
manage the business as interrelated parts, not separate activities, so Statement 4 is incorrect.
7 C Undertake the minor upgrade

EV for major upgrade = (0·80 × $11m) + (0·2 × $7·5m) = $10·3m
EV for minor upgrade = (0·70 × $9m) + (0·3 × $6m) = $8·1m
Decision
Shutdown and sell $5·75m
Major upgrade (10·3m – 4·5m) $5·8m
Minor upgrade ($8·1m – $2m) $6·1m
As the minor upgrade has the highest expected return that should be the option chosen.
8 A D, A, C, B
In a single limiting factor situation products should be ranked based on their contribution per
unit of limiting factor, which in this case is labour hours.
Product A B C D
Contribution per unit ($) 46 52 21 60
Number of labour hours required per unit 6 8 3 2
Contribution per labour hour ($) 7·67 6·50 7·00 30·00
Ranking 2nd 4th 3rd 1st
9
D 1 2 3
Target 1 is a financial target and so assesses economy factors. Target 2 is measuring the rate of
work handled by staff which is an efficiency measure. Target 3 is assessing output, so is a
measure of effectiveness.
10 D 1, 2, 3 and 4
t
Management information systems do summarise data from TPS into periodic reports for
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management to use for decision-making.
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Transaction processing systems do facilitate the immediate processing of data.
2
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Executive information systems draw data from the MIS and support senior managers to make
o
strategic decisions. They usually have dashboard and interactive graphics so that the big picture
C uitcan be seen.
t
Enterprise resource planning systems can have extranet links set up with customers and
t I n
suppliers.
Fi 11 rs A 1 and 3 only
Direct data capture is a type of data input in which there is no data entry but instead it is
captured for a specific purpose. Therefore, the use of bar coding and scanners and the
completion of timesheets are examples of direct data capture costs.
Time spent by the payroll department processing personnel costs and the input of data into the
production system are examples of process costs.
12 C 1 and 4 only
Customer life-cycle costing can be used by organisations.
It has been reported that the majority of a product’s costs are determined early on, i.e. at the
design phase.
Life-cycle costing does not include any opportunity costs associated with production.
The growth phase is characterised by a rapid increase in demand.
13 A 1·33
Return per factory hour = ($130 – $50)/4 hours = $20
Factory costs per hour = $20 + ($40/4) = $15
TPAR = $20/$15 = 1·33
14 B Decrease of $78,00
Increase in variable costs per unit from buying in ($140 – $100) =$40
Therefore, total increase in variable costs (2,200 units × $40) = $88,000
Less the specific fixed costs saved if A is shut down = ($10,000)
Decrease in profit = $78,000
15 C 3 and 4
The determinants of performance are quality, innovation, resource utilisation and flexibility.
Competitiveness is a result of the determinants.
Standards should be fair, achievable and staff should have ownership of them. Controllability is
Fir Co
a feature of the rewards block.
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Rewards should be clear, motivating and controllable, so this is correct.
It is a framework designed to attempt to overcome the problems associated with performance
management in service companies.
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Marking guide
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Each question is worth 2 marks
n2 30
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Section B
16
Cuts Treatments
C 7,200 4,800
Total salon hours = 8 × 6 × 50 = 2,400 each year.
There are three senior stylists, therefore total hours available = 7,200.
Based on the time taken for each activity, they can perform 7,200 cuts (7,200 hours/1 hour per
cut) or 4,800 treatments
(7,200 hours/1·5 hours per treatment).
17
Cuts Treatments
A 1·37 1·58
Cuts
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Return per hour = (Selling price – materials)/time taken on the bottleneck = (60 – 1·50)/1 = 58·50
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TPAR = Return per hour/cost per hour = 58·50/42·56 = 1·37 (to two decimal places)
2
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Treatments
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Return per hour = (Selling price – materials)/time taken on the bottleneck = (110 – 8·90)/1·5 = 67·40
t
TPAR = Return per hour/cost per hour = 67·40/42·56 = 1·58 (to two decimal places)
t I n
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18
rs C 2, 5 and 6
The factors which are included in the TPAR are selling price, material costs, operating expenses
and bottleneck time. Increasing the selling price and reducing costs will improve the TPAR.
Increasing the time which each service takes on the bottleneck (the senior stylists’ time) will
only reduce the number of services they can provide, so this will not improve throughput.
Throughput accounting does not advocate the building of inventory as it is often used in a just-
in-time environment and there is no point increasing the activity prior to the bottleneck as it
will just create a build-up of work-in-progress. Neither of these will improve the rate of
throughput through the process.
19 B The senior stylists’ time will be a bottleneck for treatments only

The existing capacity for each activity is:
Cut Treatment
Assistants 48,000 16,000
Senior stylists 7,200 4,800
Junior stylists 8,000 9,600
If another senior stylist is employed, this will mean that their available hours will be (4 × 2,400)
= 9,600.
This will give them capacity to now do 9,600 cuts (9,600 hours/1 hour per cut) and 6,400
treatments (9,600 hours/1·5 hours per treatment).
As a result, the senior stylists will still be the bottleneck activity for treatments but for cuts the
bottleneck will now be the junior stylists as they can only do 8,000 cuts compared to the senior
stylists of 9,600.
20 A 1 and 2 only
The theory of constraints is focused on identifying restrictions in a process and how to manage
that restriction (commonly termed a bottleneck).
It is based on the concept of managing throughput, operating expenses and inventory.
Fir Co
It does use a series of focusing steps but it is not complete once the bottleneck has been
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overcome. In fact, it is an ongoing process of improvement, as once the bottleneck has been
elevated it is probable that another bottleneck will appear and the process will continue.
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It cannot be applied to all limiting factors as some, particularly those external to the
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organisation, may be out of the organisation’s control.
21 A $45·65
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Learning curve formula = y = axb
017
Cumulative average time per unit for 8 units: Y = 12 × 8–·415= 5·0628948 hours.
Therefore, cumulative total time for 8 units = 40·503158 hours.
Cumulative average time per unit for 7 units: Y = 12 × 7–·415= 5·3513771 hours.
Therefore, cumulative total time for 7 units = 37·45964 hours.
Therefore, incremental time for 8th unit = 40·503158 hours – 37·45964 hours = 3·043518 hours.
Total labour cost for 8th unit =3·043518 × $15 = $45·65277
22 C 70·0%
Actual learning rate
Cumulative number of seats produced Cumulative total Cumulative average
hours hours per unit
1 12·5 12·5
2 ? 12·5 x r
2
4 ? 12·5 x r
3
8 34·3 12·5 x r
Using algebra: 34·3 = 8 × (12·5 × r3)
4·2875 = (12·5 × r3)
0·343 = r3
r = 0·70
Therefore, the learning rate was 70%.
23 B 1, 3 and 5
An 80% learning rate means that the learning was faster than expected.
Factors which are present for a learning curve to take effect are a highly manual and repetitive
process (so staff can become quicker the more they perform the same series of tasks), no
t
stoppages to production (so the learning rate will not be lost whilst staff are idle) and a stable
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workforce (so the learning process does not have to keep restarting).
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If there is high staff turnover, stoppages in production and continual design changes, then the
2
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learning rate will not be effective and should be slower.
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24 B 1 and 2 only
t I n As marginal costing is based on variable costs, it is easier when a readily identifiable variable
rs
cost has been established.
Fi
The budgeted volume of output does need to be determined for full cost-plus pricing as it
would be used to calculate the overhead absorption rate for the calculation of the full cost per
unit.
Cost-plus pricing is internally focused and a drawback of the technique is that it fails to consider
external influences, like competitor pricing strategies.
The mark-up percentage does not have to be fixed; it can vary and be adjusted to reflect market
conditions.
25 D $362,600
As the variable cost per unit is changing depending on the production level, contribution for
each level needs to be calculated and then the probabilities applied to the outcomes.
Demand Contribution Total Probability Expected budgeted
(units) (per unit) contribution contribution
10,000 17·00 170,000 0·3 51,000
22,000 17·00 374,000 0·5 187,000
35,000 17·80 623,000 0·2 124,600
362,600
26
Fabric Wood
A $3,500 $419
Fabric is in regular use, so the replacement cost is the relevant cost (200 m2 × $17·50) = $3,500.
30 m2 of wood will have to be ordered in from the alternative supplier but the remaining 20 m2
which is in inventory and not needed for other work can be used and then replaced by an order
from the usual supplier (30 m2 × $8·50) + (20 m2 × $8·20) = $419.
27
Skilled Semi-skilled
B $1,200 $4,200
Skilled labour:
There is no cost for the first 150 hours as there is spare capacity. The remaining 50 hours
required will be paid at time and a half, which is $16 × 1·5 = $24.
50 hours × $24 = $1,200
Semi-skilled labour:
Co
There is no spare capacity, so the company will either need to pay overtime or hire in additional
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staff. The cost of paying overtime would be $18 per hour, so it would be cheaper to hire in the
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additional staff for $14 per hour.
300 hours × $14 = $4,200
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28 A $1,050
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The electricity costs are incremental as the machine will be used more to produce the new
017
order (500 hours × $1·50) = $750.
The supervisor’s salary is not relevant as it is paid anyway; however, the overtime is relevant (20
hours × $15) = $300.
29 B The overheads should be excluded because they are not incremental costs
The general fixed overheads should be excluded as they are not incremental, i.e. they are not
arising specifically as a result of this order. They are not sunk as they are not past costs. This is a
common misconception.
30 C 3, 4, 6 and 7
An opportunity cost does represent the cost of the best alternative forgone, however, if it is an
historic (past) cost, it would not be relevant.
Fixed costs can be incremental to a decision and in those circumstances would be relevant.
Committed costs are costs the organisation has already agreed to and can no longer influence
and so are not relevant.
Notional costs are used to make cost estimates more realistic; however, they are not real cash
flows and are not considered to be relevant.
Avoidable costs are saved if an activity is not undertaken and if this occurs as a result of the
decision, then they are relevant.
Common costs are relevant if the whole process is being evaluated; however, they are not
relevant to a further processing decision.
Differential costs are relevant in a make or buy decision as the organisation is trying to choose
between two options.
Marking guide Marks

Each question is worth 2 marks 30
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Section C
31 CARAD CO
(a)
(i) Sales price variance and sales volume variance
Sales price variance = (actual price – standard price) × actual volume
Sales
Actual Standard Difference Actual price
price price volume variance
$ $ $ $
Plasma TVs 330 350 –20 750 15,000 A
LCD TVs 290 300 –10 650 6,500 A
21,500 A
Sales volume contribution variance = (actual sales volume – budgeted sales volume) ×
standard margin
Actual Budgeted Sales
Co
sales sales Difference Standard volume
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volume volume margin variance
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$ $
Plasma TVs 750 590 160 190 30,400 F
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LCD TVs 650 590 60 180 10,800 F
1,400 1,180 41,200 F
(ii)
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Material price planning and purchasing operational variances
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Material planning variance = (original target price – general market price at time of
purchase) × quantity purchased
($60 – $85) × 1,400 = $35,000 A
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Material price operational variance = (general market price at time of purchase – actual
price paid) x quantity purchased
($85 – $80) × 1,400 = $7,000 F
(iii) Labour rate and labour efficiency variances
Labour rate variance = (standard labour rate per hour – actual labour rate per hour) ×
actual hours worked
Actual hours worked by temporary workers:
Total hours needed if staff were fully efficient = (750 × 2) + (650 × 1·5) = 2,475.
Permanent staff provide 2,200 hours, therefore excess = 2,475 – 2,200 = 275.
However, temporary workers take twice as long, therefore hours worked = 275 × 2 = 550.
Labour rate variance relates solely to temporary workers, therefore ignore permanent
staff in the calculation.
Labour rate variance = ($14 – $18) × 550 = $2,200 A
Labour efficiency variance = (standard labour hours for actual production – actual labour
hours worked) × standard rate
(275 – 550) × $14 = $3,850 A
(b) Explanation of planning and operational variances

Before the material price planning and operational variances were calculated, the only
information available as regards material purchasing was that there was an adverse material
price variance of $28,000. The purchasing department will be assessed on the basis of this
variance, yet, on its own, it is not a reliable indicator of the purchasing department’s efficiency.
The reason it is not a reliable indicator is because market conditions can change, leading to an
increase in price, and this change in market conditions is not within the control of the
purchasing department.
By analysing the materials price variance further and breaking it down into its two components
– planning and operational – the variance actually becomes a more useful assessment tool. The
planning variance represents the uncontrollable element and the operational variance
represents the controllable element. The planning variance is really useful for providing
feedback on just how skilled management is in estimating future prices. This can be very easy in
some businesses and very difficult in others. Giving this detail could help to improve planning
and standard setting in the future, as management will be increasingly aware of factors which
could create volatility in their forecasts.
The operational variance is more meaningful in that it measures the purchasing department’s
efficiency given the market conditions which prevailed at the time. As can be seen in Carad, the
material price operational variance is favourable which demonstrates that the purchasing
department managed to acquire the component which was in short supply at a better price
than expected. Without this breakdown in the variance, the purchasing department could have
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been held accountable for the overall adverse variance which was not indicative of their actual
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performance. This is then a fairer method of assessing performance and will, in turn, stop staff
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from becoming demotivated.
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Marking guide Marks
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(a)
(i) Sales price variance – Plasma TVs 1
I n t Sales price variance – LCD TVs 1
t
Sales volume contribution variance – Plasma TVs 1
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Sales volume contribution variance – LCD TVs 1
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4
(ii) Material price planning variance 1
Material price operational variance 1
2
(iii) Actual hours worked 3
Labour rate variance 1
Labour efficiency variance 1
5
(b) Controllability 2
Material price planning 3
Material price operating 3
Other valid point – planning or operating 1
9
32 THATCHER INTERNATIONAL PARK (TIP)

(a) TIP’s financial performance can be assessed in a number of ways:
Sales growth
Sales are up about 1·3% (W1) which is a little above the rate of inflation and therefore a move in
the right direction. However, with average admission prices jumping about 8·6% (W2) and
numbers of visitors falling, there are clearly problems. Large increases in admission prices
reduce the value proposition for the customer, it is unlikely that the rate of increase is
sustainable or even justifiable. Indeed with volumes falling (down by 6·7% (W6)), it appears that
some customers are being put off and price could be one of the reasons.
Maintenance and repairs
There appears to be a continuing drift away from routine maintenance with management
preferring to repair equipment as required. This does not appear to be saving any money as the
combined cost of maintenance and repair is higher in 20X5 than in 20X4 (possible risks are dealt
with in part (b)).
Directors’ pay
Absolute salary levels are up 6·7% (W3), well above the modest inflation rate. It appears that
the shareholders are happy with the financial performance of the business and are prepared to
reward the directors accordingly. Bonus levels are also well up. It may be that the directors have
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some form of profit related pay scheme and are being rewarded for the improved profit
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performance. The directors are likely to be very pleased with the increases to pay.
Wages
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Wages are down by 12% (W5). This may partly reflect the loss of customers (down by 6·7% (W6))
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if it is assumed that at least part of the wages cost is variable. It could also be that the directors
are reducing staff levels beyond the fall in the level of customers to enhance short-term profit and
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personal bonus. Customer service and indeed safety could be compromised here.
017
Net profit
Net profit is up a huge 31·3% (W7) and most shareholders would be pleased with that. Net
profit is a very traditional measure of performance and most would say this was a sign of good
performance.
Return on assets
The profitability can be measured relative to the asset base which is being used to generate it. This
is sometimes referred to as ROI or return on investment. The return on assets is up considerably
to 11·4% from 8% (W8). This is partly due to the significant rise in profit and partly due to the fall
in asset value. We are told that TIP has cut back on new development, so the fall in asset value is
probably due to depreciation being charged with little being spent during the year on assets. In
this regard it is inevitable that return on assets is up but it is more questionable whether this is a
good performance. A theme park (and thrill rides in particular) must be updated to keep
customers coming back. The directors of TIP are risking the future of the park.
(b) Quality provision
Reliability of the rides
The hours lost has increased significantly. Equally the percentage of capacity lost due to
breakdowns is now approaching 17·8% (W9). This would appear to be a very high number of
hours lost. This would surely increase the risk that customers are disappointed being unable to
ride. Given the fixed admission price system, this is bound to irritate some customers as they
have effectively already paid to ride.
Average queuing time

Queuing will be seen by customers as dead time. They may see some waiting as inevitable and
hence acceptable. However, TIP should be careful to maintain waiting times at a minimum. An
increase of 10 minutes (or 50%) is likely to be noticeable by customers and is unlikely to
enhance the quality of the TIP experience for them. The increase in waiting times is probably
due to the high number of hours lost due to breakdown with customers being forced to queue
for a fewer number of ride options.
Safety
The clear reduction in maintenance could easily damage the safety record of the park and is an
obvious quality issue.
Risks
If TIP continues with current policies, then they will expose themselves to the following risks:
(i) The lack of routine maintenance could easily lead to an accident or injury to a customer.
This could lead to compensation being paid or reputational damage.
(ii) Increased competition. The continuous raising of admission prices increases the
likelihood of a new competitor entering the market (although there are significant
barriers to entry in this market, e.g. capital cost, land and so on).
(iii) Loss of customers. The value for money which customers see when coming to TIP is
t
clearly reducing (higher prices, less reliability of rides and longer queues). Regardless of
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the existence of competition, customers could simply choose not to come, substituting
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another leisure activity instead.
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(iv) Profit fall. In the end if customers’ numbers fall, then so will profit. The shareholders,
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although well rewarded at the moment, could suffer a loss of dividend. Directors’ job
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security could then be threatened.
t
Workings:
t I n (W1) Sales growth is $5,320,000/$5,250,000 = 1·01333 or 1·3%.
Fi rs
(W2) Average admission prices were:
20X4: $5,250,000/150,000 = $35 per person
20X5: $5,320,000/140,000 = $38 per person
An increase of $38/$35 = 1·0857 or 8·57%.
(W3) Directors’ pay up by $160,000/$150,000 = 1·0667 or 6·7%.
(W4) Directors’ bonus levels up from $15,000/$150,000 or 10% to $18,000/$160,000 or
12·5% of turnover. This is an increase of 3/15 or 20%.
(W5) Wages are down by (1 – $2,200,000/$2,500,000) or 12%.
(W6) Loss of customers is (1 – 140,000/150,000) or 6·7%.
(W7) Profits up by $1,372,000/$1,045,000 = 1·3129 or 31·3%.
(W8) Return on assets:
20X4: $1,045,000/$13,000,000 = 1·0803 or 8·03%
20X5: $1,372,000/$12,000,000 = 1·114 or 11·4%
(W9) Capacity of rides in hours is 360 days × 50 rides × 10 hours per day = 180,000.
20X4 lost capacity is 9,000/180,000 = 0·05 or 5%.
20X5 lost capacity is 32,000/180,000 = 0·177 or 17·8%.
Marking guide Marks

(a) Sales growth 3
Maintenance 3
Directors’ pay 2
Wages 2
Net profit 2
Return on assets 2
14
(b) Reliability of rides 2
Average queuing time 2
Risks 2
6
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ACCA F5 Question Bank Formulae Sheet 379
Formulae Sheet
Learning curve
Y = axb
Where:
Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
LR = the learning rate as a decimal
Demand curve
P = a – bQ
change in price
b =change in quantity
a = price when Q = 0
MR = a – 2bQ
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380 F o r m u l a e S h e e t ACCA F5 Question Bank
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Course Notes 2015

Any unauthorised reproduction or distribution in any form is strictly

© First Intuition Publishing Ltd, 2015

1: Nature, source and purpose of management information 11

1 Accounting for management 11

1 Accounting for material, labour and overheads

1 Nature and purpose of budgeting 71

4: Standard costing 113

1 Standard costing systems 113

5: Performance measurement 125

1 Performance measurement overview 125

Solutions to lecture examples 141

Formulae sheets 165

Fundamentals Level Knowledge F1 AB The Accountant in Business

r i g 2 0 1 P7 AAA Advanced Audit & Assurance

Set a target date for the exam

Make the most out of your study sessions

The real exam

Time (excluding Questions

Nature, source and purpose

Financial Accounting Management and Cost Accounting

(c) Outline the managerial processes of planning, decision-making and control.

(f) Identify and explain the attributes of good information.

I n t until the sample is complete.

Types of cost behaviour

Examples of fixed costs are rent and head office costs.

ILLUSTRATION: CODING TRANSACTIONS

Find the lower fixed cost, using low activity level.

ILLUSTRATION: STEPPED FIXED COST WITH CONSTANT VARIABLE COST/UNIT

ILLUSTRATION: CONSTANT FIXED AND CHANGING VARIABLE COSTS

(i) Explain the structure of linear functions and equations.

(k) Distinguish between cost, profit, investment and revenue centre.

Simple bar chart

Red Blue Pink Green

Multiple bar chart

Red Blue Pink Green

Percentage component bar chart

The line graph would look something like this

Annual sales 2008-2011

A pie chart representing this might look as shown below;

Favourite colours - men

Cost accounting techniques

Purchase Order Cathedral Supplies,

C uit A goods received note (GRN) is then produced.

I n t A typical GRN would be as follows:

rst GOODS RECEIVED NOTE

OUR ORDER NO: D12/0721

10 39550 Polypipe 100m

Authorised signature: J. Henry

When an internal department requires materials, a material requisition note will be

Materials requisition note

Signature of requisitioning Manager/Foreman: Charles Adams Date 24/09/12

FORMULA GIVEN IN EXAM

t I n And the total annual cost (TAC) is:

LECTURE EXAMPLE 2.1: EOQ AND TAC

LECTURE EXAMPLE 2.2: EOQ AND DISCOUNTS

t I n The EBQ can be calculated by using the following formula:

Where: Co = Cost of setting up a batch ready to be produced

ILLUSTRATION: GRADUAL REPLENISHMENT

10,000 10,000 6,000

ILLUSTRATION: REORDER LEVELS

Comparing the techniques

Advantages and disadvantages of each method