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Pillar P
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P1 Performance Operations
P1 Performance Operations
SECTION A 20 MARKS [Note: The indicative time for answering this section is 36 minutes] ANSWER ALL EIGHT SUB-QUESTIONS IN THIS SECTION
Question One
1.1 WTD Ltd produces a single product. The management currently uses marginal costing, but is considering using absorption costing in the future. The budgeted fixed production overheads for the period are 500,000. The budgeted output for the period is 2,000 units. There were 800 units of opening inventory at the beginning of the period and 500 units of closing inventory at the end of the period. If absorption costing principles were applied, the profit for the period compared to the marginal costing profit would be A B C D 75,000 higher. 75,000 lower. 125,000 higher. 125,000 lower. (2 marks)
The following data is given for sub-questions 1.2 and 1.3 on the next page
The following data relate to a manufacturing company. At the beginning of August there was no inventory. During August 2,000 units of product X were produced, but only 1,750 units were sold. The financial data for product X for August were as follow: 40,000 12,600 9,400 22,500 6,000 19,300 109,800
Materials Labour Variable production overheads Fixed production overheads Variable selling costs Fixed selling costs Total costs for X for August
Performance Operations
1.2 A B C D
The value of inventory of X at 31 August using a marginal costing approach is 6,575 7,750 8,500 10,562 (2 marks)
1.3 A B C D
The value of inventory of X at 31 August using a throughput accounting approach is 5,000 6,175 6,575 13,725 (2 marks)
The following data is given for sub-questions 14 and 1.5 below and on the next page
The following data relate to Product Z and its raw material content for September. Budget Output Standard materials content Actual Output Materials purchased and used 11,000 units of Z 3 kg per unit at $400 per kg
It has now been agreed that the standard price for the raw material purchased in September should have been $5 per kg and that the variances should be reported as planning and operational.
1.4 A B C D
The materials planning price variance for September was $6,000 Adverse $30,000 Adverse $32,000 Adverse $33,000 Adverse (2 marks)
1.5 A B C D
The materials operational usage variance for September was $8,000 Adverse $9,600 Adverse $9,600 Favourable $10,000 Adverse (2 marks)
1.6
A manager is evaluating a three year project which has the following relevant pre-tax operating cashflows: Year Sales Costs 1 $000 4,200 2,850 2 $000 4,900 3,100 3 $000 5,300 4,150
The project requires an investment of $2 million at the start of year 1 and has no residual value. The company pays corporation tax on its net relevant operating cashflows at the rate of 20%. Corporation tax is payable in the same year as the net relevant pre-tax operating cashflows arise. There is no tax depreciation available on the investment. The manager has discounted the net relevant post-tax operating cashflows using the companys post-tax cost of capital of 7% and this results in a post-tax net present value of the project of $1018 million. The internal rate of return (IRR) of the project is 296% Calculate the sensitivity of the project to independent changes in (i) (ii) the selling price; the cost of capital. (4 marks)
1.7
A bond with a coupon rate of 7% is redeemable in eight years time for $100. Its current purchase price is $82.
1.8
Calculate the economic order quantity (EOQ) for the following item of inventory: Quantity required per year 32,000 items; Order costs are $15 per order; Inventory holding costs are estimated at 3% of inventory value per year; Each unit currently costs $40. (2 marks)
End of Section A
Performance Operations 4 Specimen Exam Paper
SECTION B 30 MARKS [Note: The indicative time for answering this section is 54 minutes] ANSWER ALL SIX SUB-QUESTIONS
Question Two
The following data is given for sub-questions (a) and (b) below
QBQ produces one type of product. Details of the budgeted sales and production are given below: Selling Price and Costs per unit Selling price Material FX: 15kg @ 6 per kg Conversion costs (variable) Fixed production overheads 40 9 8 15
The fixed production overhead absorption rate is based on annual production overheads of 720,000 and budgeted annual output of 48,000 units. The fixed overheads will be incurred evenly throughout the year. The company also incurs fixed costs for administration of 200,000 per year. Budgeted Sales Quarter 1 2 3 4 Units 10,000 12,000 14,000 10,000
Inventory It has been decided that inventory levels are to be reduced. Details are as follows: Finished goods: 5,500 units are currently held but it has been decided that the closing inventories for quarters 1, 2 and 3 will be 45%, 40% and 35% of the following quarters sales respectively. 4,500 kg are currently held but it has been decided that the closing inventories for quarters 1 and 2 will be 25% and 20% of the following quarters production requirements respectively.
Raw materials:
(a)
Prepare a materials purchase budget for Quarter 1 and then for Quarter 2. (5 marks)
(b)
In Quarter 3 the opening and closing inventories of finished goods will be 5,600 units and 4,200 units respectively. QBQ adjusts for any under or over absorption of overheads at the end of each quarter.
Assuming that all costs and revenues were as budgeted, prepare for Quarter 3: (i) (ii) (iii) a marginal costing profit statement; an absorption costing profit statement; explain the difference, if any, in the profits you have calculated. (5 marks)
Performance Operations
(c)
UV Limited is a catering company that provides meals for large events. It has a range of standard meals at fixed prices. It also provides meals to meet the exact requirements of a customer and prices for this service are negotiated individually with each customer.
Explain how a McDonaldisation approach to service delivery would impact on budget preparation and control within UV Limited. (5 marks)
(d)
A management consulting company had budgeted the staff requirements for a particular job as follows: 40 hours of senior consultant at 100 per hour 4,000 60 hours of junior consultant at 60 per hour 3,600 Budgeted staff cost for job 7,600 The actual hours recorded were: 50 hours of senior consultant at 100 per hour 55 hours of junior consultant at 60 per hour Actual staff cost for job 5,000 3,300 8,300
The junior consultant reported that for 10 hours of the 55 hours recorded there was no work that she could do. Calculate the following variances: Idle time variance; Labour mix variance; Labour efficiency variance. (5 marks)
(e)
ST plc is a medium-sized engineering company using advanced technology. It has just implemented an integrated enterprise resource planning (ERP) system in place of an old MRP (manufacturing resource planning) system.
Explain the changes that are likely to be seen after the implementation of the ERP system in (i) (ii) the budget-setting process; and the budgetary control process. (5 marks)
TURN OVER
Performance Operations
(f)
J Limited has recently been taken over by a much larger company. For many years, the budgets in J have been set by adding an inflation adjustment to the previous years budget. The new owners of J are insisting on a zero-base approach when the next budget is set, as they believe many of the indirect costs in J are much higher than in other companies under their control. Explain the main features of zero-based budgeting. (2 marks)
(i)
(ii)
Describe the problems that might arise when implementing this approach in J Limited. (3 marks) (Total for sub-question (f) = 5 marks)
End of Section B
SECTION C 50 MARKS [Note: The indicative time for answering this section is 90 minutes] ANSWER BOTH QUESTIONS IN THIS SECTION. EACH QUESTION IS WORTH 25 MARKS.
Question Three
JK plc prepares its accounts to 31 December each year. It is considering investing in a new computer controlled production facility on 1 January 2007 at a cost of 50 million. This will enable JK plc to produce a new product which it expects to be able to sell for four years. At the end of this time it has been agreed to sell the new production facility for 1 million cash. Sales of the product during the year ended 31 December 2007 and the next three years are expected to be as follows: Year ended 31 December Sales units (000) 2007 100 2008 105 2009 110 2010 108
Selling price, unit variable cost and fixed overhead costs (excluding depreciation) are expected to be as follows during the year ended 31 December 2007: 1,200 750 100 4,000,000 2,000,000 1,000,000
Selling price per unit Variable production cost per unit Variable selling and distribution cost per unit Fixed production cost for the year Fixed selling and distribution cost for the year Fixed administration cost for the year
The following rates of annual inflation are expected for each of the years 20082010: % 5 8 6 5
Selling prices Production costs Selling and distribution costs Administration costs
The company pays taxation on its profits at the rate of 30%, with half of this being payable in the year in which the profit is earned and the remainder being payable in the following year. Investments of this type qualify for tax depreciation at the rate of 25% per annum on a reducing balance basis. The Board of Directors of JK plc has agreed to use a 12% post-tax discount rate to evaluate this investment.
TURN OVER
Performance Operations
TURN OVER
Performance Operations
Question Four
CK is an entity that sells computer parts. The entitys sales and purchases accrue evenly throughout the year and inventory is managed in such a way as to give a constant inventory level throughout the year. CK had the following figures for the year ended 31 March 2008: Revenue from credit sales during the year Purchases on credit during the year Trade receivables balance at 31 March 2008 Trade payables balance at 31 March 2008 Inventory balance at 31 March 2008 Cash balance at 31 March 2008 $000 6,192 4,128 1,083 344 1,020 622
The directors want to improve working capital management and have targeted the following areas: Trade receivables reduced to 45 days. Suppliers would be willing to wait a total of 40 days for payment. Inventory reduced by 40% (from 31 March 2008 $ value levels) without having an adverse impact on sales. The budgets for the year to 31 March 2009 have been commenced, but are incomplete. Budgeted revenue from credit sales is based on the year to 31 March 2008 figure, plus a price increase of 10% from 1 April 2008 and a reduction of an estimated 3% in volume caused by the price increase. Cost of sales is budgeted at the same percentage of credit sales revenue as the year to 31 March 2008. $000 Salaries and wages are budgeted at 620 for the year Other operating expenses budget is 432 for the year Budgeted capital expenditure is 2,500 It is recommended that $1,500,000 of the proposed purchase of non-current tangible assets could be leased instead of purchased. The terms of the lease would be five payments of $400,000 each, payable in advance of 1 April each year, commencing on 1 April 2008. The lease would be classified as a finance lease by IAS 17 Leases. The implicit interest rate is 16875%.
Required: (a)
Calculate the following for CK at 31 March 2009: Trade receivables days outstanding; Trade payables days outstanding; Inventory days outstanding. (3 marks)
(b)
Prepare a cash budget for the year to 31 March 2009 based on the budgeted data and the improvements to the working capital (but not the lease). (10 marks) Explain the effect on CKs cash budget if it decides to lease $1,500,000 of the non-current assets, instead of purchasing them. (Note: You are not required to recalculate CKs cash budget) (2 marks) 10 Specimen Exam Paper
(c)
Performance Operations
CK is planning to send some of its employees to a conference. The estimated budgeted cost of $10,860 included estimated hotel costs of $5,000 and estimated fuel costs of $1,500. After the initial budget had been prepared, it was realised that there is some uncertainty concerning the hotel cost and the fuel cost. Further investigation has shown that these costs may be higher or lower than the original estimates. Estimated costs with their associated probabilities are as follows: Estimated hotel cost ($) 4,000 5,000 6,000 Probability % 20 50 30 Estimated fuel cost ($) 1,200 1,500 2,000 Probability % 10 50 40
The following two-way data table shows the effect on the total relevant cost of these alternative values. All figures are in $: Hotel $5,000 300 0 +500
Fuel
(d) (e)
Explain the meaning of the above two-way data table. (3 marks) Explain, giving examples, how the two-way data table may be used in conjunction with the probabilities to improve the information available to the directors of CK. (7 marks) (Total for Question Four = 25 marks)
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Performance Operations
4% 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456
Interest rates (r) 5% 6% 0.952 0.943 0.907 0.890 0.864 0.840 0.823 0.792 0.784 0.747 0.746 0705 0.711 0.665 0.677 0.627 0.645 0.592 0.614 0.558 0.585 0.527 0.557 0.497 0.530 0.469 0.505 0.442 0.481 0.417 0.458 0.394 0.436 0.371 0.416 0.350 0.396 0.331 0.377 0.312 Interest rates (r) 15% 16% 0.870 0.862 0.756 0.743 0.658 0.641 0.572 0.552 0.497 0.476 0.432 0.410 0.376 0.354 0.327 0.305 0.284 0.263 0.247 0.227 0.215 0.195 0.187 0.168 0.163 0.145 0.141 0.125 0.123 0.108 0.107 0.093 0.093 0.080 0.081 0.069 0.070 0.060 0.061 0.051
7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 0.362 0.339 0.317 0.296 0.277 0.258
8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215
9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231 0.212 0.194 0.178
10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149
11% 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 0.317 0.286 0.258 0.232 0.209 0.188 0.170 0.153 0.138 0.124
12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104
13% 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.111 0.098 0.087
14% 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.237 0.208 0.182 0.160 0.140 0.123 0.108 0.095 0.083 0.073
17% 0.855 0.731 0.624 0.534 0.456 0.390 0.333 0.285 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.043
18% 0.847 0.718 0.609 0.516 0.437 0.370 0.314 0.266 0.225 0.191 0.162 0.137 0.116 0.099 0.084 0.071 0.060 0.051 0.043 0.037
19% 0.840 0.706 0.593 0.499 0.419 0.352 0.296 0.249 0.209 0.176 0.148 0.124 0.104 0.088 0.079 0.062 0.052 0.044 0.037 0.031
20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.135 0.112 0.093 0.078 0.065 0.054 0.045 0.038 0.031 0.026
Performance Operations
12
Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n years
1 (1+ r ) n r
1% 0.990 1.970 2.941 3.902 4.853 5.795 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 13.865 14.718 15.562 16.398 17.226 18.046
2% 0.980 1.942 2.884 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 12.849 13.578 14.292 14.992 15.679 16.351
3% 0.971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938 12.561 13.166 13.754 14.324 14.878
4% 0.962 1.886 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590
Interest rates (r) 5% 6% 0.952 0.943 1.859 1.833 2.723 2.673 3.546 3.465 4.329 4.212 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12.085 12.462 4.917 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.477 10.828 11.158 11.470
7% 0.935 1.808 2.624 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108 9.447 9.763 10.059 10.336 10.594
8% 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.372 9.604 9.818
9% 0.917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 8.061 8.313 8.544 8.756 8.950 9.129
10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7.367 7.606 7.824 8.022 8.201 8.365 8.514
11% 0.901 1.713 2.444 3.102 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.379 7.549 7.702 7.839 7.963
12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.120 7.250 7.366 7.469
13% 0.885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.729 6.840 6.938 7.025
14% 0.877 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.373 6.467 6.550 6.623
Interest rates (r) 15% 16% 0.870 0.862 1.626 1.605 2.283 2.246 2.855 2.798 3.352 3.274 3.784 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.724 5.847 5.954 6.047 6.128 6.198 6.259 3.685 4.039 4.344 4.607 4.833 5.029 5.197 5.342 5.468 5.575 5.668 5.749 5.818 5.877 5.929
17% 0.855 1.585 2.210 2.743 3.199 3.589 3.922 4.207 4.451 4.659 4.836 4.988 5.118 5.229 5.324 5.405 5.475 5.534 5.584 5.628
18% 0.847 1.566 2.174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 7.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353
19% 0.840 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 4.486 4.611 4.715 4.802 4.876 4.938 4.990 5.033 5.070 5.101
20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 4.327 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.843 4.870
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Performance Operations
FORMULAE
PROBABILITY A B = A or B. A B = A and B (overlap). P(B A) = probability of B, given A. Rules of Addition If A and B are mutually exclusive: P(A B) = P(A) + P(B) If A and B are not mutually exclusive: P(A B) = P(A) + P(B) P(A B) Rules of Multiplication If A and B are independent: P(A B) = P(A) * P(B) If A and B are not independent: P(A B) = P(A) * P(B | A) E(X) = (probability * payoff) Quadratic Equations If aX2 + bX + c = 0 is the general quadratic equation, the two solutions (roots) are given by:
X = b b 2 4ac 2a
x=
fx f
(frequency distribution)
SD =
fx 2 x 2 (frequency distribution) f
Price:
x 100
Q w 1 Q o x 100 w
Series = Trend + Seasonal + Random Multiplicative Model Series = Trend * Seasonal * Random
Performance Operations
14
LINEAR REGRESSION AND CORRELATION The linear regression equation of Y on X is given by:
Y = a + bX or Y - Y = b(X X)
where
Covariance ( XY) n XY ( X)( Y ) = Variance ( X) n X 2 ( X) 2
b=
and or solve
a = Y bX
Y = na + b X XY = a X + bX2
Coefficient of correlation
r= Covariance ( XY) Var ( X).Var ( Y ) 6d2
n(n 2 1)
n XY ( X)( Y ) {n X 2 ( X) 2 }{n Y 2 ( Y ) 2 }
R(rank) = 1 -
FINANCIAL MATHEMATICS Compound Interest (Values and Sums) Future Value S, of a sum of X, invested for n periods, compounded at r% interest
S = X[1 + r]n
Annuity Present value of an annuity of 1 per annum receivable or payable for n years, commencing in one year, discounted at r% per annum: PV =
1 1 1 r [1 + r ] n
Perpetuity Present value of 1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per annum: 1 PV = r
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Performance Operations
VERBS USED
List State Define
DEFINITION
Make a list of Express, fully or clearly, the details/facts of Give the exact meaning of
Communicate the key features Highlight the differences between Make clear or intelligible/state the meaning or purpose of Recognise, establish or select after consideration Use an example to describe or explain something
Put to practical use Ascertain or reckon mathematically Prove with certainty or to exhibit by practical means Make or get ready for use Make or prove consistent/compatible Find an answer to Arrange in a table
Level 4 - Analysis How are you expected to analyse the detail of what you have learned.
Analyse Categorise Compare and contrast Construct Discuss Interpret Prioritise Produce
Examine in detail the structure of Place into a defined class or division Show the similarities and/or differences between Build up or compile Examine in detail by argument Translate into intelligible or familiar terms Place in order of priority or sequence for action Create or bring into existence
Level 5 - Evaluation How are you expected to use your learning to evaluate, make decisions or recommendations.
Counsel, inform or notify Appraise or assess the value of Propose a course of action
Performance Operations
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