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December 2014–June 2015 Edition
STUDY QUESTION BANK
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ACCA
Paper F5 | PERFORMANCE MANAGEMENT
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®
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PL
ACCA
PAPER F5
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PERFORMANCE MANAGEMENT
STUDY QUESTION BANK
For Examinations to June 2015
®
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(i)
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Acknowledgement
Past ACCA examination questions are the copyright of the Association of Chartered Certified
Accountants and have been reproduced by kind permission.
(ii)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
CONTENTS
Question
Page
Answer
Marks
1001
1003
15
20
Date worked
FORMULAE
Formulae sheet
(v)
COST ACCOUNTING
Abbot Manufacturing
Sunshine Sales Co
ACTIVITY BASED COSTING
3
4
PLB Co
Egerton Manufacturing Co
5
6
7
3
3
1004
1004
12
20
PL
DEVELOPMENTS IN MANAGEMENT ACCOUNTING
1
2
E
1
2
Flopro
Telmat
Environmental management accounting
4
5
6
1007
1009
1010
25
10
8
6
7
8
1011
1011
1013
10
13
13
9
1014
14
BVX
Optimal production plan
10
10
1015
1016
10
10
Rothwell Co
Slade
Tabular approach (ACCA D03)
Albany (ACCA D01)
11
11
12
12
1017
1018
1018
1018
10
8
10
10
13
13
1020
1021
16
20
14
15
15
1022
1025
1027
25
20
20
RELEVANT COSTS ANALYSIS
8
9
10
Ennerdale Co
Z Co
Parser Co (ACCA D01)
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COST VOLUME PROFIT ANALYSIS
11
Apple, Bravo and Charlie
LIMITING FACTOR DECISIONS
12
13
PRICING
14
15
16
17
RISK AND UNCERTAINTY
18
19
Mr Ellis
Decision Trees
BUDGETING
20
21
22
ZBB
Hotel Excel
BRT Co
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(iii)
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Question
Page
Answer
Marks
16
17
1028
1028
5
20
18
19
1030
1033
10
10
Date worked
QUANTITATIVE ANALYSIS IN BUDGETING
23
24
Tomkins Co
Velo Racers
25
26
Portland Co
Dallas Co
ADVANCED VARIANCE ANALYSIS
27
28
Wiffy Co
Pan Ocean Chemicals (ACCA PP)
19
20
1035
1036
18
25
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BEHAVIOURAL ASPECTS OF STANDARD COSTING
29
30
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BASIC VARIANCE ANALYSIS
Denzel Co
EGJ Products Co
21
22
1039
1041
18
15
23
24
1043
1044
16
25
25
26
26
1048
1049
1051
18
20
15
27
27
1052
1053
14
20
29
29
1057
1059
20
18
30
1060
12
30
31
31
32
32
1062
1063
1065
1067
1070
7
20
25
25
15
PERFORMANCE MEASUREMENT
31
32
Darth Co
Ties Only Co (ACCA D07)
FURTHER ASPECTS OF PERFORMANCE MEASUREMENT
Cadco
Value for money
Bank operations
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33
34
35
DIVISIONAL PERFORMANCE EVALUATION
36
37
Two-minds Co
Bablings (89) Co
TRANSFER PRICING
38
39
Musent Co
Able and Baker
PERFORMANCE MANAGEMENT INFORMATION SYSTEMS
40
Hotelco
FURTHER PRACTICE QUESTIONS
41
42
43
44
45
(iv)
Scovet (ACCA J01)
Budget behaviour (ACCA)
Budgeting & costing (ACCA J05)
Mermus Co (ACCA D04)
Balanced Scorecard (ACCA)
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Formulae Sheet
Learning curve
Y = axb
Demand curve
P = a – bQ
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change in price
change in quantity
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Where Y = cumulative average time per unit to produce x units
a = time taken for the first unit of output
x = total number of units produced
b = the index of learning (log LR/log 2)
LR = the learning rate as a decimal
b=
a = price when Q = 0
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MR = a – 2bQ
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
(v)
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PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
(vi)
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Question 1 ABBOT MANUFACTURING
Abbot Manufacturing has two departments, each making a single standardised product.
The data for unit cost and selling price of these products are as follows:
Factory cost
Profit mark-up
PL
Selling price
Department
Beta
$
6.00
4.00
4.00
16.00
———
30.00
25% 7.50
———
37.50
———
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Direct material cost
Direct labour cost
Variable manufacturing overheads
Fixed manufacturing overheads
Department
Alpha
$
4
2
2
12
——
20
50% 10
——
30
——
The factory cost figures are used in the departmental accounts for the valuation of finished goods
inventory.
The departmental income statements have been prepared for the year to 30 June. These are given below
separately for the two halves of the year.
Departmental income statements for the year to 30 June 20X9
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Department
Sales revenue
Manufacturing costs
Direct material
Direct labour
Variable overheads
Fixed overheads
Factory cost of production
Add: Opening inventory of finished goods
Less: Closing inventory of finished goods
Factory cost of goods sold
Administrative and selling costs
Cost of sales
Net profit
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1 Jul – 31 Dec 20X8
Alpha
Beta
1 Jan – 30 Jun 20X9
Alpha
Beta
$000
300
——
$000
750
——
$000
375
——
$000
675
——
52
26
26
132
——
236
60
——
296
(120)
——
176
30
——
206
——
114
76
76
304
——
570
210
——
780
(180)
——
600
100
——
700
——
30
15
15
132
——
192
120
——
312
(20)
——
292
30
——
322
——
132
88
88
304
——
612
180
——
792
(300)
——
492
100
——
592
——
94
——
50
——
53
——
83
——
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PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
The total sales revenue was the same in each six monthly period but in the second half of the year the
company increased the sales of Department Alpha (which has the higher profit mark-up) and reduced
the sales of Department Beta (which has the lower profit mark-up). An increase in company profits for
the second six months was anticipated but the profit achieved was $8,000 lower for the second half of
the year than for the first half. The profit for Department Alpha fell by $41,000, while the profit for
Department Beta rose by $33,000. There has been no change in prices of inputs or outputs.
Required:
Explain the situation described in the last paragraph. Illustrate your answer with
appropriate supporting calculations.
(8 marks)
(b)
Redraft the departmental income statements using marginal cost to value unsold
inventory.
(7 marks)
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(a)
(15 marks)
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Question 2 SUNSHINE SALES CO
Sunshine Sales Co is drafting a budget on the basis of the following data:
Direct material
Direct labour
Variable production expenses
Fixed production costs
Normal output 9,000 units per month
Sales price
$10 per unit
$5 per unit
$8 per unit
$27,000 per month
90% capacity
$30 per unit
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In order to build up inventory in anticipation of an increase in demand that is expected later in the year,
production is to exceed sales in the first three months of the year as follows:
Production
Sales
Month 1
6,500
5,000
Month 2
9,000
8,500
Month 3
10,000
9,500
Required:
(a)
Prepare two profit statements, both in comparative columnar form, covering each of
the three months
(i)
(ii)
(b)
2
On a marginal costing basis; and
On a full absorption costing basis.
Reconcile the difference in profits for each month.
(7 marks)
(8 marks)
(5 marks)
(20 marks)
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Question 3 PLB CO
PLB Co is a company producing bulk meat substitutes for the vegetarian food industry. It produces
three meat types: pork (P), lamb (L) and beef (B).
Direct costs per tonne are as follows:
Materials
Labour time
Budget production (tonnes)
P
L
B
$500
$700
$850
12 hours 14 hours 8 hours
1,000
750
900
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Direct labour costs $10 per hour
The company has just completed an activity based costing exercise. For the year just ended, the
following activities, along with their associated costs were identified:
Costs $000
16,000
1,125
990
106
PL
Activity
Machine set up cost
Ordering materials
Storage
Packing costs
Total drivers associated with each of these activities have been identified, and are shown in the table
below, along with the number of units of each driver used by each of the three products:
Production runs
Inventory orders
Tonne days of storage (‘000)
P
8
20
45
L
15
25
18
B
9
30
36
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Packing costs are incurred on a per tonne basis, and are the same per tonne for all three products.
Required:
Calculate the cost of the finished products using activity based costing.
(12 marks)
Question 4 EGERTON MANUFACTURING CO
Egerton Manufacturing Co produces a range of products at seven separate sites. Each site produces a
maximum of four products. The directors have decided to introduce Activity Based Costing (ABC) and
have asked each site manager to obtain and analyse the relevant data for their site. Product costs are
currently calculated using absorption costing, with overheads being absorbed on a machine hour basis.
As part of the process of introducing ABC, the directors wish to assess the profitability of individual
products, with the possibility that the product range may be reduced. You are the Manager of the
Brumley site and you have obtained the following data:
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3
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
A
B
C
Selling price per unit
Direct material per unit
Direct labour per unit
Overheads per unit
Total cost per unit
$
300
55
41
117·20
213·20
$
530
67
54
293
414
$
435
98
57
117·20
272·20
Budgeted production volume
Machine hours per unit
Production runs in period
Number of sales orders
Number of deliveries of material
600 units
0·6
32
19
8
400 units
1·5
40
5
2
200 units
0·6
25
15
16
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Product
The budgeted overheads of the site for the period are:
$78,560
$82,900
$49,500
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Machine running costs
Set up costs
Material handling costs
Machine hours are limited to 1,140 hours per period.
Required:
(a)
Calculate the cost of each product using ABC.
(b)
Draft a memo to the Managing Director which:
(12 marks)
Using the ABC information indicate which product(s) should no longer be
manufactured and justifies your recommendation;
(4 marks)
(ii)
Discusses the other factors that should be considered before a final decision
is made.
(4 marks)
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(i)
(20 marks)
Question 5 FLOPRO
(a)
4
Flopro makes and sells two products A and B, each of which passes through the same
automated production operations. The following estimated information is available for
period 1:
(i)
Product unit data:
Selling price per unit ($)
Direct material cost ($)
Variable production overhead cost ($)
Overall hours per product unit (hours)
A
60
2
28
0·25
B
70
40
4
0·15
(ii)
Budgeted production/sales of products A and B are 120,000 units and 45,000
units respectively. The selling prices per unit for A and B are $60 and $70
respectively.
(iii)
Maximum demand for each product is 20% above the budgeted sales levels.
(iv)
Total fixed production overhead cost is $1,470,000. This is absorbed by
products A and B at an average rate per hour based on the estimated production
levels.
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
One of the production operations has a maximum capacity of 3,075 hours that has been
identified as a bottleneck that limits the overall production/sales of products A and B. The
bottleneck hours required per product unit for products A and B are 0·02 and 0·015
respectively.
Required:
Calculate the mix (units) of products A and B that will maximise net profit and the value
($) of the maximum net profit.
(8 marks)
The bottleneck situation detailed in (a) still applies. Flopro has decided to determine the
profit maximising mix of products A and B based on the throughput accounting principle
of maximising the throughput return per production hour of the bottleneck resource. This
may be measured as: Throughput return per production hour = (selling price – material
cost)/bottleneck hours per unit.
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(b)
Required:
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All other information detailed in (a) still applies, except that the variable overhead cost as per
(a) is now considered to be fixed for the short/intermediate term, based on the value ($) which
applied to budgeted production/sales.
Calculate the mix (units) of products A and B that will maximise net profit and
the value of that net profit.
(8 marks)
(ii)
Calculate the throughput accounting ratio for product B which is calculated as:
throughput return per hour of bottleneck resource for product B/overall total
overhead cost per hour of bottleneck resource.
(3 marks)
(iii)
Comment on the interpretation of throughput accounting ratios and their use
as a control device. You should refer to the ratio for product B in your answer.
(6 marks)
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(i)
(25 marks)
Question 6 TELMAT
Telmat is a company that manufactures mobile phones. This market is extremely volatile and
competitive and achieving adequate product profitability is extremely important. Telmat is a mature
company that has been producing electronic equipment for many years and has all the costing systems
in place that one would expect in such a company. These include a comprehensive overhead absorption
system, annual budgets and monthly variance reports and the balanced scorecard for performance
measurement.
The company is considering introducing:
(a)
(b)
Target costing; and
Life cycle costing systems.
Required:
Discuss the advantages (or otherwise) that this specific company is likely to gain from these two
systems.
(10 marks)
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5
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Question 7 ENVIRONMENANTAL MANAGEMENT ACCOUNTING
“There are three reasons why implementing an environmental management accounting system makes
sense- cost savings, improved environmental reporting and minimising environmental risk.”
Required
Explain what “environmental management accounting” means.
(b)
Explain how “good” environmental behaviour may help an organisation to achieve
each of the following:
(i)
(ii)
(iii)
Cost savings;
Improved environmental reporting;
Minimising environmental risk.
(2 marks)
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(a)
(6 marks)
PL
(8 marks)
Question 8 ENNERDALE CO
Ennerdale Co has been asked to quote a price for a one-off contract. The company’s management
accountant has asked for your advice on the relevant costs for the contract. The following information
is available:
Materials
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The contract requires 3,000 kg of material K, which is a material used regularly by the company in
other production. The company has 2,000 kg of material K currently in stock that had been purchased
last month for a total cost of $19,600. Since then the price per kilogram for material K has increased by
5%.
The contract also requires 200 kg of material L. There are 250 kg of material L in stock, which are not
required for normal production. This material originally cost a total of $3,125. If not used on this
contract, the stock of material L would be sold for $11 per kg.
Labour
The contract requires 800 hours of skilled labour. Skilled labour is paid $9·50 per hour. There is a
shortage of skilled labour and all the available skilled labour is fully employed in the company in the
manufacture of product P. The following information relates to product P:
Selling price
Less
Skilled labour
Other variable costs
6
$ per unit
38
22
–––
$ per unit
100
(60)
–––
40
–––
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Required:
(a)
Prepare calculations showing the total relevant costs for making a decision about the
contract in respect of the following cost elements:
(i)
(ii)
(b)
Materials K and L; and
Skilled labour.
(7 marks)
Explain how you would decide which overhead costs would be relevant in the
financial appraisal of the contract.
(3 marks)
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(10 marks)
Question 9 Z CO
Z is one of a number of companies that produce three products for an external market. The three
products, R, S and T may be bought or sold in this market.
Inputs:
Material A
Material B
Material C
Direct labour
Variable overhead
Fixed cost
Kg
$
Kg
1,000
2,000
1,500
3,500
2,000
3,000
6,000
2,000
1,000
4,500
17,500
Normal loss
Outputs:
Product R
Product S
Product T
$
500
0
800
2,000
1,200
3,500
8,750
5,250
4,500
17,500
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Totals
PL
The common process account of Z for March 2011 is shown below:
Z can sell products R, S or T after this common process or they can be individually further processed
and sold as RZ, SZ and TZ respectively. The market prices for the products at the intermediate stage
and after further processing are:
Market prices per kg:
R
S
T
RZ
SZ
TZ
$
3.00
5.00
3.50
6.00
5.75
6.75
The specific costs of the three individual further processes are:
Process R to RZ – variable cost of $1.40 per kg, no fixed costs
Process S to SZ – variable cost of $0.90 per kg, no fixed costs
Process T to TZ – variable cost of $1.00 per kg, fixed cost of $600 per month
Required:
(a)
Produce calculations to determine whether any of the intermediate products should
be further processed before being sold. Clearly state your recommendations together
with any relevant assumptions that you have made.
(6 marks)
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7
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
(b)
Produce calculations to assess the viability of the common process:
(i)
(ii)
Assuming that there is an external market for products R, S and T; and
Assuming that there is not an external market for products R, S and T.
State clearly your recommendations.
(7 marks)
(13 marks)
Question 10 PARSER CO
Costs for special order:
Notes
1
2
3
4
5
6
$
28,500
11,500
4,000
2,300
18,000
34,000
______
PL
Direct wages
Supervisor costs
General overheads
Machine depreciation
Machine overheads
Materials
E
The managing director of Parser Co, a small business, is considering undertaking a one-off contract and
has asked her inexperienced accountant to advise on what costs are likely to be incurred so that she can
price at a profit. The following schedule has been prepared:
98,300
______
Notes:
Direct wages comprise the wages of two employees, particularly skilled in the labour
process for this job, who could be transferred from another department to undertake work
on the special order. They are fully occupied in their usual department and sub-contracting
staff would have to be bought-in to undertake the work left behind. Subcontracting costs
would be $32,000 for the period of the work. Different subcontractors who are skilled in
the special order techniques are available to work on the special order and their costs
would amount to $31,300.
(2)
A supervisor would have to work on the special order. The cost of $11,500 is comprised
of $8,000 normal payments plus $3,500 additional bonus for working on the special order.
Normal payments refer to the fixed salary of the supervisor. In addition, the supervisor
would lose incentive payments in his normal work amounting to $2,500. It is not
anticipated that any replacement costs relating to the supervisor’s work on other jobs
would arise.
(3)
General overheads comprise an apportionment of $3,000 plus an estimate of $1,000
incremental overheads.
(4)
Machine depreciation represents the normal period cost based on the duration of the
contract. It is anticipated that $500 will be incurred in additional machine maintenance
costs.
(5)
Machine overheads (for running costs such as electricity) are charged at $3 per hour. It is
estimated that 6000 hours will be needed for the special order. The machine has 4000
hours available capacity. The further 2000 hours required will mean an existing job is
taken off the machine resulting in a lost contribution of $2 per hour.
SA
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(1)
8
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
(6)
Materials represent the purchase costs of 7,500 kg bought some time ago. The materials
are no longer used and are unlikely to be wanted in the future except on the special order.
The complete Inventory of materials (amounting to 10,000 kg), or part thereof, could be
sold for $4·20 per kg. The replacement cost of material used would be $33,375.
Because the business does not have adequate funds to finance the special order, a bank overdraft
amounting to $20,000 would be required for the project duration of three months. The overdraft would
be repaid at the end of the period. The company uses a cost of capital of 20% to appraise projects. The
bank’s overdraft rate is 18%.
E
The managing director has heard that, for special orders such as this, relevant costing should be used
that also incorporates opportunity costs. She has approached you to create a revised costing schedule
based on relevant costing principles.
Required:
Briefly explain what is meant by opportunity cost.
(2 marks)
(b)
Adjust the schedule prepared by the accountant to a relevant cost basis,
incorporating appropriate opportunity costs.
(11 marks)
PL
(a)
(13 marks)
Question 11 APPLE, BRAVO AND CHARLIE
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A company manufactures and sells three products which currently have the following annual trading
performance:
Product
A
B
C
$000
$000
$000
Sales
1,794
3,740
2,950
Production cost of sales
1,242
2,860
1,888
––––––
––––––
––––––
Gross profit
Non-production overheads
552
460
––––––
880
770
––––––
1,062
767
––––––
Net profit
92
––––––
110
––––––
295
––––––
Sales units (000)
1,150
––––––
2,200
––––––
2,360
––––––
For each product, units produced and sold were the same in the period.
Fixed production overheads are absorbed at a rate of $0.30 per unit for each product. Non-production
overheads include certain costs that vary with activity at, a rate of 10% of sales value. The remaining
non-production overheads are fixed costs.
Required:
(a)
Prepare a statement, in marginal costing format, showing the sales, costs, and profit
contribution of each product expressed both in $ per unit (to three decimal places) and
also as a % of sales (to one decimal place)
(8 marks)
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9
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
(b)
Calculate, based on the current mix of sales, the sales required of each product (to the
nearest $000) in order to generate a total contribution of $3.75m per annum.
(6 marks)
(14 marks)
Question 12 BVX
BVX manufactures three garden furniture products – chairs, benches and tables. The budgeted unit cost
and resource requirements of each of these items are detailed below:
Budgeted volumes per annum




Table
$
10.00
8.00
6.00
9.00
––––––
33.00
––––––
1,500
E
Bench
$
15.00
10.00
7.50
11.25
––––––
43.75
––––––
2,000
PL
Timber cost
Direct labour cost
Variable overhead cost
Fixed overhead cost
Chair
$
5.00
4.00
3.00
4.50
––––––
16.50
––––––
4,000
These volumes are believed to equal the market demand for these products.
Fixed overhead costs are attributed to the three products on the basis of direct labour hours.
The labour rate is $4.00 per hour.
The cost of the timber is $2.00 per square metre.
SA
M
The products are made from a specialist timber. A memo from the purchasing manager advises you
that because of a problem with the supplier, it is to be assumed that this specialist timber is limited in
supply to 20,000 square metres per annum.
The sales director has already accepted an order for 500 chairs, 100 benches and 150 tables which if not
supplied would incur a financial penalty of $2,000. These quantities are included in the market demand
estimates above.
The selling prices of the three products are:
Chair
Bench
Table
$20.00
$50.00
$40.00
Required:
(a)
Determine the optimum production plan and state the net profit that this should yield
per annum.
(6 marks)
(b)
Calculate and explain the maximum price which should be paid per square metre in
order to obtain extra supplies of the timber.
(4 marks)
(10 marks)
Question 13 OPTIMAL PRODUCTION PLAN
A company uses linear programming to establish an optimal production plan in order to maximise
profit. The company finds that for the next year materials and labour are likely to be in short supply.
Details of the company’s products are as follows:
10
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
A
$
6
30
5
–––
41
50
–––
9
–––
Materials (at $2 per kg)
Labour (at $6 per hour)
Variable overheads (at $1 per hour)
Variable cost
Selling price
Contribution
B
$
8
18
3
–––
29
52
–––
23
–––
E
There are only 30,000 kg of materials and 36,000 labour hours available. The company also has an
agreement to supply 1,000 units of product A which must be met.
Required:
Formulate the objective function and constraint equations for this problem.
(4 marks)
(b)
Plot the constraints on a suitable graph and determine the optimal production plan.
(6 marks)
PL
(a)
(10 marks)
Question 14 ROTHWELL CO
Rothwell Co makes various novelty items that are sold to wholesalers particularly in the toy trade. It
has just decided to produce a new line, namely small umbrellas to decorate cocktails, which will be sold
to various chains of cocktail bars and called a bar brolly.
SA
M
It has provided you with the following information concerning the total cost of annual production and
the prices at which that production could be sold:
Annual production
and sales
(boxes of 100)
2,500
5,000
7,500
10,000
12,500
15,000
17,500
Total cost
$000
100.3
186.3
287.8
405.0
537.8
686.3
850.3
Selling price
(per 100)
$
70.8
66.7
62.5
58.3
54.2
50.0
45.8
Required:
Determine the optimal selling price for bar brollies.
(10 marks)
Question 15 SLADE
Hill Co has recently developed a new product, the Slade. Its parent company, Powell, requires that
subsidiaries achieve of 16% a return on opening capital employed on all new investment.
Financial data regarding the development and production of the Slade is as follows:
The development of the product took three years and cost $120,000. It is anticipated that demand for
the product will be 4,000 units per annum and that it will last six years.
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11
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Investment in machinery will amount to $200,000 and this will be scrapped at the end of the product’s
life for $20,000.
Incremental cash fixed costs will be $40,000 per year and the unit variable cost of production is
expected to be $50.
Required:
Calculate a price which, based on the above data, will achieve the target ROCE of 16%.
(8 marks)
E
Question 16 TABULAR APPROACH
A company manufactures a single product, product Y. It has documented levels of demand at certain
selling prices for this product as follows:
Units
1,100
1,200
1,300
1,400
Required:
Selling price per
unit
Cost per unit
$
$
48
22
46
21
45
20
42
19
PL
Demand
SA
M
Using a tabular approach calculate the marginal revenues and marginal costs for product Y at
the different levels of demand, and so determine the selling price at which the company profits
are maximised.
(10 marks)
Question 17 ALBANY
Albany has recently spent some time on researching and developing a new product for which they are
trying to establish a suitable price. Previously they have used cost plus 20% to set the selling price.
The standard cost per unit has been estimated as follows:
$
Direct materials
Material 1
Material 2
Direct labour
Fixed overheads
10
7
13
7
–––
(4 kg at $2·50/kg)
(1 kg at $7/kg)
(2 hours at $6·50/hour)
(2 hours at $3·50/hour)
37
–––
Required:
(a)
12
Using the standard costs calculate two different cost plus prices using two different bases
and explain an advantage and disadvantage of each method.
(6 marks)
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
(b)
Give two other possible pricing strategies that could be adopted and describe the impact
of each one on the price of the product.
(4 marks)
(10 marks)
Question 18 MR ELLIS
Mr Ellis, the manager of the ice rink is trying to decide what price per person to charge for a five-week
ice skating course that would be held on Saturday mornings. He is considering three possible prices$20, $30 or $50.
E
Roddy Dean, a local ice skating dancer is competing in an International Competition, and this has
increased interest in skating. If Mr Dean wins the competition, Mr Ellis believes that demand for the
courses will be high. If Mr Dean reaches the finals, but does not win the competition, demand would be
medium and if Mr Dean does not reach the finals, demand would be low.
PL
A decision on what price to charge has to be taken before the results of the competition are known as
the sports complex wishes to start to advertise the course.
Mr Ellis has provided you with a table showing his estimates of the number of people who would attend
the course, based on the price charged and the level of demand:
Demand (number of persons)
High
Medium
Low
Price charged
35
35
35
30
30
25
20
20
10
10
SA
M
20
50
Required:
Determine which price Mr Ellis should charge for the course based on the following decision
making rules. Your answer should include a brief explanation of the meaning of each rule, and
what type of risk taker would use it.
(i)
(ii)
(iii)
Maximax;
Maximin;
Minimax regret.
(16 marks)
Question 19 DECISION TREES
An oil company has recently acquired rights in a certain area to conduct surveys and geological test
drillings that may lead to lifting oil where it is found in commercially exploitable quantities.
The area is already considered to have good potential for finding oil in commercial quantities. At the
outset the company has the choice to conduct further geological tests or to carry out a drilling
programme immediately. On the known conditions, the company estimates that there is a 70% chance
of further tests indicating that a significant amount of oil is present.
Whether the tests show the possibility of oil or not, or even if no tests are undertaken at all, the
company could still pursue its drilling programme or alternatively consider selling its rights to drill in
the area.
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13
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Thereafter, however, if it carries out the drilling programme, the likelihood of final success or failure in
the search for oil is considered dependent on the foregoing stages. Thus:
(i)
If the tests indicated that oil was present, the expectation of success in drilling is given as
80%.
(ii)
If the tests indicated that there was insufficient oil present, then the expectation of success
in drilling is given as 20%.
(iii)
If no tests have been carried out at all, the expectation of finding commercially viable
quantities of oil is given as 55%.
E
Costs and revenues have been estimated for all possible outcomes and the net present value of each is
given below:
Outcome
Net present value
$ million
(10)
(50)
PL
Geological testing
Drilling cost
Success in finding oil
Sale of exploitation rights:
Tests indicate oil is present
Tests indicate “no oil”
Without geological tests
Required:
150
65
15
40
Prepare a decision tree diagram to represent the above information.
(8 marks)
(b)
For the management of the company, calculate its best course of action.
(7 marks)
SA
M
(a)
(c)
Explain the value of decision trees in providing management with guidance for decisionmaking. Illustrate examples of any situations where you consider their use would be of
benefit.
(5 marks)
(20 marks)
Question 20 ZBB
(a)
Explain why zero-based budgeting (ZBB) might be a useful tool to employ to ensure
that budgetary requirements are kept up to date.
(4 marks)
(b)
Describe the steps necessary to implement a ZBB system for the following:
–
–
–
questioning why expenditure needs to be incurred;
deciding which activities should be provided with a budget; and
questions to be asked when budgeted activities are to be ranked to allocate
scarce resources.
(8 marks)
(c)
Critically assess the use of zero-based budgeting as a tool that might be used to
motivate employees.
(6 marks)
(d)
Explain the advantages of encouraging employee participation in budget setting.
(7 marks)
(25 marks)
14
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Question 21 HOTEL EXCEL
You are the general manager of the Hotel Excel. It is the hotel’s policy that rolling budgets are
prepared, using a six month time horizon. You are about to prepare the budget for July–December
2010, and have collated the following information:
the hotel has 90 bedrooms, each of which can accommodate one or two guests;
(ii)
during the months of July, August and December (high season), standard room rates will
be $110 per night;
(iii)
during the months of September, October and November (low season), standard room rates
will be $95 per night;
(iv)
the rates above apply to each room, regardless of whether there are one or two guests;
(v)
average room occupancy per night at standard rates is expected to be:
80%
50%
PL
high season
low season
E
(i)
the company is registered with a number of internet-based hotel providers. It is expected
that, subject to capacity, an average of 20 rooms per night can be sold through these
facilities. These sales will be in addition to the occupancy levels noted in point (v). The
internet based provider pays 40% of the standard rate for all bookings;
(vii)
it is forecast that the average additional spending by guests will be $40 per room night, and
that the gross margin earned on this additional spending will be 35%;
(viii)
variable costs are estimated to be $17 per room night;
(ix)
fixed costs are estimated to be $40,000 per month;
SA
M
(vi)
(x)
when occupancy is above 90%, additional staff costs of $150 per night are forecast.
Required:
(a)
For the six month period to 31 December 2010, calculate the Hotel’s budgeted:
(i)
(ii)
(iii)
(b)
revenue;
costs;
profit.
Explain the benefits and drawbacks of using rolling budgets.
(6 marks)
(6 marks)
(1 mark)
(7 marks)
(20 marks)
Question 22 BRT CO
BRT Co makes a range of glassware ornaments. The marketing plan for 2011 is based on the three
products that have proved most popular in the past: Dog, Bunny and Cat. The expected sales for
each product and selling price are as follows:
Dog
Bunny
Cat
Sales
10,000
20,000
5,000
Price
$10
$5
$20
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15
STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Answer 1 ABBOT MANUFACTURING
(a)
Explanation
The situation described in the question arises from the method of inventory valuation used
by Abbot, together with the fluctuations in the level of finished goods inventory that have
occurred in the periods under review. The firm is using an absorption costing basis for
inventory valuation purposes. This method attaches part of the fixed production costs to
each item held in inventory. In the case of department Beta it is $16. In the income
statement the matching concept requires the use of an inventory adjustment process to
adapt the cost of production figure to a cost of goods sold figure.
1 Jul – 31 Dec
Alpha
Beta
1 Jan – 30 Jun
Alpha
Beta
$000
$000
$000
$000
36
112
72
96
72
——
36
96
——
12
——
160
——
64
PL
Department
E
When levels of inventory are fluctuating, this process of bringing forward fixed costs from
past periods and carrying forward fixed costs to future periods can have a considerable
effect on the profit calculations. The following table shows the effect of the inclusion of
fixed factory overheads in inventory valuations.
Fixed overheads brought forward in
opening inventory of finished goods
Fixed overheads carried forward in
closing inventory of finished goods
SA
M
Profit increased by
Profit reduced by
Net profit as per absorption costing
income statement
Profit prior to inventory adjustment
16
94
——
58
——
50
——
66
——
60
53
——
113
——
83
——
19
——
These “unadjusted” profit figures are in line with the changes in the sale mix between the
two periods.
The important aspect of the effect that the different inventory valuations have on profit is
that, under marginal costing, profit depends only on the level of sales (all other things
being equal). Under an absorption costing convention, profit depends on both the level of
sales and also on production levels.
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1001
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Marginal costing income statements
1 Jul – 31 Dec 20X8
Alpha
Beta
Department
Sales revenue
Variable manufacturing costs
Direct material
Direct labour
Variable overheads
Factory cost of production
Add: Opening inventory of finished goods
Less: Closing inventory of finished goods
Total contribution
Less: Fixed overheads
Factory overheads
Administration and selling
Net profit
$000
300
——
$000
750
——
$000
375
——
$000
675
——
52
26
26
——
104
24
——
128
(48)
——
80
——
114
76
76
——
266
98
——
364
(84)
——
280
——
30
15
15
——
60
48
——
108
(8)
——
100
——
132
88
88
——
308
84
——
392
(140)
——
252
——
PL
Factory cost of goods sold
1 Jan – 30 Jun 20X9
Alpha
Beta
E
(b)
220
470
275
423
(132)
(30)
——
58
——
(304)
(100)
——
66
——
(132)
(30)
——
113
——
(304)
(100)
——
19
——
SA
M
These profit figures are those under the absorption-costing basis before making the
adjustment for fixed factory overhead in the inventory valuations.
Tutorial note: The important aspect of examination technique here is to look at all (both)
requirements before reading the body of the text and before answering any part of the question. In
this way, if you cannot get the clues of what is required for part (a) from the last paragraph, part (b)
tells you what the examiner is driving at. This then leaves the problem of making sure that you do
not answer part (b) in your answer to (a) – which just needs a little planning.
1002
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Answer 2 SUNSHINE SALES CO
(a)
Profit statement
(i)
Marginal costing basis
Month 1
$
Add: Opening inventory
Contribution
Fixed costs
Profit
(ii)
(115,000)
———
35,000
(27,000)
———
8,000
———
90,000
45,000
72,000
———
207,000
34,500
———
241,500
(46,000)
———
(195,500)
———
59,500
(27,000)
———
32,500
———
Month 3
$
$
285,000
100,000
50,000
80,000
———
230,000
46,000
———
276,000
(57,500)
———
(218,500)
———
66,500
(27,000)
———
39,500
———
Absorption costing basis
Month 1
$
SA
M
Sales
Cost of production
Materials
Labour
Variable expenses
Fixed costs
Add: Opening inventory
Less: Closing inventory
Profit
Month 2
$
$
255,000
$
150,000
65,000
32,500
52,000
27,000
———
176,500
–
———
176,500
(39,000)
———
Cost of sales
(b)
Month 2
$
255,000
PL
Less: Closing inventory
65,000
32,500
52,000
———
149,500
–
———
149,500
(34,500)
———
$
E
Sales ($30 per unit)
Variable costs
Materials ($10 per unit)
Labour ($5 per unit)
Expenses ($8 per unit)
$
150,000
(137,500)
———
12,500
———
90,000
45,000
72,000
27,000
———
234,000
39,000
———
273,000
(52,000)
———
(221,000)
———
34,000
———
Month 3
$
$
285,000
100,000
50,000
80,000
27,000
———
257,000
52,000
———
309,000
(65,000)
———
(244,000)
———
41,000
———
Reconciliation of profits
Month 1
$
Absorption costing profit
12,500
Increase in inventory  Fixed cost per unit ($3) 4,500
———
Marginal costing profit
8,000
———
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Month 2
$
34,000
1,500
———
32,500
———
Month 3
$
41,000
1,500
———
39,500
———
1003
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Answer 3 PLB CO
Cost per tonne
P
$
500
120
4,000
300
450
40
–––––
5,410
–––––
WORKINGS
P
(2)
Material orders
Cost
Cost/order
Cost/product
Cost/tonne
L
8
(4)
B
Total
15
9
$4,000,000
$4,000
$7,500,000
$10,000
$4,500,000
$5,000
20
25
30
$300,000
$300
$375,000
$500
$450,000
$500
18,000
36,000
180,000
$240
360,000
$400
Total tonne days preserved
45,000
Total cost
Cost/tonne day
Cost/product
450,000
Cost/tonne
$450
106,000
, i.e. $40/tonne
Packing cost =
2,650 tonnes
SA
M
(3)
Production run
Cost
Cost/run
Cost/product
Cost/tonne
32
$16,000,000
$500,000
PL
(1)
B
$
850
80
5,000
500
400
40
––––––
6,870
––––––
E
Materials
Labour
Set up costs (W1)
Material orders (W2)
Storage (W3)
Packing (W4)
L
$
700
140
10,000
500
240
40
––––––
11,620
––––––
75
$1,125,000
$15,000
99,000
$990,000
$10
Answer 4 EGERTON MANUFACTURING CO
(a)
Calculation of product costs using ABC
Product
Direct material per unit
Direct labour per unit
Overheads per unit: (W4)
Total cost per unit
1004
A
$
55
41
114.61
210·61
B
$
67
54
204.09
325·09
C
$
98
57
302.78
457·78
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
WORKINGS
Machine costs
Product
Machine hours per unit
Budgeted production volume
Total machine hours
Machine costs
Cost per machine hour
Total costs apportioned:
(2)
B
1·5
400 units
600
C
0·6
200 units
120
26,186.40
43,644.0
8,728.8
A
32
B
40
C
25
27,348.48
34,185.60
21,366.00
Total
1,080
$78,560
$72·74
78,559.2
PL
Total
97
$82,900
$854·64
82,900.08
Material handling cost
Product
Material deliveries
Material handling costs
Cost per delivery
Total costs apportioned
A
2
C
16
3,807.70
30,461.60
A
26,186.40
27,348.48
B
43,644.00
34,185.60
C
8,728.80
21,366.00
15,230.80
————
68,765.68
600
————
114.61
————
3,807.70
————
81,637.30
400
————
204.09
————
30,461.60
————
60,556.40
200
————
302.78
————
8
15,230.80
B
Total
26
$49,500
$1,903·85
49,500.10
Overhead cost per unit
SA
M
(4)
0·6
600 units
360
Set up costs
Product
Production runs in period
Set up costs
Cost per set up
Total costs apportioned
(3)
A
E
(1)
Product
Total machine costs (W1)
Total set-up costs (W2)
Total material handling costs
(W3)
Total overhead costs
Production (units)
Overhead cost per unit
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1005
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
(b)
To
From
Subject
Date
Managing Director
Brumley Site Manager
Activity Based Costing
6 December 20X2
(i)
Which product(s) should not be manufactured
E
As requested, I have calculated the cost per unit for each of the products manufactured at the
Brumley site. When the unit cost is compared with the selling price, the results are as
follows:
A
B
C
$
$
$
Selling price per unit
300·00
530·00
435·00
Cost per unit
210·60
325·09
457·78
Profit/(Loss) per unit
89·40
204·91
(22·78)
PL
From this it can be clearly seen that production of Product C should cease, as this product is
unprofitable.
At first sight, product B appears to be the most attractive, yielding a unit profit of over $200.
This seems to suggest that the production of product B should be maximised.
However, such an approach ignores the fact that machine hours are limited to 1,140 in each
production period. This means that an assessment of which product is more favourable
should be based on the profit per unit of limiting factor, rather than the profit per unit of
output. Carrying out such a calculation:
SA
M
Product
Profit per unit
Machine hours per unit
Profit per machine hour
A
$89·40
0·6
$148·98
B
$204·91
1·5
$136·61
This means that Product A is preferable, and should be produced up to the maximum market
demand. Product B should be produced only when demand for Product A is satisfied.
(ii)
Other factors to be considered
Before implementing my recommendation to cease production of Products C and B, the
following factors should be considered:
1006

Sales of each product may be interdependent. If sales of Product A can only be
made along with sales of C in particular, it would obviously be counter-productive
to cease sales of C.

The interdependence of products from Brumley with products of other sites would
also need to be considered.

Cessation of a product, even if it is independent of the other products produced may
result in a loss of customer goodwill, and sales could be adversely affected.

Market demand should be confirmed to ensure that there are no factors that will lead
to reduced sales volumes.
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
The stage of each product in the product life cycle may affect the decision. If A is a
mature product, there may be a declining market. Concentrating production on a
mature product may be placing too much reliance on a market that could soon
disappear.

It would also be prudent to review current practices to assess whether the cost
structure of products B and C can be amended, leading to a reduction in unit cost.

The accuracy of the results of activity based costing is entirely dependent on the use
of appropriate cost drivers. If the cost drivers selected do not actually influence the
total cost incurred, decisions will be made based on inaccurate information. It is
therefore essential that the cost drivers have been correctly identified.

It should also be noted that the analysis of costs in activity based costing assumes
that all costs are amenable to control over the long term. If the objective is to
maximise short-term profit, activity based costing is not an appropriate technique.
E

Answer 5 FLOPRO
(a)
PL
Only when you are fully satisfied on these points should production of C (and possibly B)
cease.
Optimum product mix
The contribution per product unit (selling price – variable cost) may be calculated as:
A = $60 – (2 + 28) = $30
B = $70 – (40 + 4) = $26
SA
M
Contribution per unit
Bottleneck hours per unit
Contribution per bottleneck hour
Ranking
A
$30
0·02
$1,500

B
$26
0·015
$1,733

Therefore produce and sell product B up to its maximum demand and then product A with the
remaining capacity:
Maximum demand of product B (45,000 × 120%)
Bottleneck hours required for B (54,000 × 0·015)
Bottleneck hours available for A (3,075 – 810)
Output of product A which is possible (2,265 ÷ 0·02)
54,000 units
810 hours
2,265 hours
113,250 units
Maximum net profit:
Contribution product A
Contribution product B
113,250 × $30
54,000 × $26
$
3,397,500
1,404,000
–––––––––
Total contribution
Less: Fixed overhead cost:
4,801,500
1,470,000
–––––––––
Net profit
3,331,500
–––––––––
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1007
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
(b)
Throughput accounting
(i)
Product mix to maximise net profit
Throughput per unit is calculated as selling price – direct material cost:
A = $60 – 2 = $58
B = $70 – 40 = $30
A
$58
0·02
$2,900
B
$30
0·015
$2,000
E
Throughput per unit
Bottleneck hours per unit
Throughput return per bottleneck hour
Flopro should sell product A up to its maximum demand and then product B using the
remaining capacity.
144,000 units
2,880 hours
195 hours
13,000 units
PL
Maximum demand of product A (120,000 × 120%)
Bottleneck hours required for A (144,000 × 0·02)
Bottleneck hours available for B (3,075 – 2,880)
Output of product B which is possible (195 ÷ 0·015)
Maximum net profit:
Throughput return product A 144,000 × ($60 – 2)
Throughput return product B 13,000 × ($70 – 40)
SA
M
Total throughput return
Less:
Overhead cost:
Variable based on budget (120,000 × $28 + 45,000 × $4)
Fixed
Net profit
(ii)
$
8,352,000
390,000
_________
8,742,000
(3,540,000)
(1,470,000)
_________
3,732,000
_________
Throughput accounting ratio for product B
Throughput accounting ratio =
Throughput return per hour of bottleneck
Total overhead cost per hour of bottleneck
Throughput return per hour of bottleneck for product B was calculated in part (i) as $2,000.
Total overhead cost per hour of bottleneck:
Total overhead costs: (3,540,000 + 1,470,000)
Total hours of bottleneck:
Total overhead cost per hour of bottleneck (5,010,000 ÷ 3075)
2,000
= 1.2275
Throughput accounting ratio =
1,629.27
1008
$5,010,000
3,075
$1629.27
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
(iii)
Interpretation
Where throughput accounting principles are applied, a product is worth producing and selling
so long as its throughput return per bottleneck hour is greater than the production cost per
throughput hour. This may be measured by the throughput accounting ratio. Where the ratio
is less than 1·00, return exceeds cost and the focus should be on improving the size of the
ratio.
Efforts may be made to improve the position for each product and in total by focusing on
areas such as
Improved throughput ($) per unit by increasing selling price or reducing material
cost per unit. Product B has a very high material element ($40 per unit)

Improving the throughput ($) per unit by reducing the time required on the
bottleneck resource. Reducing the time for product B from 0·015 hours to 0·01
hours through methods change would improve its ratio.

Improving the overall position by reducing the cost of spare capacity. This may be
achieved by operational re-design aimed at reducing or eliminating the impact of
any bottlenecks.
PL
E

The throughput ratio for product B is 1·2275 which is greater than 1·00 and therefore
acceptable. Its ratio is considerably less than that of product A, which is 1·780 ($2,900 ÷
$1,629·27). The product ratio may be used as a basis for the monitoring of trend, by product
and in total.
Answer 6 TELMAT
SA
M
In the rapidly changing business environment, customer requirements, economic factors and technology
can all change very fast. Telmat is in a particularly volatile business since technology is changing
rapidly as text messaging develops and digital telephones take over. Both life cycle costing and target
costing are systems that should help the company cope with this. These systems should help Telmat to
compete in terms of cost and product development in the telecoms market.
(a)
Target costing
Target costing has replaced traditional standard costing/variance analysis in many
organisations. Telmat may wish to follow suit for cost reduction and control.

Standard costs are too rigid for cost reduction and control. They usually need to be
set for a year at a time, but Telmat’s environment is too fast moving. Target costing
is more flexible, so targets can change/reduce from month to month.

Standard costing focuses on internal costs while target costing takes into account the
competitive market and the price customers are prepared to pay. The organisation
has to be outward rather than inward looking. For Telmat, the final customer as
well as the system supplier must be considered. (Standard costing tends to focus on
internal costs.)

Target costing should be used as a cost reduction technique, unlike standard
costing, and should incorporate a learning effect.

Target costing usually involves other techniques, such as value analysis and value
engineering, which should simplify production methods and reduce cost. As Telmat
has short product life cycles, this is very important.
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
1009
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK

Life cycle costing
Estimating life cycle costs and revenues will highlight which products can generate
profits quickly. As the life cycle of Telmat’s products is likely to be short because
of changing technology, this is very important.

Life cycle costing focuses on the time to market as well as money. This is often a
key factor in generating profit. Telmat will probably have to bring new products to
market quickly and on time in order to achieve a profit.

If costs and benefits are monitored over the life cycle, a project can be stopped early
if events have changed or not turned out as planned.

The research and development and design costs are likely to be quite high and will
need to be recovered quickly, so life cycle costing, with its emphasis on timescale
should be very beneficial.
E

PL
(b)
Staff can be highly motivated by target costing if used correctly. It helps to break
down any artificial functional barriers as staff at all levels and in all functions are
involved.
Probably the company should adopt both target costing and life cycle costing.
Answer 7 ENVIRONMENANTAL MANAGEMENT ACCOUNTING
(a)
Meaning of environmental management accounting
SA
M
While there is no unique definition of the term environmental management accounting, the
term is generally taken to mean providing management with information about the
environmental impact of the organisations activities. This includes both physical and
monetary information. Physical information would include things such as the amount of
scarce resources, such as energy and water that are used (and wasted). Monetary information
includes things such as money saved or spent on becoming more environmentally friendly.
Traditional management accounting was not concerned with environmental issues. In recent
years, however, the environment has become an important issue, and businesses in need to be
aware of how their environmental impact of their activities so that they can be managed.
(b)
How good environmental behaviour can help
(i)
Cost saving
Good environmental behaviour often brings cost savings through a reduction in the waste of
energy and water. Many organisations have made huge saving on energy costs, for example,
by implementing more efficient energy processes, and insulation. Many companies have also
reduced printing costs by issuing newsletters and other such items through e-mail, in order to
reduce the use of paper.
(ii)
Improved environmental reporting
In traditional management accounting, many environmental related costs were simply lumped
in with other overheads, so management were not aware of them. To have environmental
management accounting means that the accounting systems will now show such costs as a
separate category. This will not only help management to be aware of them, but will also
help with external reporting.
1010
©2014 DeVry/Becker Educational Development Corp. All rights reserved.
STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
(iii)
Minimising environmental risk
Environmental risk relates to the potential adverse effects of bad environmental behaviour.
This may include fines for pollution, costs of cleaning up and lost sales if the organisation
gets a reputation for being a harmer of the environment. Environmental management
accounting makes such risks clearer to management, so they can be better managed.
Answer 8 ENNERDALE CO
Relevant costs
Materials
K
L
3,000 kg at ($19,600 ÷ 2,000) × 1·05
200 kg at $11
(ii)
Skilled labour
Labour cost
800 hours at $9·50
Opportunity cost of labour 800 hours at ($40 ÷ 4)
(b)
Overhead costs
$
30,870
2,200
––––––
33,070
––––––
E
(i)
PL
(a)
$
7,600
8,000
–––––––
15,600
–––––––
Any variable overhead costs associated with the contract would be relevant because they
would represent additional or incremental costs caused directly by the contract.
SA
M
Fixed overhead costs would only be relevant if the total fixed overhead costs of the company
increased as a direct consequence of the contract being undertaken. In that case the relevant
amount would be the specific increase in the total fixed overhead costs caused by the
acceptance of the contract.
Arbitrary apportionments of existing fixed overhead costs would not be relevant. Similarly
sunk and committed costs would not be relevant.
Answer 9 Z CO
(a)
Further processing decision
On financial grounds, further processing is worthwhile if the further processing cost is less
than the incremental revenue.
Evaluation of further processing based on March 2011 output and assuming no losses in the
further process:
Product
RZ
SZ
TZ
Incremental
revenue
800 × (6.00 – 3.00) = 2,400
2,000 × (5.75 – 5.00) = 1,500
1,200 × (6.75 – 3.50) = 3,900
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Incremental
Increase/
cost
(decrease) in profit
800 × $1.40 = $1,120
1,280
2,000 × 0.90 = 1,800
(300)
1,200 × 1.00 + 600 = 1,800
2,100
1011
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Taking each product individually, it can be seen that products R and T should be converted as
the incremental revenue exceeds the incremental cost of further processing. In the case of T
this assumes that the March 2011 output is representative of other months and that the
quantity produced is sufficient to ensure that the incremental revenue covers both the fixed
and variable costs. However, as TZ can be sold for a relatively high price, volumes would
have to drop considerably for this to become an issue.
(b)
Viability of the common process
(i)
E
This is not true of S. Considered in isolation product S should not be converted. However
there may be other reasons for producing all three products, in particular marketing
considerations such as whether the company needs to supply all three products in order to sell
the two profitable products, RZ and TZ.
If there is an external market for R, S and T
Assuming that all March 2011 output can be sold at the prices given:
Selling price/kg
$
3.00
5.00
3.50
R
S
T
Output
kgs
800
2,000
1,200
Sales value
$
2,400
10,000
4,200
––––––
16,600
––––––
PL
Product
Total cost of common process in March 2011 = $17,500
Loss in March 2011 = $900 and therefore the common process is not financially viable.
If there is not an external market for R, S and T
SA
M
(ii)
Revenue from selling RZ, SZ, TZ:
RZ
800 × $6.00
SZ
2,000 × $5.75
TZ
1,200 × $6.75
$
4,800
11,500
8,100
––––––
17,500
Common costs
Further costs:
RRZ 800 × $1.40
SSZ 2,000 × $0.90
TTZ 1,200 × $1.00
Fixed
1,200
600
––––––
24,400
1,120
1,800
1,800
––––––
4,720
––––––
22,220
––––––
2,180
––––––
Based on this analysis the common process is financially viable.
1012
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Answer 10 PARSER CO
(a)
Opportunity cost
Opportunity costs represent the value of the loss or sacrifice when choosing between scarce
alternatives. Lack of scarcity implies zero opportunity cost.
Revised costs for special order
Subcontractor costs
Supervisor costs
General overheads
Machine maintenance
Machine overheads
Materials
Interest costs
Notes
1
2
3
4
5
6
7
$
31,300
1,000
1,000
500
22,000
31,500
900
______
E
(b)
PL
88,200
Notes:
The choice lies between the two subcontractor costs that have to be employed
because of the shortage of existing labour. The minimum cost is to have
subcontractors employed who are skilled in the special process.
(2)
Only the difference between the bonus and the incentive payment represents an
additional cost that arises due to the special order. Fixed salary costs do not change.
(3)
Only incremental costs are relevant.
(4)
Depreciation is a period cost and is not related to the special order. Additional
maintenance costs are relevant.
(5)
The relevant costs are the variable overheads ($3 × 6,000 hours) that will be
incurred, plus the displacement costs of $2 × 2,000 hours making a total of $22,000.
(6)
Since the materials are no longer used the replacement cost is irrelevant. The
historic cost of $34,000 is a sunk cost. The relevant cost is the lost sale value of the
inventory used in the special order which is: 7,500 kg × $4·20 per kg = $31,500.
(7)
Full opportunity costing will also allow for imputed interest costs on the
incremental loan. The correct interest rate is the overdraft rate since this represents
the incremental cost the company will pay. Simple interest charges for three
months are therefore: (3/12) × $20,000 × 18% = $900.
SA
M
(1)
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1013
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Answer 11 APPLE, BRAVO AND CHARLIE
(a)
Marginal cost statement
Product A
$/unit
1.700
1.000
0.170
_____
%
sales
100.0
58.8
10.0
_____
Product C
%
$/unit sales
1.250 100.0
0.500 40.0
0.125 10.0
_____ _____
60.0
_____
1.170
_____
68.8
_____
0.625 50.0
_____ _____
40.0
0.530
31.2
0.625
Total variable cost
0.936
_____
Contribution
0.624
Sales1
Variable production cost2
Variable non-production cost3
Notes
sales ($)
sales units
$/unit sales =
2
 Production cost of sales ($) 
$/unit variable production cost = 
  0.3
sales units


PL
(e.g. Product A
3
50.0
1,794
= $1.56)
1,150
1
(e.g. Product A
1,242
– 0.3 = $0.78)
1,150
$/unit variable non-production cost = 10% of sales per unit
Sales required
SA
M
(b)
Product B
E
$/unit
1.560
0.780
0.156
_____
%
sales
100.0
50.0
10.0
_____
Total sales (1,794 + 3,740 + 2,950)
Variable production costs:
Total production costs (1,242 + 2,860 + 1,888)
Fixed production costs (5,710 units × $0.3/unit)
Variable non-production costs (10% × 8,484)
Contribution
3,750
Sales required: 8,484 ×
3,358.6
1,794
Product A 9,473 ×
8,484
3,740
Product B 9,473 ×
8,484
2,950
Product C 9,473 ×
8,484
$000
8,484
5,990
(1,713)
(848.4)
_______
3,358.6
_______
$000
9,473
2,003
4,176
3,294
_____
9,473
_____
1014
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Answer 12 BVX
Optimum production plan
Contribution/unit
Timber/unit (m²)
Contribution/m²
Ranking
Minimum units to avoid penalty
Timber required for
minimum units (m²)
Number of units to maximum
demand/production resources
Timber used for production
above minimum units
Chair
$8.00
2.5
$3.20
1st
500
Bench
$17.50
7.5
$2.33
3rd
100
Table
$16.00
5
$3.20
1st
150
Total
1,250
750
750
2,750
3,500
233
1,350
8,750
1,747.5
6,750
Timber available
17,247.5
––––––––
19,997.5
––––––––
20,000
––––––––
PL
Timber used
E
(a)
Total number of units
to be produced
4,000
Contribution from:
Chairs
4,000 ×$8.00
Benches
333 ×$17.50
Tables
1,500 ×$16.00
333
1,500
$
32,000.00
5,827.50
24,000.00
–––––––––
SA
M
Fixed costs
Profit
61,827.50
54,000.00
–––––––––
7,827.50
–––––––––
Since the optimum plan includes production of sufficient quantities of each item to meet the
order comprising the minimum demand, and production of the most profitable items already
meets the maximum demand, there is no need to consider the financial penalty.
(b)
Maximum price
The maximum price which should be paid for the timber, a scarce resource, is also known as
its shadow price.
The shadow price is the price at which the purchaser makes a nil contribution from its use.
Therefore to answer the question it is necessary to consider the use of any additional timber
acquired.
The present situation is that demand for chairs and tables is fully satisfied from the existing
resources, but there is some unsatisfied demand for benches. Thus any additional timber
would be used to manufacture more benches.
Based on the current input cost of $2.00 per m2 each m2 of timber earns a contribution of
$2.33. Thus the maximum price to be paid is the sum of these values; $4.33 per m2.
However, there is no benefit in obtaining more timber than can be used to satisfy the total
demand for benches, so this shadow price of $4.33 per m2 only applies for up to 12,500 m2 of
timber. Thereafter there is no use for the timber, so its shadow price is nil.
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1015
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Answer 13 OPTIMAL PRODUCTION PLAN
(a)
Objective function and constraints
Objective is to maximise profit:
Let a = the number of units of A to be produced
Let b = the number of units of B to be produced
Objective function:
9a + 23b
E
b units
000
a = 1,000
PL
(b)
Constraints:
Non-negativity
b0
Restriction on A a  1,000
Materials
3a + 4b  30,000
Labour
5a + 3b  36,000
Graphical solution
14
13
12
11
SA
M
10
9
5a + 3b = 36,000
8
7
6
5
4
3
3a + 4b = 30,000
Iso-contribution
line
2
1
0
1016
1
2
3
4
5
6
7
8
9
10
11
12
a units
000
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Optimal point is the intersection of the lines:
a = 1,000; and
materials constraint 3a + 4b = 30,000.
(3 × 1,000) + 4b = 30,000
3,000 + 4b = 30,000 therefore 4b = 30,000 – 3,000 giving 4b = 27,000
so b = 27,000 ÷ 4,000 therefore b= 6,750 units
Answer 14 ROTHWELL CO
E
The optimal production plan is to make 1,000 units of A and 6,750 units of B.
Tabulated below are the total cost and revenue figures together with profit at each activity level to
determine optimal selling price. The same result has been reached by comparing marginal cost and
revenue figures.
Total
revenue
Total
cost
$000
177.0
333.5
468.75
583.0
677.5
750.0
801.5
$000
100.3
186.3
287.8
405.0
537.8
686.3
850.3
Profit
Marginal
cost
Marginal
revenue
$000
76.7
147.2
180.95
178.0
139.7
63.7
(48.8)
$000
–
86.0
101.5
117.2
132.8
148.5
164.0
$000
–
156.5
135.25
114.25
94.5
72.5
51.5
PL
Production
and sales
(100s)
2,500
5,000
7,500
10,000
12,500
15,000
17,500
SA
M
Selling
price
(per 100)
$
70.8
66.7
62.5
58.3
54.2
50.0
45.8
It can be seen from the profit column that profit is maximised where the selling price is set at $62.5, as
this gives the highest profit of $180.95.
Tutors note: For learning purposes only, the marginal cost and marginal revenue has been shown in
the last two columns. It is not necessary to calculate these to solve the question. The marginal cost
column simply shows the increase in total cost by moving from one level of output to the next. For
example, if production rises from 5,000 units to 7,500 units, total costs rise from $186.3 to $287.8, an
increase of $101.5. So this is the marginal cost at the 7,500 units level. Similarly, as production rises
from 5,000 units to 7,500 units, total revenue increases by $135.25, so this is the marginal cost at the
7,500 units level. Whenever the marginal revenue from increasing output is higher than the marginal
cost increasing output increases profits. This is always the case until output reaches 7,500 units. It
can be seen that the marginal cost of moving from 7,500 to 10,000 is higher than the marginal revenue
however, so it is not worth producing and selling beyond 7,500 units. To maximise output therefore,
Rothwell should produce 7,500 units.
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1017
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Answer 15 SLADE
Investment
Therefore, annual profit required

$(120,000 + 200,000) = $320,000
16% × $320,000
= $51,200
Total annual costs:
Amortisation of development
$120,000
6
$(200,000  20,000)
6
Depreciation
= $30,000
$
40,000
200,000
——–—
290,000
–––––––
E
Cash fixed costs
Variable costs (4,000 × 50)
= Costs + Profit
= $(290,000 + 51,200) = $341,200
PL
Required revenue
= $20,000
= $341,200  4,000 = $85.30
Unit price
Answer 16 TABULAR APPROACH
Demand
Selling price
per unit
Units
$
Total
revenue
Marginal
revenue
Cost
per unit
Total
cost
Marginal
cost
$
$
$
$
$
= units ×
cost per unit
SA
M
= units ×
unit selling
price
1,100
48
52,800
52,800
22
24,200
24,200
1,200
46
55,200
2,400
21
25,200
1,000
1,300
45
58,500
3,300
20
26,000
800
1,400
42
58,800
300
19
26,600
600
MR ≥ MC at 1,300 units, therefore profits will be maximised at this point which is a selling price of
$45.
Answer 17 ALBANY
(a)
Cost plus prices
Marginal cost plus = $30 × 120% = $36
Advantage



1018
Simple and easy to calculate.
Focuses on contribution.
Can easily adjust the mark-up
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Disadvantage


May not cover fixed costs.
Ignores price/demand relationship
Total cost plus = $37 × 120% = $44·40




More likely to ensure a profit is made.
Product is not sold below full cost.
Simple and easy to calculate
Can easily adjust the mark-up.
Disadvantage


Fixed costs need to be allocated to the cost unit which may be ambiguous.
Ignores price/demand relationship.
Possible pricing strategies
PL
(b)
E
Advantage
Any two of the following:
Price skimming – tends to lead to a high price initially, useful if the product is
completely new.

Penetration pricing – go to market with a low price initially to gain market share.

Price discrimination – use two different prices in two different markets if there are
barriers between the markets (e.g. age, time and location).
SA
M


Premium pricing – charging a higher price than the competitors as the product can
be differentiated.

Cost plus pricing – leads to a price that will cover costs although care needs to be
taken with regard to marginal cost plus to ensure that the plus is large enough to
cover fixed costs.

Market price – leads to an acceptable price but one which may vary.

Price to maximise profits although a demand function will need to be established –
leads to an optimal price but may not affect the market price.
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1019
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Answer 18 MR ELLIS
Pricing decision for the ice skating course
Table of revenues
Demand (number of persons)
High
Medium
Low
Price charged
700
700
700
30
900
750
600
50
1,000
500
500
Decision under maximax
E
(i)
20
PL
Maximax involves choosing the decision with the highest potential return. People who use
this method of decision-making are “risk seekers”. They are prepared to accept a high level
of risk on the basis that they have the possibility of making a higher return.
It can be seen from the table above that the highest potential revenue is $1,000. This would
be gained if the ice rink manager charges $50 for the course, and the demand is high.
A maximax decision maker would therefore charge a price of $50.
(ii)
Decision under maximin
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Maximin decision makers are risk averse. They wish to limit the down side of their decision,
so they select the decision that has the highest worst-case scenario. Such decision makers are
pessimistic in outlook.
The worst outcome for each of the three prices is as follows:
Price
20
30
50
Worst outcome
(lowest revenue)
700
600
500
A minimax decision maker would choose a price of $20 as this gives the highest worst
outcome of $700.
(iii)
Minimax regret
Minimax regret decision makers fear making a decision which could turn out to be very
different from what would have been the best decision. They therefore look at each of the
possible outcomes, and see what would be the best decision if that outcome occurs. They
then calculate the “regrets” for the other decisions. Regrets are the differences between the
best decision and the actual output if the other decisions had been made. They choose the
decision that has the lowest potential regret.
In order to calculate the decision under minimax regret, it is first necessary to calculate a table
of regrets.
1020
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
Table of regrets
Demand
Medium
High
Return at best decision
Regrets if price = 20
Regrets if price = 30
Regrets if price = 50
1,000
300
100
0
750
50
0
250
Low
700
0
100
200
Price
Regret
20
30
50
300
100
250
E
The maximum regret for each price is:
PL
A minimax decision maker would therefore choose a price of $30, as this has the lowest
maximum regret.
Answer 19 DECISION TREES
(a)
Diagram
Drill (50)
120
70
0.2
Indicate
oil 0.7
Indicate no
oil 0.30
15
Tests
(10)
43.5
Find oil
150
No oil
Sell Rights 65
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53.5
0.8
Drill (50)
30
0.2
Find oil
150
0.8
No oil
Sell Rights 15
Sell Rights 40
Drill now (50)
0.55
82.5
0.45
= Path to follow
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Find oil
150
No oil
1021
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
(b)
Best course of action
The company should undertake geological tests. If the tests indicate that oil is present then a
drilling programme should be carried out. However, if the tests indicate that there is no oil
then the company should sell the drilling rights.
This strategy will maximise expected returns at $43.5m.
(c)
Value of decision trees
E
The main value of a decision tree is that it maps out clearly all the decisions and uncertain
events and exactly how they are interrelated. They are especially beneficial where the
outcome of one decision affects another decision. For example in the above, the probability
of eventual success changes depending on the test outcomes. The analysis is made clearer by
annotating the tree with probabilities, cash flows, and expected values so that the optimum
decisions (based on expected values) can be clearly seen.
Answer 20 ZBB
(a)
Usefulness
PL
However, drawing a tree diagram is only one way of undertaking a decision. It is based on
the concept of expected value and as such suffers from the limitations of this technique. For
example, in this example, if the test drilling proves positive, the tree indicated the company
should drill, as opposed to selling the rights. But if it does there is a 20% chance of it losing
$50 million. A risk-averse company may well decide to accept the safer option and sell the
rights and settle for $65 million.
SA
M
Zero-based budgeting (ZBB) is a method of budgeting that re-examines, at each budgeting
exercise, whether the budgeted activity is to be funded at any level. Hence, the budgeting
exercise begins at a zero or nil cost base. It is a device that is particularly useful when an
organisation is unsure if its costs are at the most efficient levels. Most efficient costs are not
the same as minimum levels since very low costs might impinge on service or product quality.
The purpose of ZBB is to overcome inefficient forms of budgeting that might lead to slack
practices that consequently consume more resources than the most effective and efficient
organisations face.
(b)
Steps to implement ZBB
There are a series of steps that would ordinarily be taken in order to implement an effective
ZBB system.
Questioning why expenditure needs to be incurred
The development of a questioning attitude to activities that incur costs is the first step to
ensuring that costs are kept to most efficient levels. It is important to recall that ZBB, in the
short term, can only change costs over which the organisation has short-term control. Longer
term, or period costs, can only be changed over a longer horizon. Taxes and other regulatory
costs cannot be the focus of ZBB because they are difficult to influence.
Thus ZBB can be immediately effective where costs can be related to identifiable activities.
The questions that might emerge in such situations are as follows:

1022
Can costs associated with an activity be isolated? If costs cannot be identified to a
particular activity to a degree that provides management with confidence that they
can change the costs then there is little point in applying ZBB techniques to the
cost;
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
An even more basic question is to ask how important the activity is to the business
and what, if the costs can be identified, is the total cost saving that might result
should the activity be stopped. In this respect, it is important to identify effects on
costs elsewhere in the business. If the activity to be stopped absorbed fixed costs,
then the fixed costs will have to be re-apportioned without absorption to the activity
that is to be stopped. Moreover, there may be joint costs such that stopping one
activity may have an uncertain effect on joint costs incurred with another activity;

Is the activity in question the cheapest way of providing the service or contribution
to production? Thus, it is important not to ask simply if the costs relating to the
activity are the most efficient, but are there alternatives that might reduce costs still
further and still maintain a given level of service or production;

A more fundamental question about conducting ZBB processes is whether the
benefits of employing ZBB outweigh the costs. It is important to appreciate that
conducting a ZBB exercise is not a costless process if, as will inevitably be the case,
management time is consumed.
E

PL
Deciding which activities should be provided with a budget
Budgeted activities should be capable of being monitored and controlled. If an activity is
recognised as a budget centre, and is going to be subject to a ZBB process, then it is important
that management undertake the task of monitoring costs in relation to activity and taking
corrective action when appropriate. Thus, if an activity consumes resources and is capable of
being monitored and controlled then it should be provided with a budget. This will then make
the activity subject to ZBB processes.
SA
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“Decision packages” are sometimes referred to in the context of ZBB and activities. These
relate to how activities can be described when thinking about how ZBB can be used to judge
an activity. There are two types of decision activity:

Mutually exclusive decisions: when ZBB assessments are made of an activity,
alternative courses of action are sometimes benchmarked against existing activities.
A choice is then made over which activity might be the preferable course of action.
The preferred choice will involve budgeted information, but may also involve other
factors such as product quality and service level provision.

Incremental decisions: ZBB assessments are often related to the level of activity in a
budget centre. Thus, there will be a minimum level of activity that provides the
essential level of product or service. This is often referred to as the “base” activity.
Further levels of activity are then incremental and, subject to correctly identifying
and isolating the variable costs related to an activity, ZBB assessments can be made
separately of both the base and the incremental activities. This division might then
provide management with an understanding of the degree of flexibility the
organisation has.
Questions to be asked when ranking budgeted activities for scarce resources
The allocation of scarce resources is a key management task. Scarce resources will have to be
allocated to the activities of a business in terms of providing appropriate labour and materials,
along with any other costs related to an activity. Whilst ZBB is most often applied to support
activities, the technique can also be applied to a production process.
Some sorting of ranking will have to be applied in order to determine which activities are
funded by a budget against those that are not. The key question for budgeting purposes
relates to:
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1023
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK

Defining the appropriate decision package (as described above);

The importance of the activity in relation to the organisation in terms of:


How the ranking system is to be used:

Are all activities to be funded above a certain rank; or

Is there a scaling of funds allocated against funds requested as determined
by the rank; or

Is there a combination of methods?
E

Support for the organisation’s objective (e.g. maximising shareholder wealth);
Support for other service or product activities;
Essentially, a judgement has to be made by management of the benefit of the activity to the
organisation. Theoretically, this is best achieved by determining deprival value. In practice,
deprival values are difficult tools and some level of arbitrary judgement has to take place in
which non-financial factors might play a significant role.
Critical assessment of the use of ZBB
PL
(c)
The motivation of employees is one of the most difficult tasks facing management since the
problems are complex and not always referable to financial performance indicators. To the
extent that employees are not responsive to financial performance indicators then ZBB is
going to be less effective as a device to motivate employees.
SA
M
The problem of employee motivation is one of achieving goal congruence with the
organisational objectives. ZBB can be useful in this respect as a method of tackling the
problem of motivating employees to achieve targeted performance when a clear
understanding of the activities and their related decision packages is essential for the
management tasks of monitoring and controlling an activity.
In this respect ZBB has the following advantages
1024

It ensures that only forward-looking objectives are addressed. This limits the
potential for historical abuses in budget setting to be established. Employees can be
set targets that are consistent with the future objectives of the organisation.

Building “budget slack” is minimised because, in principle, the entire costs of an
activity are reviewed at each budget setting stage. Employees are then set realistic
targets that relate to activity levels that are the most efficient.

Managers are made to understand, as part of the ZBB process, the activity itself.
This reduces tension between those who decide (management) and those who have
to implement manager decisions. Claims that management do not really understand
the nature of an activity are thus reduced.

ZBB encourages flexibility in employees since they know that potentially activities
may be stopped. Flexibility induces goal consistency by enabling incentive
schemes to reflect activity. In other words, employees are more likely to be
responsive to management directives if they are aware and trust that the budget
setting process encourages and supports payments that are responsive to flexibility.
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STUDY QUESTION BANK – PERFORMANCE MANAGEMENT (F5)
(d)
Advantages of encouraging employee participation in budget setting
Generally, participative budget setting will result in:
An informed budget setting process such that management are aware of the detail of
budgeted activities as provided by the people who work daily in the budgeted
activity;

Avoids the criticism that budgets are unrealistic;

Participation reduces the adverse effects of budget imposition when difficult
management decisions have to be made (e.g. staff reduction);

Employees become aware and more involved in the management activities of the
organisations. To the extent that they become more aware, then a greater
understanding of the needs of the organisation as a whole is reached;

Coordination in an activity might be improved. If activities are jointly budgeted, or
are part of the same process, then coordination between activities might be
improved;

Budgetary slack may be reduced as management become more aware of the
operational activities in an activity;

Achievable budgets are more likely to be set;

When budgets are not met management are more likely to have a deeper knowledge
of the operational issues involved;

There is less risk that subordinates will undermine budgets.
SA
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PL
E

Answer 21 HOTEL EXCEL
(a)
(i)
Number of nights
High season
July
August
December
Occupancy %
Rooms/night
On-line sales
31
31
31
–––
93
Low season
September
October
November
30
31
30
–––
91
80
72
18 (max available)
Revenue:
Room letting
72 rooms at $110 per night × 93 nights
18 rooms at $44 per night × 93 nights
45 rooms at $95 per night × 91 nights
20 rooms at $38 per night × 91 nights
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50
45
20
$736,560
$73,656
$389,025
$69,160
1025
PERFORMANCE MANAGEMENT (F5) – STUDY QUESTION BANK
Additional spending:
90 rooms at $40 per night × 93 nights
65 rooms at $40 per night × 91 nights
$334,800
$236,600
Total revenue
(ii)
$1,839,801
Variable cost
$142,290
$100,555
Additional spending: $40/night × 65% = $26
High $26 × 90 rooms × 93 nights
Low $26 × 65 rooms × 91 nights
$217,620
$153,790
Fixed costs $40,000/month × 6 months
Total costs
(b)
$240,000
$13,950
PL
Additional staff $150/night × 93 nights
E
High $17 × 90 rooms × 93 nights
Low $17 × 65 rooms × 91 nights
(iii)
Budgeted profit
Profit
$1,839,801 – $868,205
$868,205
$971,596
Benefits and drawbacks of rolling budgets
Benefits
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As budgeted results are prepared more frequently, assumptions must be made for a shorter
time period. This should make the budget more accurate.
The budget will therefore reflect up-to-date assumptions regarding both internal resources and
external influences.
The period covered by available budget data will be longer, as the period covered by the
budget is continually “rolled out”. This will aid planning.
A rolling budget emphasises the continuous nature of business.
Managers will therefore be encouraged to regard planning as an on-going, rather than a oneoff, activity.
Drawbacks
A common problem of budgeting is that it is time consuming. This is exacerbated by the
frequent revisions needed to prepare rolling budgets.
As a result, rolling budgets can be costly.
There is a danger that the need for frequent revisions will lead to the budget being seen as a
distraction by operational managers. They may feel that preparing the budget gets in the way
of “real work”.
If managers are not competent to prepare budgets, or do not participate in the budgeting
process, using a continuous budget will not solve these problems. Indeed it may make them
worse.
1026
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