f5 mock 09 2

Final Assessment

KAPLAN PUBLISHING of 9

ACCA FINAL ASSESSMENT

Performance

Management

JUNE 2009

QUESTION PAPER

Time allowed Reading time: 15 minutes Writing time: 3 hours

Answer all questions

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

Kaplan Publishing/Kaplan Financial

ACCA F5 Performance Management

© Kaplan Financial Limited, 2008 All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

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Final Assessment

Answer all questions QUESTION 1 F plc supplies pharmaceutical drugs to drug stores. Although the company makes a satisfactory return, the directors are concerned that some orders are profitable and others are not. The management has decided to investigate a new budgeting system using activity-based costing principles to ensure that all orders they accept are making a profit. Each customer order is charged as follows. Customers are charged the list price of the drugs ordered plus a charge for selling and distribution costs (overheads). A profit margin is also added, but that does not form part of this analysis. Currently F plc uses a simple absorption rate to absorb these overheads. The rate is calculated based on the budgeted annual selling and distribution costs and the budgeted annual total list price of the drugs ordered. An analysis of customers has revealed that many customers place frequent small orders with each order requesting a variety of drugs. The management of F plc has examined more carefully the nature of its selling and distribution costs, and the following data have been prepared for the budget for next year:

Total list price of drugs supplied $8m Number of customer orders 8,000

Selling and distribution costs $000 Cost driver Invoice processing 280 See Note 2 Packing 220 Size of package – see Note 3 Delivery 180 Number of deliveries – see Note 4 Other overheads 200 ___ Number of orders

Total overheads 880 ___

Notes: 1 Each order will be shipped in one package and will result in one delivery to the

customer and one invoice (an order never results in more than one delivery). 2 Each invoice has a different line for each drug ordered. There are 28,000 invoice

lines each year. It is estimated that 25% of invoice processing costs are related to the number of invoices, and 75% are related to the number of invoice lines.

3 Packing costs are $32 for a large package, and $25 for a small package. 4 The delivery vehicles are always filled to capacity for each journey. The delivery

vehicles can carry either 6 large packages or 12 small packages (or appropriate combinations of large and small packages). It is estimated that there will be 1,000 delivery journeys each year, and the total delivery mileage that is specific to particular customers is estimated at 350,000 miles each year. $40,000 of delivery costs are related to loading the delivery vehicles, and the remainder of these costs are related to specific delivery distance to customers.



The management has asked for two typical orders to be costed using next year’s budget data, using the current method, and the proposed activity-based costing approach. Details of two typical orders are shown below:

Order A Order B Lines on invoice 2 8 Package size Small Large Specific delivery distance 8 miles 40 miles List price of drugs supplied $1,200 $900

Required: (a) Calculate the charge for selling and distribution overheads for Order A and Order B

using:

(i) the current system; and (3 marks) (ii) the activity-based costing approach. (12 marks)

(b) Write a report to the management of F plc in which you assess the strengths and

weaknesses of the proposed activity-based costing approach for F plc; and (5 marks) (Total: 20 marks)


Final Assessment

QUESTION 2 W plc provides two cleaning services for staff uniforms to hotels and similar businesses. One of the services is a laundry service and the other is a dry cleaning service. Both of the services use the same resources but in different quantities. Details of the expected resource requirements, revenues and costs of each service are shown below:

Laundry $ per service

Dry cleaning $ per service

Selling price 7.00 12.00 Cleaning materials ($10.00 per litre) 2.00 3.00 Direct labour ($6.00 per hour) 1.20 2.00 Variable machine cost ($3.00 per hour) 0.50 1.50 Fixed costs* 1.15 ____ 2.25 ____ Profit 2.15 ____ 3.25 ____

*The fixed costs per service were based on meeting the budget demand for December 20X3.

W plc has already prepared its budget for December based on sales and operational activities of 8,000 laundry services and 10,500 dry cleaning services, but it is now revising its plans because of forecast resource problems.

The maximum resources expected to be available in December 20X3 are:

Cleaning materials 5,000 litres Direct labour hours 6,000 hours Machine hours 5,000 hours

W plc has one particular contract which it entered into six months ago with a local hotel to guarantee 1,200 laundry services and 2,000 dry cleaning services every month. If W plc does not honour this contract it has to pay substantial financial penalties to the local hotel. Required: (a) Determine which input is limiting and, using key factor analysis, rank the services

provided by W plc so as to maximise its profit for December 20X3. (7 marks) (b) The Sales Director has reviewed the selling prices being used by W plc and has

provided the following further information:

• If the price for laundry were to be reduced to $5.60 per service, this would increase the demand to 14,000 services.

• If the price for dry cleaning were to be increased to $13.20 per service, this would reduce the demand to 9,975 services.

Assuming that such selling price changes would apply to all sales and that the resource limitations continue to apply, and that a graphical linear programming solution is to be used to maximise profit. (i) State the constraints and objective function. (5 marks)

(ii) Use a graphical linear programming solution to advise W plc whether it should revise its selling prices. (8 marks)

(Total: 20 marks)



QUESTION 3 County Preserves produce jams, marmalade and preserves. All products are produced in a similar fashion: the fruits are low temperature cooked in a vacuum process and then blended with glucose syrup with added citric acid and pectin to help setting. Margins are tight and the firm operates a system of standard costing for each batch of jam. The standard material cost data for a batch of raspberry jam are: Fruit extract 400 kg @ $0.16 per kg Glucose syrup 700 kg @ $0.10 per kg Pectin 99 kg @ $0.332 per kg Citric acid 1 kg @ $2.00 per kg Standard processing loss 3% The summer of 20X7 proved disastrous for the raspberry crop with a late frost and cool, cloudy conditions at the ripening period, resulting in a low national yield. As a consequence, normal prices in the trade were $0.19 per kg for fruit extract although good buying could achieve some savings. The impact of exchange rates on imports of sugar has caused the price of syrup to increase by 20%. The actual results for the batch were: Fruit extract 428 kg @ $0.18 per kg Glucose syrup 742 kg @ $0.12 per kg Pectin 125 kg @ $0.328 per kg Citric acid 1 kg @ $0.95 per kg Actual output was 1,164 kg of raspberry jam. Required: (a) Calculate the ingredient planning variances that are deemed uncontrollable. (6 marks) (b) Calculate the ingredients operating variances that are deemed controllable. (4 marks) (c) Comment on ONE advantage and ONE disadvantage of variance analysis using

planning and operating variances. (2 marks) (d) Calculate the mixture and yield operating variances. (6 marks) (e) Suggest possible reasons for the mix and yield variances. (2 marks) (Total: 20 marks)


Final Assessment

QUESTION 4 The following monthly budgeted cost values have been taken from the budget working papers of MZ Limited for the year ended 30 September 20X8.

Activity level 60% 70% 80% $ $ $

Direct materials 30,000 35,000 40,000 Direct labour 40,500 47,250 54,000 Production overhead 46,000 52,000 58,000 Selling overhead 15,000 17,000 19,000 Administration overhead 28,000 _______ 28,000 _______ 28,000 _______ 159,500 _______ 179,250 _______ 199,000 _______

During September 20X8, actual activity was 1,292 units (which was equal to 68% activity) and actual costs were:

$

Direct materials 33,500 Direct labour 44,000 Production overhead 46,250 Selling overhead 16,150 Administration overhead 27,800 _______ 167,700 _______

Required: (a) Prepare a budgetary control statement for MZ Limited on a flexible budget basis for

the month of September 20X8. (12 marks) (b) Explain the difference between fixed and flexible budgets, and state when each

should be used to control costs. (4 marks) (c) The preparation of budgets is an important task that relies on the identification of the

principal budget factor. Explain the term ‘principal budget factor’ and state its importance in the budget preparation process. (4 marks)

(Total: 20 marks)



QUESTION 5 BLA Ltd is a design consultancy that provides advice to clients regarding property maintenance and improvements. BLA Ltd does not undertake building work on behalf of its clients but will recommend contractors that undertake the type of work requested. The following information is also relevant: (i) Each chargeable consultation is charged at a rate of $150 per consultation.

(ii) The consultants are each paid a fixed annual salary of $45,000. In addition they receive a bonus of 40% of the fee income generated in excess of budget.

(iii) In an attempt to gain new business, consultants may undertake consultations on a ‘no-fee’ basis. Such consultations are regarded as Business Development Activity by the management of BLA Ltd.

(iv) Consultants will sometimes undertake remedial consultations with clients who experience problems at the time when work commences on each client’s site. Remedial consultations are also provided on a non-chargeable, i.e. ‘no fee’ basis.

(v) BLA Ltd has a policy of maintaining staff at a level of 45 consultants on an ongoing basis, irrespective of fluctuations in the level of demand. Also, BLA Ltd has retained links with retired consultants and will occasionally subcontract work to them, if current full-time consultants within a particular category are fully utilised. During the year subcontractors only undertook non chargeable client consultations. BLA Ltd pays these subcontractors $150 per consultation.

(vi) In November 20X2, BLA Ltd purchased ‘state of the art’ business software for use by its consultants in simulating design improvements. The software was used throughout the year by consultants who specialise in landscape and garden design. It is now planned to introduce the use of the software by the other categories of consultant within BLA Ltd.

(vii) Other operating expenses (excluding the salaries of the consultants) were budgeted at $2,550,000 for the year to 31 October 20X3. The actual amount incurred in respect of the year to 31 October 20X3 was $2,805,000, which excludes payments to subcontractors.


Final Assessment

BLA Ltd: Sundry statistics for year ended 31 October 20X3

Budget Actual

Total client enquiries:

New business 67,500 84,000

Repeat business 32,400 28,000

Number of chargeable client consultations:

New business 24,300 22,400

Repeat business 16,200 19,600

Number of non-chargeable client consultations undertaken by BLA consultants:

Number of business development consultations 1,035 1,200

Number of remedial consultations 45 405

Number of non-chargeable client consultations undertaken by subcontractors:

120

Other statistics:

Number of complaints 324 630

Required: Fitzgerald and Moon have suggested that business performance should be measured in a number of ways. Assess the performance of BLA with respect to the following dimensions: (a) Financial performance (5 marks) (b) Service quality (4 marks) (c) Flexibility (3 marks) (d) Resource utilisation (4 marks) (e) Innovation (4 marks) (Total: 20 marks)


Final Assessment

ACCA

Paper F5

Performance Management June 2009

Final Assessment – Answers

To gain maximum benefit, do not refer to these answers until you have completed the final assessment questions and submitted them for marking.

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Final Assessment

ANSWER 1

(a) (i) OAR = activity of level Budgeted

overheads Budgeted = $8m

$880,000 = 11% of list price

Selling and distribution charge for Order A = 11% of $1,200 = $132 Selling and distribution charge for Order B = 11% of $900 = $99

(ii) Cost driver rates

Invoice processing

Cost per invoice = invoices 8,000$280,000 25%× = $8.75 per invoice

Cost per invoice line = lines invoice 28,000

$280,000 75%× = $7.50 per invoice line

Packing $32 for large packages and $25 for small packages. Delivery

Loading costs = journeys 1,000

$40,000 = $40 per journey

There are 12 small packages to a lorry and so the loading costs are $40/12 = $3.33 per small package. There are 6 large packages to a lorry and so the loading costs are $6.67 per large package.

Mileage costs = miles 350,000$40,000 $180,00 − = $0.40 per mile

Other overheads

Cost per order = orders 8,000

$200,000 = $25 per order



A B $ $

Invoice processing 8.75 8.75 $7.50 × 2 15.00 $7.50 × 8 60.00 Packing 25.00 32.00 Delivery 3.33 6.67 $0.40 × 8 3.20 $0.40 × 40 16.00 Other overheads 25.00 _____ 25.00 ______ Charge for selling and distribution 80.28 _____ 148.42 ______

(b) Strengths and weaknesses of proposed system

The present system is very simple but makes no attempt to link the selling and distribution costs to the factors which cause those costs. The present system simply charges all orders a blanket rate of 11% on list price. The proposed ABC system is still very simple but makes some effort to determine the cost drivers, i.e. those factors which are most closely related to the way in which the costs of an activity are incurred. For instance, it has been found for the invoice processing costs that the costs are affected by the number of invoices issued, but also by how complicated the invoices are, i.e. how many different lines there are on the invoice. Charging out the invoice processing costs on the basis of the two cost drivers above will result in more accurate costs and will give more information about the cost structure and the cost drivers in order to improve cost control. Once the cost structure is known, efforts can be made to reduce the volume of activity of the cost driver (e.g. the 28,000 invoice lines) and/or the cost of the cost driver (e.g. the £7.50 per invoice line).

It is argued by ABC supporters that the better costs calculated under ABC can then be used as the basis for fixing selling prices and that these selling prices relate to the true cost of the order and thus will prevent loss-making orders. F plc can also compare the true costs of the different elements of the system against the costs of outsourcing. The more accurate costs determined under an ABC system can be used to justify selling prices or selling price increases to customers. Whilst it is undoubtedly true that ABC gives more accurate costs, it is also true that it will be more expensive to implement and the benefit may not exceed the cost. The proposed system, here, is still very simple and it is possible that a more detailed analysis would provide further useful information. ABC attempts to find the cost driver for each type of cost and thus avoid the arbitrariness of absorption costing but, here, some costs are still charged on an arbitrary basis, e.g. the other overheads.


Final Assessment

MARKING GUIDE

Marks

(a) (i) OAR 1 Order A costs 1 Order B costs 1 _

Total 3 (ii) Cost driver rates Invoice processing 2 Packing 1 Delivery 2 Other 1 Order A costs (0.5 per cost element) 3 Order B costs (0.5 per cost element) 3 _

Total 12 (b) 1 mark for each point made, to a maximum of 5 5 __ Total 20 __



ANSWER 2 (a) Step 1: determine limiting factor

Resources needed Resources available

Cleaning materials 0.2 (W) × 8,000 + 0.3 (W) × 10,500 4,750 5,000 Direct labour 0.2 (W) × 8,000 + 3

1 (W) × 10,500 5,100 6,000

Machine hours 6

1 (W) × 8,000 + 0.5 (W) × 10,500 6,583 5,000

∴ Machine hours are the limiting factor.

Workings

Laundry Dry cleaning

Cleaning materials $10/litre × Number of litresBal 2.00 3.00 Direct labour $6/hour × Number of hoursBal 1.20 2.00 Variable machine cost $3/hour × Number of hoursBal 0.50 1.50

We can work out the balancing figures.

Laundry Dry cleaning $ $

Cleaning materials $10/litre × 0.2 litres 2.00 $10/litre × 0.3 litres 3.00 Direct labour $6/hour × 0.2 hours 1.20 $6/hour × 3

1 hour 2.00

Variable machine costs $3/hour × 6

1 hour 0.50 $3/hour × 0.5 hour 1.50

Step 2: Key factor analysis

Laundry Dry cleaning $ $ Selling price 7.00 12.00 Cleaning materials 2.00 3.00 Direct labour 1.20 2.00 Variable machine cost 0.50 ____ 1.50 ____ Contribution per unit 3.30 5.50 ÷ Number of machine hours per unit ÷ 6

1 ÷ 0.5

Contribution per machine hour 19.80 11.00 Priority 1st 2nd


Final Assessment

Units Machine hours Contribution £

Laundry 8,000 × 61 hour 1,333.33 26,400

Dry cleaning 7,333.33Bal 2 × 0.5 hour 3,666.67 _________ Bal 40,333 ______

5,000 _________ 66,733 ______

Tutorial note: Notice that the minimum order does not come into it. The optimum plan as shown above fulfils the minimum requirement.

Unusually we were not actually asked for contribution or profit but will need it later on.

(b) (i)

Laundry Dry cleaning $ $ Selling price 5.60 13.20 Cleaning materials 2.00 3.00 Direct labour 1.20 2.00 Variable machine cost 0.50 ____ 1.50 ____ Contribution per unit 1.90 6.70

Let L = Number of laundry services Let D = Number of dry cleaning services Objective function: Maximise contribution = 1.9L + 6.7D Subject to: 1 0.2L + 0.3D ≤ 5,000 (Cleaning materials) 2 0.2L + 3

1 D ≤ 6,000 (Direct labour)

3 61 L + 0.5D ≤ 5,000 (Machine hours)

4 L ≥ 1,200 (Minimum requirement for laundry) 5 D ≥ 2,000 (Minimum requirement for dry cleaning) 6 L ≤ 14,000 (Maximum demand for laundry) 7 D ≤ 9,975 (Maximum demand for dry cleaning) 8 L, D ≥ 0 (Non-negativity constraint)



(ii) Tutorial note:

In order to plot the graph we must turn the constraints into equations. Then we can plot the lines which the equations represent on the graph. Constraints 4 – 7 are the easiest and simply represent horizontal and vertical lines on the graph. L = 1,200 D = 2,000 L = 14,000 D = 9,975

9,975

2,000

1,200 14,000

D

L

The first constraint is a little bit more difficult. The topic is LINEAR programming and we are therefore talking about straight lines. We need two points to define a straight line:

0.2L + 0.3D = 5,000

The easiest thing to do usually is to make one of the variables equal to zero and then find the value of the second variable. Then make the second variable equal to zero and find the value of the first.

If L = 0, then 0.2L = 0 and the equation becomes:

0.3D = 5,000

∴ D = 0.3

5,000 = 16,667

If D = 0, then 0.3D = 0 and the equation becomes:

0.2L = 5,000

∴ L = 0.2

5,000 = 25,000

The straight line therefore connects 16,667 on the D axis with 25,000 on the L axis.


Final Assessment

Similarly, for the second and third constraints:

0.2L + 31 D = 6,000

61 L + 0.5D = 5,000

Linear programming solution for W plc

18,000

16

b

a

c

d

,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

L = 1,200 L = 14

0 5,000 10,000 15,000 20,000 25,000 30,000

,000

D = 9,975

Direct labour 0.2L + 0.3D = 5,000

Number of dry cleaning

services

Number of laundry services

Machine hours 1/6L + 0.5D = 5,000

Direct labour 0.2L + 1/3D = 6,000

ISO – contribution line

D = 2,000

Feasible region

16,667

25,000

D

L

D L

30,000 0 10,000

0

D L

30,000 0 18,000

0



Tutorial note:

The axes could have been shown the other way around, i.e. with laundry services on the vertical axis and dry cleaning services on the horizontal axis.

Examination tip: The optimum solution can be found by one of two main methods – the iso-contribution line or ‘testing each corner’. Choose whichever method you prefer. Testing each corner The optimum solution has to be a ‘corner’, i.e. an intersection of two or more lines. The four corners on the graph have been labelled a, b, c and d. (These are the four corners of the feasible region.) We can eliminate node (a) as a possible optimum solution because it is not as good as node (b). Node (b) has the same number of laundry services (1,200) as (a) but it has more dry cleaning services and therefore more contribution and is better. Similarly, node (d) is no good. Node (c) is better. Node (c) has the same number of laundry services (14,000) as (d) but has more dry cleaning services and therefore more contribution. The choice is therefore between node (b) and (c). We need to find the values for L and D at those two points and calculate the contributions. We need to solve simultaneous equations. Luckily they are fairly simple. Node (b) Node (b) lies on the intersection of two lines:

61 L + 0.5D = 5,000

L = 1,200

We can substitute this value for L into the first equation and find D:

61 × 1,200 + 0.5 D = 5,000

200 + 0.5D = 5,000 0.5D = 5,000 − 200 0.5D = 4,800

∴ D = 0.5

4,800 = 9,600

Contribution = 1,200 × 1.9 + 9,600 × 6.7 = 66,600


Final Assessment

Node (c) Node (c) lies on two lines:

61 L + 0.5D = 5,000

L = 14,000

Substituting the value of L into the first equation:

61 × 14,000 + 0.5D = 5,000

2,333.33 + 0.5D = 5,000 0.5D = 2,666.67

∴ D = 0.5

2,666.67 = 5,333.33 units

Contribution = 14,000 × 1.9 + 5,333.33 × 6.7 = 62,333 The optimum plan according to the linear programming solution is to undertake 1,200 laundry services and 9,600 dry cleaning services. This gives a contribution of £66,600. This contribution is not as good as the £66,733 contribution that we got with the original plan. Therefore we should stick with the original selling prices. Tutorial note: The iso-contribution line The optimum point could also be found by means of an iso-contribution line. An iso-contribution line is a line connecting points representing combinations of L and D which give the same contribution. If the iso-contribution line is then moved out from the origin parallel to its original position, then this will represent a better line with more L and/or more D and therefore more contribution. The idea then is to move the line out as far as possible until it is just about to leave the feasible region. The last point it touches before it leaves the feasible region is the optimum solution. The first step is to set up the iso-contribution line. L has a contribution of 1.9 D has a contribution of 6.7 1.9 × 6.7 = 12.73 To get a contribution of 12.73 we would need 6.7 Ls (12.73/1.9) or 1.9Ds (12.73/6.7). If we draw a line connecting 6.7 on the L axis with 1.9 on the D axis then this would be an iso-contribution line with every point giving a contribution $12.73.



After this first step the line is often not that useful, i.e. is difficult to plot on the graph. We simply multiply both numbers by 2 or 5 or 10 or 100 or 1,000 or whatever until it is easy to plot the line. We will multiply by 1,000 and therefore the line will connect 6,700 on the L axis with 1,900 on the D axis. Once the line has been drawn it can be moved out parallel from its original position until it leaves the feasible region. The last point it touches is the optimum solution which is node (b).

MARKING GUIDE

Marks

(a) Determining limiting factor (½ mark per balancing figure on cost card and 1 mark per resource required figure)

6

Key factor analysis (1 mark for ranking) 1 _

7 (b) (i) ½ mark for each constraint, 1 mark for objective 5 (ii) Drawing graph 6 Identifying optimal point 1 Answering question 1 _

13 __ Total 20 __


Final Assessment

ANSWER 3 Working

Original standard Revised standard Actual

Fruit Price $0.16 $0.19 $0.18 Quantity 400 kg 400 kg 428 kg Syrup Price $0.10 $0.12 $0.12 Quantity 700 kg 700 kg 742 kg Pectin Price $0.332 $0.332 $0.328 Quantity 99 kg 99 kg 125 kg Citric Acid Price $2.00 $2.00 $0.95 Quantity 1 kg 1 kg 1 kg

(a) The planning variances relate only to fruit and syrup prices.

Fruit Syrup $ $

RSQ × RSP 76 84 RSQ × SP 64 __ 70 __ 12 __ A 14 __ A

Total planning variance = $12 + $14 = $26 A (b)

Fruit Syrup Pectin Citric Acid $ $ $ $

AQ × AP 77.04 89.04 41.00 0.95 AQ × SP 81.32 89.04 41.50 2.00 SQ × SP 76.00 84.00 32.87 2.00 Price variance 4.28 F 0 0.50 F 1.05 F Usage variance 5.32 A 5.04 A 8.63 A 0

Total price variance = $5.83 F Total usage variance = $18.99 A Total ingredients variance = $13.16 A

(c) The main problem with conventional variance analysis for budgetary control reporting

purposes is that its emphasis on comparison between actual and planned performances results in a disregard for changes in these planned results. Because standards become out of date and unrealistic, the traditional accounting model does not serve as an opportunity cost system.

The operational variance measures management's operating efficiency by comparing actual results with revised standard. This variance reflects opportunity costs. That is, the gain or loss as a result of actual performance differing from a realistic standard. Hence operational variances tend to be controllable. The planning variance compares the original budget with the revised budget. This variance reflects planning error.



However, it may not be practical to find all possible perfect substitutes for the resources actually used. It may also be difficult to obtain accurate revised standard costs for the resources actually used and their substitutes. In general, there is a resistance to change. Most companies still use the traditional approach.

(d)

Workings Fruit Syrup Pectin Citric Acid Total

AQ × AM 428 742 125 1 1,296 AQ × SM 432 756 106.92 1.08 1,296 SQ × SM 400 700 99 1 1,164/0.97 = 1,200 SP ($) 0.19 0.12 0.332 2 Variances Mix variance ($) 0.76 F 1.68 F 6.00 A 0.16 F 3.40 A Yield variance ($) 6.08 A 6.72 A 2.68 A 0.16 F 15.59 A

Check: Mix + Yield = $3.40 A + $15.59 A = $18.99 A = Usage variance (e) The mix has been changed so that more of the expensive ingredient pectin has been

used, and less of the cheaper ingredients, fruit and syrup, have been used. This has caused the overall adverse mix variance.

The yield variance means that more input was required for the given output. This means there was an abnormal loss, causing the adverse variance.

MARKING GUIDE

Marks

(a) Choosing only fruit and syrup prices 1 Identification of the original and revised standard prices 1 Fruit variance 2 Syrup variance 2 _

6 (b) Each ingredient, 1 mark for the variances × 4 4 (c) 1 mark for each advantage and disadvantage 2 (d) Mix variance 3 Yield variance 3 _

6 (e) 1 mark for each reason, to a maximum of 3 __ Total 20 __


Final Assessment

ANSWER 4 (a) Budgetary control statement

Flexed budget Actual Variance $ $ $

Direct materials (W1) 34,000 33,500 500 F Direct labour (W2) 45,900 44,000 1,900 F Production overhead(W3) 50,800 46,250 4,550 F Selling overhead (W4) 16,600 16,150 450 F Administration overhead 28,000 _______ 27,800 _______ 200 _____ F

175,300 _______ 167,700 _______ 7,600 _____ F

Workings

(W1) (30000/60) × 68 = 34,000 (W2) (40,500/60) × 68 = 45,900 (W3) Variable cost = (58,000 – 46,000)/20 = 600 per percentage 68% is an extra 8% above 60%, making overhead cost − $46,000 + 8 × 600 = $50,800 (W4) Variable cost = (19,000 – 15,000)/20 = 200 per percentage Selling overhead = 15,000 + 8 × 200 = 16,600

(b) A fixed budget is a budget which shows the costs and revenues for a single level of

activity. A flexible budget shows costs and revenues for more than one level of activity so that costs etc. can be predicted for other activity levels. Fixed budgets are useful for controlling costs where the objective is to limit (cap) the level of expenditure – for example in the public sector ore in charities. Flexible budgets are used to control costs where the objectives are the efficient procurement and utilisation of resources.

(c) The principle budget factor is the factor which limits the activities of the organisation

during the budget period.

It is important that the principal budget factor is identified at the outset of the budget preparation process. If this is not done any budgets which are prepared will be impossible to achieve. If budgets are impossible to achieve, any subsequent performance evaluation will be meaningless.



(d) The role of the budget committee is to communicate with budget holders and coordinate the budget setting process.

The committee will produce a budget manual which provides detailed guidance for managers in preparing their budgets. The committee will communicate with the Board of Directors, advising them of the progress being made.

MARKING GUIDE

Marks

(a) Flexed budget Materials 1 Labour 1 Production overhead 2 Selling overhead 2 Admin overhead 1 _

7 Variances, 1 mark each variance 5 _

12 (b) 1 mark each point, to a maximum of 4 (c) 1 mark for each valid point, to a maximum 4 Total 20 ___


Final Assessment

ANSWER 5 (a) Financial performance Summary Income Statement

Budget Actual $000 $000

Fee income (W1) 6,075 _____ 6,300 _____ Costs: Consultants’ salaries (W2) 2,025 2,025 Bonus (W3) _____ 90 _____ 2,025 2,115 Other operating costs 2,550 2,805 Subcontract payments (W4) 0 _____ 18 _____ 4,575 _____ 4,938 _____ Net profit 1,500 _____ 1,362 _____

(W1) Fee income Budget 40,500 chargeable consultations × $150 Actual 42,000 chargeable consultations × $150 (W2) Consultants’ salaries 45 consultants × $45,000 (W3) Bonus 40% of $(6,300,000 – 6,075,000) (W4) Sub-contract payments 120 consultations × $150

It is clear that BLA has not performed as well as expected during the year to 31 October 20X3. Whilst client income is above budget, other operating expenses reached a level which is more than 10% higher than the budget for the year, and thus it would be extremely useful to have a more detailed breakdown of other operating expenses for the year. Consultants have earned an aggregate bonus of $90,000 in respect of activity above budgeted levels. Payments to subcontractors amounted to $18,000. Actual profit amounts to $1,362,000 against a budget of $1,500,000. It would be extremely useful to see the results of the previous two years in order to assess whether there are any discernible trends in revenues and costs. The budget for the following year should be reviewed in the light of the actual performance of this year with particular reference to checking the footing of the assumptions upon which it has been prepared.



(b) Service quality

Quality of service is the totality of features and characteristics of the service package that bear upon its ability to satisfy client needs. To some extent the increase in the number of complaints and non-chargeable consultations associated with the remedying of those complaints is indicative of a quality problem that must be addressed. • Client complaints received during the year were nearly double the budgeted

level. • Also the number of remedial consultations was 405 against a budgeted level

of only 45, which is exactly nine times higher than budget.

Perhaps BLA Ltd should review and, if necessary, limit the amount of remedial consultancy provided to any one particular client.

(c) Flexibility

Flexibility may relate to the company being able to cope with flexibility of volume, delivery speed or job specification. It is a deliberate policy of BLA Ltd to retain 45 consultants thereby maintaining flexibility to meet increasing demand. The delivery speed will be increased as a consequence of the retention of consultants. The fact that links have been retained with retired consultants will give an added dimension of flexibility in times of very heavy demand upon its consultants.

(d) Resource utilisation

Resource utilisation measures the ratio of output achieved from those resources input. In this scenario the mean number of consultations per consultant may be used as a guide. Average consultations per consultant

Budget Actual Increase/(decrease) Chargeable consultations 900 933 3.7% Non-chargeable 24 36 50% It is interesting to note that consultants are being utilised above budgeted levels for both chargeable and non-chargeable consultations. These figures would also suggest that the proportion of chargeable consultations has decreased indicating a fall in utilisation. BLA Ltd has adopted an innovative approach that requires consultants to undertake non-chargeable business development consultations which have at their heart the intention of generating new business. Hence in the immediate sense there is a trade-off between resource utilisation and innovation.


Final Assessment

(e) Innovation

Innovation should be viewed in terms of its impact on financial performance, competitiveness, service-quality, flexibility and resource utilisation in the short, medium and long term. Certainly the non-chargeable activity in terms of ‘business development’ is an innovative feature within the business of BLA Ltd, as is the non-chargeable remedial consultancy provided to clients who experience problems at the commencement of building works. The acquisition of ‘state of the art’ business software is by its very nature innovative. This has probably enabled BLA Ltd to differentiate its services from those of its competitors and enhance its reputation. The management should ensure the introduction of the software has not caused the increase in the number of complaints received.

MARKING GUIDE

Marks

(a) One mark for each relevant point, up to a maximum of 5 (b) One mark for each relevant point, up to a maximum of (c) One mark for each relevant point, up to a maximum of (d) One mark for each relevant point, up to a maximum of (e) One mark for each relevant point, up to a maximum of

4 3 4 4 __

Total 20 __


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