ACCA F5 Performance Management - 2010 - Study text

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Practice questions

Performance measurement

43 Balanced 437

44 Pyramid 438

45 Threeservices 438

46 Privatemedicalpractice 439

47 Traintimes 439

48 Growthobjective 440

49 Responsibility 442

50 CrossStreetsHotel 442

51 Non‐financialperformance

measurements



443

Divisional performance and transfer pricing

52 Decentralisation 443

53 ROI 443

54 WestDivision 444

55 Residual 445

56 Twodivisions 446

57 Trainingcompany 446

58 Shadowprice 447

59 Bricks  447

Paper F5: Performance management

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1 HEN

HEN has a single production process, for which the following costs have been

estimated for the period ending 31st December Year 7:

Material receipt and inspection costs 31,200

Power costs 39,000

Material handling costs 27,300

HEN makes three products - X, Y and Z. These products are made by the same

group of employees, using power drills. The employees are paid $8 per hour.

The following budgeted information has been obtained for the period ending 31st

December Year 7:

Product X

Product Y Product Z

Production quantity (units) 2,000

1,500 800

Batches of material 10

5 15

For each unit of product:

Direct material (metres) 5

6 2.5

Direct material cost ($) 4

3 6

Direct labour (minutes) 24

40 60

Number of power drill operations (per unit) 8

4 5

Overhead costs are currently absorbed into the cost of production units using an

absorption rate per direct labour hour. A factory-wide absorption rate is used for

work in all the production departments.

An activity based costing investigation has revealed that the cost drivers for the

overhead costs are as follows:

 Material receipt and inspection: number of batches of material

 Power: number of power drill operations

 Material handling: quantity of material (metres) handled.

Required

Prepare a summary of the budgeted production cost per unit for each of the

products X, Y and Z for the period ending 31 December Year 7:

(a) using the existing method for the absorption of overhead costs, and

(b) using an approach based on activity based costing, and the information

available about cost drivers.

Practice questions

2 Lardco

Lardco is a warehousing and distribution company. It receives and stores products

from customers, and then re-packs them for distribution as required. There are three

customers for whom the service is provided – Customer A, Customer B and

Customer C. The products stored and re-packaged for all three customers are

similar in nature and size, but some are more fragile than others and break more

easily. These have to be packaged more carefully.

Basic budget information has been gathered for the year to 31 December Year 6 and

is shown in the following table:

Products handled

units

Customer A 30,000

Customer B 45,000

Customer C 25,000

Costs

$000

Packaging materials (See note) 1,950

Labour:

basic pay 350

overtime pay 30

Occupancy costs 500

Administration and management costs 60

Note

Packaging materials are used in re-packing each unit of product for Customer A,

Customer B and Customer C in the ratio 1:2:3 respectively. This ratio is linked to the

relative fragility of the goods for each customer. It applies to the cost of packaging

materials but not to the costs of labour and overhead.

Additional information has been obtained so that unit costs can be prepared for

each of the three customers using an activity based costing approach. The additional

information for the year to 31 December Year 6 has been estimated as follows:

(1) Labour and overhead costs have been identified as attributable to each of

three work centres: receipt and inspection, storage, and packing as follows:

(2)

Cost allocation proportions

Receipt and

inspection

Storage

Packing

% %

Labour:

Basic pay 20

10 70

Occupancy cost 20

60 20

Administration cost 40

10 50

Labour: overtime pay $15,000

$6,250 $8,750

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(3) A study has shown that the fragility of different goods affects the receipt and

inspection time needed for the products for each customer. Storage required is

related to the average size of the basic incoming product units from each

customer. The re-packing of goods for distribution is related to the complexity

of packaging required by each customer. The relevant requirements per unit

of product for each customer have been evaluated as follows:

Customer A

Customer B Customer C

Receipt and inspection (minutes) 6

9 15

Storage (square metres) 0.3

0.3 0.3

Packing (minutes) 36

45 60

Required

(a) Calculate the average cost per unit of packaged products for each customer

using each of the following methods:

(i) Ignoring the ABC study, calculate a cost per unit using traditional

absorption costing.

(ii) Taking an activity based costing approach, using the information

provided.

(b) Suggest ways in which activity based costing might improve product costing

and cost control for Lardco.

3 LCC

LCC has total budgeted production overheads for next year of $816,000 and has

traditionally absorbed overheads on a machine hour basis. It makes two products,

Product V and Product W.

Product V

Product W

Direct material cost per unit $20

$60

Direct labour cost per unit $50

$40

Machine time per unit 3 hours

4 hours

Annual production 6,000 units

4,000 units

Required

(a) Calculate the product cost for each of the two products on the assumption the

firm continues to absorb overhead costs on a machine hour basis.

(b) The company is considering changing to an activity based costing (ABC)

system and has identified the following information:

Product V

Product W

Number of setups 18

Number of purchase orders 48

112

Practice questions

Overhead cost analysis $

Machine-related overhead costs 204,000

Setup related overhead costs 280,000

Purchasing-related overhead costs 332,000

Total production overheads 816,000

You are required to calculate the unit cost for each of the two products on the

assumption that the firm changes to an ABC system, using whatever

assumptions you consider appropriate.

improving profitability.

4 Customer profitability

PQR sells a range of five products. Budgeted annual data for sales and costs are as

follows:

Product Selling price

Variable cost

Annual sales

Unitd

A 3.60

2.40

100,000

B 2.50

2.00

150,000

C 4.00

2.80

120,000

D 2.40

1.50

180,000

E 6.00

4.00

80,000

The products are sold to four different types or category of customer, as follows:

% of annual sales

Category of customer

Product C1 C2 C3 C4

A 10% 20% 20% 50%

B 40% - 30% 30%

C 10% 20% 10% 60%

D 30% 10% 20% 40%

E 20% - 20% 60%

Fixed costs

Budgeted total fixed costs for the year are $465,000, analysed as follows:

Delivery costs 250,000

Order processing costs 105,000

Cost of promotion events 30,000

385,000

Other fixed costs 80,000

465,000

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The company operates an activity based costing system. Relevant budgeted data

relating to activities is as follows:

Category of customer

C3 C4

Number of deliveries 40

50 100

Number of orders 30

50 60

Number of promotion events 0

2 10

Average km per delivery 100

200

300 150

The cost drivers for each activity are:

 Delivery: kilometres (km)

 Order processing: number of orders

 Promotion events: number of promotion events

 The other fixed costs are general fixed costs, and are not allocated to activities,

products or customers.

Required

Using activity based costing, prepare a statement of budgeted customer

profitability, for each category of customer.

5 Backflush

Transactions for the year for AYZ are as follows:

Purchases of raw materials $5,000,000

Conversion costs $3,000,000

Finished goods manufactured 100,000 units

Sales 98,000 units at $100 per unit

There was no inventory at the beginning of the year. The cost per unit is $80,

consisting of $50 per unit for materials and $30 per unit for conversion costs.

Required

Show the book-keeping entries in the cost accounting system using backflush

accounting, with two trigger points.

6 Throughput

A company manufactures two products, product X and product Y, on the same

machines. Sales demand for the products exceeds the machine capacity of the

company’s production department. The potential sales demand in each period is for

8,000 units of Product X and 12,000 units of Product Y. Sales prices cannot be

increased due to competition from other firms in the market. The maximum

machine capacity in the production department is 32,000 hours in each period.

Practice questions

The following cost and profitability estimates have been prepared:

Product X

Product Y

Sales price 22

Direct materials 10

Direct labour and variable overhead 6

Contribution per unit 6

Machine hours per unit 1.5 hours

2 hours

Fixed costs in each period are $90,000.

Required

(a) Using marginal costing principles, calculate the profit-maximising output in

each period, and calculate the amount of profit.

(b) Explain how throughput accounting differs from marginal costing in its

approach to maximising profit.

Product X and for Product Y. You should assume that the direct labour cost

and variable overhead cost in your answer to part (a) is fixed in the short term.

(d) Using throughput accounting principles, calculate the profit-maximising

output in each period, and calculate the amount of profit.

7 Throughput ratio

Dustco exports cases to Spain. Each pallet of cases costs $2,000 in material costs and

are sold for $3,000. Production and sales are limited by a shortage of highly trained

quality control inspectors. Only 200 inspection hours are available per week. Every

pallet is inspected and an inspection takes 30 minutes.

Other factory costs are $300,000 per week.

Required

Calculate the throughput accounting ratio.

8 Four products

A company makes four products, W, X, Y and Z, using the same single item of

direct material in the manufacture of all the products. Budgeted data for the

company is as follows:

Product W

Y Z

Annual sales demand (units) 4,000

4,000

6,000 3,000

$ $

Direct materials cost 5.0

4.0

8.00 6.00

Direct labour cost 4.0

6.0

3.00 5.00

Variable overhead 1.0

1.5

0.75 1.25

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Fixed overhead 8.0

12.0

6.00 10.00

Full cost 18.0

23.5

17.75 22.25

Sales price 50.0

31.5

59.75 54.25

Profit per unit 32.0

8.0

42.00 32.00

Due to restricted supply, only $78,000 of direct materials will be available during the

year.

Required

Identify the quantities of production and sales of each product that would maximise

annual profit.

9 Limiting factors

(a) Company X manufactures four liquids: A, B, C and D. The selling price and

unit cost details for these products are as follows:

Liquid A

Liquid B

Liquid C Liquid D

$ per litre

$ per

litre

$ per litre

Selling price 100

110

120 120

Costs:

Direct materials 24

16 21

Direct labour

(£6/hour) 18

24 27

Direct expenses 0

3 0

Variable overhead 12

16 18

Fixed overhead

(note 1) 24

32 36

Total cost per litre 78

91 102

Profit per litre 22

29 18

Note 1

Fixed overhead is absorbed on the basis of labour hours, based on a budget of

1,600 hours per quarter (three months).

During the next three months the number of direct labour hours is expected to

be limited to 1,345 hours. The same labour is used for all products.

The marketing director has identified the maximum demand for each of the

four products during the next three months as follows:

Liquid A 200 litres

Liquid B 150 litres

Liquid C 100 litres

Liquid D 120 litres

No inventories are held at the beginning of the period that could be used to

satisfy demand in the period.

Practice questions

Required

(i) Determine the number of litres of liquids A, B, C and D to be produced

and sold in the next three months in order to maximise profits.

(ii) Calculate the profit that this would yield.

Company X and one of its customers, Company Y. Company X has agreed to

supply Company Y with supply 20 litres of each A, B, C and D during the

three month period.

This sales demand from Company Y is included in the demand levels shown

above in part (a) of the question.

Required

(i) Given the contract with Company Y, determine the number of litres of

liquids A, B, C and D to be produced and sold in the next three months

in order to maximise profits, if the maximum number of labour hours

remain 1,345 hours for the period.

(ii) Calculate the profit that this would yield.

10 Shortages

An engineering company has been experiencing problems with restricted

availability of resources. The company manufactures a variety of casings. It makes

four types of casing. Each casing requires the same bought-in component and some

high-grade steel. The standard costs for the four types of casing are as follows:

Casing A

C D

$ $

Steel 250

500

190 390

Bought-in component 50

50 50

Direct labour 60

50 100

Variable production costs 40

40 50

Fixed production costs 180

240

150 270

Selling and administration costs 145

225

120 215

Profit 35

30 55

Selling price 760

1,180

630 1,130

All the selling and administration costs are fixed and the same single component is

used for each of the four products. Direct labour is paid $8 per standard hour and

each member of the workforce is capable of producing any of the casings.

The company’s main customer has ordered 30 units of Casing A, 20 units of B, 30

units of C and 20 units of D for production and delivery in the next month. Senior

Paper F5: Performance management

management have agreed that this order should be treated as a priority order and

that these casings must be manufactured and delivered to the customer next month.

This is necessary to maintain the goodwill of the customer. It is estimated that this

order represents 10% of the total demand next month for each type of casing.

The company operates a just in time system, and has no inventories of steel,

components or finished goods.

Required

If the aim is to maximise profit for the month, establish the production and selling

plan for the company next month in each of the following situations:

(a) Situation 1. Supplies of steel are limited to $250,000.

(b) Situation 2. Only 400 bought-in components are available from suppliers.

month to 2,125.

(d) Situation 4. A labour dispute restricts available productive labour hours in the

month to 2,125; but the manufacture of any quantities of the four casings

could be sub-contracted to and outside supplier. The cost of buying the

casings externally would $475, $705, $380 and $640 for Casing A, Casing B,

Casing C and Casing D respectively. In addition, it should be assumed that

the major customer insists that its order is completed by the company itself

and the manufacture should not be sub-contracted.

Each of the restrictions on production should be treated independently, as four

different situations.

11 Proglin

(a) Proglin is a manufacturing company. It makes and sells two versions of a

product, Mark 1 and Mark 2. The two products are made from the same direct

materials and by the same direct labour employees.

The following budgeted data has been prepared for next year:

Mark 1 Mark 2

Direct materials per unit $2 $4

Direct labour hours per unit 3 hours 2 hours

Maximum sales demand 5,000 units unlimited

Contribution per unit $10 per unit $15 per unit

Direct materials and direct labour will be in restricted supply next year, as

follows:

Maximum available

Direct materials $24,000

Direct labour hours 18,000 hours

ACCA F5 Performance Management - 2010 - Study text - Emile Woolf Publishing

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