F5 Performance Management Mock 1 December 2012 Answers

QUESTION 1 # Montreal Ltd. (a) Standard Profit per kg $ Sales Direct Material A (0.6 x $0.25) B (0.45 x $0.40) C (0.15 x $0.80) Other cost Fixed Cost ($9600/30000) Total Cost Profit per kg 0.15 0.18 0.12 0.05 0.32 0.82 0.88 $ 1.7

Total Budget for January = ($0.88 x 30000) = $ 26400 Actual Profit $ Sales (31000 x 1.70) Direct Material A (16700 x $0.25) B (11900 x $0.42) C (3800 x $0.80) Other cost (31000 x 0.05) Fixed Cost Total Cost Actual Profit 4175 4998 3040 1550 11520 25283 27417 $ 52700

(b) Reconciliation Statement Budgeted Profit Sales Volume profit Variance Standard Profit on Actual Sales Fav. Material Price Variance Material Mix Variance Material Yield Variance Fixed overhead Expenditure Variance Fixed overhead Volume Variance Actual Profit (i) Direct Material Price Variance A B C Total Direct Material Mix Variance A B C Total Direct Material Yield Variance A B C Total (31,000 x 0.6 (31,000 x 0.45 (31,000 x 0.15 0.6/1.2 x 32400) 0.45/1.2 x 32400) 0.15/1.2 x 32400) x x x 0.25 0.40 0.80 $ 600 (F) 720 (F) 480 (F) 1,800 (F) (0.6/1.2 x 32400 (0.45/1.2 x 32400 (0.15/1.2 x 32400 16,700) 11,900) 3,800) x x x 0.25 0.40 0.80 $ 125 (A) 100 (F) 200 (F) 175 (F) 16,700 11,900 3,800 x x x (0.25 0.25) (0.40 0.42) (0.80 0.80) $ 0 238 (A) 0 238 (A) 175 1,800 1,920 320 27,417 Adv. 238 26,400 880 27,280

(ii) Fixed overhead volume variance = (30,000 31,000) x 0.32 = 320 (F) Fixed overhead expenditure variance = (9600 11520) = 1920 (A) (iii) Sales Volume Variance = (30000 31000) x 0.88 = 880 (F) (c) Try yourself

QUESTION # 2 Pharaoh (a) Contribution per unit Sphinx Selling price Variable cost Contribution C/S ratio Rank 3.00 1.20 1.80 0.6 1 Pyramid 2.45 1.67 0.78 0.32 3 Mummy 4.00 2.60 1.4 0.35 2

Mix ratio = 460,000:1000,000:380,000 = 23:50:19 Selling price per mix = (23 x 3) + (50 x 2.45) + (19 x 4) = 267.5 Contribution per mix = (23 x 1.8) + (50 x 0.78) + (19 x 1.4) = 107 Average C/S ratio = 107/263.5 = 0.4 Breakeven Sales Revenue = 1710,000 / 0.4 = 4274,000 (b) Product Cumulative Sales 000 Sphinx Sphinx & Mummy Sphinx, Mummy & Pyramid 1380 1520 + 1380 = 2900 2450 + 1520 + 1380 = 5350 Profit/(loss) 000 (882) (350) 430

Multi-product profit/volume graph Try yourself

QUESTION 3 # Culture Centre (a) A number of difficulties arise when attempting to measure the performance of the Culture Centre.

Multiple Objectives

The Culture Centre will have multiple objectives, e.g. attract visitors to the town, showcase new artists, and improve the culture of local people. Even if they can all the clearly identified it may be impossible to say what overriding objective is.

Measuring Outputs

Outputs can seldom be measured in a way that is generally agreed to be meaningful as it is difficult to judge whether non quantifiable objectives have been met. (For example, how can we measure the quality of an exhibition?)

Data collection can be problematic. For example, the quality of service offered to visitors may be measured by the number and type of letters received either complaining or praising the centre. If this measure is used it ignores the majority of visitors who will not bother to write.

Lack of profit measure The Culture Centre is not expected to make a profit and as there is no admission charge. Financial indicators are therefore meaningless.

Nature of service provided

Like many non-profit seeking organizations that provide services, the Culture Centre will find it difficult to define a cost unit. This problem does exist for commercial service providers but problems of performance measurement are made simple because profit can be used.

Financial Constraints

Although every organization operates under financial constraints, these are more pronounced in non-profit seeking organizations. For instance, a commercial organizations borrowing power is

effectively limited by managerial prudence and the willingness of lenders to lend, but a local authoritys ability to raise finance for the Culture Centre (whether by borrowing or via local taxes) is subject to strict control by Central Government.

Political, social and legal constraints

Unlike Big Screen, the Culture Centre is subject to strong political influences. Local authorities, for example have to carry out central governments policies as well as their (possibly conflicting) policies.

The performance indicators of public sector organizations such as the Culture Centre are subject to far more onerous legal requirements than those of private sector organizations such as the Big Screen. Whereas profit seeking organizations are unlikely in the long term to continue services making negative contribution, non-profit seeking organizations may be required to offer a range of services, even if some are uneconomic.

(b) Value for Money involves providing a service in a way that is economical, efficient and effective (the 3Es). The Culture Centre can monitor the value for money being achieved by monitoring each of these criteria, bearing in mind that the achievement of one criterion might conflict with the achievement of others. In order to make such calculations meaningful they should be compared against prior year data or a similar business.

Economy is the attainment of the appropriate quantity and quality of inputs at the lower of cost. Fir example is assessing the salaries paid to staff the aim is to obtain the desired quality at the lowest price.

Effectiveness measures whether an organizations objectives have been achieved. The culture Centre has numerous and potentially conflicting objectives.

Efficiency is the relationship between inputs and outputs, in other words, obtaining the greatest possible output for a given input.

Economy

Performance Measures Average cost of staff

Culture Centre $532000/28 =$19000

Big Screen $312000/22 =$14182

Average cost of fees to artists/film distributors

$125000/15 =$8333

$350000/65 =$5384

The culture centre seems to achieve worse economy than Big Screen. A comparison of staff costs shows that the Culture Centre has higher average costs than Big Screen. However the desired skills and experience are not likely to be the same for both organizations. A better comparison would be to compare these ratios with other centers in other parts of the country.

The Culture Centre also has higher average cost of fees to artists / film distributors. However again there is a difficulty comparing these two organizations because of the differences in the nature of showing a film and an artists exhibition.

Effectiveness

The Culture Centre attracts 125000 visitors per year. This in itself may be the measure of success or otherwise of the centre (although this should be compared against a benchmark such as other similar attractions or prior year data once it exists).

It should be noted that however the average visits per local resident last year was lower than Big Screen.

Measures of success in meeting objectives such as to improve the cultural life of local residents will prove very difficult as this is hard to quantify.

The other data given does not enable a view to be taken on other objectives such as attracting new business.

Efficiency The Culture Centre could monitor the percentage of total days or hours which it was open. This would highlight the efficiency of usage of available resources and focus managers attention on the need to meet customers needs. The data indicates that the Culture Centre is open far less than Big Screen. Research would need to be undertaken to determine whether opening hours similar to Big Screen would be beneficial for the Culture Centre. Performance Measures Culture Centre Big Screen % of days open 255/365 =70% 363/365 =99%

% of hours open

70% x 8/24 =23%

99% x 14/24 =58%

Another measure of efficiency might be cost per artist/film. The data shows that this is far higher for the cultural centre. However again there is a difficulty here of not comparing like with like. For example, the set up costs for an exhibition may be far higher with more space required. In addition the Culture Centre has a museum as well as being an art gallery. The costs of the Culture Centre could be split between its different functions but this in itself is problematic. Performance Measures % of days open Culture Centre 1226000/15 =81733 Big Screen 31154000/65 =17754

Whilst these measures go some way towards assessing the Culture Centres performance they need to be compared to a similar organization in order to be able to draw meaningful conclusions from the data.

QUESTION 4 # MOC (a) A price-discrimination strategy is where a company sells the same products at different prices in different markets. Three conditions are necessary for the successful operation of this pricing strategy: The seller must be able to determine the selling price. MOC has a monopoly and therefore this would be possible. It must be possible to segregate customers into different markets, e.g. using geographical location or age. Customers must not be able to but at the lower price in one market and sell at the higher price in another market. (b) 1 The equation of a straight line is: y = a + bx where y = price (P) a = intersection of the line with the y-axis b = gradient x = quantity (Q) 2 Start by calculation the gradient (b): Gradient = Change in price ($55-$70)/Change in quantity (900 -700) = -0.1 3 Using the price of $55, this gradient can be substituted back into the equation: y = a + bx 55 = a (0.1 x 900) 55 = a 90 a = 55 + 90 a = 145 (Alternatively: the price of $70 could be substituted back into the equation). 4 Therefore the linear relationship is P = 145 0.1Q (c) PED =% change in demand/ % change in price = (-150/900) 100 / (15/55) 100 = -16.67% / 27.27% = 0.611 = 0.611 (sign can be ignored)

The PED is less than 1 and as a result demand is inelastic. Therefore increasing the price from $55 to $70 will increase the revenue. (d) To: Management Accountant From: Student Date: xx/xx/xx

The current pricing strategy may not be able to be applied if competition was to emerge in the market as the business would now have to be more aware of the competitors' prices. We may be forced to use going rate pricing to match the competitors prices to compete. However they may choose to adopt a penetration pricing strategy, which means that they will start off with a low price to try and gain some of our market share. Competing at this price will drive down are profit margins, however we may be able to sustain low margins in the short term to try and hold onto our customer base. As we have had such a strong monopoly of the market we should already have sufficient economies of scale to be able to withstand the lower profit margins for longer than the competitor. We may even be able to undercut them so that they cant gain any of market shares. Alternatively, as we are already an established name in the market we may be able to rely on brand loyalty and keep our prices high. By keeping a high price our customer may also perceive our product to be of higher quality. This could work particularly well because this is an executive game and presumably the customer would be more likely to choose quality over a lower price.

QUESTION 5 # AME (a) Product unit costs P1 Direct Material Direct Lobour Overheads (W1) Total cost per unit 18 4 18.475 40.475 P2 25 8 36.95 69.95 P3 16 6.4 29.56 51.96

(W1) Overhead absorption rate P1 Direct labour cost (total) Direct labour cost percentage Overhead cost Overhead cost per unit 30,000 19.28% 138,563 18.475 P2 100,000 64.27% 461,901 36.95 P3 25,600 16.45% 118,224 29.56 Total 155,600 718,688

*Direct labour cost percentage = (Direct labour cost of a product / Total labour cost) x 100% (b) Product unit costs P1 Direct Material Direct Lobour Overhead per unit (W2) Total cost per unit 18 4 23.49 45.49 P2 25 8 25.04 58.04 P3 16 6.4 57.38 79.38

(W2) Assigning overheads on the basis of Activity Cost Pool Material handling & receiving Machine Maintenance & Depreciation Set up labour $ 150,000 390,000 18,688 Cost Driver Materials movements Machine hour per unit Set ups Total number of cost driver 79 10,800 16 Cost/activity 1898.7 36.1 1,168

Engineering Packing

100,000 60,000

Proportion of engineering work Orders Packed P1 $

100% 30 P2 $ 47,468 225,688 5,840 20,000 14,000 312,996 25.04

1,000 2,000 P3 $ 94,937 28,888 11,680 50,000 44,000 229,505 57.38

Material handling & receiving Machine Maintenance & Depreciation Set up labour Engineering Packing Total Overhead Overhead per unit (c) Try yourself

7,595 135,413 1,168 30,000 2,000 176,178 23.49