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Paper T7

Certified Accounting Technician Examination


Advanced Level

Planning, Control
and Performance
Management
Tuesday 7 December 2010

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
This paper is divided into two sections:
Section A – ALL TEN questions are compulsory and MUST
be attempted
Section B – ALL FOUR questions are compulsory and MUST
be attempted
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants


Section A – ALL TEN questions are compulsory and MUST be attempted
Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen answer to
each multiple choice question.
Each question is worth 2 marks.

1 A retailer forecasts that its sales in the first month of 2011 will be $600,000 and will then grow at 4% per month
for the next three months. It prices its products by adding a mark-up of 20% to its purchase cost. The retailer always
carries sufficient inventory to cover the next month’s forecast sales.

What is the forecast inventory (to the nearest dollar) at the end of the second month of 2011?
A $540,800
B $562,432
C $648,960
D $811,200

2 Which of the following could be included in a time series based sales forecast?
1. Trend
2. Seasonal variation
3. Cyclical variation
4. Random fluctuation
A 1 only
B 2 only
C 1, 2 and 3 only
D 1, 2, 3 and 4

3 Which of the following is the best definition of return on capital employed?


A Profit before interest and tax ÷ Ordinary shareholders’ funds x 100
B Profit before interest and tax ÷ (Ordinary shareholders’ funds + Non-current liabilities) x 100
C Profit after interest and tax ÷ Ordinary shareholders’ funds x 100
D Profit after interest and tax ÷ (Ordinary shareholders’ funds + Non-current liabilities) x 100

4 A company uses total quality management (TQM) and has recorded the following costs of quality for a period.
$
Staff training 8,000
Inspection 12,000
Warranty claims 20,000
Rework of faulty items detected before delivery to customers 15,000

What would be the net benefit of spending an extra 10% on prevention cost to save 20% on external failure cost?
A $2,000
B $3,200
C $5,000
D $6,200

2
5 Which of the following costs would be considered to be the responsibility of the manager of a profit centre?
1. Direct labour
2. Variable production overhead
3. Imputed interest on capital invested
4. Depreciation on machinery
A 1 and 2 only
B 1, 2 and 3 only
C 1, 2, 3 and 4
D 3 and 4 only

6 A company could sell 100,000 units per annum of a new product at a competitive market price of $80 per unit.
Capital investment of $10,000,000 would be required to manufacture the product. The company seeks to earn a
return on initial capital employed of 15% per annum. Preliminary costings show that prime cost is likely to be $40
per unit.

What is the target cost per unit of the new product?


A $34
B $55
C $65
D $68

7 In its first year of operations a company produced 100,000 units of a product and sold 80,000 units at $9 per unit.
It earned a marginal costing profit of $200,000. It calculates that its fixed production overhead per unit is $5.

What profit would it have earned under an absorption costing system?


A $100,000
B $200,000
C $300,000
D $320,000

8 The table below contains details of an airline’s expenditure on aviation fuel.


Year Total expenditure Total distance Fuel price
on aviation fuel flown index
$ million km million
2008 600 4,200 120
2009 1,440 4,620 240
The following statements relate to the changes between 2008 and 2009.
1 The quantity of fuel consumed increased by 140%
2 The quantity of fuel consumed increased by 20%
3 The quantity of fuel consumed per km flown increased by 20%
4 The quantity of fuel consumed per km flown increased by 109%

Which statements are true?


A 1 only
B 2 only
C 2 and 3 only
D 2 and 4 only

3 [P.T.O.
9 The following statements relate to spreadsheets.

Which statement is false?


A They are an efficient method of storing text based files.
B They facilitate ‘what if’ analysis
C They allow data to be displayed graphically
D They allow the font, size and colour of text to be changed.

10 A company budgeted to sell 5,000 units of a product in November at a standard price of $30 per unit and to earn a
profit of $25,000. It actually sold 6,000 units at $28 per unit and earned a profit of $32,000.

What was the favourable sales volume profit variance for November?
A $5,000
B $7,000
C $12,000
D $30,000

(20 marks)

4
Section B – ALL FOUR questions are compulsory and MUST be attempted

1 Hill Co is a manufacturing company that uses standard absorption costing and variance analysis to control its costs
and revenues. The standard cost card for its single product is given below.
$
Direct materials: 4 kg at $2·50 per kg 10·00
Direct labour: 2 hours at $12 per hour 24·00
Fixed overhead: 2 hours at $6 per direct labour hour 12·00
––––––
Standard cost per unit 46·00
––––––
In the most recent period,12,000 units were produced. Budgeted production for the period was 10,000 units. Actual
direct materials used cost $140,400 and actual direct labour cost was $345,000 for the 27,600 actual hours
worked. Actual fixed overhead incurred was $115,000.
Hill Co’s management accountant wishes to reconcile budgeted and actual cost for the period. She has correctly
calculated that the direct material price and usage variances were $5,400 adverse and $15,000 adverse respectively,
but she has asked you to complete the reconciliation.

Required:
(a) Calculate the following variances for the most recent period:
(i) Direct labour rate variance; (2 marks)
(ii) Direct labour efficiency variance; (2 marks)
(iii) Fixed overhead expenditure variance; (2 marks)
(iv) Fixed overhead capacity variance; (3 marks)
(v) Fixed overhead efficiency variance. (3 marks)

(b) Prepare a statement, in a form that will be useful to Hill Co’s management, that reconciles budgeted and
actual costs for the most recent period. (4 marks)

(c) When asked to explain the direct material variances for the most recent period, Hill Co’s production manager
argued that the price variances were the purchasing department’s responsibility, not his. He also argued that the
usage variance was adverse because his department had been instructed by the sales department to make
12,000 units rather than the 10,000 budgeted. This resulted in the use of more material, and once again the
variance was not his responsibility.

Required:
Explain whether you agree with the production manager’s arguments.
Note: no further calculations are required. (4 marks)

(20 marks)

5 [P.T.O.
2 The Carbone Co is a courier business. It delivers parcels in the Republic of Zedland. Parcels are collected by its fleet
of vehicles and are sorted at one of its five depots before delivery to customers. Its delivery network covers all the
major cities in Zedland, but it does not deliver to the 40% of the population who live in rural areas. The vast majority
of its business involves the bulk collection and delivery of packages between large businesses located in Zedland’s
major cities. Carbone Co is a listed company and its objectives are to earn a competitive rate of return for its
shareholders and to provide a first class service for its customers.
Carbone Co’s major competitor is the state owned Zedland postal service (ZPS). ZPS is a non profit-seeking
organisation responsible for universal mail and parcel collection and delivery in Zedland. The Zedland government
requires ZPS to provide a low cost collection and delivery service for all of Zedland’s population and for its revenues
to cover its costs which include an imputed interest charge on capital employed of 4% per annum. ZPS collects and
delivers letters and parcels through its network of 14,000 offices located in every city, town and village in Zedland.
Deliveries are made at least once every day to every part of Zedland at a government fixed price of $0·25 per letter
and $4·00 per kg for a parcel. These prices have not increased in the last five years.The government refuses to allow
ZPS to close any of its network of offices because they are also used to distribute government pension payments.
Both organisations have recently published their results for the most recent year. Details are given below:
Carbone Co ZPS
Sales revenue $400 million $123,000 million
Operating profit $80 million $38 million
Capital employed $300 million $1,000 million
Investors’ required rate of return 14% pa 4% pa
Number of parcels delivered 10,000 million parcels 20,000 million parcels
Total weight of parcels delivered in the year 80,000 million kg 27,000 million kg
Number of letters delivered 0 60,000 million letters
Total item kilometres (note 1) 376,000 million item km 9,000,000 million item km
Average number of parcels undelivered
at the end of each day 50 million parcels 110 million parcels
Notes
1. An item kilometre is a single kilometre travelled by either a letter or a parcel.
2. Parcel deliveries for both businesses are spread evenly over a 365 day year.
On seeing these results the leader of the Zedland government claimed that they showed the ‘gross inefficiency’ of
ZPS’s management.

Required:
(a) Calculate the following ratios and statistics for both Carbone Co and ZPS
(i) Residual income; (3 marks)
(ii) Return on sales; (2 marks)
(iii) Average distance travelled per item; (2 marks)
(iv) Average weight per parcel; (2 marks)
(v) Average time (in days) taken to deliver a parcel. (3 marks)

(b) Briefly explain three differences between Carbone Co and ZPS that make it difficult to compare their relative
performances. (6 marks)

(c) Explain, in general terms, the difference that may exist between assessing the performance of a manager and
assessing the performance of the organisation the manager works for. (2 marks)

(20 marks)

6
3 Conway Co uses budgets to plan and control its operations. Three months in advance of each financial year end it
prepares an initial annual budget, broken down into four quarters. At the end of each of the first three quarters of the
financial year the budgets for the remaining quarters are updated to reflect known changes (if any) to the costs, prices
and activity levels. The annual budget is then updated to reflect changes to quarterly budgets.
The initial budgeted income statement for one of Conway Co’s divisions for the year ended 31 December 2010 is
given below. Selling price, variable cost per unit and total fixed costs were budgeted to be the same each quarter. No
inventory is held.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year
total
Period ending 31 Mar 30 Jun 30 Sep 31 Dec 31 Dec
2010 2010 2010 2010 2010
Budgeted sales units 10,000 12,000 14,000 15,000 51,000
$000 $000 $000 $000 $000
Sales revenue 120 144 168 180 612
Less
Direct labour (semi-variable cost) 55 65 75 80 275
Direct material (variable cost) 30 36 42 45 153
Overhead (fixed cost) 6 6 6 6 24
–––– –––– –––– –––– ––––
Profit 29 37 45 49 160
––––
–––– ––––
–––– ––––
–––– ––––
–––– ––––
––––

Required:
(a) Using the initial budget calculate the following
(i) Variable direct labour cost per unit; (2 marks)
(ii) Fixed direct labour cost per quarter; (2 marks)
(iii) Direct material cost per unit. (1 mark)

(b) Until September 2010 Conway Co’s management considered that the assumptions on costs, prices and activity
levels underlying the initial budget for the year ending 31 December 2010 were valid and no revisions were
made. However, at the end of September 2010, following the loss of a major customer, the following changes
were made to the assumptions appropriate to quarter 4.
Sales volume (units) 8,000
Sales price per unit $9·00
Direct labour
variable element 10% higher per unit than budget
fixed element 5% lower than budget
Direct material 8% higher per unit than budget
Overhead 4% higher than budget

Required:
Use the revisions to Quarter 4 budget assumptions to update the budget for Quarter 4 and the annual budget
for the year ending 31 December 2010. (9 marks)

(c) Conway Co is considering implementing a full rolling budgeting system.

Required:
Explain three advantages of rolling budgeting. (6 marks)

(20 marks)

7 [P.T.O.
4 Devito Co has been asked to prepare a fixed price quotation for the manufacture and supply of desks to a government
department. If the price quoted is acceptable it will result in sales of 4,000 desks. The desks will be made using
spare capacity which currently exists in Devito Co’s desk factory. The finance director believes that the price of the
desks should be calculated using an activity based cost-plus approach. He intends to use a mark-up of 20% on this
cost to calculate a price. He has collected the following information on which to base the quotation.
Direct costs per desk
Wood 3 metres at $12 per metre
Fittings $6 per desk
Labour 6 hours at $15 per hour
Overhead
All 4,000 desks would be made in one production run. An analysis of factory overheads, including the anticipated
effect of the government order is as follows
Overhead item Cost per Cost Driver activity
annum driver per annum
Material storage and handling $2,500,000 wood metres 500,000 metres
Machine set up costs $1,000,000 production runs 200 runs
Packaging and delivery $150,000 desks delivered 150,000 desks

Required:
(a) Calculate the price PER DESK to be quoted using the finance director’s approach. (8 marks)

(b) Explain three limitations of a cost-plus based approach to product pricing. (6 marks)

(c) Define a fixed price tender and explain how a company should calculate the minimum price it could quote
for a fixed price tender. Your answer should include a definition of opportunity cost. (6 marks)

(20 marks)

End of Question Paper

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