STRATHMORE UNIVERSITY

SCHOOL OF ACCOUNTANCY
ACCA – PERFORMANCE MANAGEMENT
REVISION QUESTIONS
1 A just in time manufacturing system should lead to:
A Higher levels of stock being held in the warehouse
B Lower stock holding costs being incurred
C An increase in the number of suppliers of stocks
D A wider range of stock items being made available

2 CVP (contribution/volume/profit) analysis does not assume that

A Total costs are divided into fixed and variable costs
B There is no uncertainty
C Output is the only factor affecting costs
D The behaviour of costs and revenues is not linear

3 A company produces three products which have the following details:

Product I Product II Product III
Per unit Per unit Per unit
Direct materials (at £5/kg) 8 kg 5 kg 6 kg
Contribution per unit (£) 35 25 48
Contribution per kg of material (£) 4.375 5 8
Demand units (excluding special contract) 3,000 5,000 2,000
The company must produce 1,000 units of Product I for a special contract before meeting normal demand.
Unfortunately, there are only 35,000 kg of material available.
What is the optimal production plan?
Product I Product II Product III
A 1,000 4,600 2,000
B 1,000 3,000 2,000
C 2,875 - 2,000
D 3,000 2,200 -

4 A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For the coming
period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows:
Product X Y
Selling price per unit £20 £40
Variable cost per unit £12 £30
Skilled labour hours per unit 2 4
Maximum demand (units) per period 800 400
In order to maximise profit in the coming period, how many units of each product should the company
manufacture and sell?
A 200 units of X and 400 units of Y
B 400 units of X and 300 units of Y
C 600 units of X and 200 units of Y
D 800 units of X and 100 units of Y

5 The following statements relate to relevant cost concepts in decision making:

(i) Materials can never have an opportunity cost whereas labour can.
(ii) The annual depreciation charge is not a relevant cost.
(iii) Fixed costs would have a relevant cost element if a decision causes a change in their total expenditure
Which statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii)
6 A business makes two components which it uses to produce one of its products. Details are:
Component A Component B
Per unit information: $ $
Buy in price 14 17
Material 2 5
Labour 4 6
Variable overheads 6 7
General fixed overheads 4 3
Total absorption cost 16 21
The business wishes to maximise contribution and is considering whether to continue making the components
internally or buy in from outside.
Which components should the company buy in from outside in order to maximise its contribution?
A A only
B B only
C Both A and B
D Neither A nor B

The following information relates to questions 7 and 8:

In the following price, cost and revenue functions, which have been established by a company for one of its products, Q
represents the number of units produced and sold per week:
Price (£ per unit) = 40 – 0·03Q
Marginal revenue (£ per unit) = 40 – 0·06Q
Total cost per week (£) = 3,500 + 10Q
7 What price should be set in order to maximise weekly profits?
A £10
B £15
C £25
D £30

8 What would be the profit per week if the selling price of the product was set at £31 per unit?
A £2,800
B £3,150
C £5,490
D £5,800

9 A company manufactures and sells a single product. The variable cost of the product is £2·50 per unit and all production
each month is sold at a price of £3·70 per unit. A potential new customer has offered to buy 6,000 units per month at a
price of £2·95 per unit.
The company has sufficient spare capacity to produce this quantity. If the new business is accepted, sales to existing
customers are expected to fall by two units for every 15 units sold to the new customer.
What would be the overall increase in monthly profit which would result from accepting the new business?
A £1,740
B £2,220
C £2,340
D £2,700

10 In a short-term decision-making context, which ONE of the following would be a relevant cost?
A Specific development costs already incurred.
B The cost of special material which will be purchased.
C Depreciation on existing fixed assets.
D The original cost of raw materials currently in stock which will be used on the project.
11 Consider the following graph for total costs and total revenue:

At which point on the above graph is it most likely that profits will be maximised?
A
B
C
D

12 The following represents a profit/volume graph for an organisation:

At the specific levels of activity indicated, what do the lines depicted as ‘T’ and ‘V’ represent?
Line ‘T’ Line ‘V’
A Loss Profit
B Loss Contribution
C Total fixed costs Profit
D Total fixed costs Contribution

13 A company has a divisional structure. Division Y in the period just ended achieved Return on Investment (ROI) of 20%.
Its capital employed was $4 million, of which 25% was working capital and the remainder consisted of non-current assets at
net book value. The depreciation charge for the year was $300,000. The company’s cost of capital is 9%.
What was the residual income earned by Division Y in the period?
A $140,000
B $230,000
C $440,000
D $530,000

14 A company has two manufacturing divisions, X and Y. Division X manufactures a component C20, which has a variable
production cost of $4 per unit and a fixed production cost of $5 per unit. Division X currently transfers all its output to
Division Y, which makes Product P9. Each unit of Product P9 uses one unit of C20. Ignoring the cost of the transferred
component C20, the additional cost of making P9 in Division Y is $9. Units of Product P9 sell for $28.
There is an external market for component C20, and the market price per unit of C20 is $12. It would cost Division X $1
per unit in selling costs if it decided to sell its components in the external market.
Which of the following transfer prices for component C20 would be sufficient to encourage Division X to supply
the component to Division Y and persuade Division Y to obtain it from Division X?
A $11
B $10
C $9
D $19

15 A company has three branches (X, Y and Z) to which the following budgeted information relates:
Branch X Y Z Total
£000 £000 £000 £000
Sales 200 200 200 600
Contribution 60 50 20 130
Less: Fixed costs (35) (35) (30) (100)
Profit/(loss) 25 15 (10) 30
60% of the total fixed costs are general overheads. General overheads are apportioned to the branches on the basis of sales
value. The other fixed overheads are specific to each branch and are avoidable if a branch closes down.
If branch Z is closed down and the sales of the other two branches remained the same, what would be the revised
budgeted profit for the company?
A £10,000
B £20,000
C £40,000
D £50,000

16 Despard Ltd manufactures and sells a single product. The following data have been extracted from the current year’s
budget:
Sales and production (units) 5,000
Variable cost per unit £50
Fixed cost per unit £70
Contribution to sales ratio 75%
The selling price per unit for next year is to be 8% above the current year’s budgeted figure, whereas both the variable cost
per unit and the total fixed costs are forecast to increase by 12% above their budgeted level in the current year.
The target for next year is that total profit should remain the same as that budgeted for the current year.
Required:
(a) Calculate for the CURRENT YEAR the budgeted:
(i) contribution per unit;
(ii) total profit.

(b) Calculate the number of units which the company should produce and sell next year in order to achieve the
target level of profit.

(c) Explain, with an example, the term semi-variable (mixed) cost. How would such a cost be dealt with in
undertaking the analysis in (a)?
A mixed or semi-variable cost is one that is partly fixed and partly variable in behaviour. An example would be power costs
(gas or electricity, for instance) which consist of a fixed charge irrespective of the number of units of power consumed and
a variable charge based on the number of units of power consumed.
For cost-volume-profit analysis the fixed and variable elements need to be separately identified by using, for example, the
high low method. Each would then be considered along with the other variable and other fixed costs in the analysis.

17 Thin Co is a private hospital offering three types of surgical procedures known as A, B and C. Each of them uses a pre-
operative injection given by a nurse before the surgery. Thin Co currently rent an operating theatre from a neighbouring
government hospital. Thin Co does have an operating theatre on its premises, but it has never been put into use since it
would cost $750,000 to equip. The Managing Director of Thin Co is keen to maximise profits and has heard of something
called ‘throughput accounting’, which may help him to do this.
The following information is available:
1 All patients go through a five step process, irrespective of which procedure they are having:
– step 1: consultation with the advisor;
– step 2: pre-operative injection given by the nurse;
– step 3: anaesthetic given by anaesthetist;
– step 4: procedure performed in theatre by the surgeon;
– step 5: recovery with the recovery specialist.
2 The price of each of procedures A, B and C is $2,700, $3,500 and $4,250 respectively.
3 The only materials’ costs relating to the procedures are for the pre-operative injections given by the nurse, the anaesthetic
and the dressings. These are as follows:
Procedure A Procedure B Procedure C
$ per procedure $ per procedure $ per procedure
Pre-operative nurse’s injections 700 800 1,000
Anaesthetic 35 40 45
Dressings 5.60 5.60 5.60
4 There are five members of staff employed by Thin Co. Each works a standard 40-hour week for 47 weeks of the year, a
total of 1,880 hours each per annum. Their salaries are as follows:
– Advisor: $45,000 per annum;
– Nurse: $38,000 per annum;
– Anaesthetist: $75,000 per annum;
– Surgeon: $90,000 per annum;
– Recovery specialist: $50,000 per annum.
The only other hospital costs (comparable to ‘factory costs’ in a traditional manufacturing environment) are general
overheads, which include the theatre rental costs, and amount to $250,000 per annum.
5 Maximum annual demand for A, B and C is 600, 800 and 1,200 procedures respectively. Time spent by each of the five
different staff members on each procedure is as follows:
Procedure A Procedure B Procedure C
Hours per procedure Hours per procedure Hours per procedure
Advisor 0.24 0.24 0.24
Nurse 0.27 0.28 0.30
Anaesthetist 0.25 0.28 0.33
Surgeon 0.75 1 1.25
Recovery specialist 0.60 0.70 0.74
Part hours are shown as decimals e.g. 0·24 hours = 14·4 minutes (0·24 x 60).
Surgeon’s hours have been correctly identified as the bottleneck resource.
Required:
(a) Calculate the throughput accounting ratio for procedure C.
Note: It is recommended that you work in hours as provided in the table rather than minutes.

(b) The return per factory hour for products A and B has been calculated and is $2,612·53 and $2,654·40 respectively. The
throughput accounting ratio for A and B has also been calculated and is 8·96 and 9·11 respectively.
Required: Calculate the optimum product mix and the maximum profit per annum.

18 Henry Company (HC) provides skilled labour to the building trade. They have recently been asked by a builder to bid for
a kitchen fitting contract for a new development of 600 identical apartments. HC has not worked for this builder before.
Cost information for the new contract is as follows:
Labour for the contract is available. HC expects that the first kitchen will take 24 man-hours to fit but thereafter the time
taken will be subject to a 95% learning rate. After 200 kitchens are fitted the learning rate will stop and the time taken for
the 200th kitchen will be the time taken for all the remaining kitchens. Labour costs $15 per hour.
Overheads are absorbed on a labour hour basis. HC has collected overhead information for the last four months and
this is shown below:
Hours worked Overhead cost, $
Month 1 9,300 115,000
Month 2 9,200 113,600
Month 3 9,400 116,000
Month 4 9,600 116,800
HC normally works around 120,000 labour hours in a year.
HC uses the high low method to analyse overheads.
LogLR
The learning curve equation is y = axb, where b   0.074
Log 2
Required:
(a) Describe FIVE factors, other than the cost of labour and overheads mentioned above, that HC should take
into consideration in calculating its bid.
There are various issues that HC should consider in making the bid:
Contingency allowance
HC should consider the extent to which its estimates are accurate and hence the degree of uncertainty it is subjected to. It
may be sensible to allow for these uncertainties by adding a contingency to the bid.
Competition
HC must consider which other businesses are likely to bid and recognise that the builder may be able to choose between
suppliers. Moreover, HC has not worked for this builder before, and so they will probably find the competition stiff and the
lack of reputation a problem.
Inclusion of fixed overhead
In the long run fixed overhead must be covered by sales revenue in order to make a profit. In the short run it is often
correctly argued that the level of fixed cost in a business may not be affected by a new contract and therefore could be
ignored in bid calculation. HC needs to consider to what extent the fixed costs of its business will change if it wins this new
contract. It is these incremental fixed costs that are relevant to a bid calculation.
Materials and loose tools
No allowance has been made for the use of tools and the various fixings (screws etc.) that will be needed to assemble and
fit the kitchens. It is possible that most fixings would be provided with the kitchen units, but HC should at least consider
this.
Supervision of labour
The time given in the question is 24 hours to ‘fit’ the first kitchen. There seems no allowance for supervision of the labour
force. It could, of course, be included within the overhead figures but no detail is shown.
Idle time
It is common for building works to be delayed by lack of materials for example. The labour time figure needs to reflect this.
Likelihood of repeat business
Some businesses consider it worthwhile to accept a low price for a new contract if it establishes a reputation with a new
buyer. HC could offer to do this work cheaper in the hope of more profitable work later on.
The risk of non-payment
HC may decide not to bid at all if it feels that the builder may struggle to pay.

(b) Calculate the total cost including all overheads for HC that it can use as a basis of the bid for the new
apartment contract.

(c) If the second kitchen alone is expected to take 21·6 man-hours to fit demonstrate how the learning rate of 95%
has been calculated.

19 Jewel Co is setting up an online business importing and selling jewellery headphones. The cost of each set of headphones
varies depending on the number purchased, although they can only be purchased in batches of 1,000 units. It also has
to pay import taxes which vary according to the quantity purchased.
Jewel Co has already carried out some market research and identified that sales quantities are expected to vary depending on
the price charged. Consequently, the following data has been established for the first month:
Number of batches Average cost per unit Total fixed costs per month, Expected selling
imported and sold including import taxes, $ $ price per unit, $
1 10·00 10,000 20
2 8·80 10,000 18
3 7·80 12,000 16
4 6·40 12,000 13
5 6·40 14,000 12
Required:
(a) Calculate how many batches Jewel Co should import and sell. (6 marks)
(b) Explain why Jewel Co could not use the algebraic method to establish the optimum price for its product.
(4 marks)
The algebraic model requires several assumptions to be true. First, there must be a consistent relationship between price (P)
and demand (Q), so that a demand equation can be established, usually in the form P = a – bQ. Here, although there is a
clear relationship between the two, it is not a perfectly linear relationship and so more complicated techniques are required
to calculate the demand equation. It also cannot be assumed that a linear relationship will hold for all values of P and Q
other than the five given.
Similarly, there must be a clear relationship between demand and marginal cost, usually satisfied by constant variable cost
per unit and constant fixed costs. The changing variable costs per unit again complicate the issue, but it is the changes in
fixed costs which make the algebraic method less useful in Jewel’s case.
The algebraic model is only suitable for companies operating in a monopoly and it is not clear here whether this is the case,
but it seems unlikely, so any ‘optimum’ price might become irrelevant if Jewel’s competitors charge significantly lower
prices.
Other more general factors not considered by the algebraic model are political factors which might affect imports, social
factors which may affect customer tastes and economic factors which may affect exchange rates or customer spending
power. The reliability of the estimates themselves – for sales prices, variable costs and fixed costs – could also be called into
question.

20 The management of Amble Ltd. is faced with the decision whether to build a new plant, expand the existing plant or
subcontract some of the operations of the company in order to meet the increasing demand of the company’s products.
To build a new plant will cost $20,000, expanding the current plant will cost $10,000 while subcontracting some of the
operations of the company will cost $7,000. The future demand of the company’s products is expected to be high,
moderate or low with probabilities of 0.2, 0.5 and 0.3 respectively.
The projected sales revenue under the various options is shown below:
States of demand
Decision High ($000) Moderate ($000) Low ($000)
Build 70 40 15
Expand 40 30 25
Subcontract 30 20 25
Before making the decision, Amble Ltd. could contract a market consulting firm to conduct a market survey on the future
prospects of the company’s products. The market survey would cost the company $2,000. The outcome of the survey could
either be acceptable or unacceptable with probabilities of 0.4 and 0.6 respectively.
If the outcome of the survey is acceptable, the probabilities of high, moderate or low demand would be 0.7, 0.2 and 0.1
respectively. If the survey outcome is unacceptable, the probabilities of high, moderate or low demand would be 0.1, 0.3
and 0.6 respectively. If the outcome of the survey is unacceptable, then Amble Ltd. will not build a new plant.
Required:
a) A decision tree for the above problem and the expected monetary value of each decision.
b) The decision you would recommend to the management of Amble Ltd.

21 Glove Co makes high quality, hand-made gloves which it sells for an average of $180 per pair. The standard cost of
labour for each pair is $42 and the standard labour time for each pair is three hours. In the last quarter, Glove Co had
budgeted production of 12,000 pairs, although actual production was 12,600 pairs in order to meet demand.
37,000 hours were used to complete the work and there was no idle time. The total labour cost for the quarter was
$531,930.
At the beginning of the last quarter, the design of the gloves was changed slightly. The new design required workers to sew
the company’s logo on to the back of every glove made and the estimated time to do this was 15 minutes for each pair.
However, no-one told the accountant responsible for updating standard costs that the standard time per pair of gloves
needed to be changed. Similarly, although all workers were given a 2% pay rise at the beginning of the last quarter, the
accountant was not told about this either. Consequently, the standard was not updated to reflect these changes.
When overtime is required, workers are paid 25% more than their usual hourly rate.
Required:
(a) Calculate the total labour rate and total labour efficiency variances for the last quarter. (2 marks)
(b) Analyse the above total variances into component parts for planning and operational variances in as much
detail as the information allows. (6 marks)
(c) Assess the performance of the production manager for the last quarter. (7 marks)
At a first glance, performance looks mixed because the total labour rate variance is adverse and the total labour efficiency
variance is favourable. However, the operational and planning variances provide a lot more detail on how these variances
have occurred.
The production manager should only be held accountable for variances which he can control. This means that he should
only be held accountable for the operational variances. When these operational variances are looked at it can be seen that
the labour rate operational variance is $3,570 A. This means that the production manager did have to pay for some
overtime in order to meet demand but the majority of the total labour rate variance is driven by the failure to update the
standard for the pay rise that was applied at the start of the last quarter. The overtime rate would also have been impacted
by that pay increase.
Then, when the labour efficiency operational variance is looked at, it is actually $55,300 F. This shows that the production
manager has managed his department well with workers completing production more quickly than would have been
expected when the new design change is taken into account. The total operating variances are therefore $51,730 F and so
overall performance is good.
The adverse planning variances of $10,360 and $44,100 do not reflect on the performance of the production manager and
can therefore be ignored here.