Answers

ACCA Certified Accounting Technician Examination – Paper T7

Planning, Control and Performance Management December 2007 Answers

1 (a) Quarterly Budgets

(i) Sales budget
Quarter 1 2 3 4
Units
Trend (units) 1,200 1,300 1,400 1,500
Seasonal variation –150 +200 +300 –350
———— ———— ———— ————
Forecast sales (units) 1,050 1,500 1,700 1,150
Forecast revenue ($) 262,500 375,000 425,000 287,500
————
———— ————
———— ————
———— ————
————
(ii) Production budget
Quarter 1 2 3 4
Units
Desired closing inventory (w1) 750 850 575 725 (w2)
Add sales 1,050 1,500 1,700 1,150
Less opening inventory (w3) (525 ) (750) (850) (575)
——— ——— ——— ———
Production 1,275 1,600 1,425 1,300
———
——— ———
——— ———
——— ———
———
Working 1: next quarter sales x 50% = 1,500 x 50% = 750 units etc.
Working 2: (1,600 – 150) x 50% = 725 units
Working 3: this quarter sales x 50% = 1,050 x 50% = 525 units etc.
(iii) Purchasing budget
Quarter 1 2 3 4
Kg
Desired closing inventory (w4) 5,120 4,560 4,160 5,360 (w5)
Used in production (w6) 5,100 6,400 5,700 5,200
Less opening inventory (w7) (4,080) (5,120) (4,560) (4,160)
—–—— —–—— —–—— ———–
Purchases (kg) 6,140 5,840 5,300 6,400
Costs ($) (w8) 49,120 46,720 42,400 51,200
—–——
—–—— —–——
—–—— —–——
—–—— ———–
———–
Working 4: next quarter production x 4 kg x 80% = 1,600 x 4 kg x 80% = 5,120 kg etc.
Working 5: production quarter 1, 2009 = ((1,700 + 200) x 50%) + 1,450 – 725 = 1675 units.
Closing inventory quarter 4 = 1675 units x 4 kg x 80%= 5,360 kg.
Working 6: production x 4 kg = 1,275 x 4 kg = 5,100 kg etc.
Working 7: this quarter production x 4 kg x 80% = 1,275 x 4 kg x 80% = 4,080 kg etc.
Working 8: Purchase kg x $8·00 per kg = 6,140 kg x $8·00 per kg = $49,120 etc.
(iv) Labour budget
Quarter 1 2 3 4
Labour (hours) (w9) 7,650 9,600 8,550 7,800
Labour ($) (w10) 114,750 144,000 128,250 117,000
––––––––
–––––––– ––––––––
–––––––– ––––––––
–––––––– ––––––––
––––––––
Working 9: this quarter’s production x 6 hours per unit = 1,275 units x 6 hours = 7,650 hours etc.
Working 10: 7,650 hours at $15·00 per hour = $114,750 etc.

(b) Approaches to budgeting.

(i) Rolling (or continuous) budgets
A rolling (or continuous) budget is one which is continually updated by adding a further accounting period (a month or
a quarter) when the earlier accounting period has expired. Existing budgets may also be revised at the same time to
reflect new circumstances.
Its advantages are:
– It forces managers to reassess budgets on a regular basis and results in budgets that are up to date and realistic
in the light of current events.
– The budget becomes a better forecast of actual results.
– The arbitrary and artificial distinction between one accounting year and the next is removed, with the result that
management always have access to a plan for the next twelve months.
– The workload of annual budget preparation is spread more evenly across the year.

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 (ii) Flexible budgets
A flexible budget is a budget, which, by recognising different cost behaviour patterns, is designed to change as volumes
of output change.
Its advantages are:
– It recognises that different costs behave in different ways with respect to volume.
– It improves the quality of control information as it facilitates a comparison of like with like. Variances calculated
against a flexed budget will give more meaningful control information than those against a fixed budget.
– It allows managers to forecast revenues, costs and profits at different activity levels and forces them to think about
cost behaviour.
(iii) Zero-based budgeting
Zero-based budgeting (ZBB), as its name suggests, involves preparing a budget from a zero-base. Budget holders are
told to assume that they had no budget allowance for particular activities and they would then be required to justify any
expenditure in order for it to be included in the budget.
The advantages of ZBB are:
– Identification and elimination of unnecessary expenditure. Activities that do not contribute toward organisational
objectives will be discontinued.
– Identification of wasteful expenditure. Overspending on activities will be identified and budgets will be reduced
accordingly.
– It challenges the status quo and encourages a questioning approach to activities and expenditure. In this way it is
the ideal antidote for incremental budgeting.
– The documentation that ZBB requires provides an in depth appraisal of an organisation’s activities.
– It provides a plan to work to (in service departments) if more funds become available.
Note: only two advantages of each method were required.

2 (a) Nicholson ratios and statistics.

Return on capital employed
Profit before interest and tax $48m
———————————— x 100% = —––— = 25%
Capital employed $192m
Return on sales
Profit before interest and tax $48m
———————————— x 100% = —––— = 10%
Sales revenue $480m
Asset turnover
Sales revenue $480m
———————— = —––— = 2·5 times
Capital employed $192m
Annual number of complaints per 1,000 customers
Number of customer complaints 21,600
———––––––––––––—–––––––––––———— = ———– = 11
Average number of customers (in thousands) 1,960
Percentage of customers lost per annum
Number of customers lost 117,600
———————————––— x 100% = —––—–— = 6%
Average number of customers 1,960,000

Average time to resolve billing queries

Average number of bill queries
unresolved at the end of each day 118
—————————–––——––— x 365 = —––— = 3·6 days
Total bill queries 12,000
Average wait for a telephone repair
Average number of telephones
unrepaired at the end of each day 804
——–––––———————–––——––— x 365 = —––—– x 365 = 29·3 days
Number of telephones returned for repair 10,000

Percentage of sales attributable to new products

Sales turnover attributable to new products $8m
———––––––––––––—–––––––––––———— = ———–= 1·7%
Total sales turnover $480m

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 (b) Discussion of performance.
(i) Financial success
Nicholson’s return on capital employed at 25% is much higher than the industry average and this indicates that it is
generating a good return on the money invested in it. This is largely explained by a return on sales of 10%, exactly
double that of the industry average company. This could be due to higher prices, lower costs, or both. The only financial
weakness apparent is that Nicholson does not enjoy as high a sales per $ of capital employed as its competitors. Overall
the company appears to have performed well financially.
(ii) Customer satisfaction
Nicholson does not perform as well as the industry average in this area. It is losing customers at twice the rate of the
industry average company. It is often much easier to retain existing customers than to win new ones. The level of
customer complaints is also much higher than average. These factors will result in lost sales. They should be seen as
leading indicators of future financial problems.
(iii) Process Efficiency
The two processes that appear in the statistics are telephone repair and bill enquiries. On both counts Nicholson
performs badly. Telephone repair appears to take an average of nearly 30 days (as compared to a two day industry
average). This will prove annoying to customers and will probably result in lost sales (customers cannot make calls
without telephones). Similarly delays in processing bill enquiries will eventually result in dissatisfied customers and poor
financial results.
(iv) Organisational learning and growth
Less than 2% of Nicholson’s income comes from new products, as compared to 20% for the industry average company.
In a sector characterised by changing technology and product innovation this is very poor. Failing to innovate is a failing
to compete. Eventually this will result in lost sales and profits.
In conclusion the company’s financial results have been good in the past year, but the prospects for the future appear
poor unless improvements are made to customer service, process efficiency and innovation.

3 (a) High-low method

(i) Budgeted variable overhead per tonne
Using the high-low technique,
Change in total budgeted overhead
Budgeted variable overhead per tonne = ———————————————
Change in volume
($264,000 – $200,000)
= —————————————
(9,000 tonnes – 5,000 tonnes)

= $16 per tonne

(ii) Budgeted fixed overhead for the period
$
If total overhead at 9,000 tonnes = 264,000
Variable overhead = 9,000 tonnes x $16 per tonne = (144,000)
————–
Budgeted fixed overheads $120,000
————–
————–

(b) Variances
(i) Total overhead absorbed in period 9
Fixed overhead absorbed = 6,500 actual tonnes x $24 per tonne
= $156,000
(ii) and (iii) Fixed overhead expenditure and volume variances
Actual fixed overhead expenditure $125,000
Expenditure variance > $5,000 adverse
Budgeted fixed overhead expenditure $120,000
Volume variance > $36,000 favourable
Absorbed fixed overhead
6,500 tonnes x $24 per tonne $156,000

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 (c) Two possible operational causes for each of the two variances.
(i) Adverse Expenditure Variance
Potential causes of an adverse expenditure variance are
– An increase in the cost of services used.
– Wasteful expenditure.
– A change in the type of services used.
(ii) Favourable Volume Variance
Potential causes of a favourable volume variance are
– Seasonal demand leading to higher than average production levels.
– Favourable labour efficiency leading to increased production.
– Increased factory capacity due to the removal of a bottleneck.
(only two causes of each were requested)

(d) Attainable and ideal standards

An attainable standard is one which can be attained if a standard unit of work is carried out efficiently, a machine properly
operated or material properly used. Allowances are made for normal losses, waste and machine downtime. They represent
what should be achieved with a reasonable level of effort under normal operating conditions.
Ideal standards are those which can be achieved under the most favourable conditions with no allowance for normal losses,
waste or machine downtime. They are set on the assumption of maximum efficiency and a perfect and ideal operating
environment.
Operational performance standards are best based upon attainable standards. An ideal standard will normally prove to be
impossible to attain and result in large adverse variances, which will give inappropriate signals to management and possibly
damage motivation. An attainable standard is not necessarily ‘easy’, and can include a target element to encourage better
performance, whilst at the same time resulting in variances that are useful in controlling costs and revenues.

4 (a) Profit statement

January February March
Rooms rented (W1) 961 504 520
$ $ $
Sales:
room rentals 115,320 60,480 62,400
restaurant (W2) 80,724 42,336 43,680
———— ———— ————
total sales 196,044 102,816 106,080
————
———— ————
———— ————
————
Contribution
room rentals (W3) 98,022 51,408 53,040
restaurant (W4) 32,290 16,934 17,472
———— ———— ————
total contribution 130,312 68,342 70,512
Fixed costs (84,400) (84,400) (84,400)
———— ———— ————
Profit 45,912 (16,058) (13,888)
————
———— ————
———— ————
————
Working 1. January room nights = $115,320 ÷ $120 per night = 961 room nights etc.
Working 2. January restaurant sales = 961 room nights x 1·5 guests per room x $56 per guest = $80,724 etc.
Working 3. January room rental contribution = room nights x contribution per room night = 961 x ($120 – $18)
= $ 98,022 etc.
Working 4. January restaurant contribution = restaurant sales x contribution sales ratio = $80,724 x 40% = $32,290 etc.

(b) Break-even point

Fixed costs $84,400
Break-even point = ————————–—————— = ———— = 622·4 room nights
Contribution per room night (W5) $135·60
Working 5. Contribution per room night = total contribution ÷ number of room nights.
Using January figures $130,312 ÷ 961 = $135·60 per room night.

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(c) Memorandum
To General manager, Overlook hotel
From An accounting technician
Subject: Hotel closure
Date: Today
I note your proposal to close the hotel for February and March 2008.
Basis of the decision.
The decision to close the hotel should be made on a relevant cost basis. That is, it should only be closed if the incremental
costs of remaining open exceed the incremental revenues we could earn.
Information required.
To calculate the incremental costs and revenues we will need the following information.
– Budgeted prices, volumes and costs for 2008. There is no guarantee that 2008 demand conditions will be exactly the
same as 2007.
– The behaviour of fixed costs during the closure period. It is unwise to assume that all fixed costs can be avoided during
the temporary closure. Although the bulk of service costs can probably be avoided, insurance, repairs and depreciation
costs may well continue to be incurred.
– A detailed analysis of budgeted service costs over the year. They are likely to vary seasonally.
– The behaviour of variable costs during the closure period. Closure will not necessarily lead to a saving of all variable
costs. For example we may need to pay staff wages during closure in order that we retain staff for when we reopen.
– Will any incremental closure or reopening costs be incurred? For example will heating systems have to be
decommissioned, will we need to pay for security guards during the closure period, will extra cleaning be required before
reopening.
– The effect of closure on demand. Temporary closure would cause difficulties for any permanent residents we may have.
If they move to other hotels we may lose more than two months sales. Closure for two months may have an impact on
demand at other times of year, for example travel agents may stop recommending us if we don’t provide an all year
service.
I hope you find this useful. Please contact me if you wish to discuss the matter further.
(Only three items of information were required)

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ACCA Certified Accounting Technician Examination – Paper T7
Planning, Control and Performance Management December 2007 Marking Scheme

1 (a) Budget construction

(i) Sales units 2
Sales revenue 1
–––
3 Note in parts ii, iii and iv. Look for
method. Penalise errors only once.
(ii) Closing stock 4
Opening stock 2
Production 2
–––
8
(iii) Closing stock 4
Opening stock 2
Purchases kg 2
Purchase cost 2
–––
10
(iv) Labour hours 2
Labour cost 2
–––
4
–––
25

(b) Budgeting approaches

Meaning 3 x 2 6
Advantages 6 x 1·5 9
15
–––
40
–––
–––

2 (a) 11/2 marks per ratio/statistic 12

(b) Financial, evidence 2 conclusion 1, max 3

Other, 2 marks per area, evidence 1,
conclusion 1, max 6
–––
Max for part b 8
–––
20
–––
–––

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3 (a) (i) method 1
variable cost 1
–––
2
(ii) Substitution approach 1
Fixed overhead 1
–––
2

(b) (i) actual tonnes 1

absorbed overheads 1
–––
2
(ii) and (iii)
2 per variance 4

(c) 1 mark per cause, max 4

(d) attainable defined 2

ideal defined 2
discussion 2
–––
20
–––
–––

4 (a) room nights 1·5

restaurant sales 1·5
rooms contribution 2
restaurant contribution 2
Profit 1
–––
8

(b) Contribution per room night 2

Break even point 1
–––
3

(c) Memorandum heading 1

Relevant cost basis 2
2 per sensible piece of
information, max 6
–––
9
–––
20
—–
—–

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