ACCA PM - Question Bank 23-24

Question Bank
ACCA
Performance Management (PM)
Exams from September 2023
ii I n t r o d u c t i o n ACCA PM Question Bank
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JUNE 2023 RELEASE

ACCA PM Question Bank Introduction iii
Contents
Page
Tuition Questions 1
Tuition Answers 71
Revision Questions 147
Revision Answers 247
Formulae sheet 375

iv I n t r o d u c t i o n ACCA PM Question Bank
First Intuition Question Bank – Performance Management
This Question Bank has been written to help you pass the Performance Management paper.
Question practice is key to success

This Question Bank gives you the targeted question practice you need to pass this exam. The questions
are closely modelled on the types of question you can expect to see in the real exam and cover the
entire syllabus. This is important as the paper contains 100% compulsory questions to test your
knowledge across the entire syllabus.
In the first section there are banks of questions based around each area of the syllabus reflecting the
chapters in the Course Notes. Once you have watched the chapter lectures with your course notes
open in front of you, attempt all of these questions using the online tuition platform (how to access
this is included in your joining instructions). We advise that you attempt each set of questions at least
once as you study the relevant chapter so the content is fresh in your mind before you move onto the
next topic. At the end of the course there is a course exam for you to complete.
In part 2 there is a further bank of questions with more exam standard questions for you to try as you
move into the revision phase of your studies. You should work through all of these on your online
revision course at least once – question practice is vital to passing this exam.
Icons in this Question Bank
You will find a tutor recording for this question on your online course
ACCA PM Question Bank Introduction v
Section A: Objective test questions and Section B: Scenario based

objective test questions
Section A & B questions below should be attempted twice:
(i) during the first (learning) phase of your course and
(ii) at the revision phase.
There are additional section A Test Your Learning questions online. Test Your Learning questions are
set up as short tests. You have to complete the whole test before you look at the answer to a question
and the test is computer marked so you will receive a score. You can attempt the Test Your Learning
questions as many times as you wish. We recommend you do them a few times to see how your score
improves.
Question Page ref

Syllabus area no Q A
1: Specialist cost and management accounting techniques

Activity based costing 1-4 1 71
Scenario question: Duff Co 5-9 2 72
Target costing 10-16 3 72
Scenario question: Edward Co 17-21 5 74
Life cycle costing 22-27 6 75
Scenario question: Volt Co 28-32 7 76
Throughput accounting 33-38 8 77
Scenario question: Gopher Garage 39-43 10 77
Environmental management accounting 44-47 11 79
2: Decision-making techniques
Relevant cost analysis 1-4 13 80
Cost volume profit analysis 5-11 14 80
Scenario question: Cardio Co 12-16 16 82
Limiting factors 17-22 17 83
Scenario question: Cara Co 23-27 19 85
Pricing decisions 28-35 21 86
Make-or-buy and other short-term decisions
Scenario question: Herera Co 36-40 23 88
Dealing with risk and uncertainty in decision-making 41-45 24 89
Scenario question: Louiedewie Co 46-50 26 90
3: Budgeting and control

Budgetary systems and type of budget 1-9 28 91
Quantitative analysis in budgeting 10-16 30 92
Standard costing 17-18 32 93
Scenario question: Kamal Co 19-23 33 94
Material mix and yield variances 24-27 34 95
Scenario question: Product Zed 28-32 36 96
Sales mix and quantity variances 33-34 37 97
Scenario question: Memia Co 35-39 38 97
vi I n t r o d u c t i o n ACCA PM Question Bank
Question Page ref

Syllabus area no Q A
Planning and operational variances 40-44 39 99
Scenario question: Demia Co 45-49 41 100
Performance analysis 50 42 101
4: Performance measurement and control

Performance management information systems 1-4 43 102
Uses of information 5-7 44 102
Management reports 8-10 44 103
Performance analysis in private sector organisations 11-14 45 103
Scenario question: Oliver’s Salon 15-19 46 104
Divisional performance and transfer pricing 20-25 48 105
Scenario question: Abel Co 26-30 49 106
Performance analysis in not-for-profit organisations and the public 31-33 50 107
sector
External considerations and behavioural aspects 34-35 51 107
ACCA PM Question Bank Introduction vii
Section C questions
The Section C questions in Part 1 of this question bank are used on the first phase of your course.
Where you see the debrief icon next to the question name, you will find that there is a video on our
online course in which your online tutor works through the answer giving advice on exam technique
and also on tricky areas.
Based on Page ref
Question name Syllabus area Past exam Q A
1 Cut and Stitch Limiting factor analysis Q3 J10 (a)-(c) 52 108
2 WX Pricing Q3, J13, (b) amended 53 111
3 Belton Park Resort Shutdown decision Q1 M/J19 54 114
4 Gym Bunnies Risk and uncertainty in decision Q1, J13, (a) and (c) 56 117
making

1 PC Co Budgetary systems/Types of budget Q3, D11 58 121
2 The Safe Soap Co Materials mix and yield Q5, D14 58 124
variances/Activity-based budgeting
3 Bedco Planning and operational variances Q5, D13 60 126
4 Jump Performance analysis and Q5, J10 60 128
behavioural aspects

1 Best Night Co Performance analysis in private Q2 M/J19 62 131
sector organisations
2 Robin Holt University Performance analysis in private Q2, S/D19 63 134
sector organisations
3 The People’s Bank Balanced scorecard Q2, M/J17 65 137
4 Portable Garage Co Divisional performance and transfer Q1, M/J18 67 140
pricing
5 Sports Co Divisional performance Q4, J10 68 143
viii I n t r o d u c t i o n ACCA PM Question Bank
PART 2 QUESTIONS
Objective test and Scenario

The questions in Part 2 of this question bank have been divided into two types:
(i) Revision questions (R) to attempt at the revision phase
(ii) Stretch questions (S) to complete between the tuition and revision stage of your studies
if, and only if, you have tried all of the tuition questions (without looking at the answers)
and you are confident with these questions. We call this phase of your studies the
revision preparation phase.
Question Page ref Revision (R)

Syllabus area no Q A Stretch (S)

Activity based costing 1-4 147 247 R
Scenario question: Wash Co 5-10 148 248 R
Target costing 11-16 150 250 R
Scenario question: Helot Co 17-21 151 251 S
Scenario question: Darask Co 22-26 153 252 R
Life cycle costing 27-29 155 253 R
Scenario question: Fit Co 30-34 156 254 R
Scenario question: XYX plc 35-39 157 255 R
Throughput accounting 40-43 158 256 R
Scenario question: Sweet Treats Bakery 44-48 160 257 R
Environmental management accounting 49-50 162 258 R
Relevant cost analysis 1-3 163 259 R
Scenario question: Losmetic Co 4-8 164 260 R
Cost volume profit analysis 9-13 165 261 S
Scenario question: Hare Events 14-18 167 262 R
Limiting factors 19-23 169 263 R
Scenario question: Higgins Co 24-28 171 265 R
Scenario question: Home Electrics Co 29-33 172 266 R
Pricing decisions 34-39 174 268 R
Scenario question: ALG Co 40-44 175 270 R
Make-or-buy and other short-term decisions 45 176 271 R
Scenario question: Three departments 46-50 177 271 R
Scenario question: Chemco 51-55 178 272 R
Dealing with risk and uncertainty in decision-making 56-58 179 273 R
Scenario question: Three products 59-63 180 274 R
Scenario question: Sandrunner 64-68 181 275 R
Scenario question: Mylo 69-73 183 276 R
ACCA PM Question Bank Introduction ix
Question Page ref Revision (R)

Syllabus area no Q A Stretch (S)

Budgetary systems and type of budget 1-6 185 279 R
Scenario question: Kenneth Co 7-11 187 281 R
Quantitative analysis in budgeting 12-17 188 282 R
Scenario question: Comfynap Co 18-22 190 284 R
Standard costing 23 191 285 R
Scenario question: Corfe Co 24-28 192 285 R
Material mix and yield variances 29-31 194 286 R
Scenario question: Romeo Co 32-36 195 287 R
Sales mix and quantity variances 37 197 288 S
Scenario question: Cut Co 38-42 197 288 R
Planning and operational variances 43-46 198 290 S
Scenario question: Grayshott Co 47-51 200 292 R
Performance analysis 52-53 201 293 R

Performance management information systems 1-3 203 294 S
Uses of information 4 203 294 S
Management reports 5-7 204 294 S
Performance analysis in private sector organisations 8-11 204 295 S
Scenario question: Bus Co 12-16 206 297 R
Scenario question: Jamair Co 17-21 208 298 R
Divisional performance and transfer pricing 22-25 209 299 S
Scenario question: Cardale Co 26-30 211 301 R
Scenario question: Andover and Winchester 31-35 213 303 R
Performance analysis in not-for-profit organisations and 36-37 214 304 S
the public sector
Scenario question: Seatown Council 38-42 215 304 R
External considerations and behavioural aspects 43 217 305 S
x Introduction ACCA PM Question Bank
Section C
Based on Page ref Revision (R)
Question name Syllabus area Past exam Q A Stretch (S)
1 The Telephone Co Relevant costs Q1, D11, (a) 218 306 R
2 The Alka Hotel CVP Q2, M/J18 219 311 R
3 Health Nuts Divisional performance and Q1, S/D20 221 314 R
transfer pricing
4 CSC Co Limiting factors Q2, S16 222 316 R
5 Bellahouston Co Limiting factors Q1, S/D21 224 319 S
6 Heat Co Pricing, Learning curves Q2, J11, (a) 225 321 R
7 Robber Co Make or Buy and other Q1, J12, (a) and 226 325 R
short term decisions (c)
8 Cement Co Risk and uncertainty in Q1, J11 227 330 R
decision making
1 Yumi Co Budget preparation and Q1 S/D19 228 334 R
approaches
2 Mic Co Quantitative analysis in Q3, D13 229 338 R
budgeting
3 Kappa Co Materials mix and yield Q3, S/D18 230 340 R
variances
4 Noble Standard costing, including Q3, J11, (a) and 231 343 R
sales mix and quantity (c)
variances
5 Clear Co Sales mix and quantity Q1, M/J20 232 346 R
variances including Planning
and operational variances
6 Truffle Co Planning and operational Q2, D12 233 348 R
variances
7 Medical Temp Co Planning and operational Q3, M/J21 234 351 R
variances
8 Sticky Wicket Performance analysis and Q2, J10 235 353 R
behavioural aspects
ACCA PM Question Bank Introduction xi
Based on Page ref Revision (R)

Question name Syllabus area Past exam Q A Stretch (S)
1 Hammocks Co Performance analysis in Q2, M/J20 237 356 R
private sector organisations
2 Flag Co and Performance analysis in Q2, S/D21 238 358 R
Budget Co private sector organisations
3 Tonford school Performance analysis in Q2, S/D20 239 360 R
not-for-profit organisations
and the public sector
4 Medcomp Performance analysis in Q4, M/J21 241 362 S
not-for-profit organisations
and the public sector
5 Protect against Divisional performance and Q4, D13 242 364 R
Fire Co transfer pricing
6 Biscuits and Cakes Divisional performance and Q5, J12, 243 366 R
transfer pricing (a),(b),(c) and (e)
7 Man Co Divisional performance and Q4, M/J 16 245 369 R
transfer pricing/ amended
Performance analysis in
private sector organisations
Formulae sheet 375
Once you have completed your revision phase question practice, you can now attempt practice
exam 2 within the real exam software. This can be found using the following link:
https://www.accaglobal.com/ie/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5/cbe-question-practice.html
ACCA Specimen paper

It is vital that you try the computer based specimen exam on the ACCA website. The specimen uses
the software that you will meet in your real exam and you must be familiar with it. You will find it on
the ACCA website: www.accaglobal.com
The ACCA also provide some additional constructed response questions. We strongly suggest you
attempt these.
xii I n t r o d u c t i o n ACCA PM Question Bank
ACCA PM Question Bank P a r t 1 questions: 1: Specialist cost and management accounting techniques 1
PART 1 QUESTIONS: Objective test and Scenario
Activity based costing

1 RDE plc uses an activity based costing system to attribute overhead costs to its three products.
The following budgeted data relates to the year to 31 December 20X8:
Product X Y Z
Production units (000) 15 25 20
Batch size (000 units) 2.5 5 4
Machine set up costs are caused by the number of batches of each product and have been
estimated to be $600,000 for the year.
Calculate the machine set up costs that would be attributed to each unit of Product Y to the
nearest $0.01.
2 According to ABC, which of the following is the correct statement of the hierarchy of levels of
activity within an organisation, ranked from the bottom upwards?
Facility
sustaining
Product
Product
sustaining
Batch
3 For which one of the following costs might the number of production runs be a cost driver?
 Production scheduling
 Product development costs
 Short-run variable overhead costs
 Materials handling and despatch costs
2 Part 1 questions: 1: Specialist cost and management accounting techniques ACCA PM Question Bank
4 KY makes several products including Product W. KY is considering adopting an activity-based

approach for setting its budget. The company’s production activities, budgeted activity costs
and cost drivers for next year are given below.
Cost driver
Activity $ Cost driver quantity
Set up costs 200,000 No. of set ups 800
Inspection / quality control 120,000 No. of quality tests 400
Machines are reset after each batch. Quality tests are carried out after every second batch.
The budgeted data for Product W for next year are:
Direct materials $2.50 per unit
Direct labour 0.03 hours per unit @ $18 per hour
Batch size 150 units
Budgeted production 15,000 units
Calculate, using activity based costing, the budgeted total production cost per unit for Product W
to the nearest $0.01.
DUFF CO
The following scenario relates to questions 5-9. Each question is worth 2 marks.
Duff Co manufactures three products X, Y and Z. Each product uses the same materials and the same
type of direct labour but in different quantities. For many years Duff Co has been using full absorption
costing and absorbing overheads on the basis of direct labour hours, but is considering switching to
activity-based costing (ABC).
The following data relates to the three products.
Product X Product Y Product Z
20,000 16,000 22,000
Direct material cost ($ per unit) 25 28 22
Direct labour (hours per unit) 2.5 3 2
Direct labour cost ($ per unit, @ $12 per hour) 30 36 24
Machine hours per unit 1.5 1.25 1.4
Batch size (units) 500 800 400
Number of purchase orders per batch 4 5 4
Duff Co also expects to incur the following indirect costs.
Cost pools
$
Machine set up costs Number of batches 280,000
Material ordering costs Number of purchase orders 316,000
Machine running costs Number of machine hours 420,000
General facility costs Number of machine hours 361,400
1,377,400
5 Calculate the budgeted full production cost per unit of product X using Duff Co’s current
method of absorption costing, to the nearest $0.01.
$
6 Calculate the total material ordering costs for Product Y to the nearest $.
7 Calculate the machine running and general facility costs per unit for Product Z to the nearest
$0.01.
8 Calculate the budgeted full production cost per unit of product X using ABC, to the nearest
$0.01, on the basis that total overheads allocated to Product X under activity-based costing are
$492,824.
9 Which TWO of the following statements about ABC are correct?

 ABC is only useful for production overheads.
 ABC is most useful when overheads are related to volume.
 ABC is an absorption costing system.
 ABC must be based on activities that are measurable in quantitative terms.
Target costing
10 The selling price of Product X is set at $350 for each unit and sales for the coming year are
expected to be 500 units.
A return of 30% on the investment of $300,000 in Product X will be required in the coming year.
What is the target cost for each unit of Product X?
11 A company has calculated that the target cost for Product Z is $40 per unit. This is based on an
expected production and sales volume of 3,000 units. The company wishes to earn a profit of
25% on sales.
What market price is the target cost for Product Z based on (to two decimal places)?
 $10.00
 $30.00
 $50.00
 $53.33
12 T Company uses target costing. The company wishes to close the target cost gap that exists for
one of its products.
Which of the following may be used to close the target cost gap?
 Replace skilled workers with less skilled workers for the more basic production tasks
 Replace existing material with higher quality material
 Raise the selling price of the product
 Use a higher grade of labour to complete work ahead of schedule
13 The following are all steps in the implementation of the target costing process for a product.
Rank them in the correct sequence.
Calculate the
target cost
Calculate the
target cost gap
Calculate the
current cost
Set the required

profit
Set the selling

price
14 Which of the following statements describes target costing?

 It calculates the expected cost of a product and then adds a margin to it to arrive at the
target selling price.
 It allocates overhead costs to products by collecting the costs into pools and sharing
them out according to each product’s usage of the cost driving activity.
 It identifies the market price of a product and then subtracts a desired profit margin to
arrive at the desired cost.
 It identifies different markets for a product and then sells that same product at different
prices in each market
15 Saris Co has set a budgeted labour cost based on the assumption of a learning rate of 80%. Its
Production Director has now found that the actual learning rate is 70%.
Which of the following statements is true?
 The cost gap will increase and the target cost will increase.
 The cost gap will decrease and the target cost will decrease.
 The cost gap will remain the same and the target cost will decrease.
 The cost gap will decrease and the target cost will remain the same.
16 Which TWO of the following techniques are relevant to target costing?

 Value analysis
 Iso-contribution analysis
 Variance analysis
 Functional analysis
EDWARD CO
Edward Co assembles and sells many types of radio, and also repairs radios for customers. It is
considering extending its product range to include digital radios. These radios produce a better sound
quality than traditional radios and have a large number of potential additional features not possible
with the previous technologies.
A radio is produced by assembly workers assembling a variety of components. Production overheads
are currently absorbed into product costs on an assembly labour hour basis.
Edward Co is considering a target costing approach for its new digital radio product. A selling price of
$44 has been set in order to compete with a similar radio on the market that has comparable features
to Edward Co’s intended product. The board have agreed that the acceptable margin (after allowing
for all production costs) should be 20%.
Cost information for the new radio is as follows.
Component 1 (Circuit board) – these are bought in and cost $4.70 each.
Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each completed radio.
However, Edward Co estimates that 4% of the purchased wire is lost in the assembly process. Wire
costs $4.80 per metre to buy.
Other materials – other materials cost $8.10 per radio.
Assembly labour – these are skilled people who are difficult to recruit and retain. It takes 30 minutes
to assemble a radio and the assembly workers are paid $12.60 per hour. It is estimated that 10% of
hours paid to the assembly workers is for idle time.
Production overheads – variable production overhead for each radio is $20 per hour and fixed
overhead for each radio is $12 per hour.
17 Which TWO of the following would be benefits of introducing a target costing approach?
 Edward Co will have a greater internal focus on its product development.
 Cost control can begin at the design stage.
 Edward Co will be able to pass on cost increases to its customers.
 The radio will only include features that the customer regards as valuable.
18 Calculate the reduction in cost that would be achieved by eliminating the labour idle time and
the wire lost in the assembly process, to the nearest $0.01.
$
19 Assuming a change in supplier meant that the cost of Component 2 fell to $4.40 per metre,
there was no idle time with labour and all other costs remained the same, calculate the cost gap
to the nearest $0.01.
20 Which TWO of the following are measures that Edward Co might wish to use to reduce the cost
gap?
 Only including standard components in the radio
 Including additional features that the competitor’s radio does not have
 Analysing costs into cost pools
 Increasing the automation of the manufacturing process
21 Which of the following would be a problem with introducing a target cost approach to the
repair services provided by Edward Co?
 The outcomes of the repair services cannot be specified properly.
 The repair work carried out will vary according to the problems found.
 The time of the skilled labour used in the repair process has to be costed.
 The service is carried out when the customer requires it.
Life cycle costing

22 Which THREE of the following costs are typically costs which occur at the Research and
Development stage of a product’s life cycle?
 Design costs
 Testing costs
 Promotional costs
 Production facility investment costs
 Customer support costs
 Inventory costs
23 A company is about to launch a new product. Total lifetime sales are expected to be 44,000
units. $3,250,000 has been incurred on design and development. Promotional costs over the
product’s life are expected to be $2,000,000. De-commissioning of the machine will cost
$250,000 at the end of the product’s life. Production of the product is expected to cost an
average of $150 per unit.
What is the life cycle cost per unit over the product’s life?
24 Which of the following is NOT a benefit of life cycle costing?

 Improved awareness of total costs
 Assists with long-term planning
 Emphasises the importance of early stage design and development costs
 Results in a market driven pricing strategy
25 In calculating the life cycle costs of a product, which of the following items would be included?
Included Excluded
Research and development  
Planning and concept design  
Testing  
Production  
Advertising  
Distribution and customer service  
26 When are the bulk of a product's life cycle costs normally determined?
 At the design/development stage
 When the product is introduced to the market
 When the product is in its growth stage
 On disposal
27 Given the following information for a product, what would be the price per item need to be to
get a profit of $10 per unit using life cycle costing principles.
R&D, marketing and launch costs $30m
Production costs per unit $25
Units sold 10m
 $28
 $38
 $35
 $65
VOLT CO
Volt Co generates and sells electricity. It operates two types of power station; nuclear and wind.
The costs and output of the two types of power station are detailed below:
Nuclear station
A nuclear station can generate 9,000 gigawatts of electricity in each of its 40 years of useful life.
Operating costs are $486m per year. Operating costs include a provision for depreciation of $175m per
year to recover the $7,000m cost of building the power station.
Each nuclear station has an estimated decommissioning cost of $12,000m at the end of its life. The
decommissioning cost relates to the cost of safely disposing of spent nuclear fuel.
Wind station
A wind station can generate 1,750 gigawatts of electricity per year. It has a life-cycle cost of $55,000
per gigawatt and an average operating cost of $40,000 per gigawatt over its 20-year life.
28 What is the life-cycle cost per gigawatt of the nuclear station (to the nearest $'000)?
 $54,000
 $73,000
 $87,000
 $107,000 (2 marks)
29 Which of the following will decrease the total life-cycle cost of a nuclear station?
(1) Increasing the useful life of the station
(2) Reducing the decommissioning cost
 1 only
 2 only
 Both 1 and 2
 Neither 1 nor 2 (2 marks)
30 How would the disposal cost of spent nuclear fuel be categorised in environmental
management accounting (EMA)?
 A prevention cost
 A detection cost
 An internal failure cost
 An external failure cost (2 marks)
31 If Volt Co sets a price to earn an operating margin of 40% over the life of a wind station, what
will be the total lifetime profit per station (to the nearest $m)?
 $35m
 $408m
 $560m
 $933m (2 marks)
32 Which of the following are benefits of life-cycle costing for Volt Co?
(1) It facilitates the designing out of costs at the product development stage
(2) It can encourage better control of operating costs over the life cycle
(3) It gives a better understanding of the causes of overhead costs
(4) It provides useful data for short-term decision-making
 1, 2 and 3
 1 and 2 only
 1 and 4
 2, 3 and 4 (2 marks)
(10 marks)
Throughput accounting
33 A company manufactures two products which requires three different machine processes:
Processing time per metre in hours
Product A Product B
Pressing 0.50 0.50
Stretching 0.25 0.40
Rolling 0.40 0.25
Each product requires 1 metre of material/unit. Production for the month is expected to be
10,000 metres for Product A and 15,000 for Product B.
Available resources for the month are expected to be:

Available resource
Material 30,000 metres
Pressing time 13,000 hours
Stretching time 8,000 hours
Rolling time 7,750 hours
Using throughput accounting, what is the bottleneck resource?
 Material
 Pressing time
 Stretching time
 Rolling time
34 A company manufactures a product which requires two hours per unit of machine time.
Machine time is a bottleneck resource as there are only five machines which are available for
24 hours per day, five days per week. The product has a selling price of $65 per unit, direct
material costs of $25 per unit, labour costs of $20 per unit and factory overhead costs of
$10 per unit. These costs are based on weekly production and sales of 300 units.
What is the throughput accounting ratio (to 2 decimal places)?
35 Z Company uses throughput accounting to help assess the efficiency of its operations.
Which of the following would improve its throughput accounting ratio?
 Introduce restrictions specifying the maximum allowed hours for each shift
 Replace existing material with higher quality material
 Raise the selling price of the product
 Use a higher grade of labour for the work
36 X Co uses a throughput accounting system. Details of product A, per unit, are as follows:
Selling price $320
Material costs $80
Conversion costs $60
Time on bottleneck resource 6 minutes
What is the return per hour for product A?
37 Which TWO of the following features distinguish throughput accounting from other costing systems?
 It does not attempt to maximise profit.
 Work in progress is valued at material cost only.
 Costs are allocated to products when they are completed or sold.
 Only labour cost is treated as a variable cost.
38 Which of the following is NOT an influence on the throughput contribution measure used in a
system of throughput accounting?
 Direct material price
 Direct material usage
 Direct labour price
 The volume of throughput
GOPHER GARAGE
Gopher Garage offers MOTs and full services to its customers. All MOTs and services have to be carried
out by one of the four mechanics at the garage. They are assisted by three trainees. The garage’s two
receptionists also deal with customers when they arrive and when they pay for the work that has been
done.
The average length of time that is spent by each member of staff on work for each customer is as
follows:
MOTs Service
Hours Hours
Mechanic 1.25 3.20
Trainee 0.50 1.50
Receptionist 0.25 0.30
The garage is open for 10 hours a day, 5 days a week. It is closed for public holidays that total two
weeks in any year. Annual staff salaries are $55,000 for each mechanic, $25,000 for each trainee and
$30,000 for each receptionist. The cost of oil and other materials used during MOTs is $15 per
customer, and the cost of oil and other materials used during services is $25 per customer. Other
garage costs (excluding raw materials and labour) amount to $125,000.
Gopher Garage charges $120 for each MOT and $200 for each service.
The garage’s accountant has identified mechanic time as being the bottleneck activity.
39 What is the annual capacity of the bottleneck activity in terms of the maximum number of each
activity?
MOTs
Services
40 The garage’s accountant has calculated the cost per hour to be $48.
What is the throughput accounting ratio for both services?
 MOT 1.75 Service 1.14
41 What would be the effect on the bottleneck if the garage employed another three mechanics?
 The mechanics’ time would be a bottleneck for MOTs only.
 The mechanics’ time would be a bottleneck for services only.
 The mechanics’ time will remain the bottleneck for both MOTs and services.
 There will no longer be a bottleneck.
42 Which TWO of the following measures could the garage use to improve the throughput
accounting ratio?
 Decrease the time spent by the mechanics on each customer
 Decrease the time spent by the trainees on each customer
 Decrease the operating expenses of the garage
 Decrease the price of the work done for each customer
43 Which of the following statements regarding the theory of constraints is/are true?
True False
It can be applied to the management of all external  
factors affecting the organisation.
It is concerned with overcoming a bottleneck  
identified in a single activity.
It aims to limit the amount of non-bottleneck  
resources used.
It tries to avoid the build-up of inventories.  
Environmental management accounting

44 Which of the following statements about environmental accounting is/are true?
True False
A significant problem for environmental accounting is  
that it is difficult to measure environmental costs.
An aim of environmental accounting is to encourage  
organisations to quantify the costs and benefits of
improving environmental practices.
The use of input/output analysis forces an  
organisation to monitor the cost of wasted material
and other environmental pollution.
It is not possible to use activity based costing to  
identify cost drivers for environmental costs.
45 Using the US Environmental Protection Agency’s definition of environmental costs, how would
the cost of producing an environmental report be classified?
 Conventional cost
 Contingent cost
 Image and relationship cost
 Potentially hidden cost
46 When activity-based costing is used for environmental accounting, which statement is correct
for environment-related costs and environment-driven costs?
 Environment-related costs can be attributed to joint cost centres and environment-
driven costs cannot be.
 Environment-driven costs can be attributed to joint cost centres and environment-
related costs cannot be.
 Both environment-related costs and environment-driven costs can be attributed to joint
cost centres.
 Neither environment-related costs nor environment-driven costs can be attributed to
joint cost centres.
47 Rose Co uses input-output analysis to account for its material. The following information is
relevant to the production output of every 1,000 kg of material input:
Output per
1,000 kg
Finished product 550 kg
Sold for scrap 250 kg
Wastage 150 kg
Lost in production 50 kg
Total 1,000 kg
The material costs $80 per kg. The company receives $45 per kg for any material which is sent
for scrapping and the disposal cost of material is an additional $15 per kg.
What is the environmental cost per 1,000 kg of input?
Checkpoint 1
Now you have completed these questions in the question bank, there are additional questions to try
on your online course. Please log into your course using the instructions that were on your joining
instructions e mail and attempt Checkpoint 1 at the end of Chapter 1.
ACCA PM Question Bank Part 1 questions: 2: Decision-making techniques 13
Relevant cost analysis

1 L is currently quoting for a job that will involve the use of three materials A, B and C. Material A
is currently in inventory with a book value of $4,000. If it was used on the job, it would need to
be replaced at a cost of $5,000. Its scrap value is $1,000. There is a surplus of Material B in
inventory. Its book value is $3,000 and it has no realisable or scrap value. There is a surplus of
Material C in inventory. Its book value is currently $6,000. It could be sold for $4,500 or used on
another job as a substitute for Material D, which L currently does not have in inventory. The
costs of obtaining D would be $4,250.
What is the relevant cost to L of using materials in inventory on this job?
2 A company is considering a one-year contract which will require three skilled workers. Skilled
workers can be hired on a temporary basis for one year at a cost of $20,000 per worker.
Alternatively, the company could retrain some existing workers who are currently paid $12,000
per worker. The training would cost $5,000 in total. If these existing workers were used, the
company would need to replace them at a total cost of $45,000.
What is the total relevant cost of labour for the one-year contract?
 $60,000
 $41,000
 $45,000
 $50,000
3 Studley Co purchased a machine three years ago for $15,000. It can be sold now for $9,000. The
current replacement cost of an equivalent machine is $14,000. If Studley Co keeps the machine
for use in the business it is expected to generate net income of $17,000.
What is the relevant cost of the machine?
 $9,000
 $14,000
 $15,000
 $17,000
4 A company has received a special order for which it is considering the use of material B which it
has held in its inventory for some time. This inventory of 945 kg was bought at $4.50 per kg. The
special order requires 1,500 kg of material B. If the inventory is not used for this order, it would
be sold for $2.75 per kg. The current price of material B is $4.25 per kg.
What is the total relevant cost of material B for the special order, to the nearest $0.01?
$
14 P a r t 1 q u e s t i o n s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA PM Question Bank
Cost volume profit analysis

5 A business manufactures a single product which it sells for $50. The variable costs of production
are $10 a unit. Next month fixed costs will be $800,000. The Finance Director wants to realise a
profit of $120,000. How many units must be sold to generate this profit?
6 Which of the following is the correct formula to calculate the break-even sales volume (in units)
for a business?
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
 𝐶𝐶
𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
𝑆𝑆
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
 𝐶𝐶
𝑆𝑆
7 A company makes a single product which it sells for $30 per unit.
Fixed costs are $18,000 per month. The contribution/sales ratio is 40%.
Next month the company’s profit target is $36,000.
What sales volume is required to achieve next month’s profit target?
 1,200 units
 1,500 units
 3,000 units
 4,500 units
8 A company makes two products with the following characteristics:

Product X Product Y
Contribution to sales ratio 0.3 0.5
Selling price per unit $3.00 $4.80
Maximum demand 8,000 units 3,000 units
Fixed costs are $9,000.
What is the minimum revenue required for production to break even?
 $20,400
 $25,800
 $29,400
 $24,000 (2 marks)
9 A profit-volume chart can illustrate the relationship between

 Sales revenue and costs
 Sales volume and costs
 Sales volume, revenue and costs
 Sales volume and profit
10 A company makes a single product which it sells for $2 per unit.

Fixed costs are $13,000 per month.
The contribution/sales ratio is 40%.
Sales revenue is $62,500.
What is the margin of safety in units?
11 Matt Milk Bar is planning to invest in a new blending machine, which will expand the range of
drinks it can offer. Its owner has estimated the following daily results for drinks associated with
the new machine:
$
Sales (200 units) 600
Variable costs (450)
Contribution 150
Incremental fixed costs (45)
Profit 105
Which of the following statements that relate to the sensitivity of the investment are true?
True False
The investment is more sensitive to a change in sales  
price than sales volume.
If variable costs increase by 25% the investment will  
make a loss.
The margin of safety is 92.5%.  
The investment’s sensitivity to incremental fixed costs  
is 70%.
CARDIO CO
Cardio Co manufactures and sells three types of fitness equipment: treadmills (T), cross trainers (C)
and rowing machines (R).
The budgeted sales prices and volumes for the next year are as follows:
T C R
Selling price $1,600 $1,800 $1,400
Units 420 400 380
The budgeted revenues and costs for each product are shown below.
T C R
$ $ $
Sales revenues 672,000 720,000 532,000
Variable costs 263,760 286,400 201,780
Fixed costs 73,940 78,100 59,320
Cardio Co’s Finance Director is considering various possibilities, including aiming for a
contribution/sales ratio of 65%. He is also looking at a scenario where the contribution/sales ratio was
60%, with sales revenues falling to $1,600,000 and fixed costs to $175,000.
12 Calculate the weighted average contribution to sales ratio for Cardio Co to the nearest 0.01%.
13 Calculate the breakeven sales revenue at a Contribution/Sales ratio of 65%, to the nearest $000.
$ 000
14 Calculate the margin of safety at a contribution/sales ratio of 60%, with sales revenues having
fallen to $1,600,000 and fixed overheads to $175,000, to the nearest 0.1%.
15 Cardio Co’s production department currently has problems meeting demand for these products,
although this will be addressed in the medium-term by a large investment in manufacturing
facilities. For now, Cardio Co’s Chief Executive has instructed the Production Department to
prioritise manufacture of products by the contribution per unit that they make.
Which of the following would NOT occur if the products making the highest contribution were
manufactured and sold first?
 Cardio Co will cover its fixed costs more quickly.
 Fewer unit sales will need to be made in order to break even.
 The breakeven point will be lower.
 The C/S ratio will rise.
16 Once Cardio Co’s new manufacturing facilities are open, the company intends to introduce a
new, mobile, cross-trainer. This will be supported by a large advertising and promotion
campaign to encourage demand. The intention is initially to charge a high price for this product,
although it may fall over time.
Which TWO of the following are reasons why Cardio Co may wish to charge a high price
initially for the mobile cross-trainer?
 The sensitivity of its demand to price is uncertain.
 The product is likely to have a long life cycle.
 It will generate high initial cash flows to cover the marketing expenditure.
 It wishes to discourage competitors from entering the market.
Limiting factors
17 TT Co operates a JIT policy with minimal inventories. It manufactures a single product with the
following cost card:
Product A
$
Materials (at $2 per kg) 8
Labour (at $5 per hour) 10
Other overheads 7
Total production cost 25
Next month demand is 4,000 units, 15,000 kg of material are available and 8,500 labour hours.
What is the limiting factor next month?
 Sales demand
 Material only
 Labour only
 Material and labour
18 Conrad Co manufactures two products, X and Y. Details of both products are as follows:
Product X Product Y
$ $
Selling price 105 136
Materials 18 16
Labour (at $10 per hour) 30 45
Variable overhead 12 15
Fixed overhead 20 25
Profit per unit 25 35
Maximum demand (units) 800 1,500

It has selected the optimal production plan to maximise profit for the month based on 4,650
labour hours. An extra 90 hours have become available at the standard rate of $10 per hour.
How much additional profit can be earned in the month?
$
19 The following statements have been made about linear programming:

1 The shadow price of a scarce resource is the increase in contribution available if one
more unit of the resource is obtained
2 Non-scarce resources always have zero slack
Which of the above statements is/are true?
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
20 A company has the following production planned for the next four weeks. The figures reflect the
full capacity level of operations. Planned output is equal to the maximum demand per product.
Product A B C D
$ per unit $ per unit $ per unit $ per unit
Selling price 160 214 100 140
Raw material cost 24 56 22 40
Direct labour cost 66 88 33 22
Variable overhead cost 24 18 24 18
Fixed overhead cost 16 10 8 12
Profit 30 42 13 48
Planned output 300 125 240 400

Direct labour hours per unit 6 8 3 2
The direct labour force is threatening to go on strike for two weeks out of the coming four. This
means that only 2,160 hours will be available for production rather than the usual 4,320 hours.
If the strike goes ahead, which TWO products should be produced if profits are to be maximised?
 A
 B
 C
 D
21 Highfly Co manufactures two products, X and Y, and any quantities produced can be sold for
$60 per unit and $25 per unit respectively.
Variable costs per unit of the two products are as follows:
Product X Product Y
$ $
Materials (at $5 per kg) 15 5
Other variable costs 6 5
Total 45 13
Next month, only 4,200 kg of material and 3,000 labour hours will be available. The company
aims to maximise its profits each month.
The company wants to use the linear programming model to establish an optimum production
plan. The model considers ‘x’ to be number of units of Product X and ‘y’ to be the number of
units of Product Y.
Which of the following statements of objective function and constraints is/are correct?
Correct Incorrect
Objective function 60x + 25y  
Material constraint 3x + y ≤ 4,200  
Labour constraint 4x + 0.5y ≥ 3,000  
22 C Co uses material B, which has a current market price of $0.80 per kg. In a linear program,
where the objective is to maximise profit, the shadow price of material B is $2 per kg.
Which TWO of the following statements are correct?
 Contribution will be increased by $2 for each additional kg of material B purchased at the
current market price.
 The maximum price which should be paid for an additional kg of material B is $2.
 Contribution will be increased by $1.20 for each additional kg of material B purchased at
the current market price.
 The maximum price which should be paid for an additional kg of material B is $2.80.
CARA CO
Cara Co makes two products, the Seebach and the Herdorf.
To make a unit of each product the following resources are required:
Seebach Herdorf
Materials ($100 per kg) 5 kg 7 kg
Labour hours ($45 per hour) 2 hours 3 hours
Machine hours ($60 per hour) 3 hours 2 hours
Fixed overheads are $300,000 each month.
The contribution per unit made on each product is as follows:
Seebach Herdorf
Contribution ($ per unit) 250 315
The maximum demand each month is 4,000 units of Seebach and 3,000 units of Herdorf. The products
and materials are perishable and inventories of raw materials or finished goods cannot be stored.
Cara Co has a legally binding obligation to produce a minimum of 2,000 units of Herdorf in each of
months 1 and 2. There is no minimum production required in month 3.
The manufacturing manager is planning production volumes and the maximum availability of
resources for months 1, 2 and 3 are as follows:
Month 1 2 3
Materials (kg) 34,000 42,000 35,000
Labour (hours) 18,000 12,000 24,000
Machine (hours) 18,000 19,000 12,000
For month 3 the following linear programming graph has been produced:
23 What is/are the limiting factor(s) in month 1?

 Materials, labour hours and machine hours
 Materials and machine hours only
 Materials only
 Labour hours only (2 marks)
24 The production manager has identified that the only limiting factor in month 2 is labour hours.
What is the production volume for Herdorf for month 2 (to the nearest whole unit)?
 0
 1,333
 2,000
 3,000 (2 marks)
25 If the shadow price for month 2 is $125 per labour hour, which of the following statements
is/are correct?
(1) The production manager would be willing to pay existing staff a maximum overtime
premium of $125 per hour for the next 2,000 hours
(2) The production manager would be willing to pay a maximum of $170 per hour for an
additional 2,000 hours of temporary staff time
 1 only
 2 only
 Both 1 and 2
26 What is the maximum profit which can be earned in month 3?

 $1,080,000
 $1,380,000
 $1,445,000
 $1,145,000 (2 marks)
27 Which of the following interpretations of the linear programming graph produced for month 3
is/are correct?
(1) All other things being equal, unless demand increases for either product labour will be a
slack variable
(2) If more machine hours were made available in month 3 they would be used initially to
make Herdorfs
 1 only
 2 only
 Both 1 and 2
Pricing decisions
28 Clogs Co sells its most popular style of wooden shoes at a profit of 20% on the current selling
price of $35. Due to a material shortage, the costs of producing this style of shoe are expected
to increase by 5% next year.
What will the new selling price need to be to maintain the 20% profit margin, to the nearest
$0.01?
29 Longbourne Co manufactures and sells covers for phones and MP3 players. The current selling
price is $10 each. Weekly demand is currently 300 covers. If Longbourne increased its price by
$1, the demand would drop to 250 covers.
What is the straight line demand equation for Longbourne Co?
 P = 10 – 0.02Q
 P = 10 – 0.004Q
 P = 16 – 0.02Q
 P = 16 – 0.004Q
30 A car rental company charges different prices to customers hiring the same make of car,
depending on the day of the week, the month of the year and the length of the rental.
The following statements have been made about its pricing strategy.
1 The company has adopted a price discrimination strategy.
2 The company’s strategy is successful because all customers have the same price elasticity
of demand.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
31 DCT Co cleans carpets. It determines its selling price by adding a mark-up of 40% to total costs.
Variable costs are $5 per carpet for cleaning and $1 for advertising. Based on an expected
volume of 2,000 carpets, fixed cleaning costs are expected to be $9,000.
What should DCT charge per carpet for cleaning?
 $7.00
 $8.40
 $10.50
 $14.70
32 A company sets a low initial price for its product with the aim that high volumes will be sold and
market share gained quickly.
This is an example of the application of which pricing policy?
 Target pricing
 Volume discounting
 Penetration pricing
 Price skimming
33 A company has entered two different new markets.

In market A, it is initially charging low prices so as to gain rapid market share while demand is
relatively elastic.
In market B, it is initially charging high prices so as to earn maximum profits while demand is
relatively inelastic.
Which price strategy is the company using in each market?
Price Penetration Market
discrimination pricing skimming
A   
B   
34 When the price of a particular product is $8.00 per unit, on average 160 units of the product are
sold per month. The price has been changed to $12.00 per unit, and now an average of 120
units per month are sold. The price elasticity of demand of demand for the product is:
 –0.30
 –0.50
 –1.00
 –1.36
35 The price of a good is $1.70 and annual demand is 50,000 units. Increasing the price by $0.15
will reduce demand by 6,000 units. The price elasticity of demand of the good at $1.70 is:
 –0.50
 –0.78
 –1.28
 –1.36
Make or buy and other short-term decisions
HERERA CO
Herera Co manufactures and sells three products, details of which are as follows:
$ $ $
Selling price 80 90 100
Materials 20 30 25
Labour 30 15 40
Share of general overhead (based on maximum demand) 10 15 15
Profit per unit 20 30 20
The same employees are used to make all three products. The maximum demand for any product is
1,000 units per month. Available labour is restricted to $55,000 monthly.
An outside manufacturer has now offered to supply Herera at the following costs:
Cost to buy in ($ per unit) 55 65 105
36 If Herera Co wishes to use the outside manufacturer wherever it is profitable, which products
should Herera Co buy in?
 X only
 Y only
 Both X and Y
 X, Y and Z
37 What would be the order of priority of making the products in house?

X
38 Herera Co has just received a special contract to make Product Y. Labour will not be a constraint
now, but it does need additional machine capacity. It purchased a machine that could be used
three years ago for $25,000. It can be sold now for $8,000. The current replacement cost of an
equivalent machine is $10,000. If Herera Co keeps the machine for use elsewhere in the
business it is expected to generate net income of $11,000.
What is the relevant cost of the machine for the special contract?
 $8,000
 $10,000
 $11,000
 $17,000
39 Which of the following represents the minimum price that Herera Co could charge for the
contract?
 Marginal cost
 Full cost
 Marginal cost plus incremental costs
 Incremental costs plus opportunity costs
40 On the basis of winning the special contract to manufacture Product Y, Herera Co now believes
it has evidence that it can apply price discrimination to Product Y.
Which of the following conditions must hold if price discrimination is to be effective?
 There must be little or no chance of a black market developing.
 There must be little or no chance that competitors can and will undercut the firm's prices
in the lower-priced market segments.
 Each of the sectors of the market must show similar intensities of demand.
 The cost of segmentation and administration should exceed the extra revenue derived
from the price discrimination strategy.
Dealing with risk and uncertainty in decision-making

41 A decision maker who uses the maximax criteria to make decisions would be classified as:
 Risk averse
 Risk seeking
 Risk neutral
 Risk managing
42 A company is not sure whether to build a small or large café and past experience suggests there
is a 40% chance that demand will be low.
Demand
Size of restaurant Low High
$ $
Small 400,000 600,000
Large (500,000) 1,000,000
The company has determined that building the small café will be best, based on the fact it has
the highest expected value at $520,000.
The company could commission a survey which would accurately predict the level of demand.
What is the maximum that it should pay for the survey?
Use the following information to answer the next three questions.

Sarah owns a café on the beach at Sandsea that serves light lunches. She has analysed her results over
the last summer and has found that they have varied according to the supplies she has ordered each
day, and the daily demand levels, which have mostly been determined by the weather. Sarah has put
together a payoff table that shows the level of daily profits the café would earn depending on the
combination of demand and supply of lunches:
Daily supply (lunches)
50 75 100 125
50 $200 $160 $125 $95
Daily demand 75 $200 $300 $265 $235
(lunches) 100 $200 $300 $420 $390
125 $200 $300 $420 $540
43 If Sarah uses a maximax approach in decision-making, what level of supply will she choose?
 50
 75
 100
 125
44 If Sarah uses a maximin approach in decision-making, what level of supply will she choose?
 50
 75
 100
 125
45 If Sarah uses a minimax regret approach in decision-making, what level of supply will she
choose?
 50
 75
 100
 125
LOUIEDEWIE CO
Louiedewie Co has identified an investment project and estimated the following cash returns for next
year, depending on how strong competition is likely to be.
Estimated cash return ($) Probability
No competition +150,000 0.35
Average competition +75,000 0.20
Strong competition -35,000 0.45
46 What is the expected cash return on the project?
47 If the project requires an investment of $80,000, what is the probability that it will be
profitable?
 Nil
 0.35
 0.55
 0.65
48 Louiedewie Co is also bidding for three other contracts, which are awarded independently of
each other. The board estimates it has a 45% chance of winning Contract A, 20% chance of
winning Contract B, and 35% chance of winning Contract C. The profits from A, B and C are
estimated to be $500,000, $550,000 and $575,000 respectively.
What is the expected value to the company of the profits from all three contracts?
 $225,000
 $500,000
 $542,000
 $536,250
49 Louiedewie Co’s contract manager has now claimed that if the company wins Contract A which
is awarded first, it can use the knowledge it has gained to improve its chances of winning
Contracts B and C. He claims its chances of winning contracts B will increase to 30% and its
chances of winning Contract C will increase to 50%.
Calculate the expected value to the company of the profits from all three contracts if Contract
A is won.
$
50 The following statements have been made about the uses of expected value:
1 Expected values are used to promote a risk-seeking attitude to decision-making.
2 Expected values are more valuable as a guide to decision-making when they refer to
outcomes that will occur many times.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
Checkpoint 2
28 P a r t 1 q u e s t i o n s : 3 : B u d g e t i n g a n d c o n t r o l ACCA PM Question Bank
Budgetary systems and type of budget

1 Which of the following would be considered as objectives of budgeting?
Objective Not objective
Authorisation of expenditure  
Business expansion  
Performance monitoring  
Resource allocation  
2 A budget which is broken down into departmental or functional objectives is likely to be MOST
useful to an organisation’s:
 Senior management
 Middle management
 Junior management
 All levels of management
3 Using variances to comparing actual performance against standard at the end of the period is:
 A strategic planning tool
 A non-financial control technique
 A feed-forward control technique
 An example of feedback control
4 Broad Co produces quarterly rolling budgets and had forecast the costs of material purchases
for the next four quarters (quarters 1, 2, 3 and 4). Purchases for quarter 1 were budgeted to be
$220,000 and it was anticipated that the cost of materials would rise at a rate of 2% per quarter.
At the end of quarter 1:
Actual material purchases were recorded as $210,000. This was due to a change of material
supplier during the quarter.
 A revised estimate for the increase in material purchase costs was made. The rise was
now predicted to be only 1% per quarter.
 The budget was updated.
What estimate for total annual material purchases should be recorded in theupdated budget
(to the nearest whole $)?
$
(2 marks)
ACCA PM Question Bank Part 1 questions: 3: Budgeting and control 29
5 The following statements have been made about the behavioural issues relating to the difficulty
of targets:
1 If a budget is too easy, most staff will be motivated to excel as they will see the budget as
realistic and attainable.
2 If a business wants to encourage staff to improve efficiency it is best to create a budget
based on ideal conditions.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
6 Match the following descriptions to the budgeting processes that they describe.
Zero- Beyond
Rolling Incremental Flexible based budgeting
Set at the start of the     
year for various
different activity levels
Continually extended by     
adding another budget
period when the first
budget period expires
Prepared by building     
on a previous period’s
budgeted or actual
figures
Uses adaptive     
management processes
and procedures
7 Zed Co wishes to change from a top-down system of budgeting to a bottom-up system.

Which of the following difficulties is it most likely to encounter as a result of the change?
 A lack of appropriate systems and spreadsheets
 A lack of comparative information
 Less ownership of the budget by staff
 Budgets will take longer to produce
8 Which of the following is an advantage of non-participative budgeting as compared to

participative budgeting?
 It increases motivation.
 It is less time consuming.
 It increases acceptance.
 The budgets produced are more attainable.
9 Following complaints by its managers about the current system of budgeting, P is considering
adopting principles of ‘beyond budgeting’. Which of the following is most likely to be a
disadvantage of introducing ‘beyond budgeting’?
 There will be more budgetary slack.
 More time will be spent on budgeting.
 It may be more difficult to co-ordinate the plans of different departments.
 It will lead to P becoming less focused on customer requirements.
Quantitative analysis in budgeting

10 TW is a company which designs and manufactures e-readers. From its past experiences, TW has
realised that whenever a new engineer is employed, there is a learning curve with a 95%
learning rate which exists for the first 20 jobs.
A new design engineer has just completed his first job in three hours.
Note: at the 95% learning rate the value of b is – 0.074
How long would it take the engineer to complete the sixth job (do all workings to 3 decimal
places)?
 2.45 hours
 2.78 hours
 3.00 hours
 4.67 hours
11 The following statements have been made about budgeting techniques:

1 Learning curves are of limited relevance in a modern manufacturing business where
production is all automated.
2 Where there is uncertainty surrounding the annual sales figure for a product, the use of
expected values may help quantify the long-run average sales figure.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
12 A company predicted that the learning rate for production of a new product would be 80%.
The actual learning rate was 75%. The following possible reasons were stated for this:
I Additional training was given to the workforce before they started to produce the
product.
II Unexpected problems were encountered with production.
III Unexpected changes to Health and Safety laws meant that the company had to increase
the number of breaks during production for employees.
Which of the above reasons could have caused the difference between the expected rate of
learning and the actual rate of learning?
 All of the above
 II and III only
 I only
 None of the above
13 The accountant of West Co is currently preparing the company’s annual flexed budget. She has
calculated that the maximum production capacity is 350,000 units and also come up with the
following figures:
Production units 250,000 300,000 325,000
$ $ $
Material costs 1,500,000 1,800,000 1,950,000
Labour costs 1,250,000 1,500,000 1,625,000
Fixed costs 600,000 600,000 600,000
In addition, for each increment of 40,000 units produced, one supervisor will need to be
employed, at an annual salary of $30,000.
What will be the total production cost if production is 90% of total capacity?
14 KL has determined from past experience that the following equation provides a reliable
estimate of its future sales volume:
y = 15,000 + 2,200x
where y is the total sales units per quarter, and x is the time period
KL has also derived the following set of seasonal variation index values for each quarter using
the multiplicative model:
Quarter 1 80
Quarter 2 110
Quarter 3 120
Quarter 4 90
Calculate the forecast sales units for the third quarter of Year 6 using the above model and
assuming that the first quarter of Year 1 is Time period 1.
Use the scatter diagram below, which shows the relationship between x and y, to answer the next
two questions:
15 The correlation coefficient between x and y must be:

 Between 0 and -1
 Between 0 and +1
 Exactly +1
 Exactly -1
16 The coefficient of determination between x and y must be:

 Between 0 and -1
 Between 0 and +1
 Exactly +1
 Exactly -1
Standard costing
17 Which of the following statements about standard costing is/are true?
True False
Standard costs should only ever be based on marginal costing  
principles.
The use of basic standards is likely to give rise to meaningful  
variances.
Current standards provide the best basis for motivating  
employees to improve performance.
Basic standards are short-term targets and useful for day-to-day  
control purposes.
18 Standard costing may be used for which FOUR of the following purposes?
 Planning
 Valuing inventory
 Meeting the legal requirement to report standard costs to shareholders
 Claiming tax back
 Assessing performance
 Motivating staff
KAMAL CO
Kamal Co has produced the following performance analysis for the January to March quarter during
which no changes were made to the specification of its product.
Budget Actual
Number of units 6,000 7,200
$ $
Revenue 540,000 633,600
Labour (48,000) (58,716)
Materials (210,000) (205,000)
Fixed overheads (69,000) (79,500)
Profit 213,000 290,384
19 The following statements have been made:

1 The company must have dropped the selling price in the period.
2 Overheads have increased as a result of the increase in sales volume.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
20 What should the profit be according to the flexed budget?
21 As a result of the results in January to March, Kamal Co reconsidered its approach to budgeting
and adopted a form of rolling budgeting, starting in April for the next twelve months. The
budgeted figures for the remainder of the year before the rolling budget was introduced were
as follows:
$
April-June 550,000
July-September 560,000
October-December 575,000
Kamal Co amended the budget so that budgeted sales for April-June were 20% higher than in
the original budget, and then increased by 5% in July-September and October-December. It did
not subsequently amend the budget for July-September. Actual sales for July-September were
$610,000.
Calculate the difference in the total sales operational variance, using the original budgeted
and revised (rolling) budgeting figures.
$
22 One of the directors has proposed that Kamal Co should consider introducing a system of zero-
based budgets for certain activities, for example marketing.
Which of the following would be considered in relation to the marketing department under
zero-based budgeting?
Considered Not considered
Whether a marketing initiative should be undertaken at  
all
Whether the marketing department should be  
outsourced
Whether some or all of the activities that are part of a  
proposed marketing campaign are justified
Whether some or all of the activities that are part of a  
proposed marketing campaign can be done more cheaply
23 The following statements have been made about the rolling and zero-based approaches to budgeting:
1 When pricing and resources are uncertain, rolling budgets are likely to provide better
information for control and decision-making.
2 Zero-based budgeting is likely to identify opportunities to carry out activities more efficiently.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
Material mix and yield variances

24 A company has a process in which the standard mix for producing 9 litres of output is as follows:
$
4.0 litres of D at $9 per litre 36.00
3.5 litres of E at $5 per litre 17.50
2.5 litres of F at $2 per litre 5.00
58.50
A standard loss of 10% of inputs is expected to occur. The actual inputs for the latest period were:
$
4,300 litres of D at $9 per litre 38,700
3,600 litres of E at $5 per litre 19,800
2,100 litres of F at $2 per litre 4,620
63,120
Actual output for the period was 9,100 litres.
What is the materials mix variance?
Adverse Favourable
$...................  
25 A company that manufactures luxury biscuits has decided to amend the ingredients mix to
include more fruit and nuts which are expensive and less oats which are cheap.
The following have arisen:
1 An adverse materials mix variance
2 A lower quality biscuit
Which of the above are most likely to be a result of the decision to change the ingredient mix?
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
26 Which of the following is a NOT a method of controlling a company’s production process?

 Appointment of a machine supervisor
 Training for customer service team
 Sample testing of batches of product
 Monitoring of materials and labour variances
27 A company manufactures Product P by mixing three materials. The standard material quantity
and material cost per unit of Product P are as follows:
$
Material W 12 kg @ $5.00 60
Material X 18 kg @ $6.00 108
Material Y 20 kg @ $8.00 160
328
In February, the actual mix used was as follows:
Quantity $
Material W 970 kg 4,947
Material X 1,230 kg 7,134
Material Y 1,400 kg 11,060
The actual output was 76 units of Product P.
What was the material yield variance for February?
Adverse Favourable
$...................  
PRODUCT ZED
To produce 15 litres of product Zed, a standard input of 16 litres is required, made up of 9 litres of
Chemical A and 7 litres of Chemical B. Chemical A has a standard cost of $10 per litre and Chemical B
has a standard cost of $15 per litre.
During September, the actual results showed that 1,650 litres of product Zed were produced, using a
total input of 900 litres of Chemical A and 900 litres of Chemical B (1,800 litres in total).
The price/litre was as budgeted for both chemicals.
28 The following statements have been made about the period:

1 There was no materials price variance.
2 The materials yield variance was favourable.
Which of the above statements are true?
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
29 What was the materials mix variance in September, to the nearest $0.01?
Adverse Favourable
$...................  
30 The following statements have been made about mix variances

1 Mix variances help managers identify problems with the quality of output.
2 Adverse mix variances over a period are likely to have an adverse effect on labour
efficiency variances.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
31 The production department now believes that the total input of 900 litres of Chemical A and 900
litres of Chemical B (1,800 litres in total) should only have produced 1,500 litres of product Zed.
Calculate the material usage operational variance to the nearest $0.01.
Adverse Favourable
$...................  
32 Which of the following factors would explain an adverse material usage planning variance?
Explain Not explain
Changes in the production process causing increased  
loss of materials
A higher than expected level of waste of materials  
Quality control identifying a high proportion of  
materials as sub-standard
A new supplier supplying poorer quality materials  
Sales mix and quantity variances

33 A company which sells a range of different breakfast cereals experiences an adverse sales mix
variance.
Which of the following is the most likely cause?
 The number of people eating breakfast cereals has fallen.
 The company has increased the price of its cereals.
 The company has spent too much money on marketing.
 Cost-conscious customers are switching to lower margin cereals in the range.
34 The following budgeted data for a particular period was available for a company selling two
products:
Sales price per unit Variable cost per unit Sales volume in units
Product A $20 $8 15,840
Product B $24 $11 10,560
The actual results for the period were as follows:
Sales price per unit Variable cost per unit Sales volume in units
Product A $22 $8 14,200
Product B $26 $11 12,500
What is the total sales quantity contribution variance for the period?
Adverse Favourable
$...................  
MEMIA CO
Memia Co makes televisions and computers. The standard costs and revenue for each television are as
follows:
$
Standard cost 130
Standard contribution 80
Standard sales price 210
The standard costs and revenue for each computer are as follows:
$
Standard cost 210
Standard contribution 100
Standard sales price 310
Budgeted production and sales were 12,000 televisions (10% of the market) and 8,000 computers.
As more people are watching TV on their computers, the market for televisions has shrunk to 100,000.
Memia Co’s actual sales for the period were 11,000 televisions with total revenue of $2,200,000.
However, Memia Co did sell 14,000 computers.
35 The following statements have been made about the total sales variances for televisions:
1 The total sales volume variance has all arisen due to the shrinking market.
2 The only sales price variance is an operational variance of $110,000 adverse.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
36 Calculate the sales market size and share variances for televisions.
Market size
Adverse Favourable
$...................  
Market share
Adverse Favourable
$...................  
37 Calculate the sales mix variance.

Adverse Favourable
$...................  
38 Calculate the sales quantity contribution variance.

Adverse Favourable
$...................  
39 The directors of Memia Co have collected some non-financial data relevant to sales of
televisions over the last two years as follows:
20X1 20X2
Sales volumes (units) 12,000 11,000
Number of returns (units) 1,080 1,000
No of customer complaints regarding late delivery 360 320
Which of the following is true?

 Performance has improved in relation to both product returns and customer complaints.
 Performance has deteriorated in relation to both product returns and customer
complaints.
 Performance has improved in relation to product returns but deteriorated in relation to
customer complaints.
 Performance has deteriorated in relation to product returns but improved in relation to
customer complaints.
Planning and operational variances

40 After Gen Co prepared its material budget for the first quarter, two pieces of additional
information came to light:
The Purchasing Manager managed to reduce the price of the material by placing one bulk order
at the start of the quarter.
At the end of the previous quarter, Gen Co bought a new machine as a result of its use in the
first quarter, material wastage levels fell from 3% to 2%.
Which of these factors should the budget be revised for?
 The price saving only
 The use of the new machine
 Neither factor
 Both factors
41 The learning effect entered on a budget spreadsheet was overstated due to a computer input
error.
Which of the following is this most likely to give rise to?
 An adverse labour rate variance
 A favourable labour usage variance
 A favourable labour efficiency operational variance
 An adverse labour efficiency planning variance
42 Julienne Co has identified a labour efficiency planning variance. Which of the following is the
MOST likely cause?
 A decision by the production manager to work overtime
 A decision by the production manager to change the grade of labour
 A surplus of labour in the market
 A change in working practices to comply with new regulatory restrictions on rest periods
43 Caf Co budgeted to sell 10,000 units of a new product in the period at a budgeted selling price
of $5 per unit. Actual sales volumes in the period were as budgeted but the actual sales price
achieved was only $4 per unit. This was because a competitor launched a similar product at the
same time. Caf Co had been unaware that this was going to happen when it prepared its budget
and, had it known this, it would have revised its expected selling price to $3.80 per unit, which
was the price of the competitor’s product.
What is the sales price planning variance?
Adverse Favourable
$...................  
44 The following details have been extracted from the accounting records of RG for August.
Standard Actual
Output of RG 800 units 890 units
Materials 4,000kg 4,375kg
Cost per kg $20.00 $21.60
It has now been realised that the standard cost per kg of the material should have been $20.90.
What are the following variances for August to the nearest $0.01?
Materials planning price variance
Adverse Favourable
$...................  
Materials operational price variance

Adverse Favourable
..................  
DEMIA CO
Demia Co makes televisions. The original standard prime costs, based on a budgeted production and
sales of 12,000 units, are as follows:
$
Materials 70
Labour 3hrs @ $20 per hr 60
Standard prime cost 130
Actual production and sales were 11,000 televisions.

Before the period started, Demia’s production equipment broke down and it was forced to buy a new
machine, which requires less labour input. As a result the new standard time for production is 2.5
hours per unit. During the period Demia spent $756,250 on 29,000 hours of labour.
45 The following statements have been made about the total labour variances:
1 The total labour rate variance is all due to planning errors.
2 The total labour efficiency variance is Nil.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
46 What are the correct planning and operational labour efficiency variances?
Planning labour efficiency variance
Adverse Favourable
$...................  
Operational labour efficiency variance

Adverse Favourable
$...................  
47 The new standard labour cost is based on 2.5 hours of semi-skilled labour at $20/hr. The labour
supervisor is thinking of arranging for the work to be done in pairs, using one semi-skilled and
one unskilled worker, each working for 1.5 hours.
Calculate the maximum hourly rate, to the nearest $0.01, that the supervisor can afford to
pay the unskilled workers without giving rise to an adverse labour rate variance.
$
48 The total overheads for 12,000 units were budgeted as $504,000, compared with $400,000 at
last year’s level of 9,000. The management accountant has identified that the fixed costs step
up by 20% at 10,000 units.
Calculate the budgeted variable cost per unit for televisions.
49 The management of Demia Limited wishes to increase the level of contribution from sales of
televisions and to do so by adopting a target costing approach.
Which TWO of the following would be techniques that Demia Limited could use to aim
towards achieving a target cost?
 Use of bespoke components where possible
 Better training for unskilled workers
 Change in the packaging of the televisions
 Use of components with a longer lifespan
Performance analysis
50 Which of the following statements about variances is/are true?
True False
In a rapidly changing environment variances based on standard  
costs are likely to provide a meaningful analysis of
performance.
When monitoring performance, a company only needs to focus  
on adverse variances.
A desire to create a favourable material price variance may  
result in the purchasing manager taking decisions which are
incompatible with TQM.
If a company operates a JIT policy, it is not likely to experience  
any labour idle time variance.
Checkpoint 3
ACCA PM Question Bank Part 1 questions: 4: Performance measurement and control 43
Performance management information systems

1 An information system contains external and internal data which is both qualitative and
quantitative.
What is this system most likely to be used for?
 Strategic planning
 Management control
 Operational control
 Strategic planning, management control and operational control
2 Which of the following is/are characteristics of an Executive information system?

Characteristic Not a characteristic
Records all daily transactions  
Provides only external information  
Provides summary information for the Board  
Allows modelling of entire business  
3 The following statements have been made about open and closed systems:
1 Open systems refer to systems that interact with other systems or the outside environment.
2 Closed systems are preferable for performance management.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
4 Which of the following areas of a business would an enterprise resource planning system
generally cover?
Cover Not cover
Order processing  
Manufacturing  
Distribution  
Customer service  
Human resources  
Finance  
44 P a r t 1 q u e s t i o n s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA PM Question Bank
Uses of information
5 Which of the following is/are examples of information being used for control purposes?
Control Not a control
Comparison of actual transactions to the original  
budget
Inventory management system tracking fast and slow  
moving inventory
Forecasting the level of recruitment needed  
Results of market research used for benchmarking  
performance
6 The following statements have been made about the “5-Vs” model for Big Data:
1 Velocity refers to the speed at which data is generated, analysed and processed.
2 Value refers to the authenticity and accuracy of data which may be used to draw
conclusions.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
7 The following statements all relate to the use of Big Data:

I Implementation of new computer systems which can effectively use Big Data
II Big Data is only useful when analysing non-financial information
III There are significant legislative constraints around the use of Big Data
Which of the above challenges could an organisation face?
 II only
 I and II only
 I and III only
Management reports
8 Which TWO of the following controls within an organisation help to ensure the accuracy of
information?
 Completeness checks
 Hierarchical passwords
 Data encryption
 Validation of input data
9 Which of the following statements about data controls is/are true?

True False
A range check is a form of validation control.  
Hierarchical passwords can be used to grant different  
access rights to different users of a database.
Firewalls protect data from external access.  
Encryption means that data can only be understood by  
those transmitting and receiving it, and not by anyone
intercepting it.
10 Which of the following controls would NOT be designed to ensure the security of confidential
information?
 Storage of sensitive data in locked filing cabinets
 Remote storage of back-up copies of data
 Use of a data encryption software package
 Requiring all staff to sign a confidentiality agreement
Performance analysis in private sector organisations

11 Which of the following performance indicators are considered to be financial measures and
which of the following are considered to be non-financial measures?
Financial Non-financial
Product returns rate  
Market share  
Asset turnover  
Staff turnover  
12 Which of the following is NOT a perspective of the balanced scorecard?

 Non-financial
 Internal Business Processes
 Customer
 Innovation & Learning
13 Which THREE of the following are included in Fitzgerald and Moon’s Building blocks?
 Decisions
 Dimensions
 Returns
 Rewards
 Standards
 Targets
14 For which of the following would the return on capital employed be a useful performance
measure?
 The sales team who are responsible for the revenue generated from selling product
 Factory supervisors who are responsible for the costs incurred in producing product
 The Operations Director who is responsible for the sales team and for factory costs
 The Managing Director who has overall responsibility for the businesses costs and
revenues, including the administration and finance functions
OLIVER’S SALON
Oliver is the owner and manager of Oliver’s Salon, which is a quality hairdresser that experiences high
levels of competition. The salon traditionally provided a range of hair services to female clients only. A
year ago, at the start of his 20X9 financial year, Oliver decided to expand his operations to include the
hairdressing needs of male clients.
The prices for the female clients were not increased during the whole of 20X8 and 20X9 and the mix of
services provided for female clients in the two years was the same.
Two new staff were recruited at the start of 20X9. The first was a junior hairdresser, to support the
specialist hairdressers for the female clients. She was appointed on a salary of $9,000 per annum. The
second new staff member was a specialist hairdresser for the male clients. There were no increases in
pay for existing staff at the start of 20X9 after a big rise at the start of 20X8, which was designed to
cover two years’ worth of increases.
The latest financial results are as follows.
20X8 20X9
$ $ $ $
Sales 200,000 238,500
Less cost of sales:
Hairdressing staff costs 65,000 91,000
Hair products – female 29,000 27,000
Hair products – male 8,000
94,000 126,000
Gross profit 106,000 112,500
Less expenses: 28,000 32,500
Profit 78,000 80,000
Oliver thinks the salon is much busier than a year ago and was expecting more profit.
Oliver introduced some non-financial measures of success two years ago.
20X8 20X9
Number of complaints 12 46
Number of male client visits 0 3,425
Number of female client visits 8,000 6,800
Number of specialist hairdressers for female clients 4 5
Number of specialist hairdressers for male clients 0 1
15 Calculate the average price for hair services per male client in 20X9.
$
16 Are the following statements about Oliver’s Salon true or false?

True False
Gross and net profit margins have decreased in 20X9  
compared with 20X8.
Average cost per staff member has increased in 20X9  
compared with 20X8.
17 Which of the following is least likely to be an explanation for the increase in the number of
complaints in 20X9 compared with 20X8?
 The change in customer base bringing in male clients who are more likely to complain
 Female customers complaining about the change in atmosphere following the
introduction of male services
 The mix of services offered to female clients
 Poor quality work from the new trainee
18 Which of the following statements is true?

 Resource utilisation of the property has increased and resource utilisation of specialist
female hairdressers has decreased.
 Resource utilisation of the property has increased and resource utilisation of specialist
female hairdressers has increased.
 Resource utilisation of the property has decreased and resource utilisation of specialist
 Resource utilisation of the property has decreased and resource utilisation of specialist
female hairdressers has increased.
19 Oliver is thinking about introducing more non-financial measures of performance, as he believes

that selecting the right measures can help improve customer satisfaction and hence ultimately
profitability.
Which of the following will be a problem/problems for Oliver in introducing more measures?
Problem Not a problem
It may be difficult to define measures for quality of  
service provided.
Increasing the number of measures may increase the  
chances of the measures giving a conflicting picture.
Increasing the number of measures will mean that the  
business has more of an external focus, rather than
focusing on internal problems.
Oliver may have to spend more time himself on  
measurement work and less on servicing customers.
Divisional performance and transfer pricing

20 Which of the following does the manager have control over in a cost centre?
Control No control
Revenue generation  
Attributable costs  
Apportioned head office costs  
Investment in non-current assets  
21 Division A makes and transfers a product to Division B and receives the market price for the
transferred item, whilst Division B only gets charged with the variable cost of the item.
This transfer pricing approach is known as a:
 Dual pricing system
 Opportunity cost system
 Two-part tariff system
 Market based system
22 Tallulah Ltd uses Return on Investment (ROI) and Residual Income (RI) performance measures.
The Medchester division has net assets of $12m and in the year to 31 December 20X4 it earned
profit before interest and tax of $1.8m and paid interest of $0.3m. Tallulah Ltd’s cost of capital
is 12%.
What are the correct ROI, to the nearest 0.1%, and RI, to the nearest $0.01m, for the year to
31 December 20X4?
ROI
%
RI
$ million
23 Dust Co has two divisions, A and B. Each division is currently considering the following separate
projects:
Division A Division B
Capital required for the project $32.6 million $22.2 million
Sales generated by project $14.4 million $8.8 million
Operating profit margin 30% 24%
Cost of capital 10% 10%
Current return on investment of division 15% 9%
If residual income is used as the basis for the investment decision, which Division(s) would
choose to invest in the project?
 Division A only
 Division B only
 Both Division A and Division B
 Neither Division A nor Division B
24 Which of the following does the manager have control over in an investment centre?
Control No control
Generation of revenues  
Investment in non-current assets  
Investment in working capital  
Apportioned head office costs  
25 At the start of the year, a division has non-current assets of $4 million and makes no additions
or disposals during the year. Depreciation is charged at a rate of 10% per annum on all non-
current assets held at the end of the year. Working capital is $0.5 million at the start of the year
although this is expected to increase by 20% by the end of the year. The budgeted profit of the
division after depreciation is $1.2m.
What is the expected ROI of the division for the year, to the nearest 0.01%, based on average
capital employed?
ABEL CO
The production division of Abel Co has the following standard unit costs for the production of an
electronic component:
Direct material $2.00
Direct labour $2.50
Variable overheads $1.50
Fixed overheads are expected to be $300,000 and maximum capacity is 100,000 units.
The production division currently makes and transfers all 100,000 components to the retail division,
which completes the assembly and sells it to individual consumers for $15, after incurring additional
costs of $2.50 per unit. The current transfer price policy is full cost plus 30%.
The production division has been offered the chance to sell all the components it can produce to a
commercial buyer who is willing to pay $11 per unit. The retail division can source components
externally at a price of $11.50. Assume the maximum demand for the retail division’s product is
100,000 units.
26 What is the transfer price per unit under the current policy, to the nearest $0.01?
$
27 Which of the following statements relating to the current system of transfer pricing are true?
1 Full cost-based transfer prices are most appropriate where there is an intermediate
market for the product.
2 When the producing division is operating at full capacity, a full cost-based approach
should be used for the transfer price.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
28 What is the minimum transfer price that will ensure Abel Co maximises company profit, given
the offer from the commercial buyer?
 $12.50
 $11.00
 $9.00
 $8.50
29 What is the maximum contribution that Abel Co can earn if the production division decides to
supply the commercial customer?
30 The Finance Director of Abel Co is considering switching away from the current policy, but is
concerned about how the Production division will cover its fixed costs.
Which of these methods will NOT help address the problem?
 Giving the production and retail divisions a share of Abel Co’ s overall contribution
 Setting the transfer price at variable cost, but reporting the value of the transfer for the
Production division at total cost
 Setting the transfer price at market value if an external market exists for the product
 Transferring a fixed fee to the Production division
Performance analysis in not-for-profit organisations and the public sector

31 Which of the following is/are characteristics for a public sector organisation such as a hospital?
Some non-quantifiable objectives  
Multiple stakeholders  
Objectives may be subject to political pressures  
Conflicting priorities for resource allocation  
32 Which of the following is a common way of assessing Value For Money?

 Economy, Efficiency, Effectiveness
 Economy, Efficiency, Environment
 Efficiency, Effectiveness, Environment
 Economy, Energy, Effectiveness
33 Def Co provides accounting services to government departments. On average, each staff

member works six chargeable hours per day, with the rest of their working day being spent on
non-chargeable administrative work. One of the company’s main objectives is to produce a high
level of quality and customer satisfaction.
Match DEF Co’s targets for the next year to the aspect of economy, efficiency and
effectiveness at Def Co to which they relate.
Economy Efficiency Effectiveness
Cutting departmental expenditure by 5%   
Increasing the number of chargeable   
hours handled by advisers to 6.2 per day
Obtaining a score of 4.7 or above on   
customer satisfaction surveys
Retaining all current contracts with   
government departments
External considerations and behavioural aspects

34 Which TWO of the following are negative behavioural aspects of a change in an organisation’s
performance management system?
 Increased motivation to achieve rewards by achieving targets
 Manipulation of targets to ensure results achieved
 Dysfunctional decision making
 Teamwork rather than self-interest encouraged
35 The following statements have been made about external considerations and performance
management
1 An organisation which takes account of external factors is more likely to focus on the
aspects of performance that its managers can control.
2 Planning and operational variances are a way of taking external considerations into
account when assessing performance.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
Final Checkpoint
instructions e mail and attempt the Final Checkpoint at the end of Chapter 4.
PART 1 QUESTIONS: Section C
Limiting factors
1 CUT AND STITCH (Q3, JUNE 2010)

Cut and Stitch (CS) make two types of suits using skilled tailors (labour) and a delicate and unique
fabric (material).
Both the tailors and the fabric are in short supply and so the accountant at CS has correctly produced a
linear programming model to help decide the optimal production mix.
The model is as follows.
Variables:
Let W = the number of work suits produced
Let L = the number of lounge suits produced
Constraints:
Tailors’ time: 7W + 5L ≤ 3,500 (hours) – this is line T on the diagram
Fabric: 2W + 2L ≤ 1,200 (metres) – this is line F on the diagram
Production of work suits: W ≤ 400 – this is line P on the diagram
Objective is to maximise contribution subject to:
C = 48W + 40L
On the diagram provided the accountant has correctly identified OABCD as the feasible region and
point B as the optimal point.
Required:
(a) Find by appropriate calculation the optimal production mix and related maximum contribution
that could be earned by CS. (4 marks)
(b) Calculate the shadow prices of the fabric per metre and the tailor time per hour. (6 marks)
The tailors have offered to work an extra 500 hours provided that they are paid three times their
normal rate of $1.50 per hour at $4.50 per hour.
Required:
(c) Briefly discuss whether CS should accept the offer of overtime at three times
the normal rate. (6 marks)
(d) Calculate the new optimum production plan if maximum demand for W falls
to 200 units. (4 marks)
(20 marks)
Pricing decisions
2 WX (Q3B, JUNE 2013 AMENDED)

WX is reviewing the selling price of one of its electronic products. The current selling price of the
product is $25 per unit and annual demand is forecast to be 150,000 units at this price. Market
research indicates that the level of demand would be affected by any change in the selling price.
Detailed analysis from this research shows that for every $1 increase in selling price, annual demand
would reduce by 25,000 units and that for every $1 decrease in selling price, annual demand would
increase by 25,000 units.
A forecast of the annual costs that would be incurred by WX in respect of this product at differing
activity levels is as follows.
Annual production (units) 100,000 160,000 200,000
$000 $000 $000
Direct materials 200 320 400
Direct labour 600 960 1,200
Overhead 880 1,228 1,460
The cost behaviour patterns represented in the above forecast will apply for the whole range of output
up to 300,000 units per annum of this product.
Required:
(a)
(i) Calculate the total variable cost per unit. (2 marks)
(ii) Calculate the selling price of the product that will maximise the company’s profits.
(4 marks)
(b) Explain TWO reasons why WX might decide NOT to use this optimum selling price. (4 marks)
WX has recently been suffering from liquidity problems and hopes that these will be eased by the
launch of its new webcam, which has revolutionary audio sound and visual quality. The webcam is
expected to have a product life cycle of two years.
(c) Explain the ‘market skimming’ (also known as ‘price skimming’) pricing strategy and discuss, as
far as the information allows, whether this strategy may be more appropriate for WX than
charging one price throughout the webcam’s entire life. (10 marks)
(20 marks)
Shut down decisions

3 BELTON PARK RESORT
Belton Park Resort is a new theme park resort located in the country of Beeland. The resort is made up of
a theme park, a hotel and an indoor water park. The resort opened two months ago and is already very
popular.
As all theme parks in Beeland are required, by law, to shut down in the colder month of January
because of the risk of accidents, Belton Park Resort must decide whether to shut down the whole
resort or just the theme park. It could choose to keep open the hotel and/or the water park.
Since Belton Park Resort has not been open for long, there is limited historical data available about costs
and revenues. However, based on the last two months, the following average monthly data is
available:
Hotel
Number of rooms 120
Average room rate per night $100
Average occupancy rate per month 90%
Average nightly spend on ‘extras’ per room $20
Contribution margin for ‘extras’* 60%
Water park
Number of visitors per month 12,000
Admission price per visitor $21
Average spend on ‘extras’ per visitor $12
Contribution margin for ‘extras’* 60%
*‘Extras’ includes anything purchased by the customer not included in the room rate or admission
price.
Management estimates that, for January, the average room rate per night would need to decrease by
30% and the admission price for the water park by 20%. With such reductions, it is estimated that an
occupancy rate of 50% would be achieved for the hotel and that the number of visitors to the water
park would be 52% lower than current levels. The average nightly spend on ‘extras’ per room of $20 at
the hotel and $12 per customer at the water park is expected to remain unchanged.
The running costs for the hotel and water park for each of the last two months are as follows:
Notes Hotel Water park
$ $
Staff costs 1 120,000 75,600
Maintenance costs 2 14,600 6,000
Power costs 3 20,000 18,000
Security costs 4 13,600 8,000
Water costs 5 12,900 12,100
Notes:
(1) Staff costs
Permanent staff
Included in the staff costs for the hotel is the salary of $30,000 per annum for the hotel
manager and $24,000 per annum for the head chef. These are both permanent members of staff
who are paid for the full year regardless of their working hours.
The water park employs one permanent member of staff, the manager, on a salary of $24,000
who is also paid for the full year regardless of his working hours.
Temporary staff
The remaining staff costs relate to temporary staff who are only paid for the hours they work. If
the hotel stays open in January, half of these staff members will continue to work their current
hours because their jobs are largely unaffected by guest occupancy rates. However, the other
half of the staff will work proportionately less hours to reflect the 50% occupancy rate in
January as opposed to the 90% occupancy rate of the last two months.
At the water park, the temporary staff’s working hours will fall according to the number of
visitors, hence a fall of 52% would be expected for January.
(2) Maintenance costs
Maintenance is undertaken by a local company, ‘Techworks’, which bills Belton Park Resort for
all work carried out each month. If the hotel and water park are closed, Techworks will instead
be paid a flat fee for the month of $4,000 for the hotel and $2,000 for the water park.
(3) Power costs
Electricity
Belton Park Resort pays a fixed monthly charge for electricity of $8,000 for the hotel and $7,000
for the water park, all year round.
Gas
The gas charges relate to heating and include a fixed charge of $2,200 per month for the hotel
and $1,500 per month for the water park. The remainder of the gas charges is based solely on
usage and would be expected to increase by 50% in January because of the colder weather.
(4) Security costs
If the hotel and water park close, no changes will be made to the current arrangements for
security whilst the premises are empty.
(5) Water costs
It is estimated that water costs for the hotel would fall to $6,450 for the month if it remains
open in January. However, the water costs for the water park would be expected to remain at
their current level. If the hotel and water park were closed, all water would be turned off and no
charges would arise.
Required:
(a) Calculate the incremental cash flows, for the month of January (31 days), if Belton Park Resort
decides to keep open:
(i) the hotel;
(ii) the water park.
In each case, state whether it should remain open or should close. (15 marks)
(b) Discuss any other factors which Belton Park Resort should consider when making the decision in
part (a). (5 marks)
(20 marks)
Dealing with risk and uncertainty in decision making
4 GYM BUNNIES (Q1, JUNE 2013 AMENDED)

Gym Bunnies (GB) is a health club. It currently has 6,000 members, with each member paying a
subscription fee of $720 per annum. The club is comprised of a gym, a swimming pool and a small
exercise studio.
A competitor company is opening a new gym in GB’s local area, and this is expected to cause a fall in
GB’s membership numbers, unless GB can improve its own facilities. Consequently, GB is considering
whether or not to expand its exercise studio in a hope to improve its membership numbers. Any
improvements are expected to last for three years.
Option 1
No expansion. In this case, membership numbers would be expected to fall to 5,250 per annum for the
next three years. Operational costs would stay at their current level of $80 per member per annum.
Option 2
Expand the exercise studio. The capital cost of this would be $360,000. The expected effect on
membership numbers for the next three years is as follows:
Probability Effect on membership numbers
0.4 Remain at their current level of 6,000 members per annum
0.6 Increase to 6,500 members per annum
The effect on operational costs for the next three years is expected to be:
Probability Effect on operational costs
0.5 Increase to $120 per member per annum
0.5 Increase to $180 per member per annum
A decision tree has been started to illustrate these options, but requires completion:
Option 1
5,250 members 0.5

A
D
0.5
6,000 members
Option 2
$(360k)
0.4
0.6
6,500 members 0.5

B
0.5
Required:
(a) Using the criterion of expected value, use the points on the decision tree to recommend the
decision that GB should make.
Note: Ignore time value of money. (8 marks)
(b) Calculate the maximum price that GB should pay for perfect information about the expansion’s
exact effect on MEMBERSHIP NUMBERS. (6 marks)
(c) Briefly discuss the problems of using expected values for decisions of this nature. (2 marks)
(d) Discuss the usefulness of simulation, and worst and best case figures as methods of analysing
and assess the risk that exists in a business’s decision-making. (4 marks)
(20 marks)
Budgetary systems and types of budget
1 PC CO (Q3, DECEMBER 2011)

You have recently been appointed as an assistant management accountant in a large company, PC Co.
When you meet the Production Manager, you overhear him speaking to one of his staff, saying:
‘Budgeting is a waste of time. I don’t see the point of it. It tells us what we can’t afford but it doesn’t
keep us from buying it. It simply makes us invent new ways of manipulating figures. If all levels of
management aren’t involved in the setting of the budget, they might as well not bother preparing
one.’
Required:
(a) Identify and explain SIX objectives of a budgetary control system. (9 marks)
(b) Discuss the concept of a participative style of budgeting in terms of the six objectives identified
in part (a). (11 marks)
(20 marks)
Materials mix and yield variances
2 THE SAFE SOAP CO (DECEMBER 2014 AMENDED)

The Safe Soap Co makes environmentally-friendly soap using three basic ingredients. The standard
cost card for one batch of soap for the month of September was as follows:
Material Kilograms Price per kilogram ($)
Lye 0.25 10
Coconut oil 0.6 4
Shea butter 0.5 3
The budget for production and sales in September was 120,000 batches. Actual production and sales
were 136,000 batches. The actual ingredients used were as follows:
Material Kilograms
Lye 34,080
Coconut oil 83,232
Shea butter 64,200
The Safe Soap Co has used activity-based costing to allocate its overheads for a number of years. One
of its main overheads is machine set-up costs. The following information was available in relation to
set-up costs for September.
Budget
Total number of set ups 30
Total set-up costs $40,500
Actual
Total number of set ups 36
Total set-up costs $45,400
Required:
(a) Calculate the total material mix variance and the total material yield variance for September.
(8 marks)
(b) In October the materials mix and yield variances were as follows:
Mix: $6,000 adverse
Yield: $10,000 favourable
The production manager is pleased with the results overall, stating:
‘At the beginning of September I made some changes to the mix of ingredients used for the
soaps. As I expected, the mix variance is adverse in both months because we haven’t yet
updated our standard cost card but, in both months, the favourable yield variance more than
makes up for this. Overall, I think we can be satisfied that the changes made to the product mix
are producing good results and now we are able to produce more batches and meet the
growing demand for our product.’
The sales manager, however, holds a different view and says:
‘I’m not happy with this change in the ingredients mix. I’ve had to explain to the board why the
sales volume variance for October was $22,000 adverse. I’ve tried to explain that the quality of
the soap has declined slightly and some of my customers have realised this and simply aren’t
happy but no-one seems to be listening. Some customers are even demanding that the price of
the soap be reduced and threatening to go elsewhere if the problem isn’t sorted out.’
Required:
(i) Briefly explain what the adverse materials mix and favourable materials yield variances
indicate about production at Safe Soap Co in October. (4 marks)
Note: You are NOT required to discuss revision of standards or operational and planning
variances.
(ii) Discuss whether the sales manager could be justified in claiming that the change in the
materials mix has caused an adverse sales volume variance in October. (2 marks)
(c) Calculate the following activity-based variances in relation to the set-up cost of the machines:
(i) The expenditure variance (3 marks)
(ii) The efficiency variance (3 marks)
(20 marks)
3 BEDCO (Q5, DECEMBER 2013)

Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain. It uses a just-
in-time system and holds no inventories.
The standard cost for the cotton which is used to make the bed sheets and pillowcases is $5 per m2.
Each bed sheet uses 2 m2 of cotton and each pillowcase uses 0.5 m2. Production levels for bed sheets
and pillowcases for November were as follows.
Budgeted production Actual production
levels (units) levels (units)
Bed sheets 120,000 120,000
Pillowcases 190,000 180,000
The actual cost of the cotton in November was $5.80 per m2. 248,000 m2 of cotton was used to make
the bed sheets and 95,000 m2 was used to make the pillowcases.
The world commodity prices for cotton increased by 20% in the month of November. At the beginning
of the month, the hotel chain made an unexpected request for an immediate design change to the
pillowcases. The new design required 10% more cotton than previously. It also resulted in production
delays and therefore a shortfall in production of 10,000 pillowcases in total that month.
The Production Manager at Bedco is responsible for all buying and any production issues which occur,
although he is not responsible for the setting of standard costs.
Required:
(a) Calculate the following variances for the month of November, for both bed sheets and pillow
cases, and in total:
(i) Material price planning variance; (3 marks)
(ii) Material price operational variance; (3 marks)
(iii) Material usage planning variance; (3 marks)
(iv) Material usage operational variance. (3 marks)
(b) Assess the performance of the production manager for the month of November. (8 marks)
(20 marks)
Performance analysis and behavioural aspects
4 JUMP (Q5, JUNE 2010)

Jump has a network of sports clubs which is managed by local managers reporting to the main board.
The local managers have a lot of autonomy and are able to vary employment contracts with staff and
offer discounts for membership fees and personal training sessions. They also control their own
maintenance budget but do not have control over large amounts of capital expenditure.
A local manager’s performance and bonus is assessed relative to three targets. For every one of these
three targets that is reached in an individual quarter, $400 is added to the manager’s bonus, which is
paid at the end of the year.
The maximum bonus per year is therefore based on 12 targets (three targets in each of the four
quarters of the year).
Accordingly, the maximum bonus that could be earned is 12 × $400 = $4,800, which represents 40% of
the basic salary of a local manager. Jump has a 31 March year end.
The performance data for one of the sports clubs for the last four quarters is as follows.
Qtr to Qtr to Qtr to Qtr to
30 June 30 September 31 December 31 March
2009 2009 2009 2010
Number of members 3,000 3,200 3,300 3,400
Member visits 20,000 24,000 26,000 24,000
Personal training sessions booked 310 325 310 339
Staff days 450 480 470 480
Staff lateness days 20 28 28 20
Days in quarter 90 90 90 90
Agreed targets are:
(1) Staff must be on time over 95% of the time (no penalty is made when staff are absent from
work)
(2) On average 60% of members must use the clubs’ facilities regularly by visiting at least 12 times
per quarter
(3) On average 10% of members must book a personal training session each quarter
Required:
(a) Calculate the amount of bonus that the manager should expect to be paid for the latest
financial year. (6 marks)
(b) Discuss to what extent the targets set are controllable by the local manager (you are required to
make a case for both sides of the argument). (9 marks)
(c) Describe two methods as to how a manager with access to the accounting and other records
could unethically manipulate the situation so as to gain a greater bonus. (5 marks)
(20 marks)
1 BEST NIGHT CO
Best Night Co operates a chain of 30 hotels across the country of Essland. It prides itself on the
comfort of the rooms in its hotels and the quality of service it offers to guests.
The majority of Best Night Co’s hotels are located in major cities and have previously been successful
in attracting business customers. In recent years, however, the number of business customers has
started to decline as a result of tough economic conditions in Essland.
Best Night Co’s policy is to set standard prices for the rooms in each of its hotels, with that price
reflecting the hotel’s location and taking account of competitors’ prices. However, hotel managers
have the authority to offer discounts to regular customers, and to reduce prices when occupancy rates
in their hotel are expected to be low. The average standard price per night, across all the hotels, was
$140 in 20X7, compared to $135 in 20X6.
In addition to room bookings, the hotels also generate revenue from the additional services available to
customers, such as restaurants and bars.
Summary from Best Night Co’s management accounts:
Year ended Year ended
30 June 20X7 30 June 20X6
$’000 $’000
Revenue – rooms at standard price per night 111,890 104,976
Room discounts or rate reductions given (16,783) (11,540)
Other revenue: food, drink 24,270 23,185
Total revenue 119,377 116,621
Operating costs (95,462) (92,379)
Operating profit 23,915 24,242
Other performance information:

Year ended Year ended
30 June 20X7 30 June 20X6
Capital employed (Note 1) $39.5m $39.1m
Average occupancy rates (Note 2) 74% 72%
Average customer satisfaction score (Note 3) 4.2 4.5
Notes
(1) Capital employed is calculated using the depreciated cost of non-current assets at all Best Night
Co’s hotels.
(2) Occupancy rates for the year ended 30 June 20X7 were budgeted to be 72%.
(3) Customer satisfaction scores are graded on a scale of 1–5 where ‘5’ represents ‘Excellent’. On
average, in any given town in Essland, the top 10% of hotels earn a score of 4.5 or above and the
top 25% of hotels earn a score of 4.2 or above.
Two themes are becoming increasingly frequent in the comments Best Night Co’s customers make
alongside the scores:
(1) Repeat customers have said that the standard of service in recent visits has not been as good as
in previous visits.
(2) The rooms need redecorating, and the fixtures and fittings need replacing. For example, the
beds need new mattresses to improve the level of comfort they provide.
Best Night Co had planned a two-year refurbishment programme beginning in 20X7 of all the rooms in
each hotel. However, this programme has been put on hold, due to the current economic conditions,
and in order to reduce expenditure.
Required:
Using the information provided, discuss Best Night Co’s financial and non-financial performance for
the year ended 30 June 20X7.
Note: There are 5 marks available for calculations and 15 marks available for discussion.
(20 marks)
2 ROBINHOLT UNIVERSITY
The following scenario relates to one requirement.
Robinholt University is one of the largest and most popular universities in the country of Richpori. It
had 27,000 registered students in 20X6, whereas in 20X5, the number of registered students was only
24,000. Robinholt University managed to increase its student numbers in 20X6 by making the entry
requirements for students slightly lower than in previous years. All courses at the university last for
three years.
Robinholt University has five strategic aims:
(1) To provide education which promotes intellectual initiative and produces confident and
ambitious graduates who have reached the highest academic standards to prepare them for
success in life and the workplace
(2) To provide an organised, efficient learning environment with access to cutting edge technology
and facilities
(3) To be a leader in sustainable business practices which protect the environment and support
local people
(4) To provide attractive, innovative conference and event facilities, attracting clients both
nationally and internationally
(5) To be recognised both nationally and internationally for the scope and relevance of their
research
Extracts from the university’s income statement for the last two years are as follows:
20X6 20X5
$ million $ million
Income
Tuition fees 148.0 135.6
Research grants 3.5 4.5
Conferences and other events 18.0 16.0
Total income 169.5 156.1
Expenditure
Academic staff costs 80.8 76.2
Administration staff costs 50.4 48
Premises, facilities and technology costs 7.6 8.4
Event and conference costs 8.3 8.0
Research grants 3.1 4.0
Sustainability and community assistance 1.2 2.4
Total expenditure 151.4 147.0
Surplus 18.1 9.1
Every year, final year students complete an external survey run by the National Organisation for
Students. In this, they have to agree or disagree with statements made. Extracts from this for the last
two years are shown below (the percentage rates show the number of students who agreed with the
statements made):
20X6 20X5
Teaching
(1) The course is intellectually stimulating and quality of teaching high 83% 86%
Academic support
(2) I have received good advice and support with my studies from academic staff 82% 86%
Organisation and management
(3) The course is well organised and its administration is good 81% 90%
Learning resources
(4) The standard of rooms, facilities and equipment is good 83% 92%
Personal development
(5) The course has helped me develop as a person 82% 80%
Overall satisfaction
(6) Overall, I am satisfied with the quality of the course 81% 83%
The ‘overall satisfaction’ percentage is used by the Education Authority to set the maximum level of
tuition fees that a university can charge each year and is seen as the main measure of success both
internally and externally.
Other key information
20X6 20X5
Students graduating with a First Class Honours degree (highest class
attainable) 20% 28%
Employers happy with the graduates from Robinholt University 72% 75%
Ratio of students to staff members 40:1 35:1
Staff retention rate 75% 90%
The staff retention rate in 20X5 was consistent with previous years. Data gathered from students who
graduated in 20X5 showed that 65% of students found a graduate job within one year of leaving
compared to 68% of 20X4’s graduates.
In 20X5, Robinholt University won the 'Green Environmental' award for their campuses, which all have
extensive recycling facilities. Students were also involved in a local ‘Grow to Give' food sharing project
that year, which provided thousands of pounds worth of fresh produce to food banks offering food to
poorer residents. Due to staff shortages, the university was not involved in this project in 20X6. The
recycling bins have also been abandoned because of the cost of using them.
Every year, the University Research Council issues a range of prestigious awards for contributions to
research. One of Robinholt University’s main competitors in the area won an award in 20X5 for their
contribution to some pioneering research on genetics. Robinholt University has yet to win an award
for research. However, in 20X5 it did win an ‘Innovation’ award for its new, innovative conference
facilities which have attracted a number of new clients in the last year.
Required:
Using Robinholt University's five strategic aims, assess its performance for 20X6.
Note: There are 4 marks available for calculations and 16 marks for discussion.
(20 marks)
Balanced scorecard
3 THE PEOPLE’S BANK

The People’s Bank is a bank based in the country of Nawkrei. It has a total of 65 branches across the
country and also offers online banking (access to services via computer) and telephone banking (access
to customer service agents over the telephone) to its customers. Recently, The People’s Bank also
began offering its customers a range of mobile banking services, which can be accessed from
customers’ smartphones and tablet computers. Its customer-base is made up of both private
individuals and business customers. The range of services it offers includes:
 Current accounts
 Savings accounts
 Credit cards
 Business and personal loans
 Mortgages (loans for property purchases)
The People’s Bank’s vision is to be ‘the bank that gives back to its customers’ and their purpose is ‘to
help the people and businesses of Nawkrei to live better lives and achieve their ambitions’. In order to
achieve this, the bank’s values are stated as:
(1) Putting customers’ needs first, which involves anticipating and understanding customers’ needs
and making products and services accessible to as many customers as possible. The People’
Bank has recently invested heavily in IT security to prevent fraud and also invested to make
more services accessible to disabled and visually impaired customers
(2) Making business simple, which involves identifying opportunities to simplify activities and
communicating clearly and openly
(3) Making a difference to the communities they serve, which involves primarily helping the
disadvantaged and new homeowners but also supporting small and medium-sized businesses
(SMEs) and acting fairly and responsibly at all times
Extracts from the People’s Bank balanced scorecard are shown below:
20X6 20X6
Performance measure Actual Target
Financial perspective
Return on capital employed (ROCE) 11% 12%
Interest income $7.5m $7m
Net interest margin (margin achieved on interest income) 2.4% 2.5%
Amount of new lending to SMEs $135m $150m
Customer perspective
Number of first-time homebuyers given a mortgage by The People’s Bank 86,000 80,000
Number of complaints (per 1,000 customers) 1.5 2
Number of talking cashpoints installed for the visually impaired 120 100
Number of wheelchair ramps installed in branches 55 50
Internal processes
Number of business processes within The People’s Bank re-engineered
and simplified 110 100
Number of new services made available through ‘mobile banking 2 5
Incidences of fraud on customers’ accounts or credit cards (per 1,000
customers) 3 10
Total carbon dioxide emissions (tonnes) 430,000 400,000
Learning and growth

Number of colleagues trained to provide advice to SMEs 1,300 1,500
Number of hours (paid for by The People’s Bank) used to support
community projects 1,020,000 1,000,000
Number of trainee positions taken up by candidates from Nawkrei’s most
disadvantaged areas 1,990 2,000
Number of community organisations supported (either through funding or
by volunteers from The People’s Bank) 7,250 7,000
Required:
(a) Explain why the balanced scorecard approach to performance measurement is more useful to
measure performance for The People’s Bank than a traditional approach using solely financial
performance measures. (4 marks)
(b) Using all of the information provided, including The People’s Bank’s vision and values, discuss
the performance of The People’s Bank in 20X6.
Note: Use each of the four headings of the balanced scorecard to structure your discussion.
(16 marks)
(20 marks)
4 PORTABLE GARAGE CO
The Portable Garage Co (PGC) is a company specialising in the manufacture and sale of a range of
products for motorists. It is split into two divisions: the battery division (Division B) and the adaptor
division (Division A). Division B sells one product – portable battery chargers for motorists which can
be attached to a car’s own battery and used to start up the engine when the car’s own battery fails.
Division A sells adaptors which are used by customers to charge mobile devices and laptops by
attaching them to the car’s internal power source.
Recently, Division B has upgraded its portable battery so it can also be used to rapidly charge mobile
devices and laptops. The mobile device or laptop must be attached to the battery using a special
adaptor which is supplied to the customer with the battery. Division B currently buys the adaptors
from Division A, which also sells them externally to other companies.
The following data is available for both divisions:
Division B
Selling price for each portable battery, including adaptor $180
Costs per battery:
Adaptor from Division A $13
Other materials from external suppliers $45
Labour costs $35
Annual fixed overheads $5,460,000
Annual production and sales of portable batteries (units) 150,000
Maximum annual market demand for portable batteries (units) 180,000
Division A
Selling price per adaptor to Division B $13
Selling price per adaptor to external customers $15
Costs per adaptor:
Materials $3
Labour costs $4
Annual fixed overheads $2,200,000
Current annual production capacity and sales of adaptors – both internal and external
sales (units) 350,000
Maximum annual external demand for adaptors (units) 200,000
In addition to the materials and labour costs above, Division A incurs a variable cost of $1 per adaptor
for all adaptors it sells externally.
Currently, Head Office’s purchasing policy only allows Division B to purchase the adaptors from
Division A but Division A has refused to sell Division B any more than the current level of adaptors it
supplies to it.
The manager of Division B is unhappy. He has a special industry contact who he could buy the adaptors
from at exactly the same price charged by Division A if he were given the autonomy to purchase from
outside the group.
After discussions with both of the divisional managers and to ensure that the managers are not
demotivated, Head Office has now agreed to change the purchasing policy to allow Division B to buy
externally, provided that it optimises the profits of the group as a whole.
Required:
(a) Under the current transfer pricing system, prepare a profit statement showing the profit for
each of the divisions and for The Portable Garage Co (PGC) as a whole. Your sales and costs
figures should be split into external sales and inter-divisional transfers, where appropriate.
(9 marks)
(b) Assuming that the new group purchasing policy will ensure the optimisation of group profits,
calculate and discuss the number of adaptors which Division B should buy from Division A and
the number of adaptors which Division A should sell to external customers.
Note: There are 3 marks available for calculations and 3 marks for discussion. (6 marks)
Assume now that no external supplier exists for the adaptors which Division B uses.
(c) Calculate and discuss what the minimum transfer price per unit would be for any additional
adaptors supplied above the current level by Division A to Division B so that Division B can meet
its maximum annual demand for the new portable batteries.
Note: There are 2 marks available for calculations and 3 marks available for discussion.
(5 marks)
(20 marks)
5 SPORTS CO
Sports Co is a large manufacturing company specialising in the manufacture of a wide range of sports
clothing and equipment. The company has two divisions: Clothing (Division C) and Equipment (Division
E). Each division operates with little intervention from Head Office and divisional managers have
autonomy to make decisions about long-term investments.
Sports Co measures the performance of its divisions using return on investment (ROI), calculated using
controllable profit and average divisional net assets. The target ROI for each of the divisions is 18%. If
the divisions meet or exceed this target the divisional managers receive a bonus.
Last year, an investment which was expected to meet the target ROI was rejected by one of the
divisional managers because it would have reduced the division’s overall ROI. Consequently, Sports Co
is considering the introduction of a new performance measure, residual income (RI), in order to
discourage this dysfunctional behaviour in the future. Like ROI, this would be calculated using
controllable profit and average divisional net assets.
The draft operating statement for the year, prepared by the company’s trainee accountant, is shown
below:
Division C Division E
$’000 $’000
Sales revenue 3,800 8,400
Less variable costs (1,400) (3,030)
Contribution 2,400 5,370
Less fixed costs (945) (1,420)
Net profit 1,455 3,950
Opening divisional controllable net assets 13,000 24,000

Closing divisional controllable net assets 9,000 30,000
Notes:
(1) Included in the fixed costs are depreciation costs of $165,000 and $460,000 for Divisions C and E
respectively. 30% of the depreciation costs in each division relates to assets controlled but not
owned by Head Office. Division E invested $2m in plant and machinery at the beginning of the
year, which is included in the net assets figures above, and uses the reducing balance method to
depreciate assets. Division C, which uses the straight-line method, made no significant additions
to non-current assets. It is the policy of both divisions to charge a full year’s depreciation in the
year of acquisition.
(2) Head Office recharges all of its costs to the two divisions. These have been included in the fixed
costs and amount to $620,000 for Division C and $700,000 for Division E.
(3) Sports Co has a cost of capital of 12%.
Required:
(a)
(i) Calculate the return on investment (ROI) for each of the two divisions of Sports Co.
(6 marks)
(ii) Discuss the performance of the two divisions for the year, including the main reasons
why their ROI results differ from each other. Explain the impact the difference in ROI
could have on the behaviour of the manager of the worst performing division. (6 marks)
(b)
(i) Calculate the residual income (RI) for each of the two divisions of Sports Co and briefly
comment on the results of this performance measure. (4 marks)
(ii) Explain the advantages and disadvantages of using residual income (RI) to measure
divisional performance. (4 marks)
(20 marks)
ACCA PM Question Bank Part 1 answers: 1: Specialist cost and management accounting techniques 71
PART 1 ANSWERS: Objective test and Scenario
1 $ 7.50
Total number of batches = (15/2.5) + (25/5) + (20/4) = 16

Cost driver rate = $600,000 / 16 = $37,500
Cost per unit = $37,500 / 5,000 = $7.50
Alternatively cost per unit = $37,500 × 5/ 25,000 = 7.50
2
Facility 4
sustaining
Product 1
Product 3
sustaining
Batch 2
3  Production scheduling
4 $ 5.71
Cost driver rates

Set up costs $200,000 / 800 = $250 per set up
Inspection/quality costs $120,000 / 400 = $300 per test
Product W cost per unit
Direct materials $2.50
Direct labour $0.54
Set up costs: 15,000/150 units = 100 batches, 100 × $250 / 15,000 units = $1.67
Inspection / quality cost: 100 batches/2 = 50 inspections, 50 × $300 / 15,000 units = $1.00
Total production costs = $2.50 + $0.54 + $1.67 + $1.00 = $5.71
72 Part 1 answers: 1: Specialist cost and management accounting techniques ACCA PM Question Bank
DUFF CO
5 $ 79.25
Total labour hours = (20,000 × 2.5) + (16,000 × 3) + (22,000 × 2) = 142,000

Overhead absorption rate = 1,377,400/142,000 = $9.70 per hour
Full cost per unit of X = $25 + $30 + ($9.70 × 2.5) = $79.25
6 $ 65833
Budgeted production and sales volumes (units) 20,000 16,000 22,000

Number of batches 40 20 55
Number of purchase orders per batch 4 5 4
Number of purchase orders 160 100 220
Total number of purchase orders = 160 + 100 + 220 = 480 orders
Total ordering costs for Y = $316,000 × (100/480) = $65,833
7 $ 13.54
Total machine hours = (20,000 × 1.5) + (16,000 × 1.25) + (22,000 × 1.4) = 80,800 machine hours
Machine running and facility costs = $420,000 + $361,400 = $781,400
Machine running and facility costs allocated to Z = ($781,400/80,800) × (22,000 × 1.4) = $297,860
Machine running and general facility costs per unit of Z = $297,860/22,000 = $13.54
8  $ 79.64
Overhead cost per unit of X = $492,824/20,000 = $24.64
Full cost per unit of X = $25 + $30 + $24.64 = $79.64
9  ABC is an absorption costing system.

 ABC must be based on activities that are measurable in quantitative terms.
ABC can be used for production and non-production overheads and is only of limited use if
overheads are volume-related.
Target costing
10 $ 170
Required return = 30% × $300,000 = $90,000

Target cost = (500 × $350) – $90,000 = $85,000
Per unit = $85,000/500 = $170
11  $53.33
If profit = 25% sales, then target cost = 75% sales
Selling price = $40/0.75 = $53.33
12  Replace skilled workers with less skilled workers for the more basic production tasks
13
Calculate the 3
target cost
Calculate the 5
target cost gap
Calculate the 4
current cost
Set the required 2

profit
Set the selling 1

price
14  It identifies the market price of a product and then subtracts a desired profit margin to
arrive at the desired cost.
A target cost is arrived at by identifying the market price of a product and then subtracting a
desired profit margin from it.
15  The cost gap will decrease and the target cost will remain the same.
The lower learning rate will mean costs are lower and the cost gap will decrease. The target cost
will not be affected by the change in the learning rate as it is determined by selling price and
desired margin.
16  Value analysis
 Functional analysis
Iso-contribution analysis relates to limiting factor analysis. Variance analysis is a feedback
technique whereas target costing is a feedforward technique.
EDWARD CO
17  Cost control can begin at the design stage.
 The radio will only include features that the customer regards as valuable.
Target costing will mean that Edward Co has a greater external focus. The introduction of target
costing is likely to have been prompted by the market conditions that are forcing Edward Co to
accept a selling price and not subsequently being able to pass on cost increases to its customers.
18 $ 0.75
Cost of labour idle time = (30/60) × $12.60 × (10/90) = $0.70

Cost of material waste = (25/100) × $4.80 × (4/96) = $0.05
Total cost reduction = $0.70 + $0.05 = $0.75
Note: when dealing with the 10% idle time you must multiply by 10/90 rather than just taking
10% of the cost of the 30 minutes to make the radio. This is because the 10% idle time is 10% of
the total time paid, not 10% of the total time worked.
The 30 minutes to make a radio is active time working, the idle time is in addition to this to
bring you up to the total time paid. In this case, Time worked of 90% + Idle time of 10% = Total
time paid of 100%. So the 10% is 10% of the total time paid, not 10% of the 30 minutes worked.
The same logic applies to the wastage of the wire – you must purchase enough wire so that
when you lose 4% of the length purchased, you still have 25cm left to use. So the wastage is 4%
of the total purchased, not the total used. 25cm used is 96% of the total purchased, add on the
4% wasted, and that brings you to the total 100% purchased.
19 $ 1.05
Desired cost = $44 × 80% = $35.20

Revised cost of material for radio = $4.40 × (25/100) × (100/96) = $1.15
Current cost = $4.70 + $1.15 + $8.10 + ((30/60) × ($12.60 + $20 + $12)) = $36.25
Cost gap = $36.25 – $35.20 = $1.05
20  Only including standard components in the radio

 Increasing the automation of the manufacturing process
Just using standard components is a legitimate way to reduce costs. Automation could reduce
costs by cutting down skilled labour time. Reducing the number of features will reduce the cost
gap – increasing the number of features will only work if Edward Co can charge a higher price.
Analysing costs into cost pools is the starting point of activity-based costing.
21  The repair work carried out will vary according to the problems found.
The repair service will be a potentially unique job in response to the problems that the
customer has had.
The outcome of the repair service can be specified – it is the problem being fixed and the radio
working properly again. Costing the time is not itself a problem as that will have to be done
whatever the costing method. Reducing labour time may however be problematic. The service
being carried out when required should not be an issue with costing this sort of service.
Life cycle costing

22  Design costs
 Testing costs
 Production facility investment costs
Promotional costs are normally incurred at Introduction. Customer support costs increase from
the growth stage onwards. Inventory costs would only be relevant once production had started.
23 $ 275
3,250,000 + 2,000,000+250,000 = 5,500,000/44,000units = $125

$125 + $150 = $275 per unit
24  Results in a market driven pricing strategy

This is a benefit of target costing.
25
Included Excluded
Research and development  
Planning and concept design  
Testing  
Production  
Advertising  
Distribution and customer service  
26  At the design/development stage
27  $38
Total Lifecycle costs = 10,000,000 * 25 + 30,000,000
= $280,000,000
Cost per unit = $28
Profit = $10
Price required = $38
2 VOLT CO
28  $87,000
Operating cost ($486m × 40 years) $19,440m
Decommissioning cost $12,000m
Total life-cycle costs $31,440m
Total gigawatts (9,000 × 40 years) 360,000

Life-cycle cost per gigawatt ($31,440m/360,000 gigawatts) $87,333
$87,000 (to the nearest $’000)
29  2 only
If the useful life of the nuclear station is increased, the operating cost will be incurred every
year thus increasing the total life-cycle costs. Statement (1) is not correct.
If the decommissioning cost is reduced, this will reduce the total life-cycle costs. Statement (2)
is correct.
30  An internal failure cost

The disposal cost of the spent nuclear fuel is considered to be an internal failure cost. It is a cost
incurred by Volt Co as a result of its activities; however, it is being disposed of in a safe manner
to ensure that it does not become a cost borne by society as a whole.
31  $408m
The selling price is based on the operating margin of 40%.
Selling price per gigawatt ($40,000/0.60) $66,667
Lifetime profit per gigawatt ($66,667 – $55,000) $11,667
Total lifetime profit (1,750 gigawatts × $11,667 × 20 years) $408.345m
$408m (to the nearest $m)
32  1 and 2 only
Statements (1) and (2) are benefits of life-cycle costing for Volt Co.
Statement (3) is a benefit of activity-based costing (ABC).
Statement (4) is a benefit of relevant costing.
33  Stretching time
Available resource Required
Material 30,000 metres 10,000 + 15,000 = 25,000 metres
Pressing time 13,000 hours 10,000 × 0.5 + 15,000 × 0.5 = 12,500 hrs
Stretching time 8,000 hours 10,000 × 0.25 + 15,000 × 0.4 = 8,500 hrs
Rolling time 7,750 hours 10,000 × 0.4 + 15,000 × 0.25 = 7,750 hrs
34 $ 1.33
Time available = 24 × 5 × 5 = 600 hrs

Production = 300 units, hence time per unit = 2 hrs (600/300)
Return per machine hour = (65 ─ 25)/2 = $20
Conversion cost per hour = (20 + 10)/2 = $15
TAR = $20/15 = 1.33
35  Raise the selling price of the product

This will increase the throughput contribution.
36 $ 2400
$320 – $80/(6/60) = $2,400
37  It does not attempt to maximise profit.

 Work in progress is valued at material cost only.
Throughput assumes that only material costs are variable, whereas labour and other costs will also
be variable beyond a certain time horizon, and this will affect the calculation of maximum profit.
38  Direct labour price
GOPHER GARAGE
39
MOTs 8000
Services 3125
Total garage hours per year = 10 × 5 × 50 = 2,500 hours

There are 4 mechanics, so total hours available = 2,500 hours × 4 = 10,000
Based on the time taken for each activity, they can perform 10,000/1.25 = 8,000 MOTs or
10,000/3.2 = 3,125 services
40  MOT 1.75 Service 1.14

MOT
Return per hour = (Selling price – Materials)/Time taken on the bottleneck
= ($120 – $15)/1.25 = $84
Throughput accounting ratio = Return per hour/Cost per hour = $84/$48 = 1.75
Service
Return per hour = (Selling price – Materials)/Time taken on the bottleneck
= ($200 – $25)/3.2 = $54.69
Throughput accounting ratio = Return per hour/Cost per hour = $54.69/$48 = 1.14
41  The mechanics’ time would be a bottleneck for MOTs only.

The existing capacity for each activity is:
MOTs Service
Mechanic 8,000 3,125
Trainee (2,500 × 3 ÷ 0.5/1.5) 15,000 5,000
Receptionist (2,500 × 2 ÷ 0.25/0.3) 20,000 16,667
Employing another three mechanics would mean that their hours available would be 17,500,
allowing them to carry out 14,000 MOTs or 5,469 services. As a result, the mechanics would still
be the bottleneck for MOTs but the trainees would be the bottleneck for services, as they can
only work on 5,000 services.
42  Decrease the time spent by the mechanics on each customer

 Decrease the operating expenses of the garage
Throughput accounting is concerned with minimising the throughput activity, inventory and
operating expenses. The time taken by the trainees is not relevant, as it is not currently the
throughput activity. Decreasing the selling price will worsen the throughput ratio.
43
True False
It can be applied to the management of all external  
factors affecting the organisation.
It is concerned with overcoming a bottleneck  
identified in a single activity.
It aims to limit the amount of non-bottleneck  
resources used.
It tries to avoid the build-up of inventories.  
According to the theory of constraints, it is wasteful to use non-bottleneck resources above the
level required for maximum throughput, as it will lead to a build-up of excess inventory.
Using throughput accounting will not help manage external activities that the business cannot
control. Overcoming a bottleneck in one activity may result in another activity becoming a
bottleneck and throughput accounting will be applied to this as well.

44
True False
A significant problem for environmental accounting is  
that it is difficult to measure environmental costs.
An aim of environmental accounting is to encourage  
organisations to quantify the costs and benefits of
improving environmental practices.
The use of input/output analysis forces an  
organisation to monitor the cost of wasted material
and other environmental pollution.
It is not possible to use activity based costing to  
identify cost drivers for environmental costs.
ABC principles can be used to identify cost drivers for environmental costs.
45  Image and relationship cost
46  Environment-related costs can be attributed to joint cost centres and environment-

driven costs cannot be.
This is the correct option as environment-driven costs are allocated to general overheads, not
joint centres.
47 $ 27,000
1,000 kg input – 550 kg = 450 kg not converted into output.

Environmental cost:
450 kg * $80 = 36,000 purchase price
150 kg * $15 = 2,250 disposal cost
Less:
250 kg * $45 = 11,250 income from scrap
Total environmental cost = (36,000 + 2,250 – 11,250) = 27,000
80 P a r t 1 a n s w e r s : 2 : D e c i s i o n m a k i n g t e c h n i q u e s ACCA PM Question Bank
2: Decision making techniques
1 $ 9500
Relevant cost of A is replacement cost of $5,000.

Relevant cost of B is zero as material is surplus with no realisable value.
Relevant cost of C is best alternative use. L is better off selling C for $4,500 compared with using
it and not having to purchase D for $4,250.
Relevant cost = $5,000 + $4,500 = $9,500
2  $50,000
The company can either hire new workers at a cost of $60,000 or retrain the existing ones.
The incremental cost of using the existing workers is the training cost of $5,000 plus their
replacement cost of $45,000 = $50,000 in total. This is the cheaper option.
3  $14,000
Deprival value is the lower of
Replacement cost ($14,000) and
The higher of NRV ($9,000) and economic value ($17,000) = $17,000
Hence relevant cost = $14,000
4 $ 4957.50
Cost of the quantity to be bought = (1,500 – 945) × $4.25 = $2,358.75

Opportunity cost of quantity in hand = 945 × $2.75 = $2,598.75
5 23000
Fixed cost + Profit 920,000
= = 23,000
Contribution per unit 40
6 
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
Note: 𝐶𝐶 is used to calculate break-even sales revenue ($)
𝑆𝑆
ACCA PM Question Bank Part 1 answers: 2: Decision making techniques 81
7  4,500 units
Contribution required = $18,000 + $36,000 = $54,000
Contribution per unit = 40% × $30 = $12
Hence break-even sales = $54,000/$12 = 4,500 units
8  $20,400
To determine the minimum revenue required to break even i.e. the break-even revenue, the
break-even point for each product needs to be calculated. To do that the contribution per unit
for each product needs to be established.
Product X Product Y
Contribution per unit (C/S ratio
× selling price) 0.3 × $3.00 = $0.90 0.5 × $4.80 = $2.40
Break-even point (Fixed costs/
contribution per unit) $9,000/$0.90 = 10,000 units $9,000/$2.40 = 3,750 units
Maximum demand 8,000 units 3,000 units
From the table above, either 10,000 units of product X or 3,750 units of product Y need to be
produced to break-even. However, as there is a maximum demand for both products, the
break-even sales units cannot be achieved on either product. If the break-even point cannot be
achieved with only one of the products, then the combination of units of products X and Y to be
sold in order to break even needs to be determined.
To do this, the product with the highest contribution per unit would be produced first, up to its
maximum demand, to cover the fixed costs as quickly as possible. Product Y contributes $2.40
per unit, so it will be produced first, up to its maximum demand of 3,000 units, giving a total
contribution of (3,000 units × $2.40) $7,200.
Therefore sales of product Y would cover $7,200 of the fixed costs but there will be $1,800 of
fixed costs remaining, which need to be covered by sales of product X.
Production of product X will therefore be (remaining fixed costs/contribution per unit of
product X – $1,800/$0.90) = 2,000 units.
As the question asks for the minimum revenue (break-even revenue), the last step would be to
calculate the sales revenue from the production plan calculated above.
Product X sales revenue = 2,000 units × $3.00 = $6,000
Product Y sales revenue = 3,000 units × $ 4.80 = $14,400
The minimum sales revenue required to break even would therefore be $20,400.
9  Sales volume and profit

A break-even chart illustrates the relationship between sales volume, revenue and costs.
10 15000
Sales = $62,500
Break even sales = $13,000/0.4 = $32,500
Margin of safety (sales revenue) = $30,000
Margin of safety (units) $30,000/$2 =15,000 units
11
True False
The investment is more sensitive to a change in sales  
price than sales volume.
If variable costs increase by 25% the investment will  
make a loss.
The margin of safety is 92.5%.  
The investment’s sensitivity to incremental fixed costs  
is 133%.
Price will have to fall by (105/600) × 100% = 17.5% for investment to breakeven. Volume will
have to fall by (105/150) × 100% = 70%.
An increase in variable costs of 25% = $450 × 0.25 = $112.50, greater than the profit of $105
Sales at breakeven point = 45/(150/200) = 60
Margin of safety = ((200 – 60)/200) × 100% = 70%
Sensitivity to fixed costs = (105/45) × 100% = 233%
CARDIO CO
12 60.92 %
Weighted average contribution to sales ratio (WA C/S ratio) = total contribution/total sales revenue.
T C R
$ $ $
Sales revenue 672,000 720,000 532,000
Variable costs (263,760) (286,400) (201,780)
Contribution 408,240 433,600 330,220
WA C/S ratio = ($408,240 + $433,600 + $330,220)/($672,000 + $720,000 + $532,000) =

$1,172,060/$1,924,000 = 60.92%
13 $ 325 000
Fixed costs = $73,940 + $78,100 + $59,320 = $211,360

Breakeven sales revenue = fixed costs/weighted average C/S ratio
= $211,360/65% = $325,169, say $325,000
14 81.8 %
Breakeven sales revenue = fixed costs/weighted average C/S ratio

= $175,000/60% = $291,667
Margin of safety = ((Budgeted sales – Breakeven sales)/Budgeted sales sales) × 100%
= (($1,600,000 – $291,667)/$1,600,000) × 100% = 81.8%
15  The C/S ratio will rise.

If all the products are eventually sold, the total C/S ratio will remain the same. Even if they are
not, the products with the highest contribution per unit may not be the products with the
highest C/S ratio.
16  The sensitivity of its demand to price is uncertain.

 It will generate high initial cash flows to cover the marketing expenditure.
Cardio Co is likely to play safe and start by charging a higher price to try to cover the large
marketing expenditure, if it is not sure of the responsiveness of demand to price. The product
may be a prestige product, where a higher price can be charged to gain the kudos of owning it.
A long life cycle is more likely to mean lower prices being charged initially, as the product has a
longer time to become profitable. A high price gives competitors who are prepared to undercut
similar products more opportunity to enter the market.
Limiting factors
17  Material only
4,000 units require 16,000 kg material and 8,000 labour hours. Hence material is currently the
scarce resource.
18 $ 1200
Since X makes the best contribution per labour hour (see working below), the company will
already be producing the maximum of X (800 units = 2,400 hours) and using the balance for Y.
Hence a further 90 hours would make 20 more units of Y and therefore $1,200 additional
contribution (profit).
Working Product X Product Y
Contribution per unit $45 $60
Labour hours 3 4.5
Contribution per hour $15 $13.33
Maximum demand (units) 800 1,500

Current plan: 4,650 hours available
800 units of X 2,400 hours
500 units of Y 2,250 hours
19  1 only
Non-scarce resources are not being used to their maximum capacity so by definition will have
some slack. Resources that form the critical constraints limiting the optimal production plan will
have zero slack.
20  A
 D
Product A B C D
Selling price per unit $160 $214 $100 $140
Raw material cost $24 $56 $22 $40
Direct labour cost at $11 per hour $66 $88 $33 $22
Variable overhead cost $24 $18 $24 $18
Contribution per unit $46 $52 $21 $60
Direct labour hours per unit 6 8 3 2
Contribution per labour hour $7.67 $6.50 $7 $30
Rank 2 4 3 1
Normal monthly hours
(total units × hours per unit) 1,800 1,000 720 800
If the strike goes ahead, only 2,160 labour hours will be available.
Therefore make all of D, then 1,360 hours’ worth of A (2,160 – 800 hrs).
21
Correct Incorrect
Objective function 60x + 25y  
Material constraint 3x + y ≤ 4,200  
Labour constraint 4x + 0.5y ≥ 3,000  
Contribution for X = $15 ($60 – $45)

Contribution for Y = $12 ($25 – $13)
Objective function = 15x + 12y
Constraints:
Material = 3x + y ≤ 4,200 (as X uses 3 kgs of material (15/5), Y uses 1 kg (5/5))
Labour = 4x + 0.5y ≤ 3,000 (as X uses 4 labour hrs (24/6), Y uses 0.5 hrs (3/6))
22  Contribution will be increased by $2 for each additional kg of material B purchased at the

current market price.
 The maximum price which should be paid for an additional kg of material B is $2.80.
The statement that the maximum price is £2 is wrong as it reflects the common misconception
that the shadow price is the maximum price which should be paid, rather than the maximum
extra over the current purchase price.
The statement about contribution being $1.20 is wrong but could be thought to be correct if the
statement about the maximum price being $2 was wrongly assumed to be correct.
CARA CO
23  Materials only
Seebach Herdorf Total required Available
Material (kg) 20,000 21,000 41,000 34,000
Labour (hours) 8,000 9,000 17,000 18,000
Machine hours 12,000 6,000 18,000 18,000
There is sufficient labour hours and machine hours to meet maximum demand but there is a
shortage of material, so material is the only limiting factor in month 1.
24  2,000 units
As labour has been identified as the only limiting factor in month 2, the two products first
have to be ranked on the contribution per labour hour they earn.
Seebach Herdorf
Contribution per unit ($) 250 315
Labour hours per unit 2 3
Contribution per labour hour ($) 125 105
Ranking 1st 2nd
On the basis of the ranking, the optimum plan would have been to produce Seebach first
up to its maximum demand level. However, Cara Co has a legally binding obligation to
produce a minimum of 2,000 units of Herdorf. The remaining hours after the production
of the minimum demand of Herdorf has been completed is (12,000 hours – (2,000 units of
Herdorf × 3 hours) = 6,000, which will be used to produce 3,000 units of Seebach (6,000
hours/2 hours).
There are no more hours available to make any more products, so the production volume
for Herdorf for month 2 is 2,000 units.
25  Both 1 and 2
The shadow price is the contribution earned from having one extra unit of limited resource
available and is also the extra, on top of the existing cost for that limited resource, which
a company would be willing to pay to acquire that extra resource. If the shadow price is
$125 per labour hour, it would mean that Cara Co would be willing to pay $125 of overtime
premium per hour for the next 2,000 hours. The maximum hourly rate Cara Co would be
willing to pay would be ($45 + $125) $170 for an additional 2,000 hours of temporary staff.
Therefore both statements are correct.
26  $1,145,000
To determine the optimum point from the graph, the iso-contribution line (250S + 315H)
must be moved at the same gradient through the feasible region until the last point it
leaves the feasible region. This is where the machine hours constraint (3S + 2H = 12,000)
and demand constraint for Herdorf (H = 3,000) intersect. Reading from that point across
to the y axis shows that H = 3,000 and reading from that point down to the x axis shows
that S = 2,000.
Alternatively, the values for H and S can be determined using simultaneous equations:
H = 3,000
3S + 2H = 12,000
3S + (2 × 3,000) = 12,000
S = (12,000 – 6,000)/3 = 2,000
Maximum contribution ($250 × 2,000 units) + ($315 × 3,000 units) = $1445,000
Less fixed costs $300,000
$1,145,000
27  1 only
A slack variable occurs when there are more resources available than are required.
In the graph, the labour line 2S + 3H= 24,000 is well above the feasible region which
means that it is not a binding constraint and there are more labour hours than is
required. Even if demand increases for both products, labour would still be a slack
variable as machine hours are the binding constraint and that is not expected to change.
Statement (1) is correct.
If more machine hours became available in month 3, they will be used to make Seebach
as the maximum demand of Herdorf (3,000 units) has been satisfied already. Statement
(2) is not correct.
Pricing decisions
28 $ 36.75
Current cost = 80% × $35 = $28

New selling price = ($28 × 1.05) /0.80 = $36.75
29  P = 16 – 0.02Q
P = a – bQ and when P = 10, Q = 300, so 10 = a – 300b
b = change in price/change in quantity = 1/50 = 0.02
10 = a – (0.02 × 300)
10 = a – 6, so a = 16
30  1 only
In order for the company to charge different prices, each group of customers (market segment)
must have different price elasticity of demand.
31  $14.70
Total cost per carpet = 5 + 1 + 4.5 ($9,000/2,000) = $10.50
Selling price = $10.50 × 1.40 = $14.70
32  Penetration pricing
33
A   
B   
34  –0.50
Percentage change in demand / Percentage change in price
Percentage change in demand 120 – 160/160 = -25%
Percentage change in price 12 – 8/8 = 50%
PED = -25/50 = -0.5
35  –1.36
Percentage change in demand / Percentage change in price
Percentage change in demand -6,000/50,000 = -0.12
Percentage change in price 0.15/1.70 = 0.088
PED = -0.12/0.088 = –1.36
HERERA CO
36  Both X and Y
Z makes a loss if it is bought in, whereas X and Y still make a contribution (see below).
37
X 3
Y 2
Z 1
Working:
Contribution per unit if make 30 45 35
Contribution if buy in 25 25 (5)
Lost contribution if you buy instead of make 5 20 n/a
($30-$25) ($45-$25)
Labour saved if buy in 30 15 n/a
Lost contribution per $ labour $0.17 $1.33 n/a
($5/$30) ($20/$15)
Order of making 3 2 1
We would not work out the lost contribution for

Z because we would not choose to buy instead
as we would make a loss doing so
38  $10,000
Deprival value is the lower of:
 Replacement cost ($10,000) and
 The higher of NRV ($8,000) and economic value ($11,000) = $11,000
Hence relevant cost = $10,000
39  Incremental costs plus opportunity costs

These are the costs that are relevant to the decision.
40  There must be little or no chance of a black market developing.

The lack of a black market means that Herera Co can enforce price discrimination.

41  Risk seeking
42 $ 240000
Expected value with the survey

= (0.4 × $400,000) + (0.6 × $1,000,000)
= $760,0000
Expected value without the survey
= $520,000
Therefore maximum value of the survey = $760,000 – $520,000 = $240,000
43  125
The choice using maximax will be the choice that gives the best possible result, which is a profit
of $540 if demand and supply are 125 lunches.
44  50
Look at the worst possible outcome for each level of supply:
50 75 100 125
$200 $160 $125 $95
The best of these outcomes is $200 for 50 lunches supplied.
45  125
Minimax regret table is as follows:
Daily supply (units)
50 75 100 125
50 $0 $40 $75 $105
Daily demand 75 $100 $0 $35 $65
(units) 100 $220 $120 $0 $30
125 $340 $240 $120 $0
The highest regret figures are shown in bold, and 125 has the lowest of these, therefore choose
125.
LOUIEDEWIE CO
46 $ 51750
Expected return = (0.35 × 150,000) + (0.20 × 75,000) + (0.45 × -35,000) = $51,750
47  0.35
The project will make a profit if returns exceed $80,000, which only applies in the no
competition situation.
48  $536,250
Expected value = (0.45 × $500k) + (0.2 × $550k) + (0.35 × $575k) = $536,250
49 $ 952500
Expected value = $500k + (0.3 × $550k) + (0.5 × $575k) = $952,500
50  2 only
Expected values support a risk-neutral attitude to decision-making. They are most useful when
they refer to events that will occur many times.
ACCA PM Question Bank Part 1 answers: 3: Budgeting and control 91

1
Objective Not objective
Authorisation of expenditure  
Business expansion  
Performance monitoring  
Resource allocation  
2  Junior management
3  An example of feedback control
4 Total relevant cost = $4,957.50$ 861,211
When using rolling budgets, two things happen at the end of an accounting period (month or
quarter):
 the remaining budget for the year is updated based on the actual results and the up to
date information available, and
 a further accounting period (month or quarter) is added.
In this way there will always be a full year's budget available.
In this question, the total annual material purchases will be the sum of the next four quarters
i.e. the remaining quarters of the current year (Y1 quarters 2, 3 and 4) plus the first quarter of
the following year (Y2 quarter 1). The budgets for these quarters will have been updated based
on the actual material purchases from quarter 1 ($210,000) and the predicted cost increase of
1%.
Year 1 Year 1 Year 1 Year 1 Year 2
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1
Actual Budget Budget Budget Budget
Material purchases
(increasing at 1% per quarter) $210,000 $212,100 $214,221 $216,363 $218,527
The total annual material purchases figure in the updated rolling budget would therefore be
$212,100 + $214,221 + $216,363 + $218,527 = $861,211
A common error in this question was to revise the budgets for quarters 2 – 4 as shown, but to
state the annual budget as the sum of the actual for quarter 1 and the budgets for quarters 2 –
4. This showed a misunderstanding of the rolling budget technique.
Another common error was to state the answer as $212,100 which is the restated budget for
quarter 2. This showed that the question requirements were not read carefully enough.
92 P a r t 1 a n s w e r s : 3 : B u d g e t i n g a n d c o n t r o l ACCA PM Question Bank
5  Neither 1 nor 2
If a budget is too easy, staff will not necessarily give their greatest efforts.
A budget based on ideal conditions is likely to be demotivating. Budgets need to be challenging
but achievable in order to encourage improved efficiency.
6
Zero- Beyond
Rolling Incremental Flexible based budgeting
Set at the start of the     
year for various different
activity levels
Continually extended by     
adding another budget
period when the first
budget period expires
Prepared by building on a     
previous period’s
budgeted or actual figures
Uses adaptive     
management processes
and procedures
7  Budgets will take longer to produce
8  It is less time consuming.
9  It may be more difficult to co-ordinate the plans of different departments.

10  2.45 hours
Y = axb
Average time for six jobs: 3 × 6 – 0.074 = 2.627 hours
Total time required for six jobs = 6 × 2.627 hours = 15.762 hours
Average time for five jobs: 3 × 5 – 0.074 = 2.663 hours
Total time required for five jobs = 5 × 2.663 hours = 13.315 hours
Time required to perform the 6th job = Total time required for six jobs – total time required for
five jobs.
Therefore, time required to perform the 6th job = 15.762hours –13.315 hours = 2.447 hours
11  Both 1 and 2
12  I only
The learning rate was actually better than expected and only I could cause it to improve.
13 $ 4305000
90% production = 350,000 × 0.9 = 315,000

At each level of production, material cost = $6 per unit, labour cost = $5 per unit, so both are
fully variable, total variable cost = $11 per unit
315,000/40,000 = 7.875, so 8 supervisors will be required.
Total production costs = (315,000 × $11) + $600,000 + (8 × $30,000) = $4,305,000
14 78720 units
The third quarter of Year 6 is time period 23

Expected sales volume based on the trend equation
= 15,000 + (2,200 × 23) = 65,600 units
Forecast sales volume after allowing for seasonal variation
= 65,600 × 1.2 = 78,720 units
15  Exactly -1
The line is downward sloping and all; the points lie on the line.
16  Exactly +1
Coefficient of determination (𝑟𝑟 2 ) is the correlation coefficient (r) squared. So if correlation is -1
then Coefficient of determination (𝑟𝑟 2 ) = +1
Standard costing
17
True False
Standard costs should only ever be based on marginal  
costing principles.
The use of basic standards is likely to give rise to  
meaningful variances.
Current standards provide the best basis for  
motivating employees to improve performance.
Basic standards are short-term targets and useful for  
day-to-day control purposes.
Standard costs can be based on a variety of costing approaches e.g. total absorption costing,
marginal costing, ABC principles
Basic standards are often out-of-date and therefore unlikely to give rise to meaningful variances.
Current standards reflect existing levels of efficiency and are unlikely to motivate employees to
improve performance.
Basic standards are likely to be out-of-date and may not be relevant for day-to-day control.
18  Planning
 Valuing inventory
 Assessing performance
 Motivating staff
KAMAL CO
19  1 only
The budget selling price was $90 ($540,000/6,000) and the actual price was $88
($633,600/7,200). Fixed overheads should not be affected by changes in sales volume.
20 $ 269400
Budget contribution = $282,000 (213,000 + 69,000) = $47 per unit

Flexed profit = (7,200 @ 47) – 69,000 = $269,400
21 $ 133000
Variance calculated using original budget = $610,000 – $560,000 = $50,000 F

Revised budget = $550,000 × 120% × 105% = $693,000
Variance calculated using revised budget = $610,000 – $693,000 = $83,000 A
Difference = $50,000 + $83,000 = $133,000
Note that this is the difference between the original and revised budget figures for the quarter.
22
Considered Not considered
Whether a marketing initiative should be undertaken  
at all
Whether the marketing department should be  
outsourced
Whether some or all of the activities that are part of a  
proposed marketing campaign are justified
Whether some or all of the activities that are part of a  
proposed marketing campaign can be done more
cheaply
All of these would be considered as part of zero-based budgeting.
23  Both 1 and 2
Rolling budgets are updated a short period at a time, so can more easily accommodate changes
in price and resource availability.
Zero-based budgeting starts with no preconceived assumptions about how activities should be
carried out, so budget-setters can identify the most efficient way to operate without being
influenced by whether it will mean changing the current way things are done.

24
Adverse Favourable
$2400  
Actual Actual Standard

quantity quantity cost
Material Standard mix Actual mix Variance per kg Variance
kgs kgs kgs $ $
A 4,000 4,300 (300) 9 (2,700)
B 3,500 3,600 (100) 5 (500)
C 2,500 2,100 400 2 800
10,000 10,000 (2,400) A
25  1 only
The change will increase the cost of the mix at standard prices and most likely increase the
quality of the biscuit.
26  Training for customer service team

This will not affect the production process.
27
Adverse Favourable
$1312  
Actual
Standard quantity quantity Standard
Material Standard mix Standard mix Variance cost per kg Variance
kgs kgs kgs $ $
W 912 864 48 5 240
X 1,368 1,296 72 6 432
Y 1,520 1,440 80 8 640
3,800 3,600 1312F
PRODUCT ZED
28  1 only
We’re told that the price/litre is as budgeted.
Standard yield is 15/16 = 0.9375 × input quantity. Expected yield from actual input of 1,800
litres is 1,800 x 0.9375 = 1,687.5 litres. Actual yield is only 1,650 litres, less than expected.
29
Adverse Favourable
$562.50  
9/16 7/16
A B Total
Standard 1,012.5 787.5 1,800
Actual 900 900 1,800
112.5 112.5
$10 $15
1,125 F 1,687.5 A 562.5 A
AQSM: A = 9/16 × 1,800 = 1, 012.50 litres; B = 7/16 × 1,800 = 787.50 litres
The Mix Variance is given by: T2 – T1 = $562.50 adverse
Material mix variances are concerned with quantity, not quality. A favourable materials mix is
more likely to lead to an adverse labour efficiency variance, because the cheaper materials may
be more difficult to use or take more time to use because there is more waste.
31
Adverse Favourable
$1631.25  
AM SQSM
Materials AQ SP SQ SP
A 900 9,000 1,113.75 11,137.50
B 900 13,500 866.25 12,993.75
Total T1 = 22,500 T2 = 24,131.25
SM: A = 9/16 and B = 7/16
Expected input for yield of 1,650 litres = 1,650 × (1,800/1,500) = 1,980 litres
SQSM: A = 9/16 × 1,980 = 1,113.75 litres; B = 7/16 × 1,980 = 866.25 litres
Operational materials usage variance = $24,131.25 – $22,500 = $1,631.25 favourable
32
Explain Not explain
Changes in the production process causing increased  
loss of materials
A higher than expected level of waste of materials  
Quality control identifying a high proportion of  
materials as sub-standard
A new supplier supplying poorer quality materials  
Advanced knowledge of changes in the production process and a new supplier supplying sub-
quality materials could have influenced the planning process. Actual waste being higher is an
operational factor. Quality control rejecting a large amount of materials is generally an
operational factor, unless we know that quality control procedures were changed.

33  Cost-conscious customers are switching from premium products to lower margin cereals
in the range.
This will increase the proportion of low margin sales and have a negative impact on profitability.
34
Adverse Favourable
$3720  
The sales quantity contribution variance is calculated as follows:

Actual sales Standard sales Difference Standard
in std mix in std mix in units contribution Variance
Product A 16,020 15,840 180F $12 $2,160F
Product B 10,680 10,560 120F $13 $1,560F
Total $3,720F
MEMIA CO
35  2 only
The difference between budgeted and actual sales is 1,000 televisions. The volume variance
that would be expected due to the shrinking market is 2,000 units (revised sales would be 10% ×
100,000 units = 10,000 units). Therefore, there must be both a planning and operational sales
volume variance (see below).
Sales price variance: actual revenue $2,200,000 – (11,000 units @$210) = $110,000 adverse
There is no information to suggest this is anything other than an operational variance.
36
Market size
Adverse Favourable
$160000  
Market share
Adverse Favourable
$80000  
Market size (Planning sales volume)

Televisions
Revised budget sales 10,000
Original budget sales 12,000
Variance 2,000 (A)
Valued at STANDARD CONTRIBUTION $80
VARIANCE IN $ 160,000 (A)
Market share (Operating sales volume)
Televisions
Actual sales 11,000
Revised sales 10,000
Variance in televisions 1,000 (F)
Valued at STANDARD CONTRIBUTION $80
VARIANCE IN $ 80,000 (F)
37
Adverse Favourable
$80000  
Actual sales Actual sales Difference Standard

in std mix in actual mix in units contribution Variance
Televisions 15,000 11,000 4,000A $80 $320,000A
Computers 10,000 14,000 4,000F $100 $400,000F
Total $80,000F
38
Adverse Favourable
$440000  
Weighted average budgeted contribution per unit = (12,000 × $80) + (8,000 × $100)
/(12,000 + 8,000) = $88
Sales quantity variance in units = (15,000 + 10,000) – (12,000 + 8,000) = 5,000 favourable
Sales quantity variance in $ = 5,000 × $88 = $440,000 favourable
39  Performance has deteriorated in relation to product returns but improved in relation to

customer complaints
Sales volumes (units) 12,000 11,000
Number of returns (units) 1,080 1,000
No of customer complaints regarding late delivery 360 320
Returns as % of sales 9.0% 9.1%
Customer complaints as % of sales 3.0% 2.9%

40  The use of the new machine
The price saving is the result of an operational decision. The budget should however have been
prepared on the basis that the new machine would be used.
41  An adverse labour efficiency planning variance

If the learning curve was overstated in error at the planning stage the work will have taken
longer than expected.
42  A change in working practices to comply with new regulatory restrictions on rest

practices
This is likely to have a negative impact on productivity but is due to an uncontrollable external
factor.
43
Adverse Favourable
$12000  
Planning variance = ($3.80 – $5) × 10,000 = $12,000 adverse
44
Adverse Favourable
$3937.50  
4,375 kg × ($20 – $20.90) = $3,937.50 adverse

Materials operational price variance
Adverse Favourable
$3062.50  
(4,375kg × ($20.90 – $21.60)) = $3,062.50 adverse

DEMIA CO
There is no revised planning information for labour rate, any rate difference will be operational.
If Demia spent 29,000 hours making 11,000 units compared to an original flexed budget of
33,000 hours, there is clearly a labour efficiency variance of some sort.
Total labour efficiency variance = (29,000 hours – 33,000 hours) @ $20 = $80,000 favourable
46 Planning labour efficiency variance
Adverse Favourable
$110000  

Adverse Favourable
$30000  
Planning labour efficiency variance

(Standard hours for actual production (11,000 × $3) – revised hours for actual production
(11,000 × 2.5)) × standard rate
11,000 TVs: (33,000 –27,500) × $20 = $110,000 favourable
(Actual hours – revised standard hours for actual production) × standard rate
11,000 TVs: (29,000 – 27,500) × $20 = $30,000 adverse
Note: this approach uses the Examiner’s preferred method of calculating the P&O variances.
47 $ 13.33
Original standard = 2.5 @$20 = $50

For a nil variance, cost of 1.5 hours unskilled time must be no more than $50 – (1.5@$20) = $20
So max rate per hour = $20/1.5 = $13.33
48 $ 20
400,000 – 9,000 VC = (504,000 – 12,000 VC)/1.2

Multiply both sides by 1.2
480,000 – 10,800 VC = 504,000 – 12,000 VC
Add 12,000 VC to both sides
480,000 + 1,200 VC = 504,000
Deduct 480,000 from both sides
1,200 VC = $24,000
Divide both sides by 1,200
VC = $20
49  Better training for unskilled workers

 Change in the packaging of the televisions
Better training should reduce inefficiencies and waste. Changing the packaging could either
make the packaging cheaper, or more durable (with any increase in costs because the packaging
was more durable being outweighed by the reduced risk of breakages).
Use of standard components should help reduce costs. The length of life of components used
does not affect production costs.
50
True False
In a rapidly changing environment variances based on  
standard costs are likely to provide a meaningful
analysis of performance.
When monitoring performance, a company only needs  
to focus on adverse variances.
A desire to create a favourable material price variance  
may result in the purchasing manager taking decisions
which are incompatible with TQM.
If a company operates a JIT policy, it is not likely to  
experience any labour idle time variance.
Variances will be less meaningful in a rapidly changing environment as standards are likely to be
out of date. When monitoring performance, a company should focus on significant favourable
and adverse variances. A desire to create a favourable material price variance may result in the
Purchasing Manager buying cheaper quality material which would be incompatible with TQM. If
a company operates a JIT policy, it will produce to order and not for inventory and therefore
may experience a labour idle time variance.
102 P a r t 1 a n s w e r s : 4 : P e r f o r m a n c e m e a s u r e m e n t a n d c o n t r o l ACCA PM Question Bank

1  Strategic planning
2
Records all daily transactions  
Provides only external information  
Provides summary information for the Board  
Allows modelling of entire business  
Recording all daily transactions is a characteristic of a Transaction processing system.

EIS provides both internal and external information.
3  1 only
Open systems are preferable for performance management as they are able to take account of
external uncontrollable factors.
4
Cover Not cover
Order processing  
Manufacturing  
Distribution  
Customer service  
Human resources  
Finance  
Uses of information
5
Control Not a control
Comparison of actual transactions to the original  
budget
Inventory management system tracking fast and slow  
moving inventory
Forecasting the level of recruitment needed  
Results of market research used for benchmarking  
performance
ACCA PM Question Bank Part 1 answers: 4: Performance measurement and control 103
6  1 only
Value refers to the usefulness of data and the ability to extract information which adds value to
the organisation. Veracity refers to the accuracy and quality of the data captured.
7  I and III only

Implementation of new computer systems and the maintenance of these systems can be very
costly to an organisation. Organisations will need to adhere to significant data protection
legislation and could incur fines and penalties if they do not. Both of these are challenges to
using Big Data.
Big Data relates to a wide variety of data sources, both financial and non-financial.
Management reports
8  Completeness checks
 Validation of input data
9
True False
A range check is a form of validation control.  
Hierarchical passwords can be used to grant different  
access rights to different users of a database.
Firewalls protect data from external access.  
Encryption means that data can only be understood by  
those transmitting and receiving it, and not by anyone
intercepting it.
10  Remote storage of back-up copies of data

11
Financial Non-financial
Product returns rate  
Market share  
Asset turnover  
Staff turnover  
12  Non-financial
The other perspective is Financial.
13  Dimensions
 Rewards
 Standards
14  The Managing Director who has overall responsibility for the businesses costs and
revenues, including the administration and finance functions
OLIVER’S SALON
15 $ 20
20X8: Female clients paid $200,000 for 8,000 visits. This is an average price per visit of
$200,000/8,000 = $25
In 20X9 the female hairdressing prices did not increase and the mix of services did not change
so of the total revenue $170,000(6,800 × $25) was from female clients. This means that the
balance of $68,500 ($238,500 – $170,000) was from male clients at an average price of $20 per
visit ($68,500/3,425)
16
True False
Gross and net profit margins have decreased in 20X9  
compared with 20X8.
Average cost per staff member has increased in 20X9  
compared with 20X8.
Gross margin: 20X8 – $106,000/$200,000 = 53%, 20X9 – $112,500/238,500 = 47.2%

Net margin: 20X8 – $78,000/200,000 = 39%, 20X9 – $80,000/238,500 = 33.5%
Both margins have fallen, so the first statement is true.
Average staff cost: 20X8 – $65,000/4 = $16,250, 20X9 – $91,000/6 = $15,167
Average staff cost has fallen, so the second statement is false.
17  The mix of services offered to female clients

We are told that the mix hasn’t changed. The others are all plausible explanations on the basis
of the information given.
18  Resource utilisation of the property has increased and resource utilisation of specialist
Property used is the same, so resource allocation is reflected in the total number of cuts, which
have increased from 8,000 to 6,800 + 3,425 = 10,225
Average number of clients per specialist female hairdresser has fallen from (8,000/4) = 2,000 to
(6,800/5) = 1,360
19
Problem Not a problem
It may be difficult to define measures for quality of  
service provided.
Increasing the number of measures may increase the  
chances of the measures giving a conflicting picture.
Increasing the number of measures will mean that the  
business has more of an external focus, rather than
focusing on internal problems.
Oliver may have to spend more time himself on  
measurement work and less on servicing customers.
The business needs to solve the internal problems that it has, but having an external focus
should mean that it concentrates on the measures that are more important to customers,
where its competitors may be doing better.
Some of the new measures are likely to involve assessment and inspection, which Oliver is likely
to have to carry out himself. He will also need to spend time making an overall assessment of
what the measures tell him.

20
Control No control
Revenue generation  
Attributable costs  
Apportioned head office costs  
Investment in non-current assets  
21  Dual pricing system
22 ROI
15.0 %
RI
$ 0.36 million
ROI = 1.8/12 = 15.0%

RI = 1.8 – (12% × 12) = 0.36
23  Division A only
Division A: Profit = $14.4m × 30% = $4.32m
Imputed interest charge = $32.6m × 10% = $3.26m
Residual income = $1.06m
Division B: Profit = 8.8m × 24% = $2.112m
Imputed interest charge = $22.2m × 10% = $2.22m
Residual income = $(0.108)m
24
Control No control
Generation of revenues  
Investment in non-current assets  
Investment in working capital  
Apportioned head office costs  
25 27.59 %
Opening capital employed: $4m + $0.5m = $4.5m

Closing capital employed: ($4m × 0.9) + ($0.5 × 1.2) = $3.6m + $0.6 = $4.2m
Average capital employed = $4.35m
Profit after depreciation = $1.2m
Therefore, ROI = $1.2m/$4.35m = 27.59%
ABEL CO
26 $ 11.70
Marginal cost = $6 + share of overheads $3 ($300,000/100,000 units) = full cost $9

$9 × 1.3 = $11.70
27  Neither 1 or 2
A full cost-based approach should only be used if there is no intermediate market for the
product. An opportunity cost approach should be used if the producing division is operating at
full capacity.
28  $11
If capacity is limited, it is better for the company to sell 100,000 components to the individual
consumer: contribution = $15 ─ $6 ─ $2.50 = $6.50 per unit, than to the commercial buyer at a
contribution of $5 ($11 ─ $6)
The production division will therefore want the TP to be at least $11.
The retail division will accept transfers provided the cost is less than its incremental net revenue
$15 ─ $2.50 = $12.50
29 $ 600000
Now the production division can sell 100,000 components to the commercial buyer @$5
contribution = $500,000 and the retail division can buy in the components and earn
contribution from the individual consumers @ $1 per unit ($15 ─ $11.50 ─ $2.50) = $100,000
Total company contribution = $500,000 + $100,000 = $600,000
30  Setting the transfer price at market value if an external market exists for the product
There is no guarantee that the market value will be enough to cover fixed costs.
The other methods are all used in practice to resolve this problem.

31
Some non-quantifiable objectives  
Multiple stakeholders  
Objectives may be subject to political pressures  
Conflicting priorities for resource allocation  
32  Economy, Efficiency, Effectiveness
33
Cutting departmental expenditure by 5%   
Increasing the number of chargeable   
hours handled by advisers to 6.2 per day
Obtaining a score of 4.7 or above on   
customer satisfaction surveys
Retaining all current contracts with   
government departments

34  Manipulation of targets to ensure results achieved
 Dysfunctional decision making
35  Both 1 and 2
108 P a r t 1 a n s w e r s : 2 : D e c i s i o n - m a k i n g t e c h n i q u e s ACCA PM Question Bank
PART 1 ANSWERS: Section C
Limiting factors
1 CUT AND STITCH

EXAMINER’S COMMENTS
This was probably the least-well answered question on the paper overall. This is not really
surprising, since I find that few students enjoy linear programming, and I think this comes
from a fear of anything too mathematical.
Part (a) was fairly straightforward. This should have been really well answered and I think
the reason why it wasn’t is because candidates did not expect to be given the optimal
production point in a question. They expected to have to find it themselves. Because of this,
they didn’t read the question properly and many candidates performed lots of calculations
trying to find the optimal production point!
It is so important to read questions carefully in all exams. An expectation of what the
requirement will read, based on past questions must not be developed as, when this
happens, candidates inevitably don’t answer the question that is currently being asked.
A good attempt at part (a) would have been to solve the two simultaneous equations for the critical
constraints at point B, in order to arrive at the optimum quantity of W and L to be produced. Then,
these numbers needed to be put into the objective function in order to find contribution.
It is essential to show all workings. Where workings are not shown, full marks cannot be
given. Also, it was not sufficient to simply try and read the optimum quantities off the graph.
The requirement said “find by appropriate calculation....”
(a) The optimal production mix can be found by solving the two equations given for F and T.
7W + 5L = 3,500
2W + 2L = 1,200
Multiplying the second equation by 2.5 produces:
7W + 5L = 3,500
5W + 5L = 3,000
2W = 500
W = 250
Substituting W = 250 in the fabric equation produces:
2 × 250 + 2L = 1,200
2L = 700
L = 350
The optimal solution is when 250 work suits are produced and 350 lounge suits are produced.
The contribution gained is $26,000:
C = 48W + 40L
C = (48 × 250) + (40 × 350)
C = 26,000
ACCA PM Question Bank Part 1 answers: 2: Decision-making techniques 109
EXAMINER’S COMMENTS: PART (b)

Some candidates gave perfect answers to this but, admittedly, these candidates were in the minority.
Most answers were poor and this is clearly an area that needs to be revisited. A common
error was finding a total shadow price of $14 for fabric and tailor time jointly, rather than
calculating them separately. Such answer scored poorly.
EXAM SMART
Learning how to perform key techniques is really important in the exam. For example here
you need to know and be able to demonstrate that the shadow price is calculated by:
 Adding one extra unit of resource to the constraint.
 Recalculating the optimum point and the quantities of the two products at the new optimum point.
 Recalculating the overall contribution at the new optimum point and
 Identifying the increased contribution over and above the original optimum point.
(b) The shadow prices can be found by adding one unit to each constraint in turn.
Shadow price of T
7W + 5L = 3,501
2W + 2L = 1,200
Again multiplying the second equation by 2.5 produces:
7W + 5L = 3,501
5W + 5L = 3,000
2W = 501
W = 250.5
Substituting W = 250.5 in the fabric equation produces:
(2 × 250.5) + 2L = 1,200
2L = 1,200 – 501
L = 349.5
Contribution earned at this point would be = (48 × 250.5) + (40 × 349.5) = 26,004 which is an
increase of $4.
Hence the shadow price of T is $4 per hour.
Shadow price of F
7W + 5L = 3,500
2W + 2L = 1,201
Again, multiplying the second equation by 2.5 produces:
7W + 5L = 3,500.0
5W + 5L = 3,002.5
2W = 497.5
W = 248.75
Substituting W = 248.75 in the fabric equation produces:
(2 × 248.75) +2L = 1,201
2L = 1,201 – 497.5
L = 351.75
Contribution earned at this point would be = (48 × 248.75) + (40 × 351.75) = 26,010, which is an
increase of $10.
Hence the shadow price of F is $10 per metre.
EXAMINER’S COMMENTS: PART (c)

If part (b) was poorly answered, part (c) was really poorly answered!
Many candidates could perform the calculations in part (b) but did not, on the whole,
understand that the shadow price is the premium OVER AND ABOVE the normal price that
could be paid for extra tailor time. Again, this area clearly needs revisiting.
EXAM SMART
The Examiner’s point raises a common issue with interpreting shadow prices. You need to
realise that the shadow price (in this case $4 per hour of tailor time) represents the
maximum amount over and above the current price of the resource ($1.50 per hour) that CS
might consider paying. Hence $1.50 + $5 = $5.50 per hour is the theoretical maximum per
hour that might be considered worth paying for extra tailor hours.
(c) The shadow price represents the maximum premium above the normal rate a business should
be willing to pay for more of a scarce resource. It is equal to the increased contribution that can
be gained from gaining that extra resource.
The shadow price of labour here is $4 per hour. The tailors have offered to work for $4.50 – a
premium of $3.00 per hour. At first glance the offer seems to be acceptable. However, many
businesses pay overtime at the rate of time and a half and some negotiation should be possible to
create a win/win situation. Equally some consideration should be given to the quality aspect here. If
excessive extra hours are worked then tiredness can reduce the quality of the work produced.
EXAMINER’S COMMENTS: PART (d)

Candidates needed to appreciate that whilst fabric remained a critical constraint, maximum
demand for W now became the other critical constraint rather than tailor time. Therefore,
the constraints for fabric and W now needed to be solved in order to find the optimum
production mix. It was surprising to see that candidates who completed part (a) correctly
could not do part (d) as essentially, the technique required was the same.
(d) If maximum demand for W falls to 200 units, the constraint for W will move left to 200 on the x
axis of the graph. The new optimum point will then be at the intersection of:
W = 200 and
2W + 2L = 1,200
Solving these equations simultaneously, if:
W = 200, then (2 × 200) + 2L = 1,200
Therefore L = 400.
So, the new production plan will be to make 400L and 200W.
EXAM SMART
A quick inspection of the graph for the maximum demand of W (line P) moving to 200 units
would identify that there would now be a new optimum point (not point B anymore).
Marking guide Marks

(a) Optimal point calculation 3
Contribution 1 4
(b) For each shadow price 3 6
(c) Rate discussion 3 6
Other factors e.g. tiredness, negotiation 3
(d) Find optimum point 1
Solve 2 equations 2
Conclusion 1 4
Maximum marks available 20
Pricing decisions
2 WX
EXAMINER’S COMMENTS: PART (a)
It was surprising, even disappointing, to find that many candidates were not able to apply
the ‘high – low’ technique to calculate the total variable cost of the unit.
Part (a)(ii) was generally answered well, but a significant number of candidates made an
error when calculating the selling price that would maximise the company’s profit, and put
forward an answer that could not be possible in the context of the question.
Common errors
 Unable to apply the high-low technique (part (a)(i)).
 Incorrectly believing that the total variable cost was simply the sum of the direct
material and direct labour.
 Unable to calculate the selling price that would maximise the company’s profits (part (a)(ii)).
EXAM SMART
From the information we can tell that material and labour are purely variable costs since the
total costs change in direct proportion to annual production units. Material costs are $2 per
unit and labour is $6 per unit.
Since the overhead costs do not vary in proportion to the units produced and are not
constant in total they must represent a semi variable cost.
(a)
(i) The optimum selling price occurs where marginal cost = marginal revenue.
Marginal cost is assumed to be the same as variable cost. From the data it can be
determined that the costs of direct materials and direct labour are wholly variable and
total $8 per unit. [($200,000+ $600,000) / 100,000]
The overhead costs appear to be semi-variable and will be analysed using the High Low
method:
Units $000
High 200,000 1,460
Low 100,000 880
Difference 100,000 580
Thus, the variable overhead cost per unit is $580,000 / 100,000 = $5.80. The total
variable cost per unit is therefore $13.80.
EXAM SMART
An alternative working for part (ii) for the price/demand relationship would be as follows.
1
𝑏𝑏 = 25,000 = 0.00004
Where P = $25, X = 150,000 and b = 0.00004
Therefore 25 = a - 0.00004 × 150,000
25 = a - 6
a = 31
Therefore P = 31 - 0.00004X
(ii) The price at which there is zero demand can be calculated to be $25 + ((150,000/25,000)
× $1)) = $31
There is a change in demand of 25,000 units for every $1 change in selling price so the
equation of the selling price is:
$31 ─ 0.00004x
And thus the equation for marginal revenue is:
$31 ─ 0.00008x
Equating marginal cost and marginal revenue gives:
13.80 = 31 ─ 0.00008x
─17.20 = ─0.00008x
─17.2/-0.00008 = x = 215,000
If x = 215,000 then the optimum selling price is:
$31 ─ (0.00004 × 215,000) = $22.40

The situation described above was compounded in part (b) when candidates attempted to
explain figures that were completely incorrect.
Example 1: explaining an optimum selling price of $5
Example 2: discussing an output figure of 3.34 million units
Common errors
 Submitting reasons in part (b) that did not relate to the figure calculated in part (a)(ii).
 Unclear workings.
 Submitting lengthy answers when addressing part (b) that were disproportionate to the
marks available.
(b) There are many reasons why this price may not be used (candidates are expected to explain
TWO).
 There may be inaccuracies in the demand forecasts at different prices because the model
assumes that demand is driven solely by price. In fact there are many different factors
that influence demand; these include advertising, competitor actions and changing
fashions / tastes.
 The model also assumes that the relationship between price and demand is static
whereas in reality it is regularly changing.
 There may be inaccuracies in the determination of the marginal cost, the assumption that
marginal cost equals variable cost may itself be invalid, but even if this is acceptable then
the assumption that all variable costs vary with volume is unrealistic. Some of these costs
may be driven by factors other than volume. Again there is an assumption the unit
variable cost is unchanging once it has been determined.
(c) Market skimming
Market skimming is a strategy that attempts to exploit those areas of the market which are
relatively insensitive to price changes. Initially, high prices for the webcam would be charged in
order to take advantage of those buyers who want to buy it as soon as possible, and are
prepared to pay high prices in order to do so.
The existence of certain conditions is likely to make the strategy a suitable one for WX. These
are as follows:
 Where a product is new and different, so that customers are prepared to pay high prices
in order to gain the perceived status of owning the product early. The webcam has
superior audio sound and visual quality, which does make it different from other
webcams on the market.
 Where products have a short life cycle this strategy is more likely to be used, because of
the need to recover development costs and make a profit quickly. The webcam does only
have a two-year life cycle, which does make it rather short.
 Where high prices in the early stages of a product’s life cycle are expected to generate
high initial cash inflows. If this were to be the case for the webcam, it would be
particularly useful for WX because of the current liquidity problems the company is
suffering. Similarly, skimming is useful to cover high initial development costs, which
have been incurred by WX.
 Where barriers to entry exist, which deter other competitors from entering the market;
as otherwise, they will be enticed by the high prices being charged. These might include
prohibitively high investment costs, patent protection or unusually strong brand loyalty.
It is not clear from the information whether this is the case for WX.
 Where demand and sensitivity of demand to price are unknown. In WX’s case, market
research has been carried out to establish a price based on the customers’ perceived
value of the product. The suggestion therefore is that some information is available
about price and demand, although it is not clear how much information is available.
 It is not possible to say for definite whether this pricing strategy would be suitable for
WX, because of the limited information available. However, it does seem unusual that a
high-tech, cutting edge product like this should be sold at the same price over its entire,
short life cycle. Therefore, price skimming should be investigated further, presuming that
this has not already been done by WX.
Marking guide Marks

(a)
Calculate the variable cost per unit 2
Determine the selling price equation 2
Calculate the optimum selling price per unit 2
(b)
Explain two reasons why the company might not use this optimum price – two marks each) 4
(c)
Explanation 2
Discussion of each condition – max two marks each 7
Conclusion 1
Shutdown decisions
3 BELTON PARK RESORT

Read the requirements
As usual, the verbs used in the requirements are key. Requirement (a) is a Calculate requirement,
which is fairly clear. However, candidates should read the requirements carefully, as often there are
further instructions given, as is the case here. Candidates were asked to calculate the incremental cash
flows (more on this later) in TWO cases – one if the hotel stays open, and the other if the water park
stays open. In addition they are also asked to state whether it should remain open or should close –
easy to miss or forget this!
The full examiners commentary for this question can be found here:
https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f5/exampapers/pm-2019-
marjun-a.pdf
This contains some really useful guidance on how the answer could have been calculated within the
actual exam software.
(a) (i) Hotel

Incremental revenue and contribution
$
Room revenue
Number of rooms 120
Number of nights 31
Total room nights 3,720
Occupancy rate 50%
Total nights occupied 1,860
Rate per night $70
Total room revenue 130,200
Extras’ contribution
Total nights occupied 1,860
Contribution per night $12
Total ‘extras’ contribution 22,320
Total cash inflows 152,520
$
Incremental running costs
Staff costs $120,000
Less: manager’s salary ($2,500)
Less: chef’s salary ($2,000)
50% normal hours $115,500 57,750
50% at reduced hours × 50/90 32,083
Maintenance costs:
If open $14,600
If closed $4,000
Incremental cost 10,600
Power costs:
Electric $0
Gas – fixed charge $0
Gas – variable ($20,000 – $10,200) × 1.5 14,700
Security 0
Water 6,450
Total cash outflows 121,583
Total incremental cash flows 30,937
(ii) Water park

Incremental revenue and contribution
$
Visitor revenue
Number of visitors 5,760
Admission cost $16.80
Admission revenue 96,768
Extras’ contribution
Number of visitors 5,760
Contribution per visitor $7.20
Total contribution 41,472
Total cash inflows 138,240
Incremental running costs
Staff costs:
Manager $0
Other staff ($75,600 – $2,000) × 48% 35,328
Maintenance costs:
If open $6,000
If closed ($2,000)
Incremental cost 4,000
Power costs:
Electric $0
Gas – fixed charge $0
Gas – variable ($18,000 – $8,500) × 1.5 14,250
Security 0
Water 12,100
Total cash outflows 65,678
Total incremental cash flows 72,562
Conclusion
Based on these figures, both of them should stay open because the incremental cash flows are both
positive.

Requirement (b) says Discuss any other factors Belton Park Resort should consider when making the
decision in part (a). The decision is to (open/close the hotel/water park), but candidates should read
through the requirement to see if there’s any important information. It’s perfectly acceptable to
attempt part (b) before part (a) – remember you’re asked for other factors, so the numerical
conclusion to part (a) is largely irrelevant.
Part (b) uses the word processing software. Candidates generally have less trouble using this. A few
pointers on this question – the requirement to ‘Discuss any factors...’ does say how many factors to
discuss, which can make it difficult. Candidates often use whatever remaining time they have and if
that’s not much, answers can be too brief. As a rule of thumb, a well discussed point will usually score
2 marks; a weaker point can score 1. This does vary from question to question, depending on how
difficult it is, but for a 5 mark question such as this, it is recommended that candidates aim to make
three good points (more if there is time) and at least then if each point only scores 1 mark, then 3 out
of 5 means a pass on this requirement.
(b) As regards the estimates calculated, these have been based on very limited data and should be
approached with caution. The calculations are based on the first two months’ of opening only
and, consequently, it is difficult to say how accurate they are likely to be. In addition, the basis
of estimating the revised occupancy rates for the hotel, for example, has not been given. If
these estimates are too optimistic, the actual results could be far worse.
The figures suggest that both the water park and the hotel should stay open. Given that this is a
new business and therefore it is still building up its customer base, this would seem like a wise
decision anyway, even if the calculations had shown that the estimated incremental cash flows
were not as positive as this.
Similarly, if Belton Park were to close either the hotel or the water park, they would invariably
lose some valuable staff who might seek out other jobs after the closure. These staff might not
be available again when the hotel and water park reopened in February.
The interdependency of the two sets of projections has not been taken into account in the
calculations either. Since the incremental cash flows suggest that both the hotel and the water
park should stay open, it is not a big problem. However, if they had shown, for example, that
the water park alone should close, the effect that this could have on the number of hotel
visitors would also need to be taken into account. Many visitors may be attracted to the hotel
because it has a water park.
EXAM SMART
There are many factors which could have been discussed here and would be given credit.
Marking guide Marks

(a) (i) Hotel revenue 1½
Extras contribution 1
Staff costs 2½
Maintenance cost 1
Gas variable costs 1
Water not security ½
Net cash flow ½
Conclusion: hotel ½
(ii) Admission revenue 1½
Extras contribution 1
Staff costs ½
Maintenance costs 1
Gas variable costs 1
Water not security ½
Net cash flow ½
Conclusion: water park ½
Max 15
(b) Discussion 5
Max 5
Dealing with risk and uncertainty in decision making
4 GYM BUNNIES
(a) Option 1
Net income = $720 – $80 = $640 per annum.
Total annual income = $640 × 5,250 = $3.36m
Option 2
If costs $120 per annum, net income = $720 – $120 = $600 per annum.
If costs $180 per annum, net income = $720 – $180 = $540 per annum.
Total annual income
If membership 6,000 (A):
$600 × 6,000 = $3.6m
$540 × 6,000 = $3.24m
If membership 6,500 (B):
$600 × 6,500 = $3.9m
$540 × 6,500 = $3.51m
Expected value and decision:
EV at A = (0.5 × $3.6m) + (0.5 × $3.24m) = $3.42m
EV at B = (0.5 × $3.9m) + (0.5 × $3.51m) = $3.705m
EV at C = (0.4 × $3.42m) + (0.6 × $3.705m) = $3.591m per annum
At D, compare EV of:
Option 1: (3 × $3.36m) = $10.08m
Option 2: (3 × $3.591m) – $360k = $10.413m
Therefore choose option 2 – expand exercise studio.
Net income $3.36 per annum
Net income $600 per annum Net income $3.6 per annum
Option 1
$3.42m
$10.413m 5,250 members: net per annum 0.5
income $640 per annum
A
D
0.5
6,000 members
Option 2 Net income $540 per annum Net income $3.24 per annum
$(360k)
0.4
$3.591m C
per annum Net income $600 per annum
0.6 Net income $3.9 per annum
$3.705
6,500 members per annum 0.5
B
0.5
Net income $540 per annum Net income $3.51 per annum

Part (b) asked candidates to calculate the maximum price that the company should pay for
perfect information about the expansion’s exact effect on membership numbers. Very few
candidates answered part (b) correctly. Candidates must revise this area well.
EXAM SMART
Remember that the value of perfect information (VOPI) is calculated be working out the
difference between what the EV would be if you had perfect information (in this case this
would be knowledge of what the membership numbers would change to) compared to the
EV if you didn’t have this knowledge. It might help to consider this in tabular format. The
values in the table represent the net income figures over the full three-year period
Expansion option
Option 1 Option 2
$ $
6,000 members under option 2 (see note 1 below) $10.08m $9.9m
6,500 members under option 2 $10.08m $10.755m
Note 1
If option 1 is undertaken you know you will get net income of $3.36m pa (5,250 × {720 – 80}),
hence over three years this is $10.08m. If we choose option 2 and it turns out member
numbers are 6,000 then the return is $9.9m. (Net income of 3 yrs × $3.42m (see decision
tree) = $10.26m less the capital costs of $0.36m = $9.9m.)
If we don’t have perfect information about the membership levels then the EV’s are as per
the examiners workings above, namely;
Option 1 = $10.08m
Option 2 = $10.413m
So, without perfect information you’d choose option 2 per the tree and get an EV of $10.413m.
With perfect information the following can be concluded. If you knew membership was going
to be 6,000 (prob = 0.4), you would choose option 1 and get $10.08m whereas if you knew
membership was going to be 6,500 (prob = 0.6) you would choose option 2 and get $10.755m,
giving an overall EV of $10.485m ({0.4 × $10.08m} + {0.6 × $10.755m})
The VOPI is therefore $10.485m - $10.413m = $0.072m
(b) With perfect information:

If membership numbers were 6,000:
EV = $3.42m × 3 = $10.26m
Less costs of $360k = $9.9m
Therefore, with these membership numbers, GB would choose option 1 instead.
If membership numbers were 6,500:
EV = $3.705 × 3 = $11.115m
Less costs of $360k = $10.755m
In this instance, GB would choose option 2.
So, if membership numbers are 6,000, of which there is a 0.4 probability, EV will be $10.08m
(option 1) and if membership numbers are 6,500, of which there is a 0.6 probability, then EV will
be $10.755m (option 2).
Therefore EV with perfect information = (0.4 × $10.08m) + (0.6 × $10.755) = $10.485m.
Without perfect information the EV is $10.413m, therefore the value of it is $72k ($10.485m –
$10.413m). This represents the maximum price that GB should be prepared to pay for the
information.

Part (c) asked for a brief discussion of using expected values for a decision of this nature.
It was only worth two marks, which is why the requirement asked for only a ‘BRIEF’
discussion. Many candidates spotted the most obvious point, which is that the expected
value criterion is useful for decisions that are repeated but is less relevant to one off
decisions of this nature since it merely gives a long run average of what the outcome would
be if a decision were repeated many times. However, marks could still be earned for making
points such as the fact that probabilities are difficult to ascertain etc. Please note that the
marks available for a requirement are indicative of the length of answer expected. Writing a
whole page of answer for this requirement is simply wasting valuable time that could have
been spent elsewhere.
(c) The expansion decision is a one-off decision, rather than a decision that will be repeated many
times. Expected values, on the other hand, give us a long run average of the outcome that
would be expected if a decision was to be repeated many times. The actual outcome may not
be very close to the expected value calculated and the technique is therefore not really very
useful here.
Also, estimating accurate probabilities is difficult because this exact situation has not arisen
before.
The expected value criterion for decision-making is useful where the attitude of the investor is
risk neutral. We do not know what the management of Gym Bunnies’ attitude to risk is, which
makes it difficult to say whether this criterion is a good one to use. In a decision such as this
one, it would be useful to see what the worst case scenario and best case scenario results
would be too, in order to assist decision-making.
(d) Methods of uncertainty reduction
Simulation
Computer models can be built to simulate real life scenarios. The model will predict what range
of returns the business could expect from a given decision without having risked any actual
cash. The models use random number tables to generate possible values for the uncertainty the
business is subject to. Again, computer technology is assisting in bringing down the cost of such
risk analysis.
Calculation of worst and best case figures
A business will often be interested in range. It enables a better understanding of risk. An
accountant could calculate the worst case scenario, including poor demand and high costs while
being sensible about it. He could also calculate best case scenarios including good sales and
minimum running costs. This analysis can often reassure the business. The production of a
probability distribution to show the business the range of possible results is also useful to
explain risks involved. A calculation of standard deviation is also possible.
Marking guide Marks
(a) Expected value and decision
EV at A 2
EV at B 2
EV at C 2
Compare EVs at D 1
Recommendation that follows 1
8
(b) Price of perfect information
EV with 6,000 members 2
EV with 6,500 members 2
Price 2
6
(c) Discussion 2
(d) Simulation 2
Worst-best case figures 2
4
1 PC CO
Part (a) was where the bulk of the easy marks were on this paper: a requirement to identify
and explain six objectives of a budgetary control system. A good number of answers scored
full marks. On the whole, candidates either knew the answer or didn’t; there wasn’t much in
between.
EXAM SMART
If you had identified that the bulk of the easy marks on this paper were in this question, it
would have been worth your while attempting this question first.
(a) Objectives of a budgetary control system

 To compel planning
Budgeting makes sure that managers plan for the future, producing detailed plans in
order to ensure the implementation of the company’s long-term plan. Budgeting makes
managers look at the year ahead and consider the changes in conditions that might take
place and how to respond to those changes in conditions.
 To co-ordinate activities
Budgeting is a method of bringing together the activities of all the different departments
into a common plan. If an advertising campaign is due to take place in a company in three
months’ time, for example, it is important that the production department know about
the expected increase in sales so that they can scale up production accordingly. Each
different department may have its own ideas about what is good for the organisation.
For example, the purchasing department may want to order in bulk in order to obtain
bulk quantity discounts, but the accounts department may want to order in smaller
quantities so as to preserve cash flow.
 To communicate activities
Through the budget, top management communicates its expectations to lower level
management. Each department has a part to play in achieving the desired results of the
company, and the annual budget is the means of formalising these expectations. The
whole process of budget setting, whereby information is shared between departments,
facilitates this communication process.
 To motivate managers to perform well
The budget provides a basis for assessing how well managers and employees are
performing. In this sense, it can be motivational. However, if the budget is imposed from
the top, with little or no participation from lower level management and employees, it
can have a seriously demotivational effect. This is discussed further in part (b).
 To establish a system of control

Expenditure within any organisation needs to be controlled and the budget facilitates
this. Actual results are compared to expected results, and the reasons for any significant,
unexpected differences are investigated. Sometimes the reasons are within the control of
the departmental manager and he/she must be held accountable; at other times, they
are not.
 To evaluate performance
Often, managers and employees will be awarded bonuses based on achieving budgeted
results. This makes more sense than evaluating performance by simply comparing the
current year to the previous year. The future may be expected to be very different than
the past as economic conditions change. Also, events happen that may not be expected
to reoccur. For example, if weather conditions are particularly wet one year, a company
making and selling umbrellas would be expected to make higher than usual sales. It
would not be fair to assess managers against these historical sales levels in future years,
where weather conditions are more normal.
(Other possible objectives include:
 To delegate authority to budget holders
A formal budget permits budget holders to make financial decisions within the specified
limits agreed, i.e. to incur expenditure on behalf of the organisation.
 To ensure achievement of the management’s objectives
Objectives are set not only for the organisation as a whole but also for individual targets.
The budget helps to work out how these objectives can be achieved.)

Part (b) was a little more challenging: a requirement to discuss the concept of participative
budgeting in terms of the objectives identified in part (a). Answers to this were mixed, with
some good attempts but some poor ones too. A small number of candidates didn’t know
what participative budgeting was (the clue is in the title) so they scored nothing. Others
managed to score marks by making some valid observations about it, even if they didn’t
necessarily tackle it in the best way, which was by using the objectives in part (a) as headings
in order to give the answer some structure.
EXAM SMART
Remember that participative budgeting is sometimes referred to as bottom up budgeting,
where there is more involvement from all across the organisation.
(b) Participative budgeting

‘Participative budgeting’ refers to a budgeting process where there is some level of involvement
from subordinates within the organisation, rather than budgets just being set by the top level of
management.
There are various views about whether participative budgeting is more effective than other
styles. Each of the objectives from part (a) is dealt with below, considering the extent to which
participative budgeting helps to achieve this.
 To compel planning
Participative budgeting will compel planning. Although participation can take many
forms, often it will take the form of bottom-up budgeting, whereby the participation
starts at the lowest level of management and goes all the way up to the top. If this is the
case, then planning is taking place at many levels, and should be more accurate than if it
simply takes place at a high level, by individuals who are not familiar with the day to day
needs of the business.
 To co-ordinate activities
Co-ordination of activities may become more time consuming if a participative style of
budgeting is used. This is because, not only does there need to be co-ordination between
departments but there also has to be co-ordination between the different levels of
management within each department. The process should be cumbersome but also
effective, with everyone knowing exactly what the plan is.
 To communicate activities
Communication will be particularly effective with participative budgeting, although how
effective depends on the extent of the participation. If all levels of management are
involved, from the bottom up, then all levels of management know what the plan is.
However, the plan may change as different departments’ budgets are reviewed together
and the overall budgeted profit compared to the top level management’s expectations. Hence, it
may be the case that those people involved in the initial budgets, i.e. lower level
management, have to deal with their budgets being changed.
 To motivate managers to perform well
If managers play a part in setting the budget, they are more likely to think that the figures
included in them are realistic.
Therefore, they are more likely to try their best to achieve them. However, it may be that
managers have built budgetary slack into their budgets, in an attempt to make
themselves look good. Therefore, managers could end up performing less well than they
would do had tougher targets been set by their superiors.
 To establish a system of control
In terms of establishing a system of control, it is largely irrelevant whether the budget
setting process is a participative one or not. What is important is that actual results are
compared to expected, and differences are investigated. This should happen irrespective
of the budget setting process. Having said that, control is only really effective if the
budgeted figures are sound. As stated above, whilst they are more likely to be realistic if
a participative style of budgeting is used, the system is open to abuse in the form of
budgetary slack.
 To evaluate performance
Managers will be appraised by comparing the results that they have achieved to the
budgeted results. A participative budget will be an effective tool for this provided that
participation is real rather than pseudo and provided that the managers have not built
slack into their figures, which has gone uncorrected.
[Examiner’s note: candidates would not be required to write all of this for the available marks.]
Marking guide Marks
(a) Objectives
Each objective 1½
Max 9
(b) Participative style of budgeting
Explaining participative budgeting 2
Each objective discussed in relation to it 1½
Max 11
2 THE SAFE SOAP CO

The final question on the paper was for 15 marks and covered material mix and yield
variances. Part (a) asked for the calculations for these and was very well answered. It was
impressive to see the number of candidates who scored full marks here.
(a) Variance calculations

Mix variance
Total kg of materials per standard batch = 0.25 + 0.6 + 0.5 = 1.35 kg
Therefore standard quantity to produce 136,000 batches = 136,000 × 1.35 kg = 183,600 kg
Actual total kg of materials used to produce 136,000 batches = 34,080 + 83,232 + 64,200
= 181,512 kg
Actual Standard
Actual quantity quantity cost
Material Standard mix Actual mix Variance per kg Variance
kgs kgs kgs $ $

Lye 181,512 × 0.25/1.35 = 33,613.33 34,080 (466.67) 10 (4,666.70)
Coconut oil 181,512 × 0.6/1.35 = 80,672 83,232 (2,560) 4 (10,240)
Shea butter 181,512 × 0.5/1.35 = 67,226.67 64,200 3,026.67 3 9,080.01
181,512 181,512 (5,826.69)A
Yield variance
Actual
Standard quantity quantity Standard
Material Standard mix Standard mix Variance cost per kg Variance
kgs kgs $ $
Lye 0.25 × 136,000 = 34,000 33,613.33 386.67 10 3,866.70
Coconut oil 0.6 × 136,000 = 81,600 80,672 928 4 3,712
Shea butter 0.5 × 136,000 = 68,000 67,226.67 773.33 3 2,319.99
183,600 181,512 9,898.69F

Part b(i) asked for a brief explanation of what each of the variances indicates about
production at the company, Safe Soap Co. Some candidates did not read the question
properly and started discussing the manager’s performance. This was not what the question
asked so – future candidates – make sure that you always read requirements carefully. So,
for example, as regards the adverse material mix variance, answers should have stated that
it shows that the mix of materials used in October was more expensive than the standard
mix. It was surprising to see that many candidates did not know that this is what an adverse
materials mix variance shows. This was similar to some of the responses to question 2,
where the calculations were done reasonably well but understanding of what the
calculations actually meant was sometimes lacking.
Part b (ii) also proved problematic for a number of candidates. It read ‘discuss whether the
sales manager could be justified in claiming that the change in the materials mix has caused
an adverse sales volume variance in October.’ The expectation was that candidates would
identify the fact that the change in mix could have led to the adverse sales volume variance
but it cannot be definitively said that it did. Many answers tried to make it a black and white
matter i.e. yes or no, when in fact the answer was grey.
Quite a few candidates said that the sales manager couldn’t be justified in his claims because
a more expensive mix of materials was used and this means sales volumes should go up.
Again, it’s simply not as straight-forward as this. A more expensive mix might be used in
production but this doesn’t mean that a product will necessarily be better. In the case of
something like soap, adhering to a certain formula is very important.
(b)
(i) A materials mix variance will occur when the actual mix of materials used in production is
different from the standard mix. So, it is inputs which are being considered. Since the
total mix variance is adverse for the Safe Soap Co, this means that the actual mix used in
September and October was more expensive than the standard mix.
A material yield variance arises because the output which was achieved is different from
the output which would have been expected from the inputs. So, whereas the mix
variance focuses on inputs, the yield variance focuses on outputs. In both September and
October, the yield variance was favourable, meaning that the inputs produced a higher
level of output than one would have expected.
(ii) Whilst the mix and yield variances provide Safe Soap Co with a certain level of
information, they cannot address any quality issues which arise because of the change in
mix. The consequences of the change may well have an impact on sales volumes. In Safe
Soap Co’s case, the sales volume variance is adverse, meaning that sales volumes have
fallen in October. It is not known whether they also fell in September but it would be
usual for the effects on sales of the change in mix to be slightly delayed, in this case by
one month, given that it is only once the customers start receiving the slightly altered
soap that they may start expressing their dissatisfaction with the product.
There may also be other reasons for the adverse sales volume variance but given the
customer complaints which have been received, the sales manager’s views should be
taken on board.
(c)
(i) Expenditure variance
Cost driver rate = $40,500/30 = $1,350
Expected cost therefore = 36 × $1,350 $48,600
Actual cost $45,400
Variance $3,200 F
(ii) Efficiency variance

Expected no. of batches per set up
120,000/30 = 4,000
Therefore, expected no. of set ups for 136,000 = 136,000/4,000 = 34
Actual number of set ups 36
Difference 2A
× standard rate per set up $1,350
Variance $2,700 A
Marking guide Marks

Mix variance 4
Quantity variance 4
8
(b) (i) Variances
Marks per variance explained 2 4
(ii) Discussion
Per valid point 1 2
(c) (i) Expenditure variance 3
(ii) Efficiency variance 3
3 BEDCO
(a) Planning and operational variances
(i) Material Price Planning Variance (MPPV)
(Standard price – revised price) × actual quantity
Sheets ($5 – $6) × 248,000 = $248,000 adverse
Pillow cases ($5 – $6) × 95,000 = $95,000 adverse
Total $343,000 adverse
(ii) Material Price Operational Variance (MPOV)
(Revised price – actual price) × actual quantity
Sheets ($6 – $5.80) × 248,000 = $49,600 favourable
Pillow cases ($6 – $5.80) × 95,000 = $19,000 favourable
Total $68,600 favourable
(iii) Material Usage Planning Variance (MUPV)
(Standard quantity for actual production – revised quantity for
actual production) × standard price
RQ for each pillow case = 0.5 m × 1.1 = 0.55 m
Sheets (240,000 – 240,000) × $5 = 0
Pillow cases (90,000 – 99,000) × $5 = $45,000 adverse
(iv) Material Usage Operational Variance (MUOV)
(Actual quantity – revised quantity for actual production) ×
standard price
Sheets (248,000 – 240,000) × $5 = $40,000 adverse
Pillow cases (95,000 – 99,000) × $5 = $20,000 favourable
(b) Performance of the Production Manager

In total, there has been an overspend of $339,400, which looks poor. However, when the
reasons for this are examined, together with the variances calculated in (a), it is apparent that
the production manager cannot be held solely responsible for the overspend. In fact, he has had
little control over the situation.
Increase in cotton price
Since cotton is used to make bed sheets and the price of this rose in the world market by 20%,
the Production Manager’s performance has to be looked at in light of this. Because of the
increased market price, the adverse material price planning variance is very high, since the
budgeted cost of $5 per m2 was far below the actual market price of $6 per m2. The Production
Manager cannot be held responsible for this since he does not set the standard costs. He can
only be held responsible for any difference in price between the $6 market price and the $5.80
actual price paid. Since the $5.80 paid per m2 is less than the market price of $6 per m2, the
Production Manager performed well, as shown by the favourable material price operating
variance of $68,600.
Increase in amount of cotton used
Since more cotton was used for actual production than budgeted, a total adverse material
usage variance of $65,000 ($45,000 + $20,000) arose. However, of this, $45,000 (material usage
planning variance) arose because of the request for a change in the design of the pillowcases by
Bedco’s customer. This was not within the control of the Production Manager and his
performance should not therefore be assessed on it. However, an adverse material usage
operational variance of $20,000 also arose; the performance of the Production Manager is weak
here. Most of the adverse operational variance actually related to the production of bed sheets
rather than pillowcases. It is not clear why this arose but it is definitely poor. Bedco was also
unable to produce all the pillowcases ordered by its customer in November as the order fell
short by 10,000 units. If this was genuinely because of the late design change, however, it
seems unfair to judge the Production Manager on this.
Marking guide Marks
MPPV 3
MPOV 3
MUPV 3
MUOV 3
Max 12
(b) Discussion
Each valid point 2
Max 8
4 JUMP
Part (a) examined the calculation of bonuses for a manager based on a set of given targets;
answers to this were good on the whole.
(a) Bonus calculation:

Qtr to Qtr to Qtr to Qtr to Bonus hits
30/06/09 30/09/09 31/12/09 31/03/10
Staff on time
On-time % 430/450 = 452/480 = 442/470 = 460/480 =
95.5% 94.2% 94.0% 95.8%
Bonus earned? Yes No No Yes 2
Members visits
Target visits 60% × 3,000 ×12 60% × 3,200 × 12 60% × 3,300 × 12 60% × 3,400 × 12
= 21,600 = 23,040 = 23,760 = 24,480
Actual visits 20,000 24,000 26,000 24,000
Bonus earned? No Yes Yes No 2
Personal training
Target 10% × 3,000 10% × 3,200 10% × 3,300 10% × 3,400
= 300 = 320 = 330 = 340
Actual sessions 310 325 310 339
Bonus earned Yes Yes No No 2
Total 6
The bonus earned by the manager would be 6 × $400 = $2,400, which is 50% of the total bonus available.

Part (b) required a discussion of the extent to which the three targets set were controllable
by managers. For a narrative requirement, this was fairly well answered overall.
A minority of candidates did misread the requirement though and instead gave commentary
on the extent to which the targets had been met in the year.
EXAM SMART
Follow the clues given by the Examiner in the requirement. Here:
 There are three targets given: a sub-heading for each one would give a clear line of
demarcation between each part of the question.
 There are nine marks awarded for this requirement: three marks per target.
 The requirement states that you need to make a case for both sides of the argument.
Therefore your answer needs to be balanced.
 Focus on how much control you think the manager has. Form a conclusion on this for
each target if you can.
(b) An important principle of any target-based bonus system is that the targets must be based on
controllable aspects of the manager’s role.
Staff on time
The way in which a manager manages staff can have a big bearing on whether or not an
individual staff member is keen to work and arrive on time. We are told that the local manager
has the power to vary employment contracts so he should be able to agree acceptable shift
patterns with staff and reward them for compliance. In this respect the lateness of staff is
controllable by the manager.
On the other hand, an individual staff member may be subject to home pressures or problems
with public or other transport meaning that even they cannot control the time of arrival at work
on some days. The manager cannot control these events either. If this problem became regular
for a member of staff, then the local manager could vary the contract of employment
accordingly.
Overall, lateness to work is controllable by the local manager.
Member use of facilities
The local manager controls the staff and hence the level of customer service. Good quality
customer services would probably encourage members to use the facilities more often. Equally,
by maintaining the club to a high standard, then the local manager can remove another
potential reason for a member not to use the facilities regularly.
On the other hand, customers are influenced by many factors outside of the club. Their state of
health or their own work pressures can prevent members being able to come to the club.
Overall, the local manager can only partly control the number of member visits.
Personal training sessions
Again, the local manager controls the level of customer service and the standard of
maintenance in the personal training department. He also has control over prices so, if the
bookings fall, he is able to reduce prices or make special offers to encourage use of the facilities.
On the other hand, personal training sessions may be seen as a luxury by customers and in
times of financial difficulty they are expendable by them. Personal training sessions are often
available from other sources and competition can force down the sales of the club. The
manager can respond to that by improving services. He cannot, however, make significant
investment in improving the facilities without board approval.
Overall, the local manager can only partly control the number of personal training sessions
booked.

Again, there were some good answers here, with only a minority of candidates talking about
manipulating profits, which wasn’t relevant to a business where profit based targets weren’t
being used.
EXAM SMART
In this requirement you should have focused on the instances where no bonus would be
received and think about whether it would have been possible to manipulate the figures to
hit a bonus target in any of those situations.
(c) There are a variety of methods by which the performance data can be manipulated.
Cut off
The unethical manager could record visits in a different period than was actually the case. For
example, in quarter three the target for personal training sessions was not met by 20 sessions.
This was probably obvious to the manager in the last few days of that quarter. He could have
therefore recorded some sessions as having taken place in the next quarter. Indeed, only one
session would have to be moved in this way in order for the manager to meet the target in the
final quarter and gain another $400 of bonus.
Reduce prices to below economic levels to encourage use
The targets that the manager is subject to are mainly volume driven. A reduction in prices would
harm profitability but would not damage the manager’s bonus potential. More sessions are
bound to follow if the price is set low enough. (Other ideas would be acceptable, including
advising staff to take the day off if they were going to be late. This would damage service levels
admittedly, but would potentially gain a bonus for lateness.)
Marking guide Marks
(a) Per target 2 Max 6
(b) For each target – supporting controllability 1½
For each target – denying controllability 1½ Max 9
(c) For each idea of manipulation, up to 2½ Max 5

1 BEST NIGHT CO
Discussion of performance
Once candidates have calculated sufficient relevant figures, it is necessary to discuss them,
together with other information supplied in the scenario, which relates to the performance
of Best Night Co. Generally in a question of this type, each relevant discussion point is worth
1 mark, although more can be gained with further expansion on that point. The way to
choose appropriate headings is by looking back to the scenario. In this question there was
plenty of information about revenue, so that would have been a good first heading. Then
some cost and operating profit details and enough information to calculate ROCE were
supplied, so these could form the next two headings. For the final heading, looking at the
non-financial information, customer satisfaction is extremely important to Best Night Co.
Having broken down the discussion into four distinct headings, a candidate only needed to
make an average of two good points under each of them, along with a few correct
calculations, to comfortably pass this question.
There are two key ways of making discussion points which are worthy of marks:
 Making a link between two separate pieces of information given in the scenario; and
 Using information given in the scenario to state why things have changed year on year.
Linkages
There are many statements in this scenario which can be linked together. For example, it
states in the first paragraph of the question that ‘Best Night Co prides itself on the comfort
of the rooms’ but towards the end, the scenario mentions that customers have commented
that the beds need new mattresses to improve the level of comfort they provide. These two
pieces of information are clearly at odds with one another. Best Night Co appears not to be
delivering on one of its key targets. A candidate noticing and discussing this linkage would
have been given credit.
Justification
In the calculations section above, it was discussed how many of the calculation marks could
be earned by calculating the percentage growth or decline in any of the items given in the
scenario. Further discussion marks were awarded for those candidates who looked carefully
through the scenario to see if there were any reasons given for those percentage changes.
Finally, the most common error from candidates on this question (and a very easy mistake to
make) is to offer advice to the company. Advice does not address the requirement and so it
doesn’t matter how insightful the piece of advice is, it will not score any marks and it wastes
valuable time in the exam.
EXAM SMART
Make sure you consider any guidance given in the questions about how the 20 marks are
broken down. Here you were told there are 5 marks for calculations and 15 marks for
discussion. In this type of performance measurement question, each correct calculation is
worth 0.5 marks so you should aim to be performing ten relevant and correct calculations to
score all of the 5 calculation marks.
Performance for year ended 30 June 20X7

Gross room revenue – Best Night’s ‘gross’ room revenue based on standard room rates has increased
by 6.6% in 20X7, which reflects the higher occupancy rates (74% v 72%) and the increase in standard
room rates ($140 v $135 per night).
However, this gives a rather misleading impression of how well the hotels have performed in the year
to 20X7.
Revenue after discounts – Revenue from room sales, adjusted for discounts or rate reductions
offered, has actually only increased 1.8%, and that reflects the significant 45% increase in discounts or
reductions offered:
20X7 20X6 % change
$’000 $’000
Standard revenue 111,890 104,976 6.6%
Discounts/reductions 16,783 11,540 45.4%
Room revenue net of discounts 95,107 93,436 1.8%
Faced with the declining number of business customers, and consequently the prospect of lower
occupancy rates, managers may have decided to offer lower room rates to try to retain as many of
their existing business customers as possible, or to try to attract additional leisure customers.
Although occupancy rates increased by 2.8% (from 72% to 74% which now exceeds the budgeted level),
revenue, net of discounts, only increased by 1.8%. This means that revenue per room per night after
discounts in 20X7 was lower than in 20X6, despite the standard rate being higher ($140 v $135).
In the context of tough market conditions, the decision to increase the standard room rate for 20X7
appears rather optimistic. Although the hotel managers have managed to achieve occupancy rates
higher than budget, they have only managed to do so by reducing room rates.
Additional revenue – One of the potential benefits of increased occupancy rates, even if guests are
paying less per room per night, is that they will generate additional revenue from food and drink sales.
This appears to be the case because additional revenues have increased by approximately 5%.
Total revenue – In total, revenue (net of discounts) has increased 2.4% in 20X7 v 20X6. Given the tough
competitive environment, Best Night Co could view any increase in revenues as positive. Moreover,
provided the revenue achieved from selling the room is greater than the variable cost of providing it,
then increasing occupancy levels should increase the hotels’ contribution to profit.
Operating profit – However, despite the increase in revenue, operating profits have fallen by $0.3m
(1.3%) between 20X7 and 20X6, due to a sizeable increase in operating costs.
There is no detail about Best Night Co’s operating costs, for example, the split between fixed and
variable costs. However, in an increasingly competitive market, cost control is likely to be very
important. As such, the $3 million (3.3%) increase in operating costs between 20X6 and 20X7 is
potentially a cause for concern, and the reasons for the increase should be investigated further.
However, when looking to reduce costs, it will be very important to do so in a way which does not
compromise customer satisfaction. More generally, Best Night Co needs to avoid cutting expenditure
in areas which will have a detrimental impact on customer satisfaction ratings, for example, not
replacing mattresses even though they are becoming uncomfortable to sleep on.
Operating profit margin – The increase in costs has also led to a fall in operating profit margin from
20.8% to 20.0%.
It is perhaps more instructive to look at the margin based on standard room rates per night, thereby
reflecting the impact of the discounts offered as well as the increase in costs. On this basis, the margin
falls slightly more: from 18.9% to 17.6%.
20X7 20X6
$’000 $’000
Discounts offered 16,783 11,430
Gross revenue 136,160 128,051

Operating profit margin 17.6% 18.9%
ROCE – This reduced profitability is also reflected in the company’s return on capital employed which
has fallen slightly from 62% ($24.2m/$39.1m) to 60.5% ($23.9m/$39.5m). This suggests that the value
which Best Night Co is generating from its assets is falling. The decline in ROCE could be a particular
concern given the relative lack of capital investment in the hotels recently. Capital investment will
increase the cost of Best Night Co’s non-current assets, thereby reducing ROCE for any given level of
profit.
Customer satisfaction scores
Although the reduction in profitability should be a concern for Best Night Co, the reduction in
customer satisfaction scores should potentially be seen as a greater cause for concern. The scores
suggest that, in the space of one year, Best Night Co hotels have gone from being in the top 10% of
hotels to only just being in the top 25%. This is a significant decline in one year, and one which Best
Night Co cannot afford to continue.
Best Night Co prides itself on the comfort of its rooms and the level of service it offers its guests. Both
of these factors are likely to be important considerations for people when considering whether or not
to stay in a Best Night Co hotel. Therefore, falling customer satisfactions levels could be seen as an
indication that fewer existing customers will stay at a Best Night Co hotel in future – thereby
threatening occupancy rates, and prices, in future.
Moreover, the scores suggest that the decision to defer the refurbishment programme is likely to have
a detrimental impact on future performance.
Marking guide Marks
Calculations 5
Revenue 4
Operating profit 2
ROCE 2
Cust satisfaction 3
Other valid points 4
2 ROBINHOLT UNIVERSITY
Looking at the requirement for this question in more detail:
‘Using Robinholt’s five strategic aims, assess its performance for 20X6.’
The answer must identify the strategic aims, and use each one as a heading. Although there
may be some crossover between aims, what essentially the phrasing of the requirement has
done is break itself down into five shorter questions, of four marks each. Thinking of it in this
way makes it seem easier than trying to attempt 20 marks in one go.
It is essential to read the scenario first. This is always an important part of answering any
question, but especially in a performance assessment scenario. Time is tight – so it is
important to actively read the scenario to determine the information required. To assess
performance, there needs to be something to compare it to – be this prior periods, industry
averages, targets/budgets, etc. It is also important to know what decisions have been made
during the period – these decisions will have affected performance, and can be used to
explain the numbers.
The five strategic aims also need to be identified as the answer will be structured around
these. This is where the word processing software in the CBE is incredibly useful as the aims
can be put in as headings straightaway and none of them will be missed. Reading the
scenario identifies the aims immediately.
Financial information is also given, as well as results of student surveys and some other non-
financial information. The skill now is to identify which pieces of information are relevant to
each aim. Don’t be overawed by the amount of information – a very strong answer would
discuss (and calculate where necessary) two performance measures per strategic aim – if it
seems that there isn’t a lot to say on one aim, see if there’s more that can be said on
another.
Using the scenario information is absolutely vital here – even things which seem relatively
minor. For example, the first paragraph says that Robinholt has increased student numbers
(a calculation mark can be achieved by working this out to be 12.5%) by lowering entry
requirements. Is this in line with aim 1 – “…graduates who have achieved the highest
academic standards…” – maybe not. That decision to lower entry requirements could have
had further impacts, i.e. what are the results like? The number of students attaining a first
class degree has fallen by 8 percentage points – so clearly not meeting aim 1. Similarly, the
number of employers happy with their graduates has also fallen.
Taking this approach of looking at the scenario information to determine what is relevant to
the aims and the impact of the various decisions taken by Robinholt was the ideal way to
approach this question.
EXAM SMART
This question had one requirement for the full 20 marks which can often look daunting,
however, do not panic! Questions of this type can almost always be divided up into smaller
chunks, making things much more manageable. Use of headings, which are often given in
the requirement, allow answers to be structured appropriately. Whilst planning, set yourself
up with a structure using these headings in the answer box and then go on to answer the
question by filling out a section under each heading.
(a) (1) To provide education which promotes intellectual initiative and produces confident and
ambitious graduates who have reached the highest academic standards to prepare
them for success in life and the workplace
There are various performance indicators which can be looked at to ascertain whether
RU is meeting this strategic aim. First, question 1 of the survey shows that 83% of
students think that the course is intellectually stimulating and the quality of teaching is
high. This has gone down by three percentage points since 20X5, which is not good.
In the NOS survey, the percentage of graduates agreeing that the course has developed
them as a person has increased from 80% in 20X5 to 82% in 20X6. This would indicate
that RU is indeed developing confident and ambitious graduates.
However, the number of graduates achieving first class degrees in 20X6 has fallen vastly
from 28% to 20%. Given that the entry requirements were only relaxed in 20X6, this
should not have had any impact on results. This infers that the quality of teaching may
have declined and the ratio of students to academic staff has increased from 35:1 to
40:1. It appears that, although many new students were recruited in 20X6, there were
not enough new academic staff recruited to deal with the influx of students. This is
shown by the fact that student numbers increased by 13% but academic staff costs only
increased by 6%.
As there was presumably a pay rise in the year too, it is clear that a proportionate
amount of new staff were not recruited. This failing is also reflected by the fall in the
answer to question 2 from 86% to 82%, with students being less satisfied in 20X6 with
the advice and support they have received. Also, the staff retention rate has gone down
in 20X6, meaning that staff are less familiar with RU and therefore more likely to provide
a fragmented service.
However, in 20X5 75% of employers were happy with the graduates they recruited, in
20X6 this dropped to 72%. In addition, in 20X5 only 65% of students have managed to
obtain graduate jobs within a year compared to previous years. Given that RU has
relaxed the entry requirements for students in 20X6, this may mean that its 20X6 recruits
are not as well qualified as its 20X5. This could mean that in the future the number of
graduates obtaining graduate jobs within a year and the satisfaction percentages of
employers could fall further. This decision has meant that there has been a 23% increase
in fee income, but it compromises RU’s ability to meet its first strategic aim.
(2) To provide an organised, efficient learning environment with access to cutting edge
technology and facilities
As regards premises, the money spent on maintaining these has decreased by 10% in
20X6, despite the increased student numbers. In the NOS survey, the percentage of
students satisfied with these facilities has gone down nine percentage points from 92% to
83%. This suggests that this particular strategic aim has been neglected. Students seem
far less satisfied with the way that the courses are run and administered now, with a fall
of nine percentage points in answers to question 4. Administration staff costs have only
increased by 5% despite a 13% increase in student numbers and, presumably, a pay rise
during the year. It can be inferred that staff are under increasing pressure and unable to
cope with the increased numbers. This is again reflected by the fall in the staff retention
rate from 90% in 20X5 to 75% in 20X6.
(3) To be a leader in sustainable business practices which protect the environment and
support local people
As with the above strategic aim, this one also seems to have been a little forgotten in
20X6. In 20X5, RU won an environmental award for its campuses. It also took part in a
food sharing initiative which helped the local community. It has now got rid of its
recycling bins and ceased to be involved in the food share project. RU’s spending on
sustainability and community assistance has actually halved in 20X6. This decline in
activity is partly attributable to staff shortages. All in all, this is not very good as RU is
now failing to meet one of its main strategic aims.
(4) To provide attractive, innovative conference and event facilities, attracting clients both
nationally and internationally
Conference and event income has gone up by 13% in 20X6, which is a good increase for
RU. It has managed to control its costs relating to these events well too, since these have
only increased by 4%. RU has also won an award for its conference facility and attracted a
number of new clients. RU therefore appears to be focusing well on this strategic aim.
(5) To be recognised both nationally and internationally for the scope and relevance of
their research
Income from research at RU has actually gone down by 13% this year, as have the
associated costs. Whilst a local university has won an award for their contribution to
research, RU has not been successful in this regard. The suggestion is that this aim has
not been focused on in 20X6.
Overall satisfaction
In addition to the above, it should be considered that the overall satisfaction percentage for
students has decreased from 83% to 81%. This could have serious implications for RU as it is the
main performance indicator used both internally and externally to assess how RU is performing.
As well as meaning that RU may well now attract fewer students, it will also have an impact on
the fees which can be charged to students in future years. The university needs to consider how
it can improve the service it is providing in order to improve overall satisfaction.
Calculations
2016 2015 %age
$m $m increase/(decrease)
Income
Tuition fees 148 135.6 9%
Research grants 3.5 4.5 (22%)
Conferences and other events 18 16 13%
Total income 169.5 156.1 9%
Expenditure
Academic staff costs 80.8 76.2 6%
Administration staff costs 50.4 48 5%
Premises, facilities and technology costs 7.6 8.4 (10%)
Event and conference costs 8.3 8 4%
Research grants 3.1 4 (23%)
Sustainability and community assistance 1.2 2.4 (50%)
Total expenditure 151.4 147 3%
Surplus 18.1 9.1 99%
Student numbers 27,000 24,000 13%
Marking guide Marks

(a) Calculations 4
Strategic aims discussion 16
Balanced scorecard
3 THE PEOPLE’S BANK

Performance on this question was reasonably strong, although poor exam technique in
addressing the specific requirement did let some candidates down. Part (a) was a short
requirement asking why the balanced scorecard would be more useful to the People’s Bank
than using solely financial performance measures.
Although there were only four marks available, it did highlight some candidates’ weakness in
not being able to use the information in the scenario to help them answer the question.
Most were able to identify the generic point that the balanced scorecard gives a more
rounded view by looking at a wider range of performance measures (financial and non-
financial) as well as internal and external factors. However, the scenario gives us more help
and shows us how important these non-financial factors are to the bank – the 3 values given
highlight this. If their performance was assessed purely on profit they would never strive to
meet those values, or looking at it another way they might be judged to have failed by
spending money on improving customer accessibility or simplifying their processes.
EXAM SMART
The examiner highlights a key point of the non-financial aspects of the balanced scorecard,
that the important elements under each header reflect the bank’s mission and values. The
financial measures will obviously focus on profit maximisation, but you will need to identify
the scenario what the other important objectives are and what measures will therefore be
important. Here there is a particular focus on disadvantaged customers. The aim of
simplifying processes will affect internal processes (simpler processes resulting in greater
efficiency) and customers (making services easier to use).
The balanced scorecard approach looks not only at the financial performance but also non-financial
performance. In order to maintain a competitive edge, organisations have to be very aware of the
changing needs of their customers. In the case of The People’s Bank, this has involved identifying
specific categories of customers which have particular needs, like SMEs in a commercial context, or
like the disabled or visually impaired in a non-commercial context. This permits these needs to be
addressed.
The People’s Bank has a vision and strategy which goes far beyond just making money. They want to
help the community and disadvantaged people and give something back to customers also. Hence, by
using the balanced scorecard, performance measures which address whether the Bank is being
successful in pursuing their vision can be incorporated.
In addition, from a purely business perspective, if employees and customers are valued and internal
processes are efficient, an organisation should have more chance of achieving long-term success
anyway. So, even putting aside the social objectives The People’s Bank has, the balanced scorecard can
be useful to The People’s Bank to measure these other aspects of future success too.

Part (b) was a more traditional performance assessment question. However, exam technique
was crucial here. The note in the requirement says to use each of the four headings of the
balanced scorecard to structure your answer. Candidates who ignored this found it much
harder to score well on this question, as it was harder to see how their points corresponded
to the perspectives of the balanced scorecard. It was pleasing to see though, that the
majority did use the headings suggested (which were given in the scenario).
Similarly, the requirement specifically asked candidates to use the bank’s vision and values
to assess performance. Therefore, a sensible approach would be to take each perspective,
use the performance measures given and details in the scenario to see how they link to the
bank’s vision and values.
The other key skill in these questions is to identify linkages between measures – cause and
effect relationships. For example, on the Financial perspective we can see that new lending
to SMEs was significantly (10%) down on target. The first point you should make is that this
is not in line with the bank’s third value – to support SMEs. This alone will be given credit,
and similar points should be made for each heading, however even more credit can be given
if you go on to say that the drop in new lending to SMEs is due to the fact that fewer
colleagues have been trained to provide advice to SMEs (under learning and growth). Other
similar linkages could be that fewer complaints were made than expected, possibly due to
more simplified processes or fewer incidences of fraud. These points do not require a great
deal of technical knowledge, but require candidates to analyse the information given quickly
and understand how they affect one another.
Finally, a long discussion question like this should finish with a brief, overall conclusion. This
should be in line with your findings – sometimes it will be very clear that performance has
been good or bad, otherwise you might have to say something like “with the exception of
the financial perspective, The People’s Bank has performed well in meeting its vision.”
EXAM SMART
The examiner has made things easier for you by making very clear what approach you should
take in the question requirements. The obvious way to structure the answer was under the
four headers, and given that it is clearly stated in the requirements that this is what you
should do, there really is no excuse for the candidates who failed to do so.
The requirements also clearly highlight the need to bring in vision and values to each section
of the scorecard that you discuss. Again, you should have highlighted these as important
when you read the scenario, but the requirements make it clear that you must keep
referring to them in order to score well.
As with the other question in Section C of this exam, it is important to identify links between
different measures to see if success in one is balanced by poorer performance in another.
One obvious one here is IT security – clearly desirable for non-financial reasons (customer
security) but costing money and adversely affecting profitability this year. However unlike in
the other question, where you could weigh up the net impact by calculating different
variances, assessing the net impact may be very difficult if you are looking at different
elements of the balanced scorecard, and this is one of its problems.
The performance of the bank will be considered under each of the headings used in the balanced
scorecard:
Financial perspective
The People’s Bank has had a year of mixed success when looking at the extent to which it has met its
financial targets. Its return on capital employed (ROCE) shows how efficiently it has used its assets to
generate profit for the business. The target for the year was 12% but it has only achieved an 11%
return. The People’s Bank’s interest income, however, was in fact $0.5m higher than its target, which
is good. This may have been achieved by offering slightly better interest rates to customers than
competing banks, as the interest margin The People’s Bank achieved is slightly lower than target. The
most likely reason for the under target ROCE is therefore probably the investment which The People’s
Bank has made in IT security and facilities for the disabled and visually impaired. Whilst this may have
reduced ROCE, this investment is essentially a good idea as it helps The People’s Bank pursue its vision
and will keep customers happy. It will also, in the case of the IT security investment, prevent the bank
and its customers from losing money from fraud in the future.
The other performance measure, the amount of new lending to SMEs, is a little bit disappointing, given
The People’s Bank’s stated value of making a difference to communities. The failure to meet this target
may well be linked to the fact that an insufficient number of staff were trained to provide advice to
SMEs and consequently, fewer of them may have been successful in securing additional finance.
Customer perspective
With regard to its customers, The People’s Bank has performed well in the year. It has exceeded its
target to provide mortgages to new homeowners by 6,000. This is helping The People’s Bank pursue its
vision of helping new homeowners. It has also managed to beat the target for customer complaints
such that there are only 1.5 complaints for every 1,000 customers, well below the target of 2. This may
be as a result of improved processes at the bank or improved security. It is not clear what the precise
reason is but it is definitely good for The People’s Bank’s reputation.
The bank has also exceeded both of its targets to help the disabled and visually impaired, which is
good for its reputation and its stated value of making services more accessible.
Internal processes
The number of processes simplified within the bank has exceeded the target, which is good, and the
success of which may well be reflected in the lower customer complaints levels. Similarly, the
investment to improve IT systems has been a success, with only three incidences of fraud per 1,000
customers compared to the target of 10. However, perhaps because of the focus on this part of the
business, only two new services have been made available via mobile banking, instead of the target of
five, which is disappointing. Similarly, it is possible that some of the new systems have prevented the
business from keeping its CO2 emissions to their target level.
Learning and growth
The People’s Bank has succeeded in helping the community, exceeding both of its targets relating to
hours of paid volunteer work and number of community organisations supported by volunteers or
funding. These additional costs could have contributed to the fact that the bank did not quite meet its
target for ROCE.
However, the bank has not quite met its targets for helping small businesses and helping the
disadvantaged. As mentioned earlier, the shortfall in training of employees to give advice to SMEs may
have had an impact on The People’s Bank’s failure to meet its target lending to SMEs. As regards the
percentage of trainee positions, the target was only just missed and this may well have been because
the number of candidates applying from these areas was not as high as planned and the bank has no
control over this.
Overall, the bank has had a fairly successful year, meeting many of its targets. However, it still has
some work to do in order to meet its stated values and continue to pursue its vision.
Marking guide Marks Marks

(a) Discussion 4
(b) Financial 4
Customer 4
Internal 4
Learning 4
16
4 PORTABLE GARAGE CO
Requirement (a) was well attempted by most candidates, which you would expect to be the
case as it involves some relatively simple calculations. The model answer doesn’t require any
further explanation, but some common mistakes were:
Layout
When asked to calculate profit for two or more divisions, as we are here, a columnar approach
is by far the best method. Unfortunately the majority of candidates chose to calculate the
profits for each division separately, writing out each cost/revenue separately. Whilst this
approach would be given full credit, it is time-consuming, and time is a scarce resource in any
exam.
Not answering the full requirement
Possibly as a result of poor layout, many candidates failed to perform perhaps the simplest task
of the requirement – add up the two divisions’ figures to show PGC’s results. I cannot stress
enough how important it is to address every aspect of a requirement, and this is no exception.
Of those who did give a figure for PGC, many just gave the total profit. While this was given
some credit, full credit could not be given – the requirement asked for a profit statement, which
would be expected to show the breakdown of different revenue and cost types.
Using incorrect volumes
Perhaps as a result of being under time pressure and rushing, the most common technical
mistake was to use incorrect sales volumes, for either division. We are told that B’s maximum
demand is 200,000, for example, but they only produce 150,000. It’s important to read the
scenario carefully, and make notes of the key figures.
Missing key information
The most commonly missed piece of information was the $1 ‘other’ variable cost on external
sales for Division A. Omitting this figure can only be as a result of not reading the scenario
carefully enough. This omission was not as important as some of the errors already mentioned,
but it was an otherwise straightforward mark that many candidates were not awarded.
(a) Profit statement for current position:

Division B Division A PGC Co
$000 $000 $000
Sales revenue:
External sales (150,000 × $180/200,000 × $15) 27,000 3,000 30,000
Internal transferred sales (150,000 × $13) 1,950
Total revenue 27,000 4,950 30,000
Variable costs:
External material costs 6,750 1,050 7,800
Labour costs 5,250 1,400 6,650
Other costs of external sales 200 200
Total variable costs 13,950 2,650 14,650
Contribution 13,050 2,300 15,350

Less fixed costs 5,460 2,200 7,660
Profit 7,590 100 7,690
Requirement (b) was the most poorly answered part of this question. Judging by the answers
given, most candidates failed to recognise that the key to this question was considering what
was best for the group. The requirement says that the new policy will ensure the optimisation
of group profits, so we need to look from their perspective.
Many candidates discussed this from the point of view of each division. The buying division, B,
doesn’t really care where they get the components from – they cost $13 either way (ignoring
quality differences, etc). The selling division makes $7 contribution from an external sale, but
only $6 from an internal sale, therefore will want to sell externally. This is true, and many
answers came to the (correct) conclusion that A should continue to sell its 150,000 spare
capacity to B, but the remaining 30,000 should be bought by B from the external source.
Although this conclusion is correct, it could not be awarded full marks due to the lack of group
focus. From the group’s perspective, the internal transfer price is irrelevant (which is easy to see
from the answer to (a) – it cancels out). The group has to make a decision here – would they
rather B bought the components from A, meaning that A misses out on 30,000 external sales, or
would they rather keep those sales, and have B buy the components externally.
Once you’ve identified that those are the only things to consider, this becomes a relatively
simple make v buy question. If A supplies the extra 30,000 units to B, the group loses out on the
$7/unit external contribution A would have received. If B buys them for $13/unit, this costs PGC
an extra $6 (variable cost of production is $7, and $13 - $7 = $6) per unit. PGC would rather pay
an extra $6 per unit than lose out on $7 contribution, so B should buy externally.
(b) If Division B can buy adaptors from outside the group at $13 per unit, then the optimum
position is for Division A to sell as many adaptors as possible to external customers at $15 each
and then sell the remainder to Division B at a price to be agreed between them.
This would mean that Division A continues to sell Division B 150,000 adaptors but Division B
then buys the remaining 30,000 adaptors from an external supplier. This is because the
contribution per unit for Division A’s external sales is $7 ($15 – $3 – $4 – $1). This means that
for every external sale it loses, it forfeits $7 for the group. However, the incremental cost for the
group of Division B buying adaptors from outside the group is only $6 ($13 external cost less the
$7 cost of making them in-house). So, it makes sense for Division A to satisfy its external sales
first before selling internally.
Requirement (c) asked for the minimum transfer price for any extra adaptors supplied by
Division A.
This put candidates back on more familiar ground – most were able to identify that the
minimum price is the lowest price that the selling division would accept. Many remembered
that the minimum transfer price marginal cost + opportunity cost. Unfortunately, few were able
to apply this knowledge to the scenario.
Firstly, as the requirement states that this would be for any additional adaptors supplied above
the current level, Division A does not have spare capacity to produce those units. Therefore, any
additional units would mean that A would give up on external sales – this is where the
opportunity cost arises. A significant minority of candidates stated that the opportunity cost
was nil, as A has spare capacity. As mentioned earlier, reading the requirement and scenario
carefully can help prevent these errors.
The opportunity cost, therefore, is the contribution A would lose out on from its external sales.
As mentioned earlier, this is $7 – occasionally $8 was given as an answer due to the omission of
the extra external variable cost of $1, but this would still be a strong answer. Once the
opportunity cost is identified, the minimum transfer price is then simply the variable cost + $7 =
$14.
Finding this transfer price doesn’t involve any complicated calculations, but it is important to
address the requirement – calculate and discuss. Many candidates could not be awarded full
marks because they simply gave the answer $14, with no explanation.
(Note that the $14 can also be reached by adjusting the external price of $15 by the $1 external
cost. Full credit was given for this method.) internally.
(c) In order for Division A to supply Division B with 180,000 adaptors, it would have to reduce its
external sales from 200,000 units to 170,000. This is because it only has enough spare capacity
to supply Division B with 150,000 units at present after it has supplied adaptors to its external
customers.
The minimum transfer price in situations where there is no spare capacity is marginal cost plus
opportunity cost. In this case, contribution is lost by not selling 30,000 units to the external
customers. As the marginal cost for Division A’s internal sales is $7 ($4 + $3) and the
contribution per unit for external sales is $7 per unit ($15 – $3 – $4 – $1), the transfer price for
the additional 30,000 units would need to be $14.
Marking guide Marks
Portable Garage Co:
(a)
External sales – A/B 1
Internal sales – A ½
External materials – A/B 1
Internal costs – B ½
Labour costs – A/B 1
Other costs – A 1
Fixed costs ½
Profit – A/B 1
PGC Co figures 2½
9
Marking guide Marks

(b)
External cost of $7 -A 1
Incremental cost of $6 1
External sales first – A 1
150,000 from A/30,000 externally 1
Approach 2
6
(c)
Minimum transfer price (marginal cost + opportunity cost) 1
Opportunity cost – lost contribution $7 1
Add marginal cost for transfer price of $14 1
Approach 2
5
5 SPORTS CO
EXAMINER’S COMMENTS: PART (a)(i)
Sports Co was a typical divisional performance measurement question, asking candidates to
calculate return on investment (ROI) and residual income (RI), as well as some discursive
aspects.
The calculations were performed well – virtually all candidates were able to calculate ROI
and RI. However, marks were still a little varied as only stronger candidates were able to
make the necessary adjustments to profit to allow for controllability. In questions of this
type, it’s especially important to look in the scenario for clues about anything which the
divisional managers can’t control. Here, we’re specifically told in the notes that a proportion
of the depreciation costs are not controlled by the divisional managers, and that head office
recharges are included in fixed costs. These will not be controllable, so should be added back
to profit.
Once controllable profit and average net assets have been calculated for (a), the same
figures should be used in the calculation of RI in (b), making (b)(i) a relatively straightforward
question, and candidates scored well accordingly.
(a)
(i) Return on investment = controllable profit/average divisional net assets
Controllable profit
C E
$’000 $’000
Add back depreciation on non-controllable assets 49.5 138
Add back Head Office costs 620 700
Controllable profit 2,124.5 4,788
Average divisional net assets

$’000 $’000
Opening assets 13,000 24,000
Closing assets 9,000 30,000
Average assets 11,000 27,000
ROI 19.3% 17.7%
EXAMINER’S COMMENTS: PART (a)(ii)

Performance in the discursive aspects was less strong. Looking at the requirement for (a)(ii)
in detail, we’re asked to discuss the two divisions’ performance, including the ROI difference.
However, there is a second part – to explain the impact this ROI difference could have on the
manager of the worst performing division.
(ii) Whilst Division C has exceeded the target ROI, Division E has not. If controllable profit in
relation to revenue is considered, Division C’s margin is 56% compared to Division E’s
margin of 57%, so Division E is actually performing slightly better. However, Division E has
a larger asset base than Division C too, hence the fact that Division C has a higher ROI.
Since Division E appears to be a much larger division and is involved in sports equipment
manufacturing, then it could be expected to have more assets. Division E’s assets have
gone up partly because it made substantial additions to plant and machinery. This means
that as well as increasing the average assets figure, the additions will have been
depreciated during the year, thus leading to lower profits. This may potentially have had
a large impact on profits since Division E uses the reducing balance method of
depreciation, meaning that more depreciation is charged in the early years.
Based on the ROI results, the manager of Division C will get a bonus and the manager of
Division E will not. This will have a negative impact on the motivation level of the
manager of Division E and may discourage him from making future investments, unless a
change in the performance measure used is adopted.
EXAMINER’S COMMENTS: PART (b)(i)

Again, from an exam technique point of view it’s easy to get bogged down in the detail of
the performance management part, and forget about the second part. With a fairly open
requirement like ‘discuss the performance,’ candidates can often spend too long looking at
irrelevant or unnecessary comparisons. This is where reading the scenario carefully is so
useful.
To score well in a performance assessment question, you need to add value to your
discussion, rather than bland comments like ‘E did better than C.’ Some key points from the
scenario:
 Divisional managers make decisions about investments
 Target ROI is 18%
 Bonus awarded for meeting this
 Division E made $2m investment
There are other points, but this is only a 6 mark question, so let’s not get carried away.
Looking at those, we can easily look at our calculations and comment:
 Did managers meet target?
 Will they get a bonus?
 Large investment will increase net assets so reduce ROI
Other points such as the difference between the businesses can also be used to explain the
different ROIs, but don’t forget to discuss the behavioural aspects – the manager will be
demotivated, and may try to manipulate the figures by not investing. These are textbook
points, but can be applied to this scenario.
(b)
(i)
C E
$’000 $’000
Controllable profit 2,124.5 4,788
Less: imputed charge on assets at 12% (1,320) (3,240)
Residual income 804.5 1,548
From the residual income results, it can clearly be seen that both divisions have
performed well, with healthy RI figures of between $0.8m and $1.55m. The cost of
capital of Sports Co is significantly lower than the target return on investment which the
company seeks, making the residual income figure show a more positive position.
EXAMINER’S COMMENTS: PART (b)(ii)

Finally, (b)(ii) looks like a simple advantages/disadvantages of RI question. However, scores
on this were fairly low – the main reason because candidates did not address the Explain
part of the requirement. Many candidates simply stated several advantages/disadvantages
of RI, without explaining them. For example, one common advantage given was ‘RI reduces
dysfunctional decision making.’ This does not explain the advantage – a ‘because’ comes in
handy here. ‘RI reduces dysfunctional decision making because it uses the whole company’s
cost of capital, so positive RI projects for the company would also be accepted by the
division.’ That extra couple of seconds making sure that you have addressed the
requirement properly will pay dividends.
(ii) Advantages
The use of RI should encourage managers to make new investments, if the investment
adds to the RI figure. A new investment can add to RI but reduce ROI and in such a
situation measuring performance with RI would not result in the dysfunctional behaviour
which has already been seen at Sports Co. Instead, RI will lead to decisions which are in
the best interests of the company as a whole being made.
Since an imputed interest charge is deducted from profits when measuring the
performance of the division, managers are made more aware of the cost of assets under
their control. This is a benefit as it can discourage wasteful spending.
Alternative costs of capital can be applied to divisions and investments to account for
different levels of risk. This can allow more informed decision-making.
Disadvantages
RI does not facilitate comparisons between divisions since the RI is driven by the size of
divisions and their investments. This can clearly be seen in Sports Co where the RI of
Division E is almost twice that of Division C, which will be related to Division E being a
much larger division.
RI is also based on accounting measures of profit and capital employed which may be
subject to manipulation so as, for example, to obtain a bonus payment. In this way it
suffers from the same problems as ROI.
Marking guide Marks

(a) (i) Net profit 1
Add back depreciation 1
Add back HO costs 1
Controllable profit 1
Average assets 1
ROI 1
6
(ii) Discussion 6
(b) (i) Controllable profit 1
Imputed interest 1
RI 1
Comment 1
4
(ii) Advantages/disadvantages 4
ACCA PM Question Bank Part 2 questions: 1: Specialist cost and management accounting techniques 147
PART 2 QUESTIONS: Objective test and Scenario

1 Which of the following statements about activity-based costing is/are true?
True False
ABC can only be used within a manufacturing  
environment.
ABC assumes that most overhead costs are incurred at  
the product level.
A cost driver is a factor which causes a change in the  
cost of an activity.
Traditional absorption costing tends to under-estimate  
overhead costs for high volume products.
2 A company manufactures two products, C and D, for which the following information is available:
Product C Product D Total
Budgeted production (units) 1,000 4,000 5,000
Labour hours per unit/in total 8 10 48,000
Number of production runs required 13 15 28
Number of inspections during production 5 3 8
Total production set up costs $140,000
Total inspection costs $80,000
Other overhead costs $96,000
Other overhead costs are absorbed on the basis of labour hours per unit.
Using activity-based costing, what is the budgeted overhead cost per unit of product D, to the
nearest $0.01?
3 Teddy Co makes two products using the same type of material and the same workforce. The
following information is available:
Product Product
Lou Dew
Budgeted production (units) 5,000 4,000
Material per unit ($) 20 25
Labour per unit ($) 40 60
Fixed overheads relating to materials are $150,000. The cost driver for these costs is the cost of
material purchased.
General fixed overheads are $374,000. These are absorbed on the basis of labour cost.
Using activity-based costing, what is the budgeted fixed overhead cost per unit of product
Lou, to the nearest $0.01?
$
4 A company makes two products using the same type of materials and skilled workers. The
following information is available:
Product A Product B
Budgeted volume (units) 1,000 2,000
Material per unit ($) 10 20
Labour per unit ($) 5 20
Fixed costs relating to material handling amount to $100,000. The cost driver for these costs is
the volume of material purchased.
General fixed costs, absorbed on the basis of labour hours, amount to $180,000.
Using activity-based costing, what is the total fixed overhead amount to be absorbed into
each unit of product B (to the nearest whole $)?
 $113
 $120
 $40
 $105
WASH CO
Wash Co assembles and sells two types of washing machines – the Spin (S) and the Rinse (R).
The company’s policy is to transfer the machines from its assembly division to its retail division at full
cost plus 10%.
The overhead costs are currently allocated to the products on the basis of labour hours, but Wash Co’s
Chief Management Accountant is contemplating using machine hours or activity-based costing (ABC)
for absorption.
You have obtained the following information for the last month from the assembly division.
Product S Product R
Production and sales (units) 3,200 5,450
Materials cost $117 $95
Labour cost (at $12 per hour) $6 $9
Machine hours (per unit) 2 1
Total no. of production runs 30 12
Total no. of purchase orders 82 64
Total no. of deliveries to retail division 64 80
Overhead costs: $
Machine set-up costs 306,435
Machine maintenance costs 415,105
Ordering costs 11,680
Delivery costs 144,400
Total 877,620
5 Calculate a transfer price to the nearest $ for Product S if machine hours are used as the basis
for absorption.
$
6 Using ABC, calculate to the nearest $ the machine overheads (set-up and maintenance costs)
that will be absorbed by each unit of Product S.
7 Using ABC, calculate to the nearest $ the selling overheads (ordering and delivery costs) that will
be absorbed by each unit of Product R.
8 The Chief Accountant is also considering using ABC when analysing environmental costs.
Which of the following statements relating to environmental activity-based costing
(environmental ABC) is/are true?
True False
Environmental ABC will be concerned with prevention  
activities as well as detection and correction activities.
Environmental ABC helps identify environment-driven  
costs, which may be hidden within general overheads.
Volume of emissions may be a cost driver in  
environmental ABC.
Environmental ABC can measure cost savings resulting  
from measures to reduce environmental impact.
9 As well as environmental ABC, the Chief Accountant is looking at other techniques for
accounting for environmental impacts.
Which TWO of the following statements relating to accounting for environmental costs are
true?
 Flow cost accounting involves analysing materials flows into two categories, material and
disposal
 Input/output analysis aims to identify residual or waste.
 Environmental life cycle costing looks at costs up until the point production ceases.
 Environment-related costs are connected with activities for which costs can be directly
traced.
10 A company's actual production figures for a batch of products are as follows:

Kg $
Material 2,000 10,000
Labour and overhead 26,000
2,000 36,000
Normal loss 10% (200)
1,800 36,000
Abnormal loss (100) (2,000)
Good output 1,700 34,000
In terms of environmental cost categorisations, how would the normal and abnormal losses
be described?
 Normal loss = Potentially hidden costs Abnormal loss = Conventional costs
 Normal loss = Potentially hidden costs Abnormal loss = Contingent costs
 Normal loss = Conventional costs Abnormal loss = Contingent costs
 Normal loss = Conventional costs Abnormal loss = Contingent costs
What does this test?
Target costing
11 Which of the following statements in relation to costing techniques is/are true?
True False
Target costing is a market driven approach to pricing.  
Using target costing to set selling prices guarantees  
that a company will make a profit on its products.
Unlike traditional costing methods, in ABC production  
overheads are not absorbed across product units.
An organisation which switches to ABC may find that  
some of its existing products, which require minimal
labour hours, no longer appear profitable.
12 The unit selling price of Product Z has been set at $200. The company requires a profit margin of
40%. The product specification includes material, labour and overheads at $55, $75 and $15
respectively.
What is the cost gap for each unit of Product Z?
13 Which of the following is/are characteristics of a service industry?

Characteristic Not characteristic
Homogenity  
Intangibility  
Perishability  
Spontaneity  
14 Which TWO of the following methods of reducing an organisation’s costs in order that its target cost
gap can be closed would be most effective in reducing the costs in a service industry context?
 Use a lower grade of labour
 Renegotiate terms with suppliers
 Reduce the time spent in terms of labour hours
 Attempt to increase sales volumes to achieve economies of scale
15 S Company is a manufacturer of multiple products and uses target costing. It has been noted
that Product P currently has a target cost gap and the company wishes to close this gap.
Which of the following may be used to close the target cost gap for product P?
 Use overtime to complete work ahead of schedule
 Substitute current raw materials with cheaper versions
 Raise the selling price of P
 Negotiate cheaper rent for S Company’s premises
16 The selling price of Product X is set at $550 for each unit and sales for the coming year are
expected to be 800 units.
A return of 30% on the investment of $500,000 in Product X will be required in the coming year.
What is the target cost for each unit of Product X, to the nearest $0.01?
HELOT CO (SECTION B, SEPTEMBER 2016)

EXAM SMART
This question can also be found on the ACCA practice platform. We recommend that you
attempt a number of questions within the platform in order that you get used to the
software.
The following scenario relates to Questions 16–20. Each question is worth 2 marks.
Helot Co develops and sells computer games. It is well known for launching innovative and interactive
role-playing games and its new releases are always eagerly anticipated by the gaming community.
Customers value the technical excellence of the games and the durability of the product and
packaging.
Helot Co has previously used a traditional absorption costing system and full cost plus pricing to cost
and price its products. It has recently recruited a new finance director who believes the company
would benefit from using target costing. He is keen to try this method on a new game concept called
Spartan, which has been recently approved.
After discussion with the board, the finance director undertook some market research to find out
customers’ opinions on the new game concept and to assess potential new games offered by
competitors. The results were used to establish a target selling price of $45 for Spartan and an
estimated total sales volume of 350,000 units. Helot Co wants to achieve a target profit margin of 35%.
The finance director has also begun collecting cost data for the new game and has projected the following:
Production costs per unit $
Direct material 3.00
Direct labour 2.50
Direct machining 5.05
Set-up 0.45
Inspection and testing 4.30
Total non-production costs $000
Design (salaries and technology) 2,500
Marketing consultants 1,700
Distribution 1,400
17 Which of the following statements would the finance director have used to explain to Helot Co’s
board what the benefits were of adopting a target costing approach so early in the game’s life-
cycle?
1 Costs will be split into material, system, and delivery and disposal categories for
improved cost reduction analysis
2 Customer requirements for quality, cost and timescales are more likely to be included in
decisions on product development
3 Its key concept is based on how to turn material into sales as quickly as possible in order
to maximise net cash
4 The company will focus on designing out costs prior to production, rather than cost
control during live production
 1, 2 and 4
 2, 3 and 4
 1 and 3
 2 and 4
18 What is the forecast cost gap for the new game?

 $2.05
 $0.00
 $13.70
 $29.25
19 The board of Helot Co has asked the finance director to explain what activities can be
undertaken to close a cost gap on its computer games.
Which of the following would be appropriate ways for Helot Co to close a cost gap?
1 Buy cheaper, lower grade plastic for the game discs and cases
2 Using standard components wherever possible in production
3 Employ more trainee game designers on lower salaries
4 Use the company’s own online gaming websites for marketing
 1, 2 and 3
 1, 3 and 4
 2 and 4
 2 and 3
20 The direct labour cost per unit has been based on an expected learning rate of 90% but now the
finance director has realised that a 95% learning rate should be applied.
Which of the following statements is true?
 The target cost will decrease and the cost gap will increase
 The target cost will increase and the cost gap will decrease
 The target cost will remain the same and the cost gap will increase
 The target cost will remain the same and the cost gap will decrease
21 Helot Co is thinking about expanding its business and introducing a new computer repair service
for customers. The board has asked if target costing could be applied to this service.
Which of the following statements regarding services and the use of target costing within the
service sector is true?
 The purchase of a service transfers ownership to the customer
 Labour resource usage is high in services relative to material requirements
 A standard service cannot be produced and so target costing cannot be used
 Service characteristics include uniformity, perishability and intangibility
DARASK CO
Darask Co is a global consumer electronics manufacturer. It sells its own brand of smartphones,
computers and personal entertainment devices. It uses target costing.
D-Paad – Feasibility study results
The board of Darask Co has conducted a feasibility study in order to decide whether or not to launch a
new device, the D-Paad, in 20X9. The D-Paad will have a three-year life cycle, over which a total of
80 million units will be sold.
The variable manufacturing and selling cost of the D-Paad is currently estimated at $123 per unit. The
total fixed product cost, including investment and overheads, is budgeted to be $3,360m over the
whole life cycle.
The initial estimate of the selling price included in the feasibility study for the D-Paad was calculated to
ensure a profit mark-up of 60%.
D-Paad – Market research analysis
The board decided to commission some market research to determine the price customers would be
willing to pay for the D-Paad. Sales volumes and sales prices were estimated for the various stages of
the D-Paad’s product life cycle as follows:
Sales volume Sales price
(millions) ($/unit)
Introduction 8 425
Growth 14 300
Maturity 56 220
Decline 2 120
Based on the market analysis, the board has approved the development of the D-Paad as long as the
total product cost, including manufacturing, investment and overheads, does not exceed $13,000m.
Retail outlets
The board of Darask Co is also considering the opening of some retail outlets which will be located in
major cities around the world. The outlets, as well as selling Darask Co's products, will also hold
free-of-charge surgeries where the product users can seek help on how to use their devices and have
their devices repaired.
The board has been discussing whether it is possible to use target costing in relation to the retail
outlets. The following statements have been made:
Director X Target costing cannot be used because it is difficult to estimate target selling prices
for services
Director Y Target costing is most useful when what is being developed has a high degree of
variability such as developing new services
Director Z Target costing when developing new services is difficult because services are
intangible and measuring a unit of service is not always possible
22 Which of the following statements about the use of target costing at Darask Co is/are correct?
(1) It relies on just-in-time processes in order to work
(2) It can be used alongside life cycle costing and planning
 1 only
 2 only
 Both 1 and 2
 Neither 1 nor 2
23 What was the initial selling price of the D-Paad from the feasibility study results
24 Based on the market research analysis, what is the total cost gap of the D-Paad, if Darask Co
wants to achieve a target profit margin of 45%?
 $3,928m
 $1,912m
 $9,072m
 $11,088m
25 The following proposals have been made in order to close the cost gap of the D-Paad:
(1) Introduce 24-hour working in the factories where the D-Paad is made in order to increase
production and build inventory
(2) Incorporate quality assurance inspections into the manufacturing processes to reduce
faulty units
(3) Increase the sales and marketing spend in order to boost the sales volumes of the D-Paad
Which of these proposals is/are likely to reduce the cost gap?
 1 and 2
 2 and 3
 2 only
 1 and 3
26 In relation to the use of target costing for the retail outlets, which of the directors' statements
is/are correct?
 X, Y and Z
 Y and Z only
 X and Y only
 Z only
Life cycle costing

27 What is the name of the costing approach which identifies a product’s selling price and
establishes ways of making the product that will earn an acceptable profit?
 Absorption costing
 Activity based costing
 Life cycle costing
 Target costing
28 Which of the following statements that have been made about life cycle costing is/are true?
True False
It focuses on the short-term by identifying costs at the  
beginning of a product’s life cycle.
It identifies all costs which arise in relation to the  
product each year and then calculates the product’s
profitability on an annual basis.
It accumulates a product’s costs over its whole life time  
and works out the overall profitability of a product.
It allocates costs to each stage of a product’s life cycle  
and writes them off at the end of each stage.
29 A manufacturing company which produces a range of products has developed a budget for the
life-cycle of a new product, P. The information in the following table relates exclusively to
product P:
Lifetime total Per unit
Design costs $800,000
Direct manufacturing costs $20
Depreciation costs $500,000
Decommissioning costs $20,000
Machine hours 4
Production and sales units 300,000
The company’s total fixed production overheads are budgeted to be $72 million each year and
total machine hours are budgeted to be 96 million hours. The company absorbs overheads on a
machine hour basis.
What is the budgeted life-cycle cost per unit for product P?
 $24.40
 $25.73
 $27.40
 $22.73
FIT CO
Fit Co specialises in the manufacture of a small range of high-tech products for the fitness market. It is
currently considering the development of a new type of fitness monitor, which would be the first of its
kind in the market. It would take one year to develop, with sales then commencing at the beginning of
the second year. The product is expected to have a life cycle of two years, before it is replaced with a
technologically superior product. The following cost estimates have been made.
Year 1 Year 2 Year 3
Units manufactured and sold 100,000 200,000
Research and development costs $160,000
Product design costs $800,000
Marketing costs $1,200,000 $1,000,000 $1,750,000
Manufacturing costs:
Variable cost per unit $40 $42
Fixed production costs $650,000 $1,290,000
Distribution costs:
Variable cost per unit $4 $4.50
Fixed distribution costs $120,000 $120,000
Selling costs:
Variable cost per unit $3 $3.20
Fixed selling costs $180,000 $180,000
Administration costs $200,000 $900,000 $1,500,000
30 Which of the following costs would be included as part of the calculation of life cycle costs?
Included Not included
Research and development costs  
Product design costs  
Marketing costs  
Distribution costs  
Selling costs  
Administration costs  
31 Which TWO of the following are benefits of using life cycle costing?
 It attempts to distinguish clearly between the costs of different periods.
 It gives a good indication of the success of research and development and design activities.
 It ensures that products do not enter a decline stage of their life cycle.
 It matches initial costs to the revenues that the product finally earns.
32 In which TWO of the following circumstances is life cycle costing particularly useful?
 Products with a short life
 Products with an even spread of costs and revenues over their lives
 Very simple products
 Products being launched in a competitive environment where time to market is very
important
33 After preparing the cost estimates above, Fit Co realises that it has not taken into account the
effect of the learning curve on the production process. The variable manufacturing cost per unit
above, of $40 in Year 2 and $42 in Year 3, includes a cost for 0.5 hours of labour. The Year 2 cost
per hour for labour is $24 and the Year 3 cost is $26 per hour. Subsequently, it has been
estimated that, although the first unit is expected to take 0.5 hours, a learning curve of 95% is
expected to occur until the 100th unit has been completed. The result will be that it takes a
total labour time of 35.56 hours for the first 100 units.
Calculate to the nearest $10,000, the labour cost that will be included for Year 2 in the
calculation of the life cycle cost.
$ 000
34 Further analysis has been undertaken of the costs of the new product. Now the total
manufacturing life cycle costs of the monitor are estimated to be $12,600,000 and total life
cycle costs overall of $23,000,000. The sales director believes that the maximum price of the
new monitor would be $85 and the board wishes to make a 20% profit margin on it. The
research and development and product design teams have estimated that they could undertake
extra work, with the aim of finding ways to reduce total manufacturing costs by 25%.
Calculate the maximum level of costs that could be incurred by the research and development
and product design teams if a 20% profit margin is to be achieved, assuming that the changes
they suggest successfully reduce manufacturing costs by 25%.
$ 000
XYX PLC
XYX Plc is about to launch a new product and have the following information available:
Cost/Year 0 1 2 3
Stage Development Launch Growth.Maturity Decline
Research $3,000,000
Marketing $5,000,000 $10,000,000 $3,000,000 $500,000
Production cost per unit $1.50 $1.30 $1.10
Expected Production volumes 500,000 1,150,000 500,000
35 What are the total lifecycle costs per unit to the nearest $0.01.
36 What is the average selling price per unit required to make a profit of $5,052,500 to the nearest
0.01?
$
37 Which part of the lifecycle is the most likely place for the majority of costs to be determined by
decisions taken?
 Maturity – when the greatest number of items are made and sold?
 Decline – where we need to pay sell of machines and dispose of obsolete items?
 Growth – as we begin to cope with increased production?
 Development/Launch – where we finally create a product that the customers will buy and
take it to market?
38 Where is lifecycle costing least helpful in business?

 To allow us to focus on total costs
 To enable long term planning
 To enable us to identify which products to make with limited time/material
 Helps us to identify and control development costs
39 As the longer the life cycle, the greater the profit for most products/service, which three ideas
would help us extend/maximise the life cycle?
 Get the product to market as soon as possible
 Increase the price of the product as it grows
 Find new markets or new uses for the product
 Release new version of the product as the older ones become mature
 Reduce the production costs via economies of scale
40 Which of the following statements about throughput accounting is/are true?
True False
Throughput accounting is based on the concept that  
there is a finite capacity at certain critical points in an
organisation’s production schedule.
Throughput accounting treats labour as a fixed cost in  
the short-term.
Throughput accounting focusses on improving  
efficiency by using all production facilities to their
maximum capacity.
The aim of throughput accounting is to increase the  
speed with which products move through an
organisation in order to maximise profit.
41 S Ltd manufactures three products, A, B and C. The products use a series of different machines
but there is a common machine, P, that is a bottleneck.
The selling price and standard cost for each product for the forthcoming year is as follows:
A B C
$ $ $
Conversion costs 55 40 66
Machine P - minutes 12 10 7
Using a throughput accounting approach, what would be the ranking of the products for best
use of the bottleneck?
A
42 A company manufactures a product which requires four hours per unit of machine time.
Machine time is a bottleneck resource as there are only ten machines which are available for
12 hours per day, five days per week. The product has a selling price of $130 per unit, direct
material costs of $50 per unit, labour costs of $40 per unit and factory overhead costs of
$20 per unit. These costs are based on weekly production and sales of 150 units.
What is the throughput accounting ratio (to 2 decimal places)?
 1.33
 2.00
 0.75
 0.31
43 A manufacturing company uses three processes to make its two products, X and Y. The time
available on the three processes is reduced because of the need for preventative maintenance
and rest breaks.
The table below details the process times per product and daily time available:
Hours Hours required Hours required
available to make one unit to make one unit
Process per day of product X of product Y
1 22 1.00 0.75
2 22 0.75 1.00
3 18 1.00 0.50
Daily demand for product X and product Y is 10 units and 16 units respectively.
Which of the following will improve throughput?
 Increasing the efficiency of the maintenance routine for Process 2
 Increasing the demand for both products
 Reducing the time taken for rest breaks on Process 3
 Reducing the time product X requires for Process 1
SWEET TREATS BAKERY (SECTION B, DECEMBER 2016)

EXAM SMART
software.
Sweet Treats Bakery makes three types of cake: brownies, muffins and cupcakes. The costs, revenues
and demand for each of the three cakes are as follows:
Brownies Muffins Cupcakes
Selling price ($ per unit) 1.50 1.40 2.00
Material cost ($ per unit) 0.25 0.15 0.25
Labour cost ($ per unit) 0.40 0.45 0.50
Overhead ($ per unit) 0.15 0.20 0.30
Minimum daily demand (units) 30 20 10
Maximum daily demand (units) 140 90 100
The minimum daily demand is required for a long-term contract with a local cafe and must be met.
The cakes are made in batches using three sequential processes; weighing, mixing and baking. The
products must be produced in their batch sizes but are sold as individual units. Each batch of cakes
requires the following amount of time for each process:
Weighing (minutes) 15 15 20
Mixing (minutes) 20 16 12
Baking (minutes) 120 110 120
The baking stage of the process is done in three ovens which can each be used for eight hours a day, a total
of 1,440 available minutes. Ovens have a capacity of one batch per bake, regardless of product type.
Sweet Treats Bakery uses throughput accounting and considers all costs, other than material, to be
'factory costs' which do not vary with production.
44 On Monday, in addition to the baking ovens, Sweet Treat Bakeries has the following process
resources available:
Process Minutes available
Weighing 240
Mixing 180
Which of the three processes, if any, is a bottleneck activity?
 Weighing
 Mixing
 Baking
 There is no bottleneck
45 On Wednesday, the mixing process is identified as the bottleneck process. On this day, only 120
minutes in the mixing process are available.
Assuming that Sweet Treats Bakery wants to maximise profit, what is the optimal production
plan for Wednesday?
 80 brownies, 30 muffins and 100 cupcakes
46 Sweet Treats Bakery has done a detailed review of its products, costs and processes.
Which TWO of the following statements will improve the throughput accounting ratio?
 The café customer wants to negotiate a loyalty discount.
 A bulk discount on flour and sugar is available from suppliers.
 There is additional demand for the cupcakes in the market.
 The rent of the premises has been reduced for next year.
47 On Friday, due to a local food festival at the weekend, Sweet Treats Bakery is considering
increasing its production of cupcakes. These cupcakes can be sold at the festival at the existing
selling price.
The company has unlimited capacity for weighing and mixing on Friday but its existing three
ovens are already fully utilised, therefore in order to supply cupcakes to the festival, Sweet
Treats Bakery will need to hire another identical oven at a cost of $45 for the day.
How much will profit increase by if the company hires the new oven and produces as many
cupcakes as possible?
 $31.00
 $55.00
 $95.00
 $140.00
48 In a previous week, the weighing process was the bottleneck and the resulting throughput ratio
(TPAR) for the bakery was 1.45.
State which of the following statements about the TPAR for the previous week are true and
which are false.
True False
The bakery’s operating costs exceeded the total throughput  
contribution generated from the three products.
Less idle time in the mixing department would have  
improved the TPAR
Improved efficiency during the weighing process would  
have improved the TPAR.

49 Which of the following statements about environmental cost accounting is/are true?
True False
The majority of environmental costs are already  
captured within a typical organisation’s accounting
system. The difficulty lies in identifying them.
Input/output analysis divides material flows within an  
organisation into three categories: material flows,
system flows, and delivery and disposal flows.
Input/output analysis enables classification of output  
as finished production, scrap and waste.
Environmental life cycle costing enables analysis of  
clean-up and disposal activities relating to a product.
50 The following are types of management accounting techniques:

I Flow cost accounting
II Input/output analysis
III Life-cycle costing
IV Absorption costing
Which of the above techniques could be used by a company to account for its environmental
costs?
 I only
 II and III only
 I, II and III only

1 Which of the following statements about relevant costing is/are true?
True False
Decisions should always be based on future  
incremental accounting profits.
When a required resource is in scarce supply, the  
opportunity cost of the next best alternative use
needs to be considered.
Sunk costs are irrelevant to decision making as the  
expenditure has already been incurred.
Depreciation may be a relevant cost if it is incremental  
to the project being considered.
2 A company has received a special order which needs 1,000 metres of material Z. It has
800 metres of material Z in inventory, which it purchased for $5 per metre. If the inventory is
not used for this order, it would be sold for $3.75 per metre. The current price of material Z is
$4.50 per metre.
What is the total relevant cost of material B for the special order?
3 The Fruit Company (F Co) currently grows fruit which customers pick themselves from the fields
before paying. F Co is concerned that a large number of customers are eating some of the fruit
whilst picking it and are therefore not paying for all of it. As a result, it has to decide whether to
hire staff to pick and package the fruit instead.
Which of the following values and costs are relevant to the decision?
Relevant Not relevant
The total sales value of the fruit currently picked and  
paid for by customers
The cost of growing the fruit  
The cost of hiring staff to pick and package the fruit  
The total sales value of the fruit if it is picked and  
packaged by staff instead
LOSMETIC CO
Losmetic Co is a company producing a variety of cosmetic creams and lotions. The company has just
been asked by one of its biggest customers, a chain of stores, to produce a one-off order of creams for
a special promotion that the stores are running. The order needs to be completed within three weeks.
The following cost estimate has been prepared:
Materials $
Silk powder 15,000 grams at $2.20 per gram 33,000
Silk amino acids 5,000 grams at $0.80 per gram 4,000
Aloe vera 20,000 grams at $1.40 per gram 28,000
Labour
Skilled 500 hours at $12 per hour 6,000
Unskilled 250 hours at $8 per hour 2,000
Factory overheads 750 hours at $4 per hour 3,000
Total production cost 76,000
General fixed overheads 15% of total production cost 11,400
Total cost 87,400
As the order is a one-off order, Losmetic Co will be quoting on a relevant cost basis, so that it can offer
as competitive a price as possible.
4 Losmetic Co has sufficient inventory of all materials currently to fulfil the order. The current
replacement costs from the company’s normal supplier are silk powder $2.50 per gram, silk
amino acids $1 per gram, aloe vera $1.70 per gram.
The silk amino acids are not needed currently for any other purposes. Both the silk powder and
aloe vera are in regular use. However, owing to temporary problems with the normal supplier,
15,000 grams of aloe vera will have to be purchased from another supplier at $2 per gram, in
order to fulfil other orders if the one-off order is accepted.
Calculate the cost of materials that should be included in the quotation.
5 The skilled labour force is paid a guaranteed annual salary based on a 40-hour week at a rate of
$12 per hour. There is no spare capacity for the next three weeks. Overtime is paid at time and
a half. Skilled labour could be brought in from outside at a rate of $16 per hour.
There are two spare members of staff who are unskilled labour. They must be paid a minimum
of $8 per hour for a 30-hour week. Additional hours are paid at the hourly rate, but they will be
paid time and a half for the next three weeks for every hour that exceeds what they would have
worked if they worked an average 40-hour week each week.
Calculate the cost of labour that should be included in the quotation.
$
6 Of the factory overheads, $1.60 relates to the electricity costs connected with running the
machinery. The other $2.40 is the cost of the supervisor’s salary. The supervisor is paid an
annual salary that is the equivalent of $40 per hour. He receives a premium of 25% on this rate
for overtime, which he is paid on an hourly basis. He is expected to work 15 hours’ overtime if
Losmetic Co accepts this order.
Calculate the cost that should be included in the quotation for factory overheads.
7 How should the general fixed overheads be treated when preparing the quotation?
 The overheads should be included because they are production costs.
 The overheads should be excluded because they are not opportunity costs.
 The overheads should be excluded because they are not incremental costs.
 The overheads should be included to ensure Losmetic Co makes a profit from the order.
8 Which of the following statements about relevant costing is/are true?

True False
All cash expenses are relevant costs, all non-cash  
expenses are non-relevant costs.
Notional costs are never relevant costs.  
Fixed costs are never relevant costs.  
Not all future costs are relevant costs.  

9 The following statements have been made about CVP analysis:
Which of the following statements about CVP analysis is/are true?
True False
CVP can help a company assess how sensitive its profits  
might be to below budget performance.
CVP analysis uses a total absorption costing approach.  
CVP analysis is flexible enough to deal with changes in  
both variable and fixed costs at different levels of activity.
Break-even analysis can only be used for a single product  
or for multiple products which are sold in a constant mix.
10 P Co makes two products – P1 and P2 – budgeted details of which are as follows:

P1 P2
$ $
Selling price 10.00 8.00
Cost per unit:
Direct materials 3.50 4.00
Direct labour 1.50 1.00
Variable overhead 0.60 0.40
Fixed overhead 1.20 1.00
Profit per unit 3.20 1.60
Budgeted production and sales for the year ended 30 November 2015 are:
Product P1 10,000 units
Product P2 12,500 units
The fixed overhead costs included in P1 relate to apportionment of general overhead costs only.
However, P2 also includes specific fixed overheads totalling $2,500.
If only product P1 were to be made, how many units (to the nearest unit) would need to be
sold in order to achieve a profit of $60,000 each year?
 25,625 units
 19,205 units
 18,636 units
 26,406 units
11 Which of the following are required in order to calculate the break-even sales revenue for a
manufacturing company which produces multiple products?
Required Not required
Product mix ratio  
Contribution to sales ratio for each product  
General fixed costs  
Method of apportioning general fixed costs  
12 Christine Co makes two products, the sara and the cristina. Production and sales of the sara are
three times that of the cristina. Each unit of the sara makes a contribution of $12, each unit of
the cristina makes a contribution of $7. Fixed costs are $269,000.
How many units of both products taken together must be made and sold to achieve a profit of
$75,000?
13 A company makes and sells product X and product Y. Twice as many units of product Y are made
and sold as that of product X. Each unit of product X makes a contribution of $10 and each unit
of product Y makes a contribution of $4. Fixed costs are $90,000.
What is the total number of units which must be made and sold to make a profit of $45,000?
 7,500
 22,500
 15,000
 16,875
HARE EVENTS (SECTION B, DECEMBER 2016)

EXAM SMART
software.
Hare Events is a company which specialises in organising sporting events in major cities across
Teeland. It has approached the local council of Edglas, a large city in the north of Teeland, to request
permission to host a running festival which will include both a full marathon and a half marathon race.
Based on the prices it charges for entry to similar events in other locations, Hare Events has decided
on an entry fee of $55 for the full marathon and $30 for the half marathon. It expects that the
maximum entries will be 20,000 for the full marathon and 14,000 for the half marathon.
Hare Events has done a full assessment of the likely costs involved. Each runner will receive a race pack
on completion of the race which will include a medal, t-shirt, water and chocolate. Water stations will
need to be available at every five kilometre (km) point along the race route, stocked with sufficient
supplies of water, sports drinks and gels. These costs are considered to be variable as they depend on
the number of race entries.
Hare Events will also incur the following fixed costs. It will need to pay a fixed fee to the Edglas council
for permits, road closures and support from the local police and medical services. A full risk
assessment needs to be undertaken for insurance purposes. A marketing campaign is planned via
advertising on running websites, in fitness magazines and at other events Hare Events is organising in
Teeland, and the company which Hare Events usually employs to do the race photography has been
approached.
The details of these costs are shown below:
Full marathon Half marathon
$ $
Race packs 15.80 10.80
Water stations 2.40 1.20
$
Council fees 300,000
Risk assessment and insurance 50,000
Marketing 30,000
Photography 5,000
14 If Hare Events decides to host only the full marathon race, what is the margin of safety?
 35.0%
 47.7%
 52.3%
 65.0%
15 Assuming that the race entries are sold in a constant sales mix, based on the expected race
entry numbers, what is the sales revenue that Hare Events needs to achieve in order to break
even (to the nearest $000)
 $385,000
 $575,000
 $592,000
 $597,000
16 Hare Events wishes to achieve a minimum total profit of $500,000 from the running festival.
What are the number of entries Hare Events will have to sell for each race in order to achieve
this level of profit, assuming a constant sales mix based on the expected race entry numbers
applies? Work to the nearest whole number.
 Full marathon: 17,915 entries Half marathon: 12,540 entries
17 Hare Events is also considering including a 10 km race during the running festival. It expects the
race will have an entry fee of $20 per competitor and variable costs of $8 per competitor. Fixed
costs associated with this race will be $48,000.
If the selling price per competitor, the variable cost per competitor and total fixed costs for
this 10 km race all increase by 10%, which of the following statements will be true?
 Break-even volume will increase by 10% and break-even revenue will increase by 10%.
 Break-even volume will remain unchanged but break-even revenue will increase by 10%.
 Break-even volume will decrease by 10% but break-even revenue will remain unchanged.
 Break-even volume and break-even revenue will both remain the same.
18 Which of the following statements relating to cost volume profit analysis are true?
(i) Production levels and sales levels are assumed to be the same so there is no inventory
movement.
(ii) The contribution to sales (C/S ratio) can be used to indicate the relative profitability of
different products.
(iii) CVP analysis assumes that fixed costs will change if output either falls or increases
significantly.
(iv) Sales prices are recognised to vary at different levels of activity especially if higher
volume of sales is needed
 (i), (ii) and (iii)
 (ii), (iii) and (iv)
 (i) and (ii)
 (iii) and (iv)
Limiting factors
19 A company uses the linear programming model to find the optimal production plan for its two
products X and Y. The model considers ‘x’ to be number of units of product X and ‘y’ to be the
number of units of product Y.
It has identified the following equations:
Objective function = Maximise 8x + 12y
Subject to the following constraints:
Material 2x + y ≤ 2,000
Unskilled labour: x + y ≤ 1,500
and x ≥ 400
What is the optimal solution for the output of X and Y?
X
20 Taylor Co manufactures two products, A and B, and any quantities produced can be sold for
$30 per unit and $25 per unit respectively.
Variable costs per unit of the two products are as follows:
Product A Product B
$ $
Materials (at $2 per kg) 8 6
Other variable costs 7 3
Total 25 14
Next month, only 3,200 kg of material and 2,000 labour hours will be available. The company
aims to maximise its profits each month and wants to use the linear programming model to
establish an optimum production plan.
The model considers ‘x’ to be number of units of Product A and ‘y’ to be the number of units of
Product B.
Which of the following statements of objective function and constraints is correct?
Objective function Material constraint Labour constraint
 30x + 25y 4x +3y ≤ 3,200 2x + y ≤ 2,000
 5x + 11y 4x + 3y ≥ 3,200 2x + y ≥ 2,000
 5x + 11y 4x + 3y ≤ 3,200 2x + y ≤ 2,000
 30x + 25y 4x + 3y ≥ 3,200 2x + y ≥ 2,000
21 A linear programming model has been formulated for two products, X and Y. The objective
function is depicted by the formula C = 5X + 6Y, where C = contribution, X = the number of
product X to be produced and Y = the number of product Y to be produced.
Each unit of X uses 2 kg of material Z and each unit of Y uses 3 kg of material Z. The standard
cost of material Z is $2 per kg.
The shadow price for material Z has been worked out and found to be $2.80 per kg.
If an extra 20 kg of material Z becomes available at $2 per kg, what will the maximum
increase in contribution be?
 Increase of $96
 Increase of $56
 Increase of $16
 No change
22 A jewellery company makes rings (R) and necklaces (N).

The resources available to the company have been analysed and two constraints have been
identified:
Labour time 3R + 2N ≤ 2,400 hours
Machine time 0.5R + 0.4N ≤ 410 hours
The management accountant has used linear programming to determine that R = 500 and N =
400.
Which of the following is/are slack resources?
1 Labour time available
2 Machine time available
 1 only
 2 only
 Both 1 and 2
 Neither 1 nor 2
23 Which TWO of the following statements about forecasting based on simple linear regression
are correct?
 It can account for the effect of multiple independent variables
 It assumes that historical data is a reliable guide to the future
 It is not suitable when the variables show strong negative correlation
 Cost forecasts using extrapolation are less accurate than those using interpolation
HIGGINS CO
Higgins Co (HC) manufactures and sells pool cues and snooker cues. The cues both use the same type
of good quality wood (ash), which can be difficult to source in sufficient quantity. The supply of ash is
restricted to 5,400 kg per period. Ash costs $43.20 per kg.
The cues are made by skilled craftsmen who are well known for their workmanship. HC’s craftsmen
are generally only able to work for 12,000 hours in a period. The craftsmen are paid $18 per hour.
HC sells the cues to a large market. Demand for the cues is strong and the company has estimated that
up to 15,000 pool cues and 12,000 snooker cues can be sold in any period. The selling price for pool
cues is $41 and the selling price for snooker cues is $69.
Manufacturing details for the two products are as follows.
Pool cues Snooker cues
Craftsmen time per cue 0.5 hours 0.75 hours
Ash per cue 250 g 250 g
Other variable costs per cue $1.20 $4.70
HC does not keep inventory.
24 Calculate the maximum contribution that HC could earn if ash and labour were not constraints.
25 Calculate the number of pool and snooker cues HC would manufacture if demand for both types
of cue was not a constraint and assuming HC continues to manufacture both types of cue.
26 If the amount of ash available was increased to 7,000 kg and the amount of skilled labour
available was increased to 16,000 hours, which of the following statements would be true,
assuming maximum demand for pool cues was 15,000 and maximum demand for snooker cues
was 12,000?
 Labour would remain a constraint but ash would no longer be a constraint.
 Ash would remain a constraint but labour would no longer be a constraint.
 Both labour and ash would still be constraints.
 Neither labour nor ash would be constraints.
27 Assume that the constraints that limit HC are the constraints on labour available and the
demand for snooker cues. Under these constraints 6,000 pool cues are made. The contribution
for snooker cues has recently increased to $45 per cue and for pool cues to $25 per cue.
Some of the craftsmen have offered to work overtime, provided that they are paid double time
for the extra hours over the contracted 12,000 hours. HC has estimated that up to 1,200 hours
per period could be gained in this way.
Calculate the shadow price of labour.
$
28 Which of the following statements relating to limited factor analysis or linear programming
is/are true?
True False
The objective function is the function relating to the  
limitation of the scarce resource.
The constraints in graphical linear programming analysis  
are drawn as straight lines.
The shadow price is only significant for constraints that  
are binding.
There will be slack if less than the maximum amount  
available of a limited resource is needed.
HOME ELECTRICS CO (MARCH/JUNE 2021)

Home Electrics Co manufactures electrical appliances for domestic use. It is madeup of two divisions.
Small Appliances division
Two of the products manufactured by the Small Appliances division are the Blender (Product B) and
the Toaster (Product T). The standard cost cards per unit for each ofthe products is as follows:
B T
$ $
Selling price 80 120
Direct materials ($5 per kg) 10 15
Direct labour ($7 per hour) 21 35
Variable overheads 12 18
Fixed overheads 8 10
Profit 29 42
In the first quarter of the year the supply of materials was restricted to 2,000 kg per month. This was
due to a global shortage.
It is now April and it has been identified that material will continue to be limited to 2,000 kg per month
but also labour hours will be restricted to 3,200 hours per month. The management accountant has
supplied formulas for the production constraints as follows:
Materials 2B + 3T = 2000
Labour 3B + 5T = 3200
Large Appliances division
This division also manufactures two products; a Freezer (Product F) which earns a contribution of $150
per unit and a Dishwasher (Product D) which earns a contribution of $200 per unit. Both products use
the same resources, several of which are in short supply.
In April only 4,000 labour hours, 2,500 kg of material and 3,200 machine hours will be available. The
management accountant has applied linear programming and defined the following constraints:
Materials 4F + 6D = 2500
Labour 10F + 8D = 4000
Machine time 5F + 10D = 3200
Demand for D 250
Labour and machine time have been identified as the binding constraints and an optimum production
plan of 240 units of F and 200 units of D has been calculated.
29 What is the contribution per unit of limiting factor for Product T in the first quarter of the year
30 Using simultaneous equations, what is the total contribution to be earned from Products B
and T in April?
 $28,400
 $35,600
 $62,000
 $77,200
31 Which of the following statements about the use of linear programming toresolve limiting
factor problems are true?
(1) The linear programming method helps to identify the optimum selling price for a product
(2) Slack occurs when more than the maximum available of the limited resource is required
 1 only
 2 only
 Both 1 and 2
 Neither 1 nor 2
32 What would be the shadow price of material in the Large Appliances division (to the nearest
whole $)?
33 Which of the following statements about the linear programming method in the Large
Appliances division are true?
(1) Product D has a slack value
(2) Contribution of $76,000 will be earned from the optimum production plan
(3) Labour and machine time intersect at the optimum point if shown on a graph
 1, 2 and 3
 2 and 3 only
 1 and 3 only
 2 only
Pricing decisions
34 Which of the following statements about price elasticity of demand is/are true?
True False
If PED < 1, total revenue will rise if the selling price of  
the product is increased.
If PED >1, the demand is said to be inelastic.  
PED may be at different levels at different points on the  
demand curve.
If a downward demand curve changes to become  
steeper, demand is becoming more elastic.
35 A company’s demand curve is P = 34 – 0.05Q. It experiences some cost discounts if it produces

200 units or more, so its cost function is as follows:
TC = 1,500 + 3Q (up to Q = 199)
TC = 1,900 + 2.8Q (if Q = 200 or more)
What is the optimum selling quantity and price, to the nearest $0.01?
Quantity
Price $
36 A company wishes to enter two different new markets.

In market A, it has estimated that demand will be relatively elastic.
In market B, demand is likely to be relatively inelastic initially.
Which price strategy is most appropriate for the company to use in each market?
A   
B   
37 Which of the following statements about pricing is/are true?

True False
Target costing results in a market driven selling price.  
Cost-plus pricing only works if the % mark-up is applied  
to total absorption costing.
A cost-plus pricing policy will always result in a profit for  
the company.
Penetration pricing aims to recover the high initial costs  
of product development.
38 Which TWO of the following circumstances that may arise in relation to the launch of a new
product favour a penetration pricing policy?
 Demand is relatively inelastic.
 There are significant economies of scale.
 The firm wishes to discourage new entrants to the market.
 The product life cycle is particularly short.
39 Product C currently sells 8,000 units per year at a price of $50 per unit. Market research shows
that an increase in price of $2 would decrease annual sales by 800 units.
What is the marginal revenue at an output level of 6,000 units (to the nearest $)?
ALG CO
ALG Co is launching two new, innovative, products onto the market and is trying to decide on the right
launch price for them.
The first product’s expected life is three years. Given the high level of costs which have been incurred
in developing the product, ALG Co wants to ensure that it sets its price at the right level and has
therefore consulted a market research company to help it do this. The research, which relates to
similar but not identical products launched by other companies, has revealed that at a price of $60,
annual demand would be expected to be 250,000 units.
However, for every $2 increase in selling price, demand would be expected to fall by 2,000 units and
for every $2 decrease in selling price, demand would be expected to increase by 2,000 units.
A forecast of the annual production costs which would be incurred by ALG Co in relation to the new
product are as follows:
Annual production (units) 200,000 250,000 300,000 350,000
$ $ $ $
Direct material 2,400,000 3,000,000 3,600,000 4,200,000
Direct labour 1,200,000 1,500,000 1,800,000 2,100,000
Overheads 1,400,000 1,550,000 1,700,000 1,850,000
40 Calculate the total fixed overheads for this product, using the high-low method.
41 Given the data above, which of the following is the correct formulation of the demand function?
 P = 190 – 0.001x
 P = 250 – 0.001x
 P = 250 – 0.0005x
 P = 310 – 0.001x
42 The second product’s variable costs have been identified as $20 per unit and its demand
function has been formulated as 240 – 0.001x.
Calculate the expected revenue for the product.
43 ALG Co plans to adopt a policy of market skimming for the two new products.
In which TWO of the following situations is market skimming an appropriate policy?
 Customers are prepared to pay high prices to obtain a new product.
 Products have a long life cycle.
 Barriers to entry deter competitors.
 There are significant economies of scale connected with output.
44 One of the directors has read about the market penetration pricing policy and wishes to have an
idea of what the differences are between market penetration and market skimming policies.
In which of the following situations would a market skimming policy be more likely to be
used, and in which situations would a market penetration policy be more likely to be used?
Skimming Penetration
The level of demand is unknown.  
Demand is expected to be elastic.  
ALG Co can discourage competitors from entering the  
market.
ALG has excess production capacity.  

45 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 only
 B only
 Both A and B
 Neither A nor B
THREE DEPARTMENTS
The following are performance figures for three retail departments operated by a shop.
Café Bedding Furniture Total
$ $ $ $
Sales 10,000 25,000 50,000 85,000
Variable costs 7,000 13,000 29,000 49,000
Share of fixed shop overheads 5,000 6,000 8,000 19,000
Profit/loss (2,000) 6,000 13,000 17,000
The furniture department is located on the ground floor of the shop, and the bedding department and
café are located on the fifth floor.
46 The following statements have been made about the café:

1 The café should be closed down as it is loss making.
2 Without the café, the shop’s total profit would be higher.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
47 You have been informed that if the café is shut down, fixed shop overheads of $3,500 would be
saved, but the bedding department is likely to lose 10% of its revenues.
If the café is closed, what will the new profit figure be?
48 Which of the following is the most likely explanation of why the bedding department will lose
10% of its revenues?
 Customers often visit the café after they have been in the bedding department.
 Customers have to go through the bedding department to get to the café.
 Customers often visit the furniture department and the café department together.
 The bedding department and café are complementary.
49 If the café is shut, what measure can the shop take that is most likely to prevent the bedding
department losing 10% of its revenues?
 Let the bedding department also occupy the area formerly occupied by the café
 Relocate the bedding department next to the furniture department on the ground floor
 Adopt a policy of product line pricing on beds
 Adopt a policy of relevant cost pricing on beds
50 One of the directors has argued that one argument for keeping the café is that it increases the
overall level of customer satisfaction with the store. Which of the following is the most helpful
measure of the customer satisfaction generated by the café?
 New items added to the café’s menu
 Length of queues in the café
 % occupancy of the tables in the café
 Profits made by the café
CHEMCO
Chemco imports different grades of fertiliser which it sells in bulk to farmers. All products currently
make a profit. Chemco has now decided to consider refining the fertilisers by further processing, in
order to sell it to individuals for domestic use.
The quantities and associated costs are as follows:
Medium
Fertiliser Basic grade Premium
Current monthly sales quantity 100 kg 40 kg 60 kg
Current sales price per kg (farmers) $5 $7 $10
After further processing:
Sales price per kg (individual customers) $5.5 $8 $13
Further processing cost per kg $0.60 $0.80 $2
51 The following statements have been made about the fertilisers:

1 The basic fertiliser should only ever be sold in bulk to farmers.
2 If Chemco can obtain additional supplies, medium grade fertiliser should be sold to both
farmers and to individuals for domestic use.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
52 Assume the available quantity of fertiliser that Chemco can obtain is limited each month by
import quotas, but that there are no restrictions on sales demand.
To which type or types of customer should each fertiliser be sold, in order to maximise
profits?
Basic Medium grade Premium
Farmers   
Individual customers   
53 Chemco has just gained a new contract. The fertiliser it has agreed to supply needs a chemical
added as part of the refining process. The chemical is in stock but is in short supply and is also
needed by the company on an existing contract. Since the chemical is relatively unstable, any
excess inventory has to be disposed of after six months.
What is the total relevant cost of the chemical required for the new contract?
 The replacement cost of the chemical
 The price at which the chemical could be sold in the outside market
 The contribution (excluding chemical cost) foregone from using the chemical in the
existing contract
 The disposal cost of the chemical
54 Another fertiliser that Chemco sells requires two chemicals as part of the refining process. To
produce 100 kg of the fertiliser, a standard input mix of 6 litres of Chemical A and 14 litres of
Chemical B is required.
Chemical A has a standard cost of $30 per litre and Chemical B has a standard cost of $40 per litre.
During last month, the actual results showed that 5,000 kg of the fertiliser X were produced,
using a total input of 31,000 litres of Chemical A and 72,500 litres of Chemical B (103,500 litres
in total).
The actual costs of Chemicals A and B were at the standard cost of $20 and $25 per litre respectively.
Calculate the materials mix variance.
Adverse Favourable
$...................  
55 In which of the following circumstances would it NOT be reasonable to calculate a materials mix
variance?
 Proportions in the mix are changeable.
 Proportions in the mix can be controlled.
 The chemicals used in the mix are discrete.
 The usage variance of individual chemicals is of limited value.

56 Which of the following statements about uncertainty in decision-making is/are true?
True False
Mystery shopping may be used to reduce the  
uncertainty associated with making changes to an
existing product or launching a new one.
Sensitivity involves identifying a number of possible  
outcomes that may arise if the project goes ahead.
Focus groups are used to provide qualitative data  
about new products.
Pay-off tables record all possible outcomes.  
57 Tree Co is considering employing a sales manager. Market research has shown that a good sales
manager can increase profit by 30%, an average one by 20% and a poor one by 10%. Experience
has shown that the company has attracted a good sales manager 35% of the time, an average
one 45% of the time and a poor one 20% of the time.
The company’s normal profits are $180,000 per annum and the sales manager’s salary would be
$40,000 per annum.
Based on the expected value criterion, which of the following represents the correct advice
which Tree Co should be given?
 Do not employ a sales manager as profits would be expected to fall by $1,300
 Employ a sales manager as profits will increase by $38,700
 Employ a sales manager as profits are expected to increase by $100
 Do not employ a sales manager as profits are expected to fall by $39,900
58 The Mobile Sandwich Co prepares sandwiches which it delivers and sells to employees at local
businesses each day. Demand varies between 325 and 400 sandwiches each day. As the day
progresses, the price of the sandwiches is reduced and, at the end of the day, any sandwiches
not sold are thrown away. The company has prepared a regret table to show the amount of
profit which would be foregone each day at each supply level, given the varying daily levels of
demand.
Regret table
Daily supply of sandwiches (units)
325 350 375 400
325 $0 $21 $82 $120
Daily demand 350 $36 $0 $44 $78
for sandwiches (units) 375 $82 $40 $0 $34
400 $142 $90 $52 $0
Applying the decision criterion of minimax regret, how many sandwiches should the company
decide to supply each day?
 325
 350
 375
 400
THREE PRODUCTS
The matrix below shows the various contribution outcomes for three products, X, Y, and Z, depending
on whether the product price is $10 or the product price is $15.
Profit
Product P = $10 P = $15
X 60 80
Y -28 160
Z 50 90
59 Using expected values, which product should be chosen?

 Project X
 Project Y
 Project Z
 It is impossible to say
60 If the two product prices are equally likely to occur, which product or products should be chosen?
 Product X
 Product Y
 Product Z
 Either Project X or Project Z
61 If the variable cost of Product X is $7, calculate the fall in the number of units sold if the Product
price is $15 compared with if it is $10.
units
62 If the quantity sold of Product Z was 10 when the price was $10 and 9 when the price was $15,
what would be the demand function for Product Z?
 5 – 0.2Q
 50 – 0.2Q
 50 – 5Q
 60 – 5Q
63 Which of the following is/are disadvantages of using marginal cost plus pricing?
Disadvantage Not disadvantage
It ignores fixed costs.  
The mark-up % cannot be varied.  
Budgeted output volume needs to be established.  
The basis it uses for absorption of fixed overheads is  
arbitrary.
SANDRUNNER
Sandrunner golf club is setting its annual membership fee, which will affect the number of members.
The forecast annual cash inflows from membership fees are shown below.
Membership fees
Membership fee Low Average High
$000 $000 $000
$300 180 210 270
$400 200 220 240
$450 180 205 245
$500 160 190 210
64 If the maximax decision-making technique is applied the fee set would be:
 $300
 $400
 $450
 $500
65 Which TWO of the following are criticisms of using the maximax technique?
 It presupposes an attitude of risk aversion.
 It ignores the probabilities of different outcomes.
 It ignores outcomes that are less than the best possible.
 It assumes there are opportunity losses.
66 If the minimax regret decision making technique is applied the fee set would be:
 $300
 $400
 $450
 $500
67 The committee has now decided to set the fee at $300 or $400 for the next year. For both
outcomes the probabilities are Low 0.5 Average 0.3 High 0.2. A golf club member who is a
marketing consultant has offered to carry out a survey of possible members to determine with
certainty what the outcome will be.
Calculate the maximum amount that the marketing consultant should be paid for his work.
68 Over the longer-term, the committee are concerned with the increased costs of running the golf
club. It believes that it may be able to maximise cash flow from members by introducing
differential membership fees, so that the fees members pay will depend to some extent on how
frequently they use facilities offered by the club.
Which TWO of the following is the committee MOST likely to take into account when
considering whether to introduce differential membership fees?
 The subscriptions charged by other golf clubs in the area
 The profits made by the club shop
 The amount of usage of the course at weekends (the busiest time of the week)
 The number of members using the club’s restaurant facilities
MYLO (SECTION B, SEPTEMBER 2016)

EXAM SMART
software.
The following scenario relates to Questions 62 – 66. Each question is worth 2 marks.
Mylo runs a cafeteria situated on the ground floor of a large corporate office block. Each of the five
floors of the building are occupied and there are in total 1,240 employees.
Mylo sells lunches and snacks in the cafeteria. The lunch menu is freshly prepared each morning and
Mylo has to decide how many meals to make each day. As the office block is located in the city centre,
there are several other places situated around the building where staff can buy their lunch, so the level
of demand for lunches in the cafeteria is uncertain.
Mylo has analysed daily sales over the previous six months and established four possible demand
levels and their associated probabilities. He has produced the following payoff table to show the daily
profits which could be earned from the lunch sales in the cafeteria:
Demand level Probability Supply level
450 620 775 960
$ $ $ $
450 0.15 1,170 980 810 740
620 0.30 1,170 1,612 1,395 1,290
775 0.40 1,170 1,612 2,015 1,785
960 0.15 1,170 1,612 2,015 2,496
69 If Mylo adopts a maximin approach to decision-making, which daily supply level will he choose?
 450 lunches
 620 lunches
 775 lunches
 960 lunches
70 If Mylo adopts a minimax regret approach to decision-making, which daily supply level will he
choose?
 450 lunches
 620 lunches
 775 lunches
 960 lunches
71 Which of the following statements is/are true if Mylo chooses to use expected values to assist in
his decision-making regarding the number of lunches to be provided?
1 Mylo would be considered to be taking a defensive and conservative approach to his
decision
2 Expected values will ignore any variability which could occur across the range of possible
outcomes
3 Expected values will not take into account the likelihood of the different outcomes
occurring
4 Expected values can be applied by Mylo as he is evaluating a decision which occurs many
times over
 1, 2 and 3
 2 and 4
 1 and 3
 4 only
72 The human resources department has offered to undertake some research to help Mylo to
predict the number of employees who will require lunch in the cafeteria each day. This
information will allow Mylo to prepare an accurate number of lunches each day.
What is the maximum amount which Mylo would be willing to pay for this information (to the
nearest whole $)?
 $191
 $359
 $478
 $175
73 Mylo is now considering investing in a speciality coffee machine. He has estimated the following
daily results for the new machine:
$
Sales (650 units) 1,300
Variable costs (845)
Contribution 455
Incremental fixed costs (70)
Profit 385
Which of the following statements are true regarding the sensitivity of this investment?
1 The investment is more sensitive to a change in sales volume than sales price
2 If variable costs increase by 44% the investment will make a loss
3 The investment’s sensitivity to incremental fixed costs is 550%
4 The margin of safety is 84.6%
 1, 2 and 3
 2 and 4
 1, 3 and 4
 3 and 4

1 Which of the following statements about budgeting is/are true?
True False
A rolling budget is a budget that starts at nil every  
period and requires managers to justify every item of
expenditure.
A cash flow budget is a good example of feed-forward  
control.
An incremental budget is a budget which, having been  
established at the beginning of a period is then
constantly amended and extended on account of
developing circumstances.
An advantage of activity-based budgets is that they  
enable more efficient improvement programmes to be
implemented.
2 Match the following examples of information to the category of information to which they relate.
Internal External Internal External
historic historic anticipated anticipated
Government inflation    
statistics
Purchases made by    
customers
Cash flow forecast for    
the next five years
Inventory movement    
records
3 Match the following descriptions of standards to the standards which they describe
Attainable Basic Ideal Current
Kept unchanged over a    
period of time
Makes no allowance for    
normal losses, waste and
machine downtime
Assumes an efficient level of    
operation, but includes
allowances for normal loss,
waste and machine
downtime
Based on working conditions    
and prices that apply now
4 Which of the following statements about changing budgetary systems is/are true?
True False
The costs of implementation may outweigh the benefits.  
Employees will always welcome any new system which  
improves planning and control within the organisation.
The time and cost involved in the system transition may initially  
lead to control being worse not better.
Employees will adapt easily to the new system and this will  
increase their motivation.
5 Which of the following statements about the master budget is/are true?
True False
It sets out the timetable for budget preparation.  
It is usually prepared before the functional budgets.  
It includes a budgeted statement of profit or loss,  
statement of financial position and cash budget.
It is always prepared on a top-down basis.  
6 Which of the following statements about zero based budgeting is/are true?
True False
It makes it easier for employees to artificially inflate  
budgets.
It facilitates improvements in processes.  
Employees will focus on eliminating wasteful  
expenditure.
Short-term benefits could be emphasised over long-  
term benefits.
KENNETH CO
Kenneth Co makes many products, one of which is Product Z. Kenneth Co is considering making
various changes to the way it approaches the budgeting process, including adopting an activity-based
costing approach in place of the current practice of absorbing overheads using direct labour hours.
The main budget categories and cost driver details for October are set out below, excluding direct
material costs:
Budget category $ Cost driver details
Direct labour 128,000 8,000 direct labour hours
Set-up costs 22,000 88 set-ups each month
Quality testing costs* 34,000 40 tests each month
Other overhead costs 32,000 absorbed by direct labour hours
* A quality test is performed after every 75 units produced
The following data for Product Z is also provided:
 Direct materials: budgeted cost of $21.50 per unit
 Direct labour: budgeted at 0.3 hours per unit
 Batch size: 30 units
 Set-ups: 2 set-ups per batch
 Budgeted volume for October: 150 units
7 Calculate, to the nearest $0.01, the budgeted unit cost of Product Z for October using a direct
labour-based absorption method for all overheads.
8 Calculate, to the nearest $0.01, the budgeted unit cost of Product Z for October using an
activity-based costing approach for all overheads.
9 Kenneth Co is currently using an incremental approach to budgeting, but its Finance Director
wishes to switch to a zero-based approach.
Which of the following are advantages of the incremental approach to budgeting?
Advantage Not advantage
It encourages managers to spend up to the maximum  
allowed in the budget.
It is a straightforward approach for inexperienced  
managers to apply.
It is suitable for organisations where historic costs are  
a good guide to future costs.
It forces employees to avoid wasteful expenditure.  
10 Which of the following describes a zero-based budgeting approach?

 Updating the budget regularly and controlling performance with the use of variance
analysis that analyses variances into planning and operational variances
 Using the current year’s results as a starting point and updating the budget for changes in
activity or inflation
 Analysing the cost of each activity, identifying alternative ways of performing the activity
and assessing the consequences of performing the activity at different levels or not at all
 Using an adaptive management process to prepare budgets that are focused on cash
flows rather than cost control
11 Which TWO of the following are disadvantages of the zero-based approach to budgeting?
 Zero-based budgeting does not respond to changes in the economic environment.
 It is difficult to rank activities that have qualitative rather than quantitative benefits.
 It restricts management from changing plans once the budget has been approved.
 Operational managers will become less motivated if zero-based budgeting is introduced,
as they will not be involved in the budgeting process.

12 The total costs for a factory’s first four month’s production are as follows:
Month Output Total cost
(units) ($)
January 11,000 12,000
February 15,000 17,500
March 10,000 12,500
April 13,000 16,000
If a = total fixed costs and b = variable cost per unit, the values of a and b determined by the
high-low method are as follows:
a$
b$
13 A worker takes 2 hours to produce the first unit of a product, but gets faster so that after a total
of 11.664 hours, 8 units have been completed in total.
What is the learning rate, to the nearest 0.1%?
%
14 A company’s production process involves a learning effect but the Production Manager has
indicated this will cease after 200 units have been made for the following reasons:
I Restrictions on availability of other resources e.g. machine time
II Staff working at maximum physical capacity
III Lack of incentives to encourage further improvement
Which of the above are valid reasons for reaching a steady state or production?
 I only
 I and II only
 II and III only
15 A learning curve would be expected to apply in the production of items which exhibit which of
the following features?
Apply Not apply
Simple to make  
Made largely by labour efforts  
Mass-produced  
New product  
Continuous production  
16 The following table shows the number of clients who attended a particular accountancy practice
over the last four weeks and the total costs incurred during each of the weeks:
Week Number of clients Total cost
$
1 400 36,880
2 440 39,840
3 420 36,800
4 460 40,000
Applying the high low method to the above information, which of the following could be used
to forecast total cost ($) from the number of clients expected to attend (where x = the
expected number of clients)?
 7,280 + 74x
 16,080 + 52x
 3,200 + 80x
 40,000/x
17 Tech World is a company which manufactures mobile phone handsets. From its past
experiences, Tech World has realised that whenever a new design engineer is employed, there
is a learning curve with a 75% learning rate which exists for the first 15 jobs.
A new design engineer has just completed his first job in five hours.
Note: At the learning rate of 75%, the learning factor (b) is equal to –0.415.
How long would it take the design engineer to complete the sixth job?
 2.377 hours
 1.442 hours
 2.564 hours
 5 hours
COMFYNAP CO
Comfynap Co manufactures beds and other types of recliners.
The company has been developing a new bed, designed to give extra comfort. The estimated time for
the first bed is 15 hours but the Production Director expected a learning curve of 80% to apply to the
first 32 units produced, meaning that the cumulative total time for 32 units is expected to be 157.25
hours.
The cost of labour is $60 per hour.
18 Calculate the expected labour cost of the 32nd unit to the nearest $.
19 32 units of the bed have now been produced. The first bed actually took 25 hours to make and the
total time for the first 32 beds was 110 hours, at which point the learning effect came to an end.
Calculate the actual rate of learning that occurred, to the nearest 0.1%.
20 Comfynap Co has also been developing a lounge recliner. The Production Director had assumed
that a learning rate of 75% would apply to the manufacture of the recliner. However, after
initial production had been completed, it was found that a learning rate of 83% had applied.
Which TWO of the following statements could explain the difference between the expected
learning rate and the actual learning rate?
 Assembly of the recliner was labour-intensive and repetitive.
 There was high staff turnover during the initial phase of production.
 There were a number of delays in the production process.
 The design of the recliner was changed once the initial phase of production was over.
21 Comfynap Co is also developing a garden recliner. The Production and Sales Directors are trying
to formulate a budget for this product. The Production Director has guaranteed that production
will be matched to demand, but demand is uncertain.
The directors have identified the following as possible outcomes.
Demand Probability
(units)
Worst possible outcome 15,000 0.2
Most likely outcome 28,000 0.7
Best possible outcome 50,000 0.1
The selling price will be $100. The variable cost is $40 for any production level up to 20,000
units. If production is higher than 20,000 units, then the variable cost per unit will fall to $35.
The $35 variable cost will be expected to apply to all units at that level.
Expected fixed costs are $200,000.
Using probabilistic budgeting, calculate the expected budgeted contribution of the product.
22 Which of the following statements about budgeting is/are true?

True False
A budget helps to control an organisation by forcing it to  
create a plan.
A budget helps an organisation to co-ordinate the allocation  
of resources.
A budget can help an organisation to motivate staff.  
An organisation is legally required to prepare a master budget  
annually.
Standard costing
23 Which of the following statements about different types of standards in standard costing
systems is/are true?
True False
Basic standards provide the best basis for budgeting because  
they represent an achievable level of productivity.
Ideal standards are short-term targets and useful for day-to-day  
control purposes.
An attainable standard is always based on current efficiency  
levels and costs.
Current standards are particularly useful when inflation is high.  
CORFE CO (SECTION B, SEPTEMBER 2016)

EXAM SMART
software.
The following scenario relates to Questions 24 – 28. Each question is worth 2 marks.
Corfe Co is a business which manufactures computer laptop batteries and it has developed a new
battery which has a longer usage time than batteries currently available in laptops. The selling price of
the battery is forecast to be $45.
The maximum production capacity of Corfe Co is 262,500 units. The company’s management
accountant is currently preparing an annual flexible budget and has collected the following
information so far:
Production (units) 185,000 200,000 225,000
$ $ $
Material costs 740,000 800,000 900,000
Labour costs 1,017,500 1,100,000 1,237,500
Fixed costs 750,000 750,000 750,000
In addition to the above costs, the management accountant estimates that for each increment of
50,000 units produced, one supervisor will need to be employed. A supervisor’s annual salary is
$35,000.
The production manager does not understand why the flexible budgets have been produced as he has
always used a fixed budget previously.
24 Assuming the budgeted figures are correct, what would the flexed total production cost be if
production is 80% of maximum capacity?
 $2,735,000
 $2,770,000
 $2,885,000
 $2,920,000
25 The management accountant has said that a machine maintenance cost was not included in the
flexible budget but needs to be taken into account.
The new battery will be manufactured on a machine currently owned by Corfe Co which was
previously used for a product which has now been discontinued. The management accountant
estimates that every 1,000 units will take 14 hours to produce. The annual machine hours and
maintenance costs for the machine for the last four years have been as follows:
Machine Maintenance
time costs
(hours) ($’000)
Year 1 5,000 850
Year 2 4,400 735
Year 3 4,850 815
Year 4 1,800 450
What is the estimated maintenance cost if production of the battery is 80% of maximum
capacity (to the nearest $’000)?
 $575,000
 $593,000
 $500,000
 $735,000
26 In the first month of production of the new battery, actual sales were 18,000 units and the sales
revenue achieved was $702,000. The budgeted sales units were 17,300.
Based on this information, which of the following statements is true?
 When the budget is flexed, the sales variance will include both the sales volume and sales
price variances
 When the budget is flexed, the sales variance will only include the sales volume variance
 When the budget is flexed, the sales variance will only include the sales price variance
 When the budget is flexed, the sales variance will include the sales mix and quantity
variances and the sales price variance
27 Which of the following statements relating to the preparation of a flexible budget for the new
battery are true?
1 The budget could be time-consuming to produce as splitting out semi-variable costs may
not be straightforward
2 The range of output over which assumptions about how costs will behave could be
difficult to determine
3 The flexible budget will give managers more opportunity to include budgetary slack than
a fixed budget
4 The budget will encourage all activities and their value to the organisation to be reviewed
and assessed
 1 and 2
 1, 2 and 3
 1 and 4
 2, 3 and 4
28 The management accountant intends to use a spreadsheet for the flexible budget in order to
analyse performance of the new battery.
Which of the following statements are benefits regarding the use of spreadsheets for
budgeting?
1 The user can change input variables and a new version of the budget can be quickly
produced
2 Errors in a formula can be easily traced and data can be difficult to corrupt in a
spreadsheet
3 A spreadsheet can take account of qualitative factors to allow decisions to be fully
evaluated
4 Managers can carry out sensitivity analysis more easily on a budget model which is held
in a spreadsheet
 1, 3 and 4
 1, 2 and 4
 1 and 4
 2 and 3

29 Which of the following statements about materials variances is/are true?
True False
Mix and yield variances are most appropriate where a product  
requires a set amount of different types of material.
The materials yield variance assesses whether the finished  
output was greater or less than expected, given the amount of
material that was input.
Mix and yield variances are most appropriate where the input  
proportions of the materials used in a product can be varied
without substantially changing the nature of the output.
The materials mix variance assesses the impact of varying the  
proportions of the different materials used in a product.
30 Isaacs Co has a process in which the standard mix for producing 1 unit of output is as follows:
$
5 litres of R at $8 per litre 40.00
3 litres of S at $10 per litre 30.00
4 litres of T at $2 per litre 8.00
During November 2,000 units were produced and usage was:
9,700 litres of R
6,300 litres of S
7,400 litres of T
What was the materials yield variance for November?
Adverse Favourable
$...................  
31 Product GX consists of a mix of three materials, J, K and L. The standard material cost of a unit
of GX is as follows:
$
Material J 5 kg at $4 per kg 20
Material K 2 kg at $12 per kg 24
Material L 3 kg at $8 per kg 24
During March, 3,000 units of GX were produced, and actual usage was:
Material J 13,200 kg
Material K 6,500 kg
Material L 9,300 kg
What was the materials yield variance for March?
 $6,800 favourable
 $6,800 adverse
 $1,000 favourable
 $1,000 adverse
ROMEO CO (SECTION B, DECEMBER 2016)

EXAM SMART
software.
The following scenario relates to questions 32 – 36. Each question is worth 2 marks.
Romeo Co is a business which makes and sells fresh pizza from a number of mobile food vans based at
several key locations in the city centre. It offers a variety of toppings and dough bases for the pizzas
and has a good reputation for providing a speedy service combined with hot, fresh and tasty food to
customers.
Each van employs a chef who is responsible for making the pizzas to Romeo Co's recipes and two sales
staff who serve the customers. All purchasing is done centrally to enable Romeo Co to negotiate bulk
discounts and build relationships with suppliers.
Romeo Co operates a standard costing and variances system and the standard cost card for Romeo
Co's basic tomato pizza is as follows:
Ingredient Weight Price
kg $ per kg
Dough 0.20 7.60
Tomato sauce 0.08 2.50
Cheese 0.12 20.00
Herbs 0.02 8.40
0.42
In Month 3, Romeo Co produced and sold 90 basic tomato pizzas and actual results were as follows:
Kgs brought Actual cost
Ingredient and used per kg
Dough 18.9 6.50
Cheese 14.5 21.00
Herbs 2.0 8.10
42
32 What was the total favourable material price variance for Month 3 (to 2 decimal places)?
33 What was the total adverse materials mix variance for Month 3?
 $38.14
 $41.92
 $42.88
 $81.02
34 In Month 4, Romeo Co produced and sold 110 basic tomato pizzas. Actual results were as
follows:
Kgs brought Actual cost
Ingredient and used per kg
Dough 21.3 6.60
Cheese 14.2 20.00
Herbs 2.0 8.50
45
What was the total materials yield variance for Month 4? (Calculate all workings to 2 decimal
places).
 $11.63 favourable
 $12.21 favourable
 $9.75 adverse
 $21.95 adverse
35 In Month 5, Romeo Co reported a favourable materials mix variance for the basic tomato pizza.
Which of the following statements would explain why this variance has occurred?
 The proportion of the relatively expensive ingredients used in production was less than
the standard.
 The prices paid for the ingredients used in the mix were lower than the standard prices.
 Each pizza used less of all the ingredients in actual production than expected.
 More pizzas were produced than expected given the level of ingredients input.
36 In Month 6, 100 basic tomato pizzas were made using a total of 42 kg of ingredients. A new chef
at Romeo Co used the expected amount of dough and herbs but used less cheese and more
tomato sauce per pizza than the standard. It was noticed that the sales of the basic tomato
pizza had declined in the second half of the month.
Based on the above information, which TWO of the following statements are correct?
 The actual cost per pizza in Month 6 was lower than the standard cost per pizza.
 The sales staff should lose their Month 6 bonus because of the reduced sales.
 The value of the ingredients usage variance and the mix variance are the same.
 The new chef will be responsible for the material price, mix and yield variances.

37 Which of the following statements about materials and sales mix variances is/are true?
True False
Sales mix and quantity variances are only meaningful when the  
company’s products are independent of each other.
The sales mix variance considers how the profit has been affected  
by selling products in a different ratio than initially expected.
The materials mix variance can be calculated by taking the  
difference between the actual quantity in the standard mix and
the actual quantity in the actual mix, then multiplying it by the
actual cost per kg.
The materials mix variance arises because there is a difference  
between what the input should have been for the output
achieved and the actual output.
CUT CO
Cut Co produces and sells disposable razors and non-disposable razors with replaceable blades.
Its monthly budget is as follows:
Non-disposable Pack of Disposable
razors blades razors
Sales volume (units) 1,000 2,000 500
Selling price/unit ($) 15 8 5
Variable cost/unit ($) 8 3 2
Actual results for July are:
Non-disposable Pack of Disposable
razors blades razors
Sales volume (units) 900 2,600 700
Selling price/unit ($) 16 8 4.50
Variable cost/unit ($) 8 3 2
38 The following statements have been made about July:

1 As Cut Co sold 100 less non-disposable razors at $1 more per item and 200 more
disposable razors at $0.50 less per item, there is no overall price variance.
2 The total sales volume variance was favourable.
Which of the above statements are true?
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
39 What was the total sales mix variance in July?

Adverse Favourable
$...................  
40 What was the total sales quantity variance in July?

Adverse Favourable
$...................  
41 Which of the following is/are possible causes of the sales mix variance?
Possible cause Not possible cause
The size of the market for non-disposable razors  
increased.
The production costs were as budgeted.  
Price-conscious customers switched to cheaper  
disposable razors.
A close competitor withdrew its non-disposable razor  
after safety concerns.
42 Which of the following statements about pricing strategies is/are true:

True False
If product prices are set based on standard costs, then a  
business will be unable to pass the cost of production
inefficiencies on to the customer.
The prices of complementary products cannot be set  
independently.
If a company is using target costing, the price set will be  
determined by the target cost.
Price discrimination can be achieved by setting different  
prices for different versions of the same product.

43 Conrad Co budgeted that it would sell 10,000 units based on an expected total market of
200,000 units. However, after producing the budget there was a 10% increase in industry
demand due to better economic forecasts.
Which of the following is this most likely to give rise to?
 A favourable sales price variance
 A favourable sales mix variance
 A favourable market share variance
 A favourable market size variance
44 Which of the following statements about variances is/are true?

True False
The use of planning and operational variances splits responsibility  
for performance between managers in charge of day-to-day
activities and decisions and those in charge of budgeting.
The revision of budgets for operational difficulties that have been  
experienced is likely to lead to more meaningful variance analysis.
Splitting variances into planning and operational variances will  
always make operational managers more receptive to variance
analysis.
Those in charge of budgeting are not always responsible for  
planning variances.
45 The following data relate to Product Z and its raw material content for September.
Budget
Output 11,000 units of Z
Standard materials content 3 kg per unit at $4.00 per kg
Actual output 10,000 units of Z
Materials purchased and used 32,000 kg at $4.80 per kg
It has now been agreed that the standard price for the raw material purchased in September
should have been $5 per kg.
What were the following variances for September?
Adverse Favourable
...................  
Materials operational usage variance

Adverse Favourable
...................  
46 Which of the following is/are advantages of having a system of planning and operational
variances in place?
Advantage Not an advantage
The system will highlight non-controllable operational  
variances.
Managers can justify variances as being due to bad  
planning.
Planning variances can highlight out-of-date  
standards.
The system will be based on realistic standards that  
are easy to establish.
GRAYSHOTT CO
Marcus manages production and sales of product MN at Grayshott Co. Marcus has been asked to
attend a meeting with Grayshott Co's finance director to explain the results for product MN in the last
quarter.
Budgeted and actual results for product MN were as follows:
Budget Actual
Sales volume (units) 40,000 38,000
$'000 $'000
Revenue ($65 per unit) 2,600 2,394
Material (5.2 kg @ $4 per kg) (832) (836)
Labour (2 hours @ $8 per hour) (640) (798)
Variable overheads (2 hours @ $4 per hour) (320) (399)
Fixed overheads (220) (220)
Profit 588 141
There was no opening and closing inventory in the last quarter. Grayshott Co operates a marginal
costing system.
Marcus is angry about having to attend the meeting as he has no involvement in setting the original
budget and he believes that the adverse results are due to the following circumstances which were
beyond his control:
(1) A decision by Grayshott Co's board to increase wages meant that the actual labour rate per
hour was 25% higher than budgeted.
(2) Due to the closure of a key supplier, Grayshott Co agreed to a contract with an alternative
supplier to pay 6% more per kg than the budgeted price for material. The actual cost per kg of
material was $4.40.
(3) Difficult economic conditions meant that market demand for product MN was lower by 10%.
At present Grayshott Co does not operate a system of planning and operational variances and Marcus
believes it should do so.
47 What was the market share variance for product MN for the last quarter?
 $40,400 Favourable
 $80,800 Adverse
 $38,000 Adverse (2 marks)
48 What was the adverse materials price planning variance for product MN for the last quarter?
 $30,400
 $76,000
 $45,600
 $49,920 (2 marks)
49 What was the labour rate operational variance for product MN for the last quarter?
 $159,600 Adverse
 $160,000 Adverse (2 marks)
50 Which of the following would explain a labour efficiency planning variance?

(1) A change in employment legislation requiring staff to take longer rest periods
(2) Customers demanding higher quality products leading to a change in product design
(3) The learning effect for labour being estimated incorrectly in the production budget
 1 and 2 only
 2 and 3 only
 3 only
 1, 2 and 3 (2 marks)
51 Which of the following statements regarding the problems of introducing a system of planning
and operational variances is/are true?
(1) Operational managers may argue that variances are due to the original budget being
unrealistic
(2) Operational managers may seek to blame uncontrollable external factors for the
variances
 1 only
 2 only
 Both 1 and 2
(10 marks)
52 Which of the following statements about both standard costing and total quality management
is/are true?
True False
They focus on assigning responsibility solely to senior  
managers.
They work well in rapidly changing environments.  
The philosophy of continuous improvement behind TQM is  
incompatible with predetermined standards.
Standard costs may allow for a predetermined level of scrap,  
whereas TQM aims for no scrap.
53 A profit centre manager claims that the poor performance of her division is entirely due to
factors outside her control. She has submitted the following table along with notes from a
market expert, which she believes explains the cause of the poor performance:
Budget Actual Actual
Category this year this year last year Market expert notes
Sales volume (units) 500 300 400 The entire market has
decreased by 25% compared
to last year. The product will
be obsolete in four years
Sales revenue $50,000 $28,500 $40,000 Rivalry in the market saw
selling prices fall by 10%
Total material cost $10,000 $6,500 $8,000 As demand for the raw
materials is decreasing,
suppliers lowered their
prices by 5%
After adjusting for the external factors outside the manager’s control, in which
category/categories is there evidence of poor performance?
 Material cost only
 Sales volume and sales price
 Sales price and material cost
 Sales price only

1 Which of the following statements about Management information systems is/are true?
True False
They are designed to provide information for internal and  
external use.
They provide information for planning, control and decision  
making.
They are designed to report on existing operations.  
They are designed to integrate an organisation’s processes to  
provide a single system for the whole organisation.
2 The following statements have been made about planning and control as described in the three
tiers of Robert Anthony’s decision-making hierarchy:
1 Strategic planning is concerned with making decisions about the efficient and effective
use of existing resources.
2 Operational control is about ensuring that specific tasks are carried out efficiently and
effectively.
 1 only
 2 only
 Neither 1 nor 2
 Both 1 and 2
3 A manufacturer and retailer of kitchens introduces an enterprise resource planning system.

Which of the following is NOT likely to be a potential benefit of introducing this system?
 Schedules of labour are prepared for manufacturing
 Inventory records are updated automatically
 Sales are recorded into the financial ledgers
 Critical strategic information can be summarised
Uses of information
4 Scowen Co decided to employ a researcher on a part-time contract to undertake a telephone
survey into the preferences of consumers for a variety of different packaging.
Which TWO of the following costs that Scowen Co has incurred are costs of data collection?
 Cost of telephone calls
 Cost of researcher
 Cost of time spent analysing results of survey
 Costs of disseminating results to managers and staff
Management reports
5 Which of the following control(s) help to ensure the security of highly confidential information?
Don’t ensure
Ensure security security
Logical access controls  
Database controls  
Hierarchical passwords  
Range checks  
6 XYZ Co creates archive copies of its database regularly.

What is the purpose of this type of control?
 Ensure the accuracy of the data
 Preserve data confidentiality
 Prevent unauthorised access to the data
 Minimise the risk of data loss
7 A government department generates information which should not be disclosed to anyone who
works outside of the department. There are many other government departments working
within the same building.
Which of the following would NOT be an effective control procedure for the generation and
distribution of the information within the government department?
 If working from home, departmental employees must use a memory stick to transfer
data, as laptop computers are not allowed to leave the department
 All departmental employees must enter non-disclosed and regularly updated passwords
to access their computers
 All authorised employees must swipe an officially issued, personal identity card at the
entrance to the department before they can gain access
 All hard copies of confidential information must be shredded at the end of each day or
locked overnight in a safe if needed again

8 Which of the following statements about performance frameworks is/are true?
True False
In the balanced scorecard the set of indicators which measure  
whether value is being added to the shareholders is known as
the innovation and learning perspective.
The balanced scorecard looks at both internal and external  
matters concerning the organisation.
The Building Blocks model focuses solely on non-financial  
measures.
The Building Blocks model considers competitiveness, resource  
utilisation and flexibility as dimensions of performance.
9 A company has had some problems with staff motivation and retention and has decided to
introduce some targets.
Which target is it likely to face the biggest potential difficulty setting?
 Staff turnover rate
 Level of absenteeism
 Number of working hours
 Level of staff satisfaction
10 A company’s sales and cost of sales figures have remained unchanged for the last two years.
The following information has been noted:
Year ended 31 May 2015 31 May 2014
Inventory turnover period 45 days 38 days
Payables payment period 40 days 35 days
Receivables payment period 60 days 68 days
Current ratio 1.1 1.3
Quick ratio 1.3 1.4
The following statements have been made about the company’s performance for the most
recent year:
1 Customers are taking longer to pay and this may have contributed to the decline in the
company’s current ratio.
2 Inventory levels have increased and this may have contributed to the decline in the
company’s quick ratio.
 1 only
 2 only
 Both 1 and 2
 Neither 1 nor 2
11 Binny Co has annual sales of $960,000 and a current ratio of 3.2:1. All of its sales are for cash
and are priced at a mark-up on cost of 50%. The average cash balance is $40,000 and the
inventory turnover period is 90 days.
Assuming 360 days in a year, what is Binny Co’s quick ratio (acid test ratio)?
 0.64
 0.53
 0.80
 1.56
BUS CO
Bus Co is a large bus operator, operating long-distance bus services across the country. There are three
other national operators in the country. Last month, an independent survey of 40,000 passengers was
carried out, the results of which are shown in the table below:
Table: Bus passenger satisfaction % by national operator
Value for
Operator money Punctuality Journey time
Bus 68 80 82
Prime 58 80 83
Express 67 76 85
Transit 62 78 86
Based on feedback that it has had from a recent survey it has undertaken of its own customers, Bus Co
has calculated a rating for overall customer satisfaction, based on a weighted average which, it asserts,
reflects the importance customers surveyed placed on each of the three criteria above. The weightings
used were as follows:
Value for money 40%
Punctuality 32%
Journey time 28%
The managing director (MD) of Bus Co made a public statement saying that: ‘Independent research
has shown that our customers are the most satisfied of any national bus operator. Independent
research confirms that we lead our competitors on what matters most to customers. We are ahead of
them on value for money and punctuality. We are also striving to lower our environmental footprint. ’
In order to improve customer satisfaction, the MD has proposed that Bus Co should introduce an
greater variety of tickets. Currently all four operators offer standard daily single or return, or weekly
tickets, on particular routes. The MD has proposed that Bus Co should introduce Rover tickets,
allowing unlimited daily or weekly travel on all routes in certain areas, and off-peak fares, which would
apply to certain routes outside the rush hours. He has also proposed the introduction of Smartcard
tickets on the busiest routes, allowing customers to swipe their tickets on electronic readers as they
enter and leave the bus.
12 Using the customer satisfaction criteria calculated by Bus Co, rank the four bus operators, with
the operator with the highest customer satisfaction ranked first.
Bus
Prime
Express
Transit
13 State which of the following assertions made by the managing director are true and which are
false.
True False
Independent research has shown that Bus Co’s passengers  
are the most satisfied of any national bus operators.
Independent research confirms that Bus Co leads its  
competitors on what matters most to customers.
Independent research confirms that Bus Co is ahead of its  
competitors on value for money.
Independent research confirms that Bus Co is ahead of its  
competitors on punctuality.
14 Match the following measures to the value for money criteria of Economy, Efficiency and
Effectiveness.
Occupancy rate of buses   
Utilisation rate for drivers   
Percentage of customers satisfied with cleanliness of   
buses
Percentage of carbon emissions relative to target set   
15 Which of the following is least likely to improve punctuality on Bus Co’s routes?
 No longer accepting cash on buses and only accepting prepaid tickets
 Amending the timetable to allow for longer journey times on certain routes during busy
periods
 Introducing a greater range of tickets on some routes
 Allowing customers to use Smartcard tickets on busiest routes
16 Which of the following Building Block dimensions proposed by Fitzgerald and Moon is the
introduction of off-peak fares least likely to address?
 Competitiveness
 Quality
 Resource utilisation
 Flexibility
JAMAIR CO
Jamair was founded in September 20X1 and is one of a growing number of airlines in the country of
Shania. Jamair’s strategy is to operate as a low-cost, high efficiency airline.
The airline was given an ‘on time arrival’ ranking of seventh best by Shania’s aviation authority, who
rank all 50 of the country’s airlines based on the number of flights which arrive on time at their
destinations. 48 Jamair flights were cancelled in 20X7 compared to 35 in 20X6. This increase was due
to an increase in the staff absentee rate at Jamair from 3 days per staff member per year to 4.5 days.
The average ‘ground turnaround time’ for airlines in Shania is 50 minutes, meaning that, on average,
planes are on the ground for cleaning, refuelling, etc for 50 minutes before departing again. Jamair has
increased the number of cleaners and also the number of spot checks of cleaners’ work
The number of passengers carried by the airline has grown from 300,000 passengers on a total of
3,428 flights in 20X1 to 920,000 passengers on 7,650 flights in 20X7.
Media reports suggest that other aircraft companies may be interested in bidding for Jamair Co.
17 Which TWO of the following strategies are likely to aid Jamair Co’s objective of operating as a
low-cost, high efficiency airline?
 Operating mostly in capital cities to reduce landing costs
 Using only one type of aircraft
 Having Premium, Business and Economy seat classes
 Focusing on e-commerce with customers booking tickets and checking in for flights online
18 Match the following objectives of Jamair Co to the perspective of the balanced scorecard to
which they relate.
Financial Customer Internal Learning
Ensuring flights are on time    
Using fewer planes to transport    
customers
Improving turnaround times    
Improving cleanliness of planes by    
spot checks
19 Match the following performance measures used by Jamair Co to the perspective of the
balanced scorecard to which they relate.
Absentee rates of employees    
Planes’ lease costs per customer    
Revenue per passenger mile    
Number of flights cancelled    
20 Which FOUR of the following are disadvantages with using the balanced scorecard?
 It steers Jamair away from solely focusing on financial measures.
 It cannot resolve conflicts between short-term and long-term objectives.
 An improvement in one perspective of the balanced scorecard can be made without
affecting the other three perspectives.
 It can be difficult to gain an overall impression of the results provided.
 There is no direct link between the overall results of the scorecard and the creation of
shareholder value.
 The balanced scorecard will be of limited effectiveness if Jamair’s strategy is unclear.
21 The following statistics are available about Jamair and two of its principal competitors.
Jamair Competitor Competitor
1 2
Profit attributable to shareholders ($ million) 371 546 286
Share price at year-end ($) 9.0 6.0 4.5
Shares in issue at year-end (million) 520 1,100 600
Fleet size (number of aircraft) 17 29 25
Kilometres flown (million) 56 92 65
Are the following statement relating to the data above true or false?
True False
Jamair Co has a higher P/E ratio than its competitors, which  
may reflect the rumours about a takeover
Competitor 2 appears to do a greater proportion of long-  
haul flights than Jamair or Competitor 1.

22 Which of the following statements about transfer pricing is/are true?
True False
Cost-based transfer prices are most appropriate where there is  
an intermediate market for the product.
When the producing division is operating at full capacity, an  
opportunity cost based approach should be used for the transfer
price.
The maximum transfer price is the sum of the supplying  
division’s marginal cost and opportunity cost of the item
transferred.
23 Which of the following statements about divisional performance measures is/are true?
True False
Residual income is better for comparing divisions of different  
sizes.
Return on investment may cause a manager to reject a project  
that exceeds the head office target, if the project will earn less
than the division’s existing Return on investment.
A disadvantage of Residual income is that it requires an estimate  
of cost of capital.
A disadvantage of both Return on investment and Residual  
income is that they may appear to improve as a division’s assets
get older.
24 Tom has been questioned about the performance of his division, which has been worse than his
Chief Executive expected. Tom has submitted the following comments on the performance of
his division:
Category Budget Actual last Actual this
this year year year
Sales volume (units) 6,000 5,000 4,200 There has been a 20%
decrease in the market
compared with last year.
Sales revenue $600,000 $450,000 $317,000 Market selling prices have
fallen by 15% compared
with last year.
Material cost $113,400 $105,000 $81,600 Suppliers have increased
their prices by 5%
compared with last year.
Material usage (kgs) 16,200 15,000 11,500 Changes in production have
meant that each unit
produced used 10% less
material than last year.
After taking account of the factors that are not under Tom’s control, in which categories did
his division perform poorly (defined as performing below budget AND performing below what
would have been expected, based on Tom’s comments)?
Poor Not poor
performance performance
Sales volume  
Sales price  
Material cost  
Material usage  
25 At the end of 20X1, an investment centre has net assets of $1m and annual operating profits of
$190,000. However, the bookkeeper forgot to account for the following:
A machine with a net book value of $40,000 was sold at the start of the year for $50,000 and
replaced with a machine costing $250,000. Both the purchase and sale are cash transactions. No
depreciation is charged in the year of purchase or disposal. The investment centre calculates
return on investment (ROI) based on closing net assets.
Assuming no other changes to profit or net assets, what is the return on investment (ROI) for
the year?
 18.8%
 19.8%
 15.1%
 15.9%
CARDALE CO
Cardale Industrial Metal Co (CIM Co) is a large supplier of industrial metals, that is split into a number
of divisions. Each division operates separately as an investment centre, with each one having full
control over its non-current and current assets. Head Office imposes common accounting policies
including monthy rates of depreciation.
Each divisional manager is paid a salary of $120,000 per annum plus an annual performance-related
bonus, based on the return on investment (ROI) achieved by their division for the year. Each divisional
manager is expected to achieve a minimum ROI for their division of 10% per annum. If a manager only
meets the 10% target, they are not awarded a bonus. However, for each whole percentage point
above 10% which the division achieves for the year, a bonus equivalent to 2% of annual salary is paid,
subject to a maximum bonus equivalent to 40% of annual salary.
The following figures relate to Division N for the year ended 31 August 20X5:
Division N
$’000
Sales 8,700
Net profit 1,286
Non-current assets 14,980
Inventory, cash and trade receivables 3,260
Trade payables 1,400
Net profit is stated after deducting $684,000 apportioned Head Office costs.
Division N’s manager is concerned that his bonus may be lower in comparison with the manager of
Division F, a smaller division than Division N. He has found out that the manager of Division F has
achieved a return on investment of 28.5% for the year ended 31 August 20X5, which Division N’s
manager regards as very high.
Division F’s manager has stated that his figures are good because he runs his department very
efficiently and is always looking to improve the decision-making process. To that end he invested in a
strategic executive information system just before 31 August 20X5.
Division N’s manager believes that it would be better if Cardale Co switched to basing its bonus system
on the size of residual income generated by each Division, based on a cost of capital of 10%.
26 Calculate, to the nearest 0.1%, the return on investment for Division N for the year ended 31
August 20X5.
27 Calculate the bonus that the manager of Division F will be paid for the year ended 31 August
20X5.
28 Which of the following is/are possible reasons why the manager of Division F has achieved a
high ROI for the year ended 31 August 20X5?
Possible Not possible
reason reason
Division F’s manager has kept cash balances high.  
The accumulated depreciation on Division F’s non-current  
assets is low.
Division F’s manager invested in the strategic management  
information system just before the year-end.
29 For which TWO of the following reasons might Division F’s manager be concerned about the
fairness of basing bonus on RI in the way proposed by Division N’s manager?
 Division F is smaller than Division N.
 It reduces the incentive for Division F to undertake investments where the benefits may
be marginal.
 Division F has a lower risk profile than Division N.
 Division F’s manager is more likely to be penalised for taking decisions that are in the
best interests of Cardale Co.
30 For which of the following reasons is the manager of Division F most likely to have invested in a
strategic executive information system?
 The system lists in detail all the accounting information relating to his department.
 The system allows easier access to external sources of information.
 The system will help integrate information needs across Cardale Co.
 The system provides expert knowledge and assistance in decision-making in areas where
the manager lacks expertise.
ANDOVER AND WINCHESTER

Andover and Winchester are divisions within Petersfield Co, a large diversified business. The Andover
division was only created last year. The following performance statements are available for the year:
Andover Winchester
$000 $000
Revenue 200 450
Variable costs (60) (200)
Contribution 140 250
Fixed costs (25) (70)
Divisional profit before central costs 115 180
Apportioned central costs (60) (120)
Divisional net profit 55 60
Divisional net assets (@NBV) 375 200

The overall cost of financing for the company is 10%. The managers have full discretion over incurring
fixed costs.
31 What is the correct RI (in $000) for appraising the managers of the two divisions?
Andover
$ 000
Winchester
$ 000
Andover Winchester
 $77.5 $160
 $102.5 $230
 $17.5 $40
 $23 $46
32 The following statements have been made:

1 Andover division’s ROI is less than half that of Winchester division
2 One reason Winchester division appears to be performing better could be due to the fact
that it is significantly older than Andover division
 1 only
 2 only
 Both 1 and 2
 Neither 1 nor 2
33 Which of the following options shows the words that correctly fill in the gaps in the sentence?
The managers of Andover and Winchester divisions should be assessed on costs, revenue and
investments that are ............... their division. To promote goal-congruent behaviour by the two
divisions, .............. should be used to compare them. Efficiency variances ............... be used to
assess the managers of the two centres.
 controllable by/RI/can
 incurred by/RI/cannot
 controllable by/ROI/can
 incurred by/ROI/cannot
34 One of the non-executive directors at Petersfield Co has queried the means for rewarding the
managers of its divisions. He wonders whether managers can increase their rewards by trying to
manipulate the short-term results of their divisions.
Which of the following measures would be MOST effective in addressing the possible
problems of short-term manipulation of results?
 Rewarding managers for the performance of their division only
 Linking manager rewards to the overall performance of the company and not divisional
results
 Rewarding managers if they fulfil a number of financial and non-financial targets
 Only rewarding managers by means of a basic salary and not providing any rewards for
short-term performance
35 The board has agreed that the performance of each division should be partly judged by
customer satisfaction.
Which of the following measures is MOST likely to be an indication of how satisfied customers
are?
 The number of items rejected by internal quality control processes
 The level of staff turnover
 The number of new products launched by the division
 The % of on-time deliveries

36 Which of the following is LEAST suitable as a method of evaluating the performance of a public
sector organisation?
 Assessing Value-for-money
 Measuring actual performance in relation to financial targets
 Appointment of a regulator to undertake monitoring
 Conducting a survey of the users of the service
37 Core Care Trust is a public sector 'health and care' home providing care for the elderly. Income
is received on a contract basis from the local government authority. Care workers are mainly
full-time staff but occasionally temporary staff from a local employment agency must be
brought in, at great expense, to fill staff rota gaps.
There is a regulatory body monitoring the work done by care homes known as CHQC which sets
targets for the standard of care expected.
It is generally regarded that residents spend a much happier time whilst in a care home if they
are able to establish long-lasting relationships with care home staff providing their direct care.
The six performance measures below are used by the management of Core Care Trust to
monitor performance as part of the value for money framework.
Match the performance measures to the elements of the value for money framework which
they are measuring.
Options
Direct staff cost as a Temporary staff usage
Food cost per meal
percentage of contract (hours) as a percentage of
served to residents
income total staff hours
Achieving the CHQC’s Number of voids (the

designated standard of number of empty beds as a Staff turnover
care for the elderly percentage of total
SEATOWN COUNCIL
Seatown is located on the coast. The town’s main industry is tourism, with an emphasis on family
holidays. Consequently, the cleanliness of the town’s beaches is a major factor in the town’s success.
The town council has a cleaning department that is responsible for keeping the beaches clean and tidy.
Early every morning the beaches are swept using equipment that is towed behind tractors. Most litter
takes the form of paper and plastic packaging, but it can include glass bottles and aluminium cans.
To try to prevent litter being left on the beach the town council also places bins on the beaches above
the high water mark. Litter bins need to be emptied regularly, otherwise holidaymakers pile their
rubbish beside the bins. This leads to litter being spread by the wind or by seabirds scavenging for food
scraps.
The cost of cleaning the beaches is a major expense for the town council. The management team of
the town council has asked the internal audit department to investigate whether the town is getting
good “value for money” from this expenditure.
38 Which TWO of the following could be used as performance measures of the efficiency of the
beach cleaning operations?
 Tractor running costs
 How much time is spent sweeping the sands
 Amount of litter collected
 How frequently bins are being emptied
39 Which THREE of the following could be used as performance measures of the effectiveness of
the beach cleaning operations?
 Spot checks on litter bins by council officers
 The number of litter bins used
 Time spent by employees on each area of the beaches
 Ratings of beaches by external agencies
 Complaints by visitors
 Amount of vehicle miles covered by tractors
40 To help with its analysis, the council wishes to estimate the number of visitors to Seatown annually.
Which of the following is likely to be the least reliable indicator of the number of visitors to
Seatown during the year?
 Number of people on beaches ascertained by regular spot counts
 Number of hotel rooms in Seatown
 Number of users of car parks
 Number of visitors to tourist information centres
41 Which of the following would be a difficulty/difficulties in analysing the effectiveness of beach

and litter bin cleaning activities compared with each other and over the year?
Difficulty Not a difficulty
Some refreshment kiosks will only be open at certain  
times of the year.
The number of visitors will be less in winter.  
Certain areas of Seatown’s beaches are more difficult  
to sweep.
Sweeping should pick up litter that poses a threat to  
beach user safety.
42 Seatown Council is considering using Fitzgerald and Moon’s Building Block model as well as
Value for Money analysis.
Which of the following completes this paragraph?
The variation in frequency of sweeping beaches during the year is a measure of _____, whereas
the number of visitors compared with other resorts is a measure of ______.
 resource usage/service quality
 flexibility/service quality
 resource usage/competitiveness
 flexibility/competitiveness

43 The performance of an organisation can be influenced by internal and external factors. Which of
the following are internal factors and which are external factors?
Internal External
Growth in the economy  
Director leaves to join a competitor  
Market shortage of labour  
New health and safety regulations  
PART 2 QUESTIONS: Section C
1 THE TELEPHONE CO (Q1, DECEMBER 2011)

The Telephone Co (T Co) is a company specialising in the provision of telephone systems for
commercial clients. There are two parts to the business:
 Installing telephone systems in businesses, either first time installations or replacement
installations;
 Supporting the telephone systems with annually renewable maintenance contracts.
T Co has been approached by a potential customer, Push Co, who wants to install a telephone system
in new offices it is opening. While the job is not a particularly large one, T Co is hopeful of future
business in the form of replacement systems and support contracts for Push Co. T Co is therefore keen
to quote a competitive price for the job. The following information should be considered:
(1) One of the company’s salesmen has already been to visit Push Co, to give them a demonstration
of the new system, together with a complimentary lunch, the costs of which totalled $400.
(2) The installation is expected to take one week to complete and would require three engineers,
each of whom is paid a monthly salary of $4,000. The engineers have just had their annually
renewable contract renewed with T Co. One of the three engineers has spare capacity to
complete the work, but the other two would have to be moved from contract X in order to
complete this one. Contract X generates a contribution of $5 per engineer hour. There are no
other engineers available to continue with Contract X if these two engineers are taken off the
job. It would mean that T Co would miss its contractual completion deadline on Contract X by
one week. As a result, T Co would have to pay a one-off penalty of $500. Since there is no other
work scheduled for their engineers in one week’s time, it will not be a problem for them to
complete Contract X at this point.
(3) T Co’s technical advisor would also need to dedicate eight hours of his time to the job. He is
working at full capacity, so he would have to work overtime in order to do this. He is paid an
hourly rate of $40 and is paid for all overtime at a premium of 50% above his usual hourly rate.
(4) Two visits would need to be made by the site inspector to approve the completed work. He is
an independent contractor who is not employed by T Co, and charges Push Co directly for the
work. His cost is $200 for each visit made.
(5) T Co’s system trainer would need to spend one day at Push Co delivering training. He is paid a
monthly salary of $1,500 but also receives commission of $125 for each day spent delivering
training at a client’s site.
(6) 120 telephone handsets would need to be supplied to Push Co. The current cost of these is
$18.20 each, although T Co already has 80 handsets in inventory. These were bought at a price
of $16.80 each. The handsets are the most popular model on the market and frequently
requested by T Co’s customers.
(7) Push Co would also need a computerised control system called ‘Swipe 2’. The current market
price of Swipe 2 is $10,800, although T Co has an older version of the system, ‘Swipe 1’, in
inventory, which could be modified at a cost of $4,600. T Co paid $5,400 for Swipe 1 when it
ordered it in error two months ago and has no other use for it. The current market price of
Swipe 1 is $5,450, although if T Co tried to sell the one they have, it would be deemed to be
‘used’ and therefore only worth $3,000.
(8) 1,000 metres of cable would be required to wire up the system. The cable is used frequently by
T Co and it has 200 metres in inventory, which cost $1.20 per metre. The current market price
for the cable is $1.30 per metre.
(9) You should assume that there are four weeks in each month and that the standard working
week is 40 hours long.
Required:
(a) Prepare a cost statement, using relevant costing principles, showing the minimum cost that T Co
should charge for the contract. Make DETAILED notes showing how each cost has been arrived
at and EXPLAINING why each of the costs above has been included or excluded from your cost
statement. (14 marks)
(b) Explain the relevant costing principles used in part (a) and explain the implications of the
minimum price that has been calculated in relation to the final price agreed with Push Co.
(6 marks)
(20 marks)
Cost volume analysis
2 THE ALKA HOTEL

The Alka Hotel is situated in a major city close to many theatres and restaurants.
The Alka Hotel has 25 double bedrooms and it charges guests $180 per room per night, regardless of
single or double occupancy. The hotel’s variable cost is $60 per occupied room per night.
The Alka Hotel is open for 365 days a year and has a 70% budgeted occupancy rate. Fixed costs are
budgeted at $600,000 a year and accrue evenly throughout the year.
During the first quarter (Q1) of the year the room occupancy rates are significantly below the levels
expected at other times of the year with the Alka Hotel expecting to sell 900 occupied room nights
during Q1. Options to improve profitability are being considered, including closing the hotel for the
duration of Q1 or adopting one of two possible projects as follows:
Project 1 – Theatre package
For Q1 only the Alka Hotel management would offer guests a ‘theatre package’. Couples who pay for
two consecutive nights at a special rate of $67.50 per room night will also receive a pair of theatre
tickets for a payment of $100. The theatre tickets are very good value and are the result of long
negotiation between the Alka Hotel management and the local theatre. The theatre tickets cost the
Alka Hotel $95 a pair. The Alka Hotel’s fixed costs specific to this project (marketing and
administration) are budgeted at $20,000.
The hotel’s management believes that the ‘theatre package’ will have no effect on their usual Q1
customers, who are all business travellers and who have no interest in theatre tickets, but will still
require their usual rooms.
Project 2 – Restaurant
There is scope to extend the Alka Hotel and create enough space to operate a restaurant for the
benefit of its guests. The annual costs, revenues and volumes for the combined restaurant and hotel
are illustrated in the following graph:
Note: The graph does not include the effect of the ‘theatre package’ offer.
Required:
(a) Using the current annual budgeted figures, and ignoring the two proposed projects, calculate
the breakeven number of occupied room nights and the margin of safety as a percentage.
(4 marks)
(b) Ignoring the two proposed projects, calculate the budgeted profit or loss for Q1 and explain
whether the hotel should close for the duration of Q1. (4 marks)
(c) Calculate the breakeven point in sales value of Project 1 and explain whether the hotel should
adopt the project. (4 marks)
(d) Using the graph, quantify and comment upon the financial effect of Project 2 on the Alka Hotel.
Note: There are up to four marks available for calculations. (8 marks)
(20 marks)
3 HEALTH NUTS (Q1, SEPTEMBER/DECEMBER 2020)

The following scenario relates to five requirements.
Health Nuts is a fitness centre, offering ‘pay as you go’ gym facilities. It has a fully fitted gym with the
capacity to accommodate 200 users at one time. It also has 100 car parking spaces and an onsite café,
both of which are only for customers using the gym. The fitness centre has shower facilities for
customers and Health Nuts provides all customers with a clean towel to use on entry. It is open 360
days a year, from 7.00am until 9.00pm.
Customers pay $8.40 for access to the gym for one hour plus unlimited time in the café. If customers
want to use the car park, they have to pay an additional $1 per visit and 80% of visiting customers use
the car park. Health Nuts has been monitoring the number of customers attending throughout each
day for the month of June, which has considered to be an average month, and for which Health Nuts
was open for 30 days. It has determined that the average number of customers per day is 330 with 40
of these customers attending during the time of 9.00am to 5.00pm.
The total costs of the fitness centre for June, excluding the café, have also been recorded and analysed
as follows:
Fixed costs per month $48,000
Variable cost per customer $1.20
On average, half of the customers also used the café in June, with an average spend per customer of
$2.20. Of this spend, 60% related to drinks, which have a profit margin of 60%, and the remainder
related to food items, which have a profit margin of 40%. The specific fixed costs associated with
running the café are $3,600 for the month.
Créche proposal
After reviewing all of the above information, the manager of Health Nuts has put together a proposal
to close the café at the fitness centre and convert it into a crèche for children. This would mean that
parents could leave their children in the crèche whilst they use the fitness centre between the hours of
9.00am and 5.00pm only. The charge for the crèche would be $4 per child, per hour.
Initial research suggests that customers have an average of two children each. The crèche is expected
to attract new customers and increase the average number of customers between 9.00am and 5.00pm
by 300%. Only these new customers will use the crèche facilities. Car park usage is expected to
continue to be 80%. The fixed costs associated with running the crèche are estimated to be $8,000 per
month, with a variable cost of $0.50 per child, per hour.
Required:
(a) Calculate both the number of customers Health Nuts needs to break even and the margin of
safety as a percentage for the month of June for:
(i) The gym; and (3 marks)
(ii) The café. (2 marks)
(b) Explain what each of your calculations in (a) tells Health Nuts about the performance of the gym
and the café. (3 marks)
(c) Calculate the budgeted total weighted average contribution/sales (C/S) ratio and the budgeted
profit per month for Health Nuts if it closes the café and opens a crèche instead. (6 marks)
(d) Advise Health Nuts, considering both financial and non-financial factors, whether it should
replace the café with a crèche and whether the calculations in part (c) provide enough
information to make such a decision. (6 marks)
(20 marks)
Limiting factors
4 CSC CO (Q32, SEPTEMBER 2016)
EXAM SMART
software.
CSC Co is a health food company producing and selling three types of high-energy products: cakes,
shakes and cookies, to gyms and health food shops. Shakes are the newest of the three products and
were first launched three months ago. Each of the three products has two special ingredients, sourced
from a remote part the world. The first of these, Singa, is a super-energising rare type of caffeine. The
second, Betta, is derived from an unusual plant believed to have miraculous health benefits.
CSC Co’s projected manufacture costs and selling prices for the three products are as follows:
Cakes Cookies Shakes
Per unit $ $ $
Selling price 5.40 4.90 6.00
Costs:
Ingredients: Singa ($1.20 per gram) 0.30 0.60 1.20
Ingredients: Betta ($1.50 per gram) 0.75 0.30 1.50
Other ingredients 0.25 0.45 0.90
Labour ($10 per hour) 1.00 1.20 0.80
Variable overheads 0.50 0.60 0.40
Contribution 2.60 1.75 1.20
For each of the three products, the expected demand for the next month is 11,200 cakes, 9,800
cookies and 2,500 shakes.
The total fixed costs for the next month are $3,000.
CSC Co has just found out that the supply of Betta is going to be limited to 12,000 grams next month.
Prior to this, CSC Co had signed a contract with a leading chain of gyms, Encompass Health, to supply it
with 5,000 shakes each month, at a discounted price of $5.80 per shake, starting immediately. The
order for the 5,000 shakes is not included in the expected demand levels above.
Required:
(a) Assuming that CSC Co keeps to its agreement with Encompass Health, calculate the shortage of
Betta, the resulting optimum production plan and the total profit for next month. (6 marks)
One month later, the supply of Betta is still limited and CSC Co is considering whether it should breach
its contract with Encompass Health so that it can optimise its profits.
Required:
(b) Discuss whether CSC Co should breach the agreement with Encompass Health.
Note: No further calculations are required. (4 marks)
Several months later, the demand for both cakes and cookies has increased significantly to 20,000 and
15,000 units per month respectively. However, CSC Co has lost the contract with Encompass Health
and, after suffering from further shortages of supply of Betta, Singa and of its labour force, CSC Co has
decided to stop making shakes at all. CSC Co now needs to use linear programming to work out the
optimum production plan for cakes and cookies for the coming month. The variable ‘x’ is being used to
represent cakes and the variable ‘y’ to represent cookies.
The following constraints have been formulated and a graph representing the new production
problem has been drawn:
Singa: 0.25x + 0.5y ≤ 12,000
Betta: 0.5x + 0.2y ≤ 12,500
Labour: 0.1x + 0.12y ≤ 3,000
x ≤ 20,000
y ≤ 15,000
x, y ≥ 0
Required:
(c)
(i) Explain what the line labelled ‘C = 2.6x + 1.75y’ on the graph is and what the area
represented by the points 0ABCD means. (4 marks)
(ii) Explain how the optimum production plan will be found using the line labelled ‘C = 2.6x +
1.75y’ and find the optimum point from the graph. (2 marks)
(iii) Explain what a slack value is and identify, from the graph, where slack will occur as a
result of the optimum production plan. (4 marks)
Note: No calculations are needed for part (c).
(20 marks)
5 BELLAHOUSTON CO (SEPTEMBER/DECEMBER 2021)

This scenario relates to four requirements.
Bellahouston Co manufactures three types of running shoes which it sells to sports clothing retailers:
Road which are for running on roads, Spikes which are used for racing on athletics tracks and Trail
which are used for running off-road in rural locations. Each of these products use differing amounts of
the same resources. Financial information and the resource requirements related to these products
are as follows:
Road Spikes Trail
$ $ $
Selling price per pair of shoes 60.00 45.00 52.00
Variable costs per pair of shoes:
Direct material ($5 per metre) 7.50 3.00 6.00
Direct labour ($7 per hour) 7.00 10.50 7.00
Machine hours ($10 per hour) 4.00 2.00 3.00
Fixed overheads absorbed per pair of shoes 4.00 6.00 4.00
Profit per pair of shoes 37.50 23.50 32.00
Fixed overheads are absorbed at a rate of $4 per direct labour hour. Bellahouston Co uses a
just-in-time production system.
Demand and resource availability for March
Demand for the three products for the month of March is expected to be:
Road 2,300 pairs
Spikes 1,400 pairs
Trail 1,650 pairs
Bellahouston Co has received a special order from RunWild, which is not included in the demand
estimates above. RunWild are a major sports retailer who have an extensive customer base and are
known for stocking the most popular brands of sportswear. The order is to supply a maximum of 200
pairs of each type of shoe at a discount of $8.00 on the standard selling price.
RunWild will change a financial penalty if the order is not fully complete in March. If this first order is
successful, RunWild would be keen to enter into a regular supply contract.
Usually Bellahouston Co has sufficient resources to meet production, however during March the
maximum availability for the following resources has been identified:
Direct material 7,200 metres
Direct labour 6,900 hours
Machine time 1,815 hours
Demand and resource availability for April
Bellahouston Co predicted that the resource availability in March would continue into April, however it
has been discovered that the availability of direct material and direct labour will be 15% less than in
March. The available machine time and demand estimates are unchanged. RunWild would not be
placing an order in April.
Required:
(a) (i) Calculate the optimum production plan and the resulting total contribution earned for
March, assuming that the order with RunWild is supplied in full. (7 marks)
(ii) Calculate the maximum financial penalty Bellahouston Co would be prepared to accept
from RunWild, if it does not complete RunWild's order in full. (4 marks)
(b) Discuss whether Bellahouston Co should fulfil RunWild's order in full in March. (4 marks)
(c) Define the variables and formulate the constraints and objective function to be used in a linear
programming model to determine the optimum usage of resources in April. (5 marks)
(20 marks)
Pricing decisions
6 HEAT CO (Q2, JUNE 2011)

Heat Co specialises in the production of a range of air conditioning appliances for industrial premises.
It is about to launch a new product, the ‘Energy Buster’, a unique air conditioning unit which is capable
of providing unprecedented levels of air conditioning using a minimal amount of electricity. The
technology used in the Energy Buster is unique so Heat Co has patented it so that no competitors can
enter the market for two years. The company’s development costs have been high and it is expected
that the product will only have a five-year life cycle.
Heat Co is now trying to ascertain the best pricing policy that they should adopt for the Energy Buster’s
launch onto the market. Demand is very responsive to price changes and research has established
that, for every $15 increase in price, demand would be expected to fall by 1,000 units. If the company
set the price at $735, only 1,000 units would be demanded.
The costs of producing each air conditioning unit are as follows.
$
Direct materials 42
Labour 12 (1.5 hours at $8 per hour. See note below)
Fixed overheads 6 (Based on producing 50,000 units per annum)
Total cost 60
Note
The first air conditioning unit took 1.5 hours to make and labour cost $8 per hour. A 95% learning
curve exists, in relation to production of the unit, although the learning curve is expected to finish
after making 100 units. Heat Co’s management have said that any pricing decisions about the Energy
Buster should be based on the time it takes to make the 100th unit of the product. You have been told
that the learning co-efficient, b = -0.0740005.
All other costs are expected to remain the same up to the maximum demand levels.
Required:
(a)
(i) Establish the demand function (equation) for air conditioning units; (3 marks)
(ii) Calculate the marginal cost for each air conditioning unit after adjusting the
labour cost as required by the note above; (6 marks)
(iii) Equate marginal cost and marginal revenue in order to calculate the optimum price and
quantity, (3 marks)
(b) Explain what is meant by a ‘penetration pricing’ strategy and a ‘market skimming’ strategy and
discuss whether either strategy might be suitable for Heat Co when launching the Energy
Buster. (8 marks)
(20 marks)
7 ROBBER CO (Q1, JUNE 2012)

Robber Co manufactures control panels for burglar alarms, a very profitable product. Every product
comes with a one-year warranty offering free repairs if any faults arise in this period.
It currently produces and sells 80,000 units per annum, with production of them being restricted by
the short supply of labour. Each control panel includes two main components – one keypad and one
display screen. At present, Robber Co manufactures both of these components in-house. However, the
company is currently considering outsourcing the production of keypads and/or display screens.
A newly established company based in Burgistan is keen to secure a place in the market, and has
offered to supply the keypads for the equivalent of $4.10 per unit and the display screens for the
equivalent of $4.30 per unit. This price has been guaranteed for two years.
The current total annual costs of producing the keypads and the display screens are as follows.
Display
Keypads screens
Production 80,000 units 80,000 units
$000 $000
Direct materials 160 116
Direct labour 40 60
Heat and power costs 64 88
Machine costs 26 30
Depreciation and insurance costs 84 96
Total annual production costs 374 390
Notes:
(1) Materials costs for keypads are expected to increase by 5% in six months’ time; materials costs
for display screens are only expected to increase by 2%, but with immediate effect.
(2) Direct labour costs are purely variable and not expected to change over the next year.
(3) Heat and power costs include an apportionment of the general factory overhead for heat and
power as well as the costs of heat and power directly used for the production of keypads and
display screens. The general apportionment included is calculated using 50% of the direct labour
cost for each component and would be incurred irrespective of whether the components are
manufactured in-house or not.
(4) Machine costs are semi-variable; the variable element relates to set up costs, which are based
upon the number of batches made. The keypads’ machine has fixed costs of $4,000 per annum
and the display screens’ machine has fixed costs of $6,000 per annum. Whilst both components
are currently made in batches of 500, this would need to change, with immediate effect, to
batches of 400.
(5) 60% of depreciation and insurance costs relate to an apportionment of the general factory
depreciation and insurance costs; the remaining 40% is specific to the manufacture of keypads
and display screens.
Required:
(a) Advise Robber Co whether it should continue to manufacture the keypads and display screens
in-house or whether it should outsource their manufacture to the supplier in Burgistan,
assuming it continues to adopt a policy to limit manufacture and sales to 80,000 control panels
in the coming year. (8 marks)
(b) Robber Co takes 0.5 labour hours to produce a keypad and 0.75 labour hours to produce a
display screen. Labour hours are restricted to 100,000 hours and labour is paid at $1 per hour.
Robber Co wishes to increase its supply to 100,000 control panels (i.e. 100,000 each of keypads
and display screens).
Advise Robber Co as to how many units of keypads and display panels they should either
manufacture and/or outsource in order to minimise their costs. (7 marks)
(c) Discuss the non-financial factors that Robber Co should consider when making a decision about
outsourcing the manufacture of keypads and display screens. (5 marks)
(20 marks)
Risk and uncertainty in decision making
8 CEMENT CO (Q1, JUNE 2011)

Cement Co is a company specialising in the manufacture of cement, a product used in the building
industry. The company has found that when weather conditions are good, the demand for cement
increases since more building work is able to take place. Last year, the weather was so good, and the
demand for cement was so great, that Cement Co was unable to meet demand. Cement Co is now
trying to work out the level of cement production for the coming year in order to maximise profits.
The company doesn’t want to miss out on the opportunity to earn large profits by running out of
cement again. However, it doesn’t want to be left with large quantities of the product unsold at the
end of the year, since it deteriorates quickly and then has to be disposed of. The company has received
the following estimates about the probable weather conditions and corresponding demand levels for
the coming year:
Weather Probability Demand
Good 25% 350,000 bags
Average 45% 280,000 bags
Poor 30% 200,000 bags
Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has
to be disposed of at a cost of $0.50 per bag.
Cement Co has decided to produce at one of the three levels of production to match forecast demand.
It now has to decide which level of cement production to select.
Required:
(a) Construct a pay-off table to show all the possible profit outcomes. (8 marks)
(b) Decide the level of cement production the company should choose, based on the following
decision rules:
(i) Maximin (1 mark)
(ii) Maximax (1 mark)
(iii) Expected value (4 marks)
You must justify your decision under each rule, showing all necessary calculations.
(c) Describe the ‘maximin’ and ‘expected value’ decision rules, explaining when they might be used
and the attitudes of the decision makers who might use them. (6 marks)
(20 marks)
1 YUMI CO
The following scenario relates to three requirements.
Yumi Co owns a number of restaurants. It is a well-established company, and its restaurants have
gained a favourable reputation for the quality of their meals.
Yumi Co’s restaurants are all set in rural locations, where there is limited competition and this enabled
them to develop a loyal customer base. Restaurants design their own menus and décor to fit with the
requirements of their local market.
Yumi Co has been consistently profitable, however as is the case across the restaurant industry, profit
margins are quite low and there is still a constant need for Yumi Co to monitor costs.
One of Yumi Co’s restaurants is located in the small town of Cowly. Cowly has recently been the
location for the filming of a popular television series and visitor numbers to the town have increased
significantly as a result. Yumi Co’s restaurant in Cowly has noticed a similar increase in customer
numbers.
At the start of the current month a new restaurant opened in Cowly. The manager of Yumi Co’s
restaurant in Cowly has expressed concerns about the impact this new competitor will have on their
ability to achieve profit targets for the rest of the year.
Budgets for all of Yumi Co’s restaurants are prepared by the head office. At the start of each year,
restaurant managers are given an annual budget, which is split into months. At the end of each month,
the manager receives a statement comparing actual monthly performance against budget.
The statement for the Cowly restaurant for the most recent completed month is as follows:
Actual Budget Variance
Number of customers 1,800 1,500
$ $ $
Revenue 87,300 75,000 12,300 F
Costs:
Food and drink 26,100 22,500 3,600 A
Staff wages 38,250 31,500 6,750 A
Heat, light and power 8,100 7,500 600 A
Rent, rates and other overheads 12,600 12,000 600 A
Profit 2,250 1,500 750 F
Notes:
(1) Rent, rates and other overheads are apportioned to its restaurants by Yumi Co’s head office,
based on a fixed annual charge.
(2) All other budgeted costs are treated as variable costs, based on the expected number of
customers.
Yumi Co currently adopts an incremental approach to budgeting, with the annual budget figures for
each year being based on the previous year’s figures. However, a new finance director has recently
joined the company, and he has questioned whether this is suitable for all Yumi Co’s restaurants.
The new finance director has also suggested that the company should adopt a more participative
approach to budgeting.
Required:
(a) (i) Prepare a flexed budget for the Cowly restaurant. (3 marks)
(ii) With reference to your answer from part (i), explain the main weaknesses in the current
monthly budget statements issued to the restaurants as a basis for managing
performance. (4 marks)
(b) Discuss whether an incremental approach to budgeting is appropriate for Yumi Co. (6 marks)
(c) Define a participative approach to budgeting and explain the potential advantages and
disadvantages of introducing this approach at Yumi Co. (7 marks)
(20 marks)
Quantitative analysis
2 MIC CO (Q3, DECEMBER 2013)

Mic Co produces microphones for mobile phones and operates a standard costing system. Before
production commenced, the standard labour time per batch for its latest microphone was estimated
to be 200 hours. The standard labour cost per hour is $12 and resource allocation and cost data were
therefore initially prepared on this basis.
Production of the microphone started in July and the number of batches assembled and sold each
month was as follows:
Month No of batches assembled and sold
July 1
August 1
September 2
October 4
November 8
The first batch took 200 hours to make, as anticipated, but, during the first four months of production,
a learning effect of 88% was observed, although this finished at the end of October. The learning
formula is shown on the formula sheet and at the 88% learning rate the value of b is – 0.1844245.
Mic Co uses ‘cost plus’ pricing to establish selling prices for all its products. Sales of its new
microphone in the first five months have been disappointing. The sales manager has blamed the
production department for getting the labour cost so wrong, as this, in turn, caused the price to be too
high. The production manager has disclaimed all responsibility, saying that, ‘as usual, the managing
director prepared the budgets alone and didn’t consult me and, had he bothered to do so, I would
have told him that a learning curve was expected.’
Required:
(a) Calculate the actual total monthly labour costs for producing the microphones for each of the
five months from July to November. (9 marks)
(b) Discuss the implications of the learning effect coming to an end for Mic Co, with regard to
costing, budgeting and production. (4 marks)
(c) Discuss the potential advantages and disadvantages of involving senior staff at Mic Co in the
budget setting process, rather than the managing director simply imposing the budgets on
them. (7 marks)
(20 marks)
3 KAPPA CO
Kappa Co produces Omega, an animal feed made by mixing and heating three ingredients: Alpha, Beta
and Gamma. The company uses a standard costing system to monitor its costs.
The standard material cost for 100 kg of Omega is as follows:
Input Kg Cost per kg Cost per 100kg of Omegan
$ $
Alpha 40 2.00 80.00
Beta 60 5.00 300.00
Gamma 20 1.00 20.00
Total 120 400.00
Notes:
(1) The mixing and heating process is subject to a standard evaporation loss.
(2) Alpha, Beta and Gamma are agricultural products and their quality and price varies significantly
from year to year. Standard prices are set at the average market price over the last five years.
Kappa Co has a purchasing manager who is responsible for pricing and supplier contracts.
(3) The standard mix is set by the finance department. The last time this was done was at the
product launch which was five years ago. It has not changed since.
Last month 4,600 kg of Omega was produced, using the following inputs:
Input Kg Cost per kg Cost per 100kg of Omegan
$ $
Alpha 2,200 1.80 3,960
Beta 2,500 6.00 15,000
sGamma 920 1.00 920
Total 5,620 19,880
At the end of each month, the production manager receives a standard cost operating statement from
Kappa Co’s performance manager. The statement contains material price and usage variances, labour
rate and efficiency variances, and overhead expenditure and efficiency variances for the previous
month. No commentary on the variances is given and the production manager receives no other
feedback on the efficiency of the Omega process.
Required:
(a) Calculate the following variances for the last month:
(i) the material usage variance for each ingredient and in total; (4 marks)
(ii) the total material mix variance; (4 marks)
(iii) the total material yield variance. (3 marks)
(b) Discuss the problems with the current system of calculating and reporting variances for
assessing the performance of the production manager. (9 marks)
(20 marks)
Standard costing
4 NOBLE (Q3, JUNE 2011)

Noble is a restaurant that is only open in the evenings, on SIX days of the week. It has eight restaurant
and kitchen staff, each paid a wage of $8 per hour on the basis of hours actually worked. It also has a
restaurant manager and a head chef, each of whom is paid a monthly salary of $4,300. Noble’s budget
and actual figures for the month of May was as follows.
Budget Actual
Number of meals 1,200 1,560
$ $ $ $
Revenue: Food 48,000 60,840
Drinks 12,000 11,700
60,000 72,540
Variable costs:
Staff wages (9,216) (13,248)
Food costs (6,000) (7,180)
Drink costs (2,400) (5,280)
Energy costs (3,387) (3,500)
(21,003) (29,208)
Contribution 38,997 43,332
Fixed costs:
Manager’s and chef’s pay (8,600) (8,600)
Rent, rates and depreciation (4,500) (13,100) (4,500) (13,100)
The budget above is based on the following assumptions.

(1) The restaurant is only open six days a week and there are four weeks in a month. The average
number of orders each day is 50 and demand is evenly spread across all the days in the month.
(2) The restaurant offers two meals: Meal A, which costs $35 per meal and Meal B, which costs
$45 per meal. In addition to this, irrespective of which meal the customer orders, the average
customer consumes four drinks each at $2.50 per drink. Therefore, the average spend per
customer is either $45 or $55 including drinks, depending on the type of meal selected. The
May budget is based on 50% of customers ordering Meal A and 50% of customers ordering
Meal B.
(3) Food costs represent 12.5% of revenue from food sales.
(4) Drink costs represent 20% of revenue from drinks sales.
(5) When the number of orders per day does not exceed 50, each member of hourly paid staff is
required to work exactly six hours per day. For every incremental increase of five in the average
number of orders per day, each member of staff has to work 0.5 hours of overtime for which
they are paid at the increased rate of $12 per hour.
You should assume that all costs for hourly paid staff are treated wholly as variable costs.
(6) Energy costs are deemed to be related to the total number of hours worked by each of the
hourly paid staff, and are absorbed at the rate of $2.94 per hour worked by each of the eight
staff.
Required:
(a) Prepare a flexed budget for the month of May, assuming that the standard mix of customers
remains the same as budgeted. (12 marks)
(b) After preparation of the flexed budget, you are informed that the following variances have
arisen in relation to total food and drink sales:
Sales mix contribution variance $1,014 Adverse
Sales quantity contribution variance $11,700 Favourable
Required:
BRIEFLY describe the sales mix contribution variance and the sales quantity contribution
variance. Identify why each of them has arisen in Noble’s case. (4 marks)
(c) Noble’s owner told the restaurant manager to run a half-price drinks promotion at Noble for the
month of May on all drinks. Actual results showed that customers ordered an average of six
drinks each instead of the usual four but, because of the promotion, they only paid half of the
usual cost for each drink. You have calculated the sales margin price variance for drink sales
alone and found it to be a worrying $11,700 adverse. The restaurant manager is worried and
concerned that this makes his performance for drink sales look very bad.
Required:
BRIEFLY discuss TWO other variances that could be calculated for drinks sales or food sales in
order to ensure that the assessment of the restaurant manager’s performance is fair. These
should be variances that COULD be calculated from the information provided above although
no further calculations are required here. (4 marks)
(20 marks)
5 CLEAR CO (Q1, MARCH/JULY 2020)

The following scenario relates to four requirements.
Clear Co is an eye treatment specialist, founded in 20X4, which runs five clinics nationwide. It is based
in Zeeland, a country in which 20% of the population is over 65 years old, compared to only 15% ten
years ago.
Clear Co offers two eye treatment procedures: laser treatment and lens treatment. Laser treatment is
the less complex of the two procedures. Technology changes rapidly in this industry and as a result
90% of patients now qualify for laser treatment, compared to only 80% five years ago.
The remaining 10% of patients are only able to have lens treatment, of which there are two types:
‘refractive lens exchange’ (RLE) and ‘implantable contact lenses’ (ICL). Clear Co started providing RLE, a
treatment most effective for patients aged 40 or older, in 20X4 when it was founded. Two years ago, it
also began providing ICL, a treatment recommended for patients under the age of 40.
The market for eye treatment procedures in Zeeland is dominated by a few main suppliers, of which
Clear Co is one. Until two years ago, Clear Co was the largest supplier but, following the merger of two
companies, it is now the second largest. The merged company, Eos Co, has recently released its
financial statements for the year, showing profits which were 10% higher than the forecast. Eos Co’s
press release stated that it has achieved this despite offering reduced prices for the ICL treatment. It
has been able to offer reduced prices because of the economies of scale achieved by the merger.
The following information relates to the two types of lens treatments offered by Clear Co for the year
just ended:
Lens treatment RLE ICL
Budget Actual Budget Actual
Number of treatments 3,750 4,130 1,320 960
Selling price per treatment ($) 3,000 2,900 3,650 3,400
Variable cost treatment ($) 600 590 1,150 1,200
Required:
(a) Calculate the following TOTAL variances for Clear Co’s lens treatments:
(i) The sales mix contribution variance (4 marks)
(ii) The sales quantity contribution variance (4 marks)
(b) Explain what each of the sales mix contribution variance and sales quantity contribution
variance measures. (2 marks)
(c) Using your answer from part (a) and other relevant calculations, discuss Clear Co’s SALES
performance for the year just ended.
Note: there are up to four marks available for additional calculations relevant to SALES
performance and six marks available for discussion. (10 marks)
(20 marks)
6 TRUFFLE CO (Q2, DECEMBER 2012)

Truffle Co makes high quality, handmade chocolate truffles which it sells to a local retailer. All
chocolates are made in batches of 16, to fit the standard boxes supplied by the retailer. The standard
cost of labour for each batch is $6.00 and the standard labour time for each batch is half an hour. In
November, Truffle Co had budgeted production of 24,000 batches; actual production was only 20,500
batches. 12,000 labour hours were used to complete the work and there was no idle time. All workers
were paid for their actual hours worked. The actual total labour cost for November was $136,800.
The Production Manager at Truffle Co has no input into the budgeting process.
At the end of October, the Managing Director decided to hold a meeting and offer staff the choice of
either accepting a 5% pay cut or facing a certain number of redundancies. All staff subsequently
agreed to accept the 5% pay cut with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change was
implemented immediately and made the chocolates more difficult to shape. When recipe changes
such as these are made, it takes time before the workers become used to working with the new
ingredient mix, making the process 20% slower for at least the first month of the new operation.
The standard costing system is only updated once a year in June and no changes are ever made to the
system outside of this.
Required:
(a) Calculate the total labour rate and total labour efficiency variances for November, based on the
standard cost provided above. (4 marks)
(b) Analyse the total labour rate and total labour efficiency variances into component parts for
planning and operational variances in as much detail as the information allows. (8 marks)
(c) Assess the performance of the production manager for the month of November. (8 marks)
(20 marks)
7 MEDICAL TEMP CO (MARCH/JUNE 2021)

This part of the scenario relates to requirements (a) and (b).
Medical Temp Co (MTC) is one of several agencies in Sictopia supplying medical staff, both nurses and
doctors, under temporary weekly contracts to local hospitals.
Information regarding the size of the market in Sictopia for the supply of medical staff is as follows:
Quarter 1 Quarter 2
$m $m
Size of national market for supply of temporary nurses 14 18.9
Size of national market for supply of temporary doctors 8 8.2
The increase in the national market for the supply of temporary nurses is due to a shortage of full-time
nurses in Sictopia.
All agencies in Sictopia, including MTC, charge a single market rate for the supply of each type of staff:
$1,000 per week for supplying a nurse and $2,000 per week for supplying a doctor. In quarter 1, MTC
held 30% of the market for the supply of temporary nurses and 40% for the supply of temporary
doctors.
MTC uses quarterly rolling budgets. At the end of quarter 1, it prepared its budgeted revenue figures
for quarter 2. It based these budgeted figures on the assumption that the company would continue to
maintain the market share it had in quarter 1. It also assumed that it would maintain its standard
contribution margin of 80% for both nurses and doctors.
MTC's actual figures for quarter 2 are as follows:
Actual
Total revenue from supply of nurses $5.3m
Total revenue from supply of doctors $3.6m
Actual contribution margin for both nurses and doctors 75%
This part of the scenario relates to requirement (c).
Cheat Co
The market size and market share variances have also been calculated for quarter 2 for one of MTC's
competitors, Cheat Co. These variances are as follows:
Nurses Doctors Total
$'000 $'000 $'000
Market size 185 A 724 A 909 A
Market share 1,065 F 1,043 F 2,108 F
Cheat Co holds the same percentage of each market as MTC. It also uses rolling budgets and prepares
its budgeted revenue figures using exactly the same assumptions as MTC. However, when Cheat Co's
sales director had to provide the market size figures for quarter 2 to the accounts department, he
deliberately reported these figures 30% lower by excluding the market segment relating to maternity
units. The accounts department were unaware of this.
Required:
(a) Explain why businesses calculate market size and market share variances. (4 marks)
(b) Calculate the total market size (planning) variance and the total market share (operational)
variance for MTC for quarter 2. (10 marks)
(c) Discuss the actions of the sales director at Cheat Co and how this may have impacted on the
variances which have been calculated. (6 marks)
(20 marks)
8 STICKY WICKET (Q2, JUNE 2010)

Sticky Wicket (SW) manufactures cricket bats using high quality wood and skilled labour using mainly
traditional manual techniques. The manufacturing department is a cost centre within the business and
operates a standard costing system based on marginal costs.
At the beginning of April 2010 the production director attempted to reduce the cost of the bats by
sourcing wood from a new supplier and de-skilling the process a little by using lower grade staff on
parts of the production process. The standards were not adjusted to reflect these changes.
The variance report for April 2010 is shown below (extract).
Variances Adverse Favourable
$ $
Material price 5,100
Material usage 7,500
Labour rate 43,600
Labour efficiency 48,800
Labour idle time 5,400
The Production Director pointed out in his April 2010 board report that the new grade of labour
required significant training in April and this meant that productive time was lower than usual. He
accepted that the workers were a little slow at the moment but expected that an improvement would
be seen in May 2010. He also mentioned that the new wood being used was proving difficult to cut
cleanly, resulting in increased waste levels.
Sales for April 2010 were down 10% on budget and returns of faulty bats were up 20% on the previous
month. The sales director resigned after the board meeting stating that SW had always produced
quality products but the new strategy was bound to upset customers and damage the brand of the
business.
Required:
(a) Assess the performance of the Production Director using all the information above, taking into
account both the decision to use a new supplier and the decision to de-skill the process.
(7 marks)
In May 2010 the budgeted sales were 19,000 bats and the standard cost card is as follows.
Std cost Std cost
$ $
Materials (2kg at $5/kg) 10
Labour (3hrs at $12/hr) 36
Marginal cost 46
Selling price 68
Contribution 22
In May 2010 the following results were achieved.
40,000kg of wood were bought at a cost of $196,000, this produced 19,200 cricket bats. No inventory
of raw materials is held. The labour was paid for 62,000 hours and the total cost was $694,000. Labour
worked for 61,500 hours.
The sales price was reduced to protect the sales levels. However, only 18,000 cricket bats were sold at
an average price of $65.
Required:
(b) Calculate the materials, labour and sales variances for May 2010 in as much detail as the
information allows. You are not required to comment on the performance of the business.
(13 marks)
(20 marks)
1 HAMMOCKS CO (Q2, MARCH/JULY 2020)

Hammocks Co own and operate a small chain of four luxury vacation resorts. All four resorts are
located on islands that enjoy a hot, sunny climate for nine months of the year. Each resort has
gourmet restaurants, water sports and spa facilities, as well as sun terraces and pools.
Hammocks Co’s management currently focus on two distinct stakeholder groups: shareholders and
customers, and has two objectives:
(1) to make a profit long term and;
(2) to create customer loyalty
All operational (non-management) staff at the resorts receive comprehensive training and are
employed in secure, long-term contracts, which is unusual in this industry.
Guests who visit the resorts pay one upfront fee and then enjoy unlimited food, drink and use of the
resort facilities. When a guest arrives at a resort they are personally greeted by a concierge, offered a
drink and cold towel while their luggage is transferred to their luxury room. All rooms are scrupulously
clean and contain complimentary drinks, snacks, toiletries, bathrobes and slippers. The rooms are all
equipped with appliances, which Hammocks Co’s management believe that guests need during their
stay, including satellite television, coffee-maker, refrigerator and hairdryer. If a guest requests
something that is not available in the room, a call to the reception ensures that it arrives within ten
minutes.
An extract from Hammock Co’s management accounting data is as follows:
Actual 20X6
Budget Actual Actual Competitor
20X7 20X7* 20X6 ‘Loungers’
Average number of guests per week 2,000 1,960 1,940 1,700
Average revenue per week ($) 4,000,000 3,920,000 3,880,000 3,060,000
Average staff costs per week:
– Maintenance ($) 480,000 480,000 470,588 455,000
– Service ($) 960,000 960,000 941,176 800,000
Average weekly spend on repairs ($) 200,000 160,000 196,078 180,000
Ratio of operational staff to guests 1.50 1.53 1.50 1.30
Average rooms available per week** 1,200 1,200 1,200 1,100
Market share % 29 28 29 23
* The actual 20X7 figures are based on the year to date figures (ten weeks).
** Rooms are designed for double occupancy.
Note: General inflation is 2% higher in 20X7 compared to 20X6.
Extracts from TripEvent, an influential online customer forum:
‘I love Hammocks Co; the service and attention to detail is exemplary and the resorts are always
pristine. However, their competitor “Loungers” has full body dryers, ionised water taps and a range of
professional haircare equipment in all their rooms.’
‘Our third time back to Hammocks Co this year and we continue to be amazed by the wonderful level
of service. One thing though is the menus don’t seem to have changed much from one visit to the
next.’
‘We booked Hammocks Co on the spur of the moment but then found that we couldn’t get a flight. We
called Hammocks Co’s administrative centre to change our booking to another resort where we could
get a flight to and were told that it would not be a problem. However, it took two more calls and three
emails to get confirmation and then our credit card was charged twice in error. Of course it was
eventually all resolved, the incorrect charge refunded, a complimentary limousine provided to and
from the airport and we received the most amazing customer service at the resort, but it was
frustrating at the time.’
‘When I made my booking I was assured that my bed would be made with the special anti-allergenic
bedding which I need for a good night’s sleep and that my favourite blend of tea would be available.
When I arrived, neither of these requirements were met. To be fair to Hammocks Co though,
everything was in order two hours later when I went to bed.’
Required:
(a) Based on the limited information available, discuss the performance of Hammocks Co in light of
its two existing objectives. (8 marks)
(b) (i) Explain TWO advantages of Hammocks Co using the balanced scorecard approach to
performance management. (3 marks)
(ii) Suggest and justify ONE goal and TWO performance measures for each of the TWO
perspectives of the balanced scorecard which are not currently addressed by Hammock
Co’s objectives. (9 marks)
(20 marks)
2 FLAG CO AND BUDGET CO (SEPTEMBER/DECEMBER 2021)

The following scenario relates to two requirements.
The country of Jayland has two airlines, Flag Co, its national airline, and Budget Co, a recent entrant
into the market.
Flag Co
Flag Co was government owned until ten years ago but is now operated as a private company. Its
mission is 'to be the airline of choice for long distance travellers'. It charges premium fares and
operates routes from Jayland's capital city to the major airports serving the largest cities around the
world. Many of its flights have durations greater than 12 hours. The majority of its passengers are
travelling on business and are prepared to pay high prices, however the demand for business travel is
very sensitive to economic conditions. Its fleet of aircraft is regarded as 'ageing' by industry analysts.
Budget Co
Budget Co was founded by a wealthy entrepreneur who invested their personal fortune in the
company's equity. Its mission is 'to be the lowest fare airline on any route we serve'. It offers flights to
destinations up to three hours travel from Jayland. Its fleet of aircraft are generally less than two years
old. Most of its passengers are holiday-makers and the demand for its flights appears to be relatively
insensitive to economic conditions.
The following information is available for both companies:

Statement of profit or loss extract for year end 31 December 20X6 Flag Co Budget Co
$m $m
Operating profit 1,239 404
Finance costs 250 50
Other non-operating costs 130 76
Profit before tax 859 278
Statement of financial position (summarised) as at 31 December 20X6 Flag Co Budget Co

$m $m
Non-current assets 11,972 3,177
Current assets (Note 1) 3,404 885
Total assets 15,376 4,062
Total equity 4,598 1,945
Non-current liabilities 5,078 1,001
Current liabilities 5,700 1,116
Total liabilities and shareholders equity 15,376 4,062
Note 1: Current assets include inventory of $2.1m and $1.1m respectively.
Other information for year end 31 December 20X6 Flag Co Budget Co
Aviation fuel litres consumed (millions) 2.434 1.246
Available seat kilometres (millions) 21,423 14,953
Passenger seat kilometres (millions) 14,201 14,206
Operating gearing (contribution/profit before interest and tax) 950% 820%
Required:
(a) Analyse the financial performance of the two airlines, including reasons for the differences in
the two businesses' performance.
Note: Use the headings profitability, liquidity and risk to structure your answer. There are up to
six marks available for calculations. (14 marks)
(b) Briefly explain how Fitzgerald and Moon's building block model could be used to manage the
performance of a service business. (6 marks)
(20 marks)
3 TONFORD SCHOOL (Q2, SEPTEMBER/DECEMBER 2020)

All schools in the country of Ducland are funded by the state and are accountable to the Department
of Education (DoE) which oversees educational standards and monitors performance of the schools.
The DoE’s objectives, which are also the objectives for all the schools in Ducland, are to:
(1) Strive for continuous improvement in performance standards
(2) Provide a supportive learning environment, which encourages a high standard of pupil
achievement
(3) Ensure pupils are prepared for adult life and have the skills and character necessary to
contribute to society and the economy
(4) Provide all children with access to high quality education, regardless of their location or
background
Summary performance data for each school is accessible via the DoE’s website. Parents in Ducland
have the right to choose which school their child should attend and many parents use the
performance data to help with their selection.
Inspectors from the DoE visit each school in Ducland at the end of every five years. The DoE believes
that to gain a better insight into the quality of the teaching and learning environment, inspectors
should attend a selection of lessons and speak to some of the pupils.
Tonford School has recently had its inspection visit, and the school’s data entry on the DoE’s website
has been updated following that visit. The revised entry is shown below:
Performance factor Notes Tonford School National target Tonford School
Actual (2017) (2017) Actual (2012)
Exam results 1 62% 65% 64%
Pupil progress 2 0.4 0.25 0.3
Inspection grade 3, 4 Very good Good Good
Pupil numbers – 662 n/a 627
Number of teaching staff 5 35 n/a 33
Notes:
(1) The ‘exam results’ indicator shows the percentage of pupils leaving school with at least five final
exams including compulsory subjects of mathematics, science and languages at Grade A-C (the
top three grades).
(2) ‘Pupil progress’ is an indicator of how well pupils have performed in compulsory subjects in
their final exams at age 16 compared to their performance in intermediate exams at age 11.
Academic grades are given numerical values, and the ‘pupil progress’ score is the movement in
the average of pupils’ grades. Scores typically range between -0.5 and +0.5.
(3) There are six inspection grades: very good; good; average; poor and very poor.
(4) The inspector’s summary report for Tonford School concluded: “There is a very strong sense of
community values and citizenship. Pupils appear to have a genuine respect for their teachers,
and for one another, despite their diverse backgrounds.”
(5) The DoE recommends that the pupil/teacher ratio should be less than 22:1.
Required:
(a) Explain the problems which not-for-profit organisations face as a result of having multiple
objectives. (4 marks)
(b) Assess Tonford School’s performance against the objectives set by the DoE, using the
performance data published on the DoE’s website.
Note: Use the four objectives in the template provided to structure your answer.
(12 marks)
(c) Explain the difficulties in assessing performance of schools in Ducland due to the qualitative
nature of their objectives. (4 marks)
(20 marks)
4 MEDCOMP (MARCH/JUNE 2021)

The following scenario relates to two requirements.
Medcomp is a charity based in Ceeland. It provides medical treatment to prevent and cure blindness
caused by cataracts, to thousands of people in less developed countries. This disease is relatively easy
to cure when treatment is available, but the majority of people who need treatment cannot afford to
pay for it. For over 10 years Medcomp has provided free treatment from 12 treatment centres based
in fixed locations worldwide.
Medcomp employs a small number or paid permanent staff who consist of medical practitioners,
medical administrators and fundraisers, but the majority of its workforce is voluntary. The charity has
built relationships with several teaching hospitals in Ceeland, from where it recruits newly qualified
doctors and nurses. These doctors and nurses volunteer to work unpaid for a year in Medcomp's
treatment centres before returning home to work in one of Ceeland's many hospitals. Medcomp
believes that using newly qualified medical staff will promote the use of the most effective and
up-to-date techniques and procedures.
Financial donations are sourced from large businesses in Ceeland and most of the equipment and
other medical supplies needed are donated by hospitals and manufacturers. Thus, it is rare for the
treatment centres to run short of supplies.
Medcomp keeps accounts with a year end of 31 August as well as detailed operating data. Data
extracts from its management accounts for the current year (20X8) and from 20X7 and 20X6 are as
follows:
20X8 20X7 20X6
Average size of donation ($) 600 535 500
Number of donations 2,850 3,000 2,950
Total operating costs ($'000) 1,730 1,550 1,430
New procedures as a percentage of total procedures
(Note) 20% 5% 5%
Number of treatments performed 5,600 5,000 4,600
Number of successful treatments 4,312 4,300 4,002
Average number of days taken to deliver drugs and
equipment to treatment centres 7 7 7
Note: New procedures are procedures which are introduced within the year.
Medcomp is about to introduce a balanced scorecard to help implement its strategy and measure
performance. The critical success factors (CSFs), which relate to the four perspectives of the balanced
scorecard have been identified as: positive cash flow, innovation, medical effectiveness and
functional efficiency.
Required:
(a) For each perspective of the balanced scorecard, select the appropriate critical success factor
(CSF) which relates to the perspective, suggest one key performance indicator (KPI) which will
help to measure the CSF and use the KPI to analyse Medcomp's performance from 20X6 to
20X8. (16 marks)
Note: Use the balanced scorecard template provided below to structure your answer.
FINANCIAL CSF:
KPI:
Performance analysis:
CUSTOMER CSF:
KPI:
INTERNAL CSF:
BUSINESS
PROCESS
KPI:
LEARNING & CSF:

GROWTH
KPI:
(b) Explain the benefits of an organisation using the balanced scorecard to measure performance
instead of using solely financial measures. (4 marks)
(20 marks)
5 PROTECT AGAINST FIRE CO (Q4, DECEMBER 2013)

Protect Against Fire Co (PAF Co) manufactures and sells fire safety equipment and also provides fire
risk assessments and fire safety courses to businesses. It has been trading for many years in the
country of Calana, where it is the market leader.
Five years ago, the directors of PAF Co established a similar operation in its neighbouring country,
Sista, renting business premises at various locations across the country. The fire safety market in Sista
has always been dominated by two other companies, and when PAF Co opened the Sista division, its
plan was to become market leader there within five years. Both the Calana division (Division C) and the
Sista division (Division S) usually restrict themselves to a marketing budget of $0.5 million per annum
but in 2013, Division S launched a $2m advertising campaign in a final push to increase market share.
It also left its prices for products and services unchanged in 2013 rather than increasing them in line
with its competitors.
Although the populations of both countries are similar, geographically, the country of Sista is twice as
large as Calana and its customers are equally spread across the country. The products and services
offered by the two divisions to their customers require skilled staff, demand for which is particularly
high in Sista. Following the appointment of a new government in Sista at the end of 2012, stricter fire
safety regulations were immediately introduced for all companies. At the same time, the government
introduced a substantial tax on business property rents which landlords passed on to their tenants.
International shortages of fuel have led to a 20% increase in fuel prices in both countries in the last
year.
Summary statements of profit or loss for the two divisions for the two years ended 30 November 2012
and 30 November 2013 are shown below.
Division S Division S Division C Division C
2013 2012 2013 2012
$000 $000 $000 $000
Revenue 38,845 26,937 44,065 40,359
Material costs (3,509) (2,580) (4,221) (3,385)
Payroll costs (10,260) (6,030) (8,820) (7,700)
Property costs (3,200) (1,800) (2,450) (2,320)
Gross profit 21,876 16,527 28,574 26,954
Distribution and marketing costs (10,522) (7,602) (7,098) (5,998)
Administrative overheads (7,024) (6,598) (12,012) (11,974)
Operating profit 4,330 2,327 9,464 8,982
Employee numbers 380 241 420 385
Market share 30% 25% 55% 52%
Required:
Using all the information above, assess the financial performance of Division S in the year ended
30 November 2013. State clearly where further information might be required in order to make more
reasoned conclusions about the division’s performance.
Note: Up to 7 marks are available for calculations.
(20 marks)
6 BISCUITS AND CAKES (Q5, JUNE 2012)

The Biscuits division (Division B) and the Cakes division (Division C) are two divisions of a large,
manufacturing company. While both divisions operate in almost identical markets, each division
operates separately as an investment centre. Each month, operating statements must be prepared by
each division and these are used as a basis for performance measurement for the divisions.
Last month, senior management decided to recharge head office costs to the divisions. Consequently,
each division is now going to be required to deduct a share of head office costs in its operating
statement before arriving at ‘net profit’, which is then used to calculate return on investment (ROI).
Prior to this, ROI has been calculated using controllable profit only. The company’s target ROI,
however, remains unchanged at 20% per annum. For each of the last three months, Divisions B and C
have maintained ROIs of 22% per annum and 23% per annum respectively, resulting in healthy
bonuses being awarded to staff. The company has a cost of capital of 10%.
The budgeted operating statement for the month of July is shown below.
B C
$000 $000
Sales revenue 1,300 1,500
Less variable costs (700) (800)
Contribution 600 700
Less controllable fixed costs (134) (228)
Controllable profit 466 472
Less apportionment of head office costs (155) (180)
Net profit 311 292
Divisional net assets $23.2m $22.6m

Required:
(a) Calculate the expected annualised Return on Investment (ROI) using the new method as
preferred by senior management, based on the above budgeted operating statements, for each
of the divisions. (2 marks)
(b) The divisional Managing Directors are unhappy about the results produced by your calculations
in (a) and have heard that a performance measure called ‘residual income’ may provide more
information.
Calculate the annualised residual income (RI) for each of the divisions, based on the net profit
figures for the month of July. (3 marks)
(c) Discuss the expected performance of each of the two divisions, using both ROI and RI, and
making any additional calculations deemed necessary. Conclude as to whether, in your opinion,
the two divisions have performed well. (6 marks)
(d) Division B has now been offered an immediate opportunity to invest in new machinery at a cost
of $2.12 million.
The machinery is expected to have a useful economic life of four years, after which it could be
sold for $200,000. Division B’s policy is to depreciate all of its machinery on a straight-line basis
over the life of the asset. The machinery would be expected to expand Division B’s production
capacity, resulting in a 10% increase in contribution per month.
Recalculate Division B’s expected annualised ROI and annualised RI, based on July’s budgeted
operating statement after adjusting for the investment. State whether the Managing Director
will be making a decision that is in the best interests of the company as a whole if ROI is used as
the basis of the decision. (5 marks)
(e) Explain any behavioural problems that will result if the company’s senior management insist on
using solely ROI, based on net profit rather than controllable profit, to assess divisional
performance and reward staff. (4 marks)
(20 marks)
7 MAN CO (Q4 MARCH/JUNE 2016 AMENDED)

A manufacturing company, Man Co, has two divisions: Division L and Division M. Both divisions make a
single standardised product. Division L makes component L, which is supplied to both Division M and
external customers. Division M makes product M using one unit of component L and other materials. It
then sells the completed product M to external customers. To date, Division M has always bought
component L from Division L.
The following information is available:
Component L Product M
$ $
Selling price 40 96
Direct materials:
Component L (40)
Other (12) (17)
Direct labour (6) (9)
Variable overheads (2) (3)
Selling and distribution costs (4) (1)
Contribution per unit before fixed costs 16 26
Annual fixed costs $500,000 $200,000

Annual external demand (units) 160,000 120,000
Capacity of plant 300,000 130,000
Division L charges the same price for component L to both Division M and external customers.
However, it does not incur the selling and distribution costs when transferring internally.
Division M has just been approached by a new supplier who has offered to supply it with component L
for $37 per unit. Prior to this offer, the cheapest price which Division M could have bought component
L for from outside the group was $42 per unit.
It is head office policy to let the divisions operate autonomously without interference at all.
Required:
(a) Calculate the incremental profit/(loss) per component for the group if Division M accepts the
new supplier’s offer and recommend how many components Division L should sell to Division M
if group profits are to be maximised. (3 marks)
(b) Using the quantities calculated in (a) and the current transfer price, calculate the total annual
profits of each division and the group as a whole. (6 marks)
(c) Discuss the problems which will arise if the transfer price remains unchanged and advise the
divisions on a suitable alternative transfer price for component L. (6 marks)
The Finance Director of Man Co is about to introduce balanced scorecard reporting to Division L and
Division M. As there have been queries from the divisions about how the balanced scorecard will work,
in particular the three non-financial perspectives, he will need to provide more guidance before the
approach can be implemented.
Required:
(d) Explain the significance of the three non-financial perspectives in the balanced scorecard
approach to performance measurement. (5 marks)
(20 marks)
PART 2 ANSWERS: Objective test and Scenario

1
True False
ABC can only be used within a manufacturing  
environment.
ABC assumes that most overhead costs are incurred at  
the product level.
A cost driver is a factor which causes a change in the  
cost of an activity.
Traditional absorption costing tends to under-estimate  
overhead costs for high volume products.
ABC can be used for manufacturing and service businesses. Traditional absorption costing assumes
that most overhead costs are incurred at the product level and overestimates costs for high value
items. ABC considers more of the overheads relate to batch and product sustaining activities.
2 $ 46.25
Set-up costs per production run = $140,000/28 = $5,000

Cost per inspection = $80,000/8 = $10,000
Other overhead costs per labour hour = $96,000/48,000 = $2
Overheads costs of product D:
$
Set-up costs (15 × $5,000) 75,000
Inspection costs (3 × $10,000) 30,000
Other overheads (40,000 × $2) 80,000
185,000
Overhead cost per unit = 185,000/4,000 = $46.25
3 $ 49.00
Total material budget = (5,000 × $20) + (4,000 × $25) = $200,000

Fixed overheads related to materials = $150,000
OAR = $150,000/$200,000 = $0.75 per $ of material
Lou material fixed overhead = $0.75 × $20 = $15
Total labour budget = (5,000 × $40) + (4,000 × $60) = $440,000
General fixed overheads = $374,000
OAR = $374,000/$440,000 = $0.85 per $ of labour
Lou general fixed overhead = $0.85 × $40 = $34
Total fixed overhead cost per unit of Lou = $15 + $34 = $49
4  $120
Total material budget ((1,000 units × $10) + (2,000 units × $20)) = $50,000
Fixed costs related to material handling = $100,000
OAR = $2/$ of material
Product B = $2 × $20 = $40
Total labour budget ((1,000 units × $5) + (2,000 units × $20) = $45,000
General fixed costs = $180,000
OAR = $4/$ of labour
Product B = $4 × $20 = $80
Total fixed overhead cost per unit of Product B ($40 + $80) = $120
WASH CO
5 $ 298
Total overhead costs = $877,620

Total machine hours = (3,200 × 2) + (5,450 × 1) = 11,850
Overhead absorption rate = $877,620/11,850 = $74.06
Overhead cost for S = 2 × $74.06 = $148.12
Product S
$
Materials cost 117.00
Labour cost (at $12 per hour) 6.00
Overhead costs 148.12
Total cost 271.12
10% mark-up 27.11
Transfer price using machine hours 298.23
6 $ 138
Machine set up costs: driver = number of production runs

30 + 12 = 42
Therefore, cost per set up = $306,435/42 = $7,296.07
Machine maintenance costs: driver = machine hours: 11,850 as above
$415,105/11,850 = $35.03
Product S Per unit
$
Machine set-up costs ($7,296.07 × 30/3,200) 218,882 68.40
Machine maintenance costs ($35.03 × 3,200 × 2/3,200) 224,192 70.06
Total overheads absorbed 443,074 138.46
7 $ 16
Ordering costs: driver = number of purchase orders

82 + 64 = 146
Therefore, cost per order = $11,680/146 = $80
Delivery costs: driver = number of deliveries.
64 + 80 = 144
Therefore, cost per delivery = $144,400/144 = $1,002.78
Product R Per unit
$
Ordering costs ($80 × 64/5,450) 5,120 0.94
Delivery costs ($1,002.78 × 80/5,450) 80,222 14.72
Total overheads absorbed 85,342 15.66
8
True False
Environmental ABC will be concerned with prevention  
activities as well as detection and correction activities.
Environmental ABC helps identify environment-driven  
costs, which may be hidden within general overheads.
Volume of emissions may be a cost driver in  
environmental ABC.
Environmental ABC can measure cost savings resulting  
from measures to reduce environmental impact.
All the statements are true.
9  Input/output analysis aims to identify residual or waste.

 Environment-related costs are connected with activities for which costs can be directly
traced.
Flow cost accounting has a third category – System – that relates to in-house handling of materials.
Environmental life cycle costing also considers costs of clean-up and decommissioning after
production has ceased.
10  Normal loss = Potentially hidden costs Abnormal loss = Conventional costs
The understanding of environmental cost categorisations
Performance management candidates should be aware that there are different environmental
cost categorisations. One set of definitions provided by the US Environmental Protection Agency
made a distinction depending on how an organisation intended to use the information. They
identified four types of costs:
 conventional costs: raw material and energy costs having environmental relevance
 potentially hidden costs: costs captured by accounting systems but then losing their
identity in ‘general overheads’
 contingent costs: costs to be incurred at a future date – for example, clean-up costs
 image and relationship costs: costs that, by their nature, are intangible, for example, the
costs of preparing environmental reports.
In this example, normal loss costs are spread over good units of production thus losing their
identity and being lost and potentially hidden. Abnormal losses are reported separately in
results so are like conventional costs of material, energy etc. The numbers given in the question
are for illustration only and are not required to answer the question.
Target costing
11
True False
Target costing is a market driven approach to pricing.  
Using target costing to set selling prices guarantees  
that a company will make a profit on its products.
Unlike traditional costing methods, in ABC production  
overheads are not absorbed across product units.
An organisation which switches to ABC may find that  
some of its existing products, which require minimal
labour hours, no longer appear profitable.
Using target costing to set selling prices will only result in a profit if the company ensures that it
can actually produce the product for less than the selling price.
ABC, like traditional costing methods, attempts to absorb production overheads across product
units. However, this is done in a different way, using cost drivers, rather than labour or machine
hours, to establish an overhead absorption rate. This can result in quite different product costs.
12 $ 25
Profit required = 40% × $200 = $80. Hence target cost = $120

Product cost = $55 + $75 + $15 = $145
So cost gap = $25
13
Characteristic Not characteristic
Homogenity  
Intangibility  
Perishability  
Spontaneity  
Typically, the services provided will differ according to the customer so heterogeneity/variability
rather than homogeneity is normally a characteristic of a service industry.
14  Use a lower grade of labour

 Reduce the time spent in terms of labour hours
In most service industries the majority of the cost is likely to be related to labour.
15  Substitute current raw materials with cheaper versions
16 $ 362.50
Return: $500,000 × 30% = $150,000

Total sales revenue: $550 × 800 = $440,000
Therefore, total cost = $440,000 – $150,000 = $290,000
Unit cost = $290,000/800 = $362.50
HELOT CO
17  2 and 4
Target costing does encourage looking at customer requirements early on so that features
valued by customers are included, so Statement 2 is correct. It will also force the company to
closely assess the design and is likely to be successful if costs are designed out at this stage
rather than later once production has started, so Statement 4 is correct.
Statement 1 explains a benefit of flow cost accounting. Statement 3 explains the concept of
throughput accounting.
18  $2.05
Production costs per unit ($3 +$2.50 + $5.05 + $0.45 + $4.30) = $15.30
Non production cost per unit (2,500,000 + 1,700,000 + 1,400,000) / 350,000 units = $16.00
Total estimated cost ($15.30 + $16.00) $31.30
Target Sales Price = $45
Profit margin = 35%
Target cost = $45/100*65 = $29.25
Cost gap =$31.30 - $29.25 = $2.05
19  2 and 4
EXAM SMART
The word ‘appropriate’ in the requirement is important here – the methods chosen should
not impact on the target selling price.
Using more standardised components and using its own websites for marketing will reduce
processing and marketing costs.
Using cheaper materials and trainee designers will reduce costs but could impact the quality
and customer perception of the product which would impact the target price.
20  The target cost will remain the same and the cost gap will increase.
The change in the learning rate will increase the current estimated cost which will increase the
cost gap.
The target cost will be unaffected as this is based on the target selling price and profit margin;
neither of which are changing.
21  Labour resource usage is high in services relative to material requirements.

Services do use more labour relative to materials.
The other three statements are incorrect as uniformity is not a characteristic of services, there is
no transfer of ownership and although it is difficult to standardise a service due to the human
influence, target costing can still be used.
DARASK CO
22  2 only
Statement 1 is incorrect as, although just-in-time (JIT) is often associated with cost reduction
and performance improvement, there is no prerequisite that JIT must be in operation for target
costing to be useful, as long as there is scope to reduce costs sustainably in other ways.
Statement 2 is correct, but some candidates will believe that target costing, life cycle costing
and planning are alternatives to each other.
23 $ 264
$m
Variable cost ($123 × 80m) 9,840
Fixed cost (given) 3,360
13,200
Mark-up × 1.6
21,120
£21,120m ÷ 80m units = $264
24  $1,912m
Target profit
Sales units Sales price Revenue
(millions) ($) ($m)
Introduction 8 425 3,400
Growth 14 300 4,200
Maturity 56 220 12,320
Decline 2 120 240
Target revenue 80 20,160
Target cost (Balance) (11,088)
Target profit (45% × $20,160m) 9,072
Cost gap = $13,000m less $11,088m = $1,912m

25  2 only
Increasing capacity and building inventory are non-value adding activities unless the additional
production can be sold.
Boosting marketing spend to sell more units may be tempting but it does not address the cost gap.
Quality assurance inspections eliminate waste and reduces cost so is the only potential option
to reduce the cost gap.
26  Z only
Director X is wrong as it is possible to estimate target selling prices for services (many
organisations do) even if target costs may be more difficult to establish.
Director Y is wrong because a high degree of variability makes it difficult to determine a target
that can be achieved through cost reduction. Designing costs out of a new mobile phone can be
done because it is a standardised product so once it is designed the cost reduction can be
realised. If a service is so variable then it is less obvious as to what is required to fulfil each
customer’s needs so a target cost can be difficult to meet.
Director Z is correct as services are intangible and determining a service unit is not always
possible.
Life cycle costing

27  Target costing
28
True False
It focuses on the short-term by identifying costs at the  
beginning of a product’s life cycle.
It identifies all costs which arise in relation to the  
product each year and then calculates the product’s
profitability on an annual basis.
It accumulates a product’s costs over its whole life time  
and works out the overall profitability of a product.
It allocates costs to each stage of a product’s life cycle  
and writes them off at the end of each stage.
Life cycle costing goes beyond the short-term by looking at a product’s whole life cycle and
looks at costs for the entire period, not on an annual basis and not writing costs off at the end
of each stage.
29  $27.40
OAR for fixed production overheads ($72 million/96 million hours) = $0.75 per hour
Total manufacturing costs (300,000 units × $20) = $6,000,000
Total design, depreciation and decommissioning costs = $1,320,000
Total fixed production overheads (300,000 units × 4 hours × $0.75) = $900,000 Total life-cycle
costs = $8,220,000
Life-cycle cost per unit ($8,220,000/300,000 units) = $27.40
FIT CO
30
Included Not included
Research and development costs  
Product design costs  
Marketing costs  
Distribution costs  
Selling costs  
Administration costs  
All the costs listed are part of the life cycle cost calculation.
31  It gives a good indication of the success of research and development and design
activities.
 It matches initial costs to the revenues that the product finally earns.
Life cycle costing is not primarily concerned with splitting costs into periods, but a single set of
costs over a product’s whole lifetime.
It cannot normally prevent a product entering a decline stage as most products will reach that
point at some stage.
32  Products with a short life

 Products being launched in a competitive environment where time to market is very
important
Life cycle costing is particularly useful where products have a short life, since costs and revenues
can be estimated fairly accurately upfront. Life cycle costing also means that launch costs
incurred to speed up the launch are accounted for fairly.
Life cycle costing is less useful where the spread of costs is even, because it addresses the
problems of the mismatching of costs and revenues over time. It is also of limited use if
products are simple, since upfront costs are unlikely to be significant.
33 $ 790 000
Total labour time for first 100 units = 35.56 hours

Time for 99th unit
y = 0.5 × 99–0.074
= 0.3559 hours per unit.
Therefore total hours for 99 units = 35.23 hours.
Therefore, time for 100th unit = 35.56 hours – 35.23 hours = 0.33 hours
Total labour cost over life of product

Year 2
100 units 36 hours
99,900 at 0.33 hours per unit 32,967 hours
Total hours 33,003 hours
at $24 per hour $792,072
34 $ 550 000
Total revenue = 300,000 × $85 = $25,500,000

Total desired costs = $25,500,000 × 80% = $20,400,000
Reduction in manufacturing costs = $12,600,000 × 25% = $3,150,000
Total costs before extra R and D/design costs = $23,000,000 – $3,150,000 = $19,850,000
Maximum R and D/design costs = $20,400,000 – $19,850,000 = $550,000
XYX PLC
Cost/Year $ - $ 1 $ 2 $ 3 Totals
Stage Development Launch Growth.Maturity Decline
Research $3,000,000 $3,000,000
Marketing $5,000,000 $10,000,000 $3,000,000 $500,000 $18,500,000
Production cost $750,000 $1,495,000 $550,000 $2,795,000
Expected Production 500,000 1,150,000 500,000 2,150,000
volumes in units
35 Total costs = $24,295,000

Cost per unit = $11.30
36 Profit required = $5,052,500

Profit per unit $5,052,500 / 2,150,000 units = $2.35
Revenue per unit needed = Cost per unit $11.30 + profit per unit $2.35 = $13.65
37  Development/Launch – where we finally create a product that the customers will buy and
take it to market?
Studies suggest that 90% of costs are determined as the early stages of the product’s lifecycle.
38  To enable us to identify which products to make with limited time/material

This is related to limiting factors not lifecycle costing
39  Get the product to market as soon as possible

 Find new markets or new uses for the product
 Release new version of the product as the older ones become mature
Increasing prices will most likely reduce sales and shorten life cycle and economies of scale, may
indeed reduce costs but will not directly extend the lifecycle.
40
True False
Throughput accounting is based on the concept that there is a finite  
capacity at certain critical points in an organisation’s production
schedule.
Throughput accounting treats labour as a fixed cost in the short-  
term.
Throughput accounting focusses on improving efficiency by using all  
production facilities to their maximum capacity.
The aim of throughput accounting is to increase the speed with which  
products move through an organisation in order to maximise profit.
Only the bottleneck resources will be used to maximum capacity.
41
A 2
B 3
C 1
A B C
$ $ $
Throughput contribution 159 130 120
Throughput/Limiting factor 159/12 130/10 120/7
13.25 13 17.14
Ranking 2nd 3rd 1st
42  1.33
Return per factory hour = ($130 – $50)/4 hours = $20
Factory costs per hour = $20 + $40/4 = $15
TAR = $20/$15 = 1.33
43  Increasing the efficiency of the maintenance routine for Process 2

Throughput is determined by the bottleneck resource. Process 2 is the bottleneck as it has
insufficient time to meet demand.
The only option to improve Process 2 is to improve the efficiency of the maintenance routine.
All the other three options either increase the time available on non-bottleneck resources or
increase demand for an increase in supply which cannot be achieved.
SWEET TREATS BAKERY

44  Mixing
Available Total minutes
Process minutes Brownies Muffins Cupcakes required
Weighing 240 60 45 100 205
Mixing 180 80 48 60 188
Baking 1,440 480 330 600 1,410
The bottleneck is the mixing process as 188 minutes are required to meet maximum demand
but there are only 180 minutes available.
Note: Four batches of brownies need to be made in order to have sufficient cakes to meet
maximum demand as the cakes must be made in their batch sizes.
45  80 brownies, 30 muffins, 100 cupcakes

Throughput contribution ($) per batch
((Selling price – material cost) * batch size) 50 37.5 35
Mixing minutes 20 16 12
Throughput per mixing minute ($) 2.50 2.34 2.91
Ranking 2 3 1
Optimal production plan
Number of Mixing
Fulfil customer order cakes minutes
1 batch of cupcakes 20 12
1 batch of brownies 40 20
1 batch of muffins 30 16
General production (based on ranking)
4 batches of cupcakes 80 48
1 batch of brownies 40 20
Therefore the bakery should produce 80 brownies, 30 muffins and 100 cupcakes.
46  A bulk discount on flour and sugar is available from suppliers.

 The rent of the premises has been reduced for the next year.
Reduction in rent and discounts on materials will reduce costs and will improve the TPAR.
Giving a customer a loyalty discount will reduce sales revenue and as a result the TPAR. Demand
for cupcakes can increase but it will not impact the TPAR as demand is not the restriction.
47  $95.00
Each oven has a capacity of eight hours and each cupcake batch takes two hours so four extra
batches can be made.
Extra throughput = four batches x $35 = $140
Less the hire costs will result in an additional profit of $95.
48
True False
The bakery’s operating costs exceeded the total throughput  
contribution generated from the three products.
Less idle time in the mixing department would have  
improved the TPAR
Improved efficiency during the weighing process would  
have improved the TPAR.
As the TPAR exceeds 1 then the throughput contribution exceeds operating costs so Statement
1 is false.
Less idle time on a non-bottleneck process would not improve the TPAR, so Statement 2 is false.
Improving efficiency during the weighing process would improve the TPAR, as any actions to
improve throughput on a bottleneck will improve the TPAR so Statement 3 is true.

49
True False
The majority of environmental costs are already  
captured within a typical organisation’s accounting
system. The difficulty lies in identifying them.
Input/output analysis divides material flows within an  
organisation into three categories: material flows,
system flows. and delivery and disposal flows.
Input/output analysis enables classification of output  
as finished production, scrap and waste.
Environmental life cycle costing enables analysis of  
clean-up and disposal activities relating to a product.
Flow cost accounting enables analysis into material flows, system flows and delivery and
disposal flows.
50  I, II, and III only

As specified by the United Nations Division for Sustainable Development (2003).

1
True False
Decisions should always be based on future  
incremental accounting profits.
When a required resource is in scarce supply, the  
opportunity cost of the next best alternative use
needs to be considered.
Sunk costs are irrelevant to decision making as the  
expenditure has already been incurred.
Depreciation may be a relevant cost if it is incremental  
to the project being considered.
Decisions should always be based on future incremental cash flows which are more objective
than accounting profits.
Depreciation is never relevant as it is not a cash flow.
2 $ 3900
Cost of the quantity to be bought = 200 × $4.50 = $900

Opportunity cost of quantity in hand = 800 × $3.75 = $3,000
Total relevant cost = $3,900
3
Relevant Not relevant
The total sales value of the fruit currently picked and  
paid for by customers
The cost of growing the fruit  
The cost of hiring staff to pick and package the fruit  
The total sales value of the fruit if it is picked and  
packaged by staff instead
The cost of growing the fruit is not relevant since it is a common cost.
LOSMETIC CO
4 $ 76000
Silk powder: (15,000 × $2.50) + Aloe vera: (15,000 × $2) + (5,000 × $1.70) = $76,000
5 $ 8600
Skilled labour – overtime will required for employees at $12 × 150% = $18, therefore better to
bring in workers from outside, 500 hours × $16 = $8,000
Unskilled labour – 250 hours required. If they worked a 40 hour week for the next three weeks,
total hours would be 40 × 3 × 2 = 240 hours. They are guaranteed payment for 30 × 3 × 2 = 180
hours. Therefore cost = (8 × 1.5 × (250 – 240)) + (8 × (240 – 180)) = $600
Total labour cost = $8,000 + $600 = $8,600
6 $ 1950
(750 × $1.60) + (15 × $40 × 125%) = $1,950

The salary element is excluded but the full overtime payment is included.
7  The overheads should be excluded because they are not incremental costs.
The overheads are excluded as they do not arise specifically as a result of the order. Not all
relevant costs are opportunity costs. The fact that the costs are production costs is not a factor,
and we’re told that the pricing is based on relevant costs, not all costs.
8
True False
All cash expenses are relevant costs, all non-cash  
expenses are non-relevant costs.
Notional costs are never relevant costs.  
Fixed costs are never relevant costs.  
Not all future costs are relevant costs.  
Non-cash expenses are non-relevant costs, but some cash expenses (for example past expenses)
are not relevant. Notional costs are not cash flows, so are not relevant. Fixed costs may relate
specifically to the decision, so may be relevant. Some future costs may be incurred whatever
decision is taken, so are not relevant.

9
True False
CVP can help a company assess how sensitive its profits  
might be to below budget performance.
CVP analysis uses a total absorption costing approach.  
CVP analysis is flexible enough to deal with changes in  
both variable and fixed costs at different levels of activity.
Break-even analysis can only be used for a single product  
or for multiple products which are sold in a constant mix.
CVP focuses on contribution which is a marginal costing approach.

A limitation of CVP analysis is that it assumes constant variable costs per unit and a constant
fixed cost.
10  18,636 units
Number of units required to make target profit = fixed costs + target profit/contribution per unit
of P1.
Fixed costs = ($1.2 × 10,000) + ($1 × 12,500) – $2,500 = $22,000
Contribution per unit of P = $3.20 + $1.20 = $4.40
($22,000 + $60,000)/$4.40 = 18,636 units
11
Required Not required
Product mix ratio  
Contribution to sales ratio for each product  
General fixed costs  
Method of apportioning general fixed costs  
The method of apportioning general fixed costs is not required to calculate the break-even sales
revenue.
12 32000
Contribution per each ‘package’ of 4 units (3 sara 1 cristina) = (3 × $12) + $7 = $43

Contribution required for $75,000 profit = $269,000 + $75,000 = $344,000
Number of ‘packages’ required = $344,000/$43 = 8,000
Number of units required = 8,000 × 4 = 32,000
13  22,500
Two units of Y and one unit of X would give total contribution of $18.
Weighted average contribution per unit = $18/3 units = $6
Sales units to achieve target profit = ($90,000 + $45,000)/$6 = 22,500
HARE EVENTS
14  47.7%
Total fixed costs = $385,000
Contribution per marathon entry ($55 – $18.20) = $36.80
BEP = 10,462
Margin of safety (20,000 - 10,462)/20,000 = 47.7%
15  $592,000
Weighted average C/S ratio = ((2 x $36.80) + (1.4 x $18.00))/((2 x $55) + (1.4 x $30)) =
$98.80/$152 = 65%
BER = $385,000/65% = $592,308
16  Full marathon: 17,915 entries Half marathon: 12,540 entries

Weighted average C/S ratio = 65%
Revenue to achieve target profit = $885,000/65% = $1,361,538
Marathon revenue = ($110/$152) x $1,361,538 = $985,324
Number of entries = $985,324/$55 = 17,915 entries
Half marathon revenue ($42/$152) x $1,361,538 = $376,214
Number of entries = $376,214/$30 = 12,540 entries
17  Break-even volume will remain unchanged but break-even revenue will increase by 10%.
Current contribution = $12
Current BEV = $48,000/$12 = 4,000 entries
Current BER = $48,000/($12/$20) = $80,000
Revised contribution = (($20 x1.1) + ($8 x 1.1)) = $13.20
Revised fixed costs = $48,000 x 1.1 = $52,800
Revised BEV = $52,800/$13.20 = 4,000 entries
Revised BER = $52,800/($13.20/$22) = $88,000
The BEV hasn't changed but the BER has increased by 10%.
18  Statements (i) and (ii)

CVP analysis assumes no movement in inventory and the C/S ratio can be used to indicate the
relative profitability of different products so Statements (i) and (ii) are correct.
Limiting factors
EXAM SMART
Although you won’t have to draw a graph for linear programming questions in the exam,
sketching a graph in questions like this can help you see what’s happening.
19
X 400
Y 1100
Constraints are:
Material 2x + y ≤ 2,000
Unskilled labour: x + y ≤ 1,500
and x ≥ 400
For material:
Point where x is maximum possible, y is minimum is x = 1,000 y = 0
Point where x is minimum possible (ie 400), y is maximum possible is x = 400 y = 1,200
For unskilled labour:
Point where x is maximum possible, y is minimum is x = 1,500 y = 0
Point where x is minimum possible, y is maximum possible is x = 400 y = 1,100
Feasible points per these constraints are: x = 1,000 y = 0, x = 400 y = 1,100
Other boundaries of feasible region are:
x = 400, y = 0, which can be ignored as lower than x = 1,000 y = 0
x = 500, y = 1,000, point that solves material and labour simultaneous equations
Applying objective function 8x + 12y
x = 1,000 y = 0: (8 × 1,000) = 8,000
x = 400 y = 1,100: (8 × 400) + (12 × 1,100) = 16,400
x = 500 y = 1,000: (8 × 500) + (12 × 1,000) = 16,000
2,000
1,500
1,000
500
Objective function 500 1,000 1,500 x
20
Objective function Material constraint Labour constraint
 5x + 11y 4x + 3y ≤ 3,200 2x + y ≤ 2,000
Contribution per unit: A = $30-$25 = $5 and B = $25-$14 = $11
As resources are limited, the constraints are of the “less than or equal” variety.
21  Increase of $56
By definition, a shadow price is the amount by which contribution will increase if an extra kg of
material becomes available. 20 × $2.80 = $56.
22  1 only
If the values for R and N are substituted into the constraints:
Labour required = (3 × 500) + (2 × 400) = 2,300 hours which is less than what is available so
there is slack.
Machine time required = (0.5 × 500) + (0.4 × 400) = 410 hours which is exactly what is available
and so there is no slack.
23  It assumes that historical data is a reliable guide to the future

 Cost forecasts using extrapolation are less accurate than those using interpolation
One assumption of simple linear regression is that the dependent variable is only affected by
one independent variable. Therefore 'It can account for the effect of multiple independent
variables' is incorrect.
Another assumption is that what happened in the past will continue into the future. Therefore
‘It assumes that historical data is a reliable guide to the future’ is correct.
Simple linear regression is suitable when there is correlation between two variables. It can be
positive or negative correlation. Therefore ‘It is not suitable when the variables show strong
negative correlation’ is incorrect.
Interpolation means forecasting within the range of the original data whereas extrapolation
means forecasting outside the range of the original data. Forecasting within the range is more
reliable because there is data to back up the forecast. It is more difficult to be sure what the
results will be if they are outside the range recorded in the past. ‘Cost forecasts using
extrapolation are less accurate than those
HIGGINS CO
24 $ 780000
Contribution per cue

Snooker
Pool cue cue
$ $
Selling price 41.00 69.00
Material cost at $43.20/kg (10.80) (10.80)
Craftsmen cost at $18/hr (9.00) (13.50)
Other variable cost (1.20) (4.70)
Contribution per cue 20.00 40.00
Total contribution = (15,000 × 20) + (12,000 × 40) = $780,000
25 21600
0.5P + 0.75S =12,000 (1)
0.25P + 0.25S = 5,400 (2)
0.5P + 0.5S = 10,800 (2) × 2 = (3)
0.25S = 1,200 (1) – (3)
S = 4,800
Substituting in (2)
0.25P + (0.25 × 4,800) = 5,400
0.25P = 4,200
P = 16,800
Total number of cues = 4,800 + 16,800 = 21,600
26  Labour would remain a constraint but ash would no longer be a constraint.

Ash required = (0.25 × 15,000) + (0.25 × 12,000) = 6,750, less than the 7,000 kg available, so ash
is no longer a constraint.
Labour required = (0.5 × 15,000) + (0.75 × 12,000) = 16,500, more than the 16,000 hours
available so labour remains a constraint.
27 $ 50
Maximum demand S = 12,000 (1)

Labour 0.5P + 0.75S = 12,001 (2)
Substituting S = 12,000 in equation (2)
0.5P + (0.75 × 12,000) = 12,001
0.5P + 9,000 = 12,001
0.5P = 3,001
P = 6,002
Number of extra cues = 6,002 – 6,000 = 2
Increase in contribution = 2 × $25 = $50
28
True False
The objective function is the function relating to the  
limitation of the scarce resource.
The constraints in graphical linear programming  
analysis are drawn as straight lines.
The shadow price is only significant for constraints  
that are binding.
There will be slack if less than the maximum amount  
available of a limited resource is needed.
The objective function relates to the solution to the problem, it is formulated in terms of
maximising or minimising.
HOME ELECTRICS CO
29 $ $17
From the scenario, it is stated that the limiting factor for Product T in the first quarter was direct
materials. The calculation is therefore the contribution per kg of direct materials.
Selling price $120
Variable cost (15+35+18) $68
Contribution ($120 - $68) $52
Kgs of material required per unit 3
Contribution per kg of material ($52/3) $17.33
The answer is to be provided to the nearest whole $, therefore $17.
30  $35,600
The constraint equations are given:
Materials 2B + 3T = 2,000 (1)
Skilled Labour 3B + 5T = 3,200 (2)
To solve the simultaneous equations, we must multiply the equations so that we end up with
the value of Bs or the value of Ts the same. We could multiply equation (1) by 5 and (2) by 3 to
give:
10B + 15T = 10,000 (3)
9B + 15T = 9,600 (4)
Now we can eliminate the Ts by deducting equation (4) from equation (3). This leaves us with
1B = 400.
We can calculate the value of T, by using B = 400 in any of the equations. Using equation (1):
(2 × 400) + 3T = 2,000
800 + 3T = 2,000
3T = 1,200
Therefore, T = 400
Now that we know the quantities of B and T, we can calculate the total contribution. The
contribution of B = ($80 – $10 – $21 – $12) = $37.
The contribution of T = ($120 – $15 – $35 – $18) = $52.
The total contribution is therefore (37 × 400) + (52 × 400) = $35,600.
The first statement is incorrect. Linear programming identifies the optimum number of units of
each product to produce, not the optimum selling price.
The second statement is incorrect. Slack occurs when less of the limited resource is required
than is available. When slack occurs, there will be some of the resource left over after
production after production of the optimum production pan.
32 $ 0
It is possible that this question could have caught many candidates out, if they had not read the
scenario carefully. There are three constraints for the Large Applicances division (labour hours,
material and machine hours). It is stated in the scenario that labour and machine time have
been identified as the binding constraints. This suggests that material is NOT a binding
constraint, and therefore will have a shadow price of $0. Only binding constraints will have a
shadow price.
33  1, 2 and 3
All three statements are true.
Work through each statement and decide if it is true.
(1) Product D has a slack value. At the optimum solution, the demand for product D is 250,
while the output is 200. Product D has unfulfilled demand at the optimum solution, so it
has a slack value. This statement is true.
(2) Contribution of $76,000 will be earned from the optimum production plan. The optimum
production plan is to produce 240 units of product F and 200 units of product D. The total
contribution will be (240 x $150) + (200 x $200) = $76,000. This statement is true.
(3) Labour and machine time intersect at the optimum point if shown on a graph. As labour
and machine time are the binding constraints, they will be the vertex where the optimum
point occurs on a linear programming graph. This statement is true.
Pricing decisions
34
True False
If PED < 1, total revenue will rise if the selling price of  
the product is increased.
If PED >1, the demand is said to be inelastic.  
PED may be at different levels at different points on  
the demand curve.
If a downward demand curve changes to become  
steeper, demand is becoming more elastic.
If PED >1, the demand is said to be elastic. If the curve becomes steeper, demand is becoming
more inelastic.
35
Quantity 312
Price $ 18.40
P = 34 – 0.05Q so MR = 34 – 0.1Q
Up to Q = 199, MC = 3
Let MR = MC: 34 – 0.1Q = 3
31 = 0.1Q, so Q = 310
At this volume, cost discounts apply so MC becomes 2.8
34-0.1Q = 2.8
31.2 = 0.1Q
Q = 312 and P = 34 – 0.05(312) = $18.40
36
A   
B   
Demand will be much more price sensitive in market A than market B.
37
True False
Target costing results in a market driven selling price.  
Cost-plus pricing only works if the % mark-up is  
applied to total absorption costing.
A cost-plus pricing policy will always result in a profit  
for the company.
Penetration pricing aims to recover the high initial  
costs of product development.
In cost-plus pricing the % mark-up can be applied to a number of different costs.
A cost-plus pricing policy will only result in a profit for the company if demand at the chosen
price is enough to cover total costs.
Price skimming aims to recover the high initial costs of product development.
38  There are significant economies of scale.

 The firm wishes to discourage new entrants to the market.
Penetration pricing will be the preferred policy if demand is elastic and the product life cycle is long.
39 $ 40
The application of the demand function
The question requires the calculation of marginal revenue. To answer this question requires the
understanding of the demand function and that at the profit maximising level, marginal cost =
marginal revenue.
The first step is to define the demand function, P = a – bQ, where P is the price, Q is the
quantity, a is calculated as the price at which the demand would be zero, and b is calculated as
the change in price / the change in demand.
Calculate a and b:
b = 2/-800 = –0.0025
a = 50 + (8,000 × 0.0025) = 70
The demand equation can then be stated as: P = 70 – 0.0025Q
Marginal revenue (MR) can be defined as P = a – 2bQ, therefore MR = 70 – (2 × 0.0025)Q or MR
= 70 – 0.005Q.
In this question, we are given the quantity of 6,000, therefore MR can be calculated as
70 – (0.005 × 6,000) = $40. If we equate marginal revenue (MR) and marginal cost (MC), we can
say that marginal cost is also $40, although this is not required for this question.
ALG CO
40 $ 800000
Variable overhead cost using high-low method: ($1,850,000 – $1,400,000)/(350,000 – 200,000)

= $3 per unit.
Fixed costs = $1,400,000 – (200,000 × $3) = $800,000
41  P = 310 – 0.001x
Demand function is P = a – bx, where P = price and x = quantity, therefore find a value for a and
b firstly.
B = ΔP/ΔQ = 2/2,000 = 0.001 (ignore the minus sign as it is already reflected in the formula
P = a – bx)
Therefore P = a – 0.001x
Find value for ‘a’ by substituting in the known price and demand relationship from the question,
matching ‘p’ and ‘x’ accordingly.
60 = a – (0.001 × 250,000)
60 = a – 250
310 = a
P = 310 – 0.001x
42 $ 14300000
Identify MC
MC = $20
State MR
MR = 240 – 0.002x
Equate MC and MR to find Q
20 = 240 – 0.002x
0.002x = 220
x = 110,000
Substitute x into demand function to find P
P = 240 – (0.001 × 110,000)
P = $130
Sales revenue = 110,000 × $130 = $14,300,000
43  Customers are prepared to pay high prices to obtain a new product.

 Barriers to entry deter competitors.
Market skimming is charging a high price initially, which a company is more likely to do if there
is high initial demand and lack of competitive pressure. It is more likely to be associated with
products with a short life cycle, in order to maximise returns quickly. Economies of scale will
drive down costs, which may drive down price as well.
44
Skimming Penetration
The level of demand is unknown.  
Demand is expected to be elastic.  
ALG Co can discourage competitors from entering  
the market.
ALG has excess production capacity.  
High prices (skimming) are more likely to be charged if there is uncertainty about the demand.
Low prices (penetration) are more likely to be charged if demand is elastic and sensitive to
prices levels. Low prices and hence low profits may deter competitors. Low prices can ensure
that a substantial market share is gained quickly, using spare production capacity to cope with
the demand.

45  B only
The marginal cost of making A is $12 per unit and of making B is $18 per unit. It is the marginal
cost which is the relevant cost for the make or buy decision since the fixed costs will be incurred
anyway. Therefore, it is cheaper to make A ($12 marginal cost CF $14 buy in cost) but it is
cheaper to buy in B ($17 buy in cost CF $18 make cost).
THREE DEPARTMENTS
Assuming the fixed overheads will be incurred anyway, the café makes a $3,000 contribution to
fixed costs and therefore profit without the café would be lower, not higher.
47 $ 16300
Without the café: Bedding Furniture Total

$ $ $
Sales (10% of bedding lost) 22,500 50,000 72,500
Variable costs 11,700 29,000 40,700
Contribution 10,800 21,000 31,800
Fixed shop overheads
($3,500 saved) 15,500
Profit 16,300
48  Customers have to go through the bedding department to get to the café.

Shutting the café would reduce the footfall through the bedding department. The bedding and
café products are not linked strongly, so cannot be said to be complementary.
49  Relocate the bedding department next to the furniture department

Customers looking for new furniture may also be considering buying a new bed and this will
make it easier for them to view both together. A product line pricing policy relates to offering
for sale several related products, which would probably not apply to the bedding department. A
relevant cost pricing strategy is a minimum pricing strategy that is unlikely to help here.
50  % occupancy of the tables in the cafe

% occupancy should be a reliable measure if taken over time. New items added to the menu
won’t show customer satisfaction unless customers actually buy them. Length of queues in the
café may show how popular the café is, but may ultimately be self-defeating as customers get
fed up with waiting in queues. Profits made by the café will depend on the pricing policy as well
as the number of customers.
CHEMCO
51  Both 1 and 2
Basic fertiliser is not worth processing further, as the additional costs exceed the additional income.
Medium grade fertiliser is worth processing further. If there are limited quantities it should be
sold in the individual market as the contribution is increased, but if there are unlimited supplies,
both markets are profitable.
Fertiliser Basic Medium grade Premium
Current Sales price per kg (farmers) $5 $7 $10
After further processing:
Additional sales price per kg $0.50 $1.00 $3
Further processing cost per kg $0.60 $0.80 $2
Net additional contribution $(0.10) $0.20 $1
52
Basic Medium grade Premium
Farmers   
Individual customers   
Selling to Farmers (no further processing)

Basic 100Kg * $5 sales price = $500
Medium 40Kg * $7 sales price = $280
Premium 60Kg * $10 sales price = $600
Selling to Individuals (after further processing)
Basic 100Kg * ($5.50 sales price - $0.60 further processing costs) = $440
Medium 40Kg * ($8 sales price - $0.80 further processing costs) = $288
Premium 60Kg * ($13 sales price - $2 further processing costs = $660
Incremental (cost)/benefit of further processing
Basic ($440 - $500) = ($60) so better off selling to farmers
Medium ($288 - $280) = $8 so better off selling to individuals
Premium ($660 - $600) = $60 so better off selling to individuals
As there is unlimited sales demand, the total amount able to be imported up to the quota
amount can be sold to the customers that provides the most benefit.
53  The contribution foregone from using the chemical in the existing contract
When a required resource is in scarce supply, the opportunity cost of the next best alternative
use needs to be considered.
54
Adverse Favourable
$500  
6/20 14/20
A B Total
Should 31,050 72,450 103,500
Did 31,000 72,500 103,500
50 F 50 A
$30 $40
$1,500 F $2,000 A $500 A
SM: A = 0.3 and B = 0.7
AQ = 31,000 + 72,500 = 103,500
AQSM: A = 0.3 × 103,500 = 31,050 litres; B = 0.7 × 103,500 = 72,450 litres
The Mix Variance is given by: T2 – T1 = $500 Adverse
55  The chemicals used in the mix are discrete.

This means the amounts used of each chemical are independent of each other and it is not
relevant to think in terms of controlling the proportion of each.

56
True False
Mystery shopping may be used to reduce the uncertainty  
associated with making changes to an existing product or
launching a new one.
Sensitivity involves identifying a number of possible  
outcomes that may arise if the project goes ahead.
Focus groups are used to provide qualitative data about  
new products.
Pay-off tables record all possible outcomes.  
Simulation involves identifying a number of possible outcomes that may arise if the project goes
ahead.
Sensitivity involves seeing how much the estimates used to make the original decision can
change before the decision becomes incorrect.
57  Do not employ a sales manager as profits would be expected to fall by $1,300

New profit figures before salary paid:
Good manager: $180,000 × 1.3 = $234,000
Average manager: $180,000 × 1.2 = $216,000
Poor: $180,000 × 1.1 = $198,000
EV of profits = (0.35 × $234,000) + (0.45 × $216,000) + (0.2 × $198,000) = $81,900 + $97,200 +

$39,600 = $218,700
Deduct salary cost and EV with manager = $178,700
Therefore do not employ manager as profits will fall by $1,300.
58  375
EXAMINER’S COMMENT
Candidates often struggle with minimax regret questions as the concept can be a little difficult to
understand. Taking each corresponding level of supply and demand, it is necessary to work out
the regret from choosing one supply level rather than another, taking into account the actual
demand level. This is why, when the supply and demand levels are the same, there is always a
value of $0 as there is no regret because exactly the correct level of supply was anticipated. In
order to decide on the optimum supply level using minimax regret as the decision criterion, the
business should firstly identify what the highest regret is for each level of supply. Then, it should
choose the minimum of those maximum regrets in order to decide the appropriate level of supply.
So, in this question, the maximum regret at each supply level is as follows:
At 325: $142
At 350: $90
At 375: $82
At 400: $120
The minimum of these is $82 at 375, therefore the answer is C.
The maximum regret at each supply level is as follows:

At 325: $142
At 350: $90
At 375: $82
At 400: $120
The minimum of these is $82 at 375.
Risk and uncertainty
THREE PRODUCTS
59  It is impossible to say
Without the probabilities to assign, it is impossible to calculate the expected value of each
project.
60  Either Product X or Product Z

If the prices are equally likely then EV of Product X = $70 ,Y = $66 and Z = $70
61 10 units
Q1 is quantity sold at $60 profit
60 = Q1 (10 – 7)
Q1 = 20
Q2 is quantity sold at $60 profit
80 = Q2 (15 – 7)
Q2 = 10
Q1 – Q2 = 10 units
62  60 – 5Q
P = a – bQ and when P = 10, Q = 10, so 10 = a – 10b
b = change in price/change in quantity = 5/1 = 5
10 = a – (5 ×10)
10 = a – 50, so a = 60
63
Disadvantage Not disadvantage
It ignores fixed costs.  
The mark-up % cannot be varied.  
Budgeted output volume needs to be established.  
The basis it uses for absorption of fixed overheads is  
arbitrary.
The mark-up % can be varied with marginal costing. Marginal cost plus pricing does not need to
budgeted volume of output to be established. Absorption does not take place when marginal
costing is used.
SANDRUNNER
64  $300
The best possible outcome is a cash inflow of $270,000 when a fee of $300 is set.
65  It ignores the probabilities of different outcomes.

 It ignores outcomes that are less than the best possible.
Maximax presupposes an attitude of risk seeking, not risk aversion.
Opportunity losses are to do with the minimax regret technique.
66  $300
Regret matrix is constructed based on the fact that the best fee for each membership level will
have a regret of zero:
Membership fees
Membership fee Low Average High Maximum regret
$000 $000 $000
$300 20 10 0 20
$400 0 0 30 30
$450 20 15 25 25
$500 40 30 60 60
To minimise maximum regret, set fee at $300.
67 $ 6000
Expected value of $300 = (180 × 0.5) + (210 × 0.3) + (270 × 0.2) = $207,000
Expected value of $400 = (200 × 0.5) + (220 × 0.3) + (240 × 0.2) = $214,000
Therefore choose $400 on EV basis.
With perfect information Expected value = (200 × 0.5) + (220 × 0.3) + (270 × 0.2) = $220,000
Value of perfect information = $220,000 – $214,000 = $6,000
68  The subscriptions charged by other golf clubs in the area

 The amount of usage of the course at weekends (the busiest time of the week)
The committee will have to consider the possibility that members could go to other clubs if they
do not like the fee package being offered. One means of differentiation would be to charge a
lower fee to members who only use the course at quieter times (during the week). The profits
made by the club shop may affect the level of subscriptions, but not how subscriptions are
differentiated. Members are most likely to be charged separately for the food and drink they
consume in the restaurant facilities – it is not likely to affect their level of subscriptions.
MYLO
69  450 lunches
The maximin rule selects the maximum of the minimum outcomes for each supply level. For
Mylo the minimum outcomes are:
450 lunches – $1,170
620 lunches – $980
775 lunches – $810
960 lunches – $740
The maximum of these is at a supply level of 450 lunches.
70  960 lunches
The minimax regret rule selects the minimum of the maximum regrets.
Demand level Supply level
450 620 775 960
$ $ $ $
450 – 190 360 430
620 442 – 217 322
775 845 403 – 230
960 1,326 884 481 –
Max regret 1,326 884 481 430
The minimum of the maximum regrets is $430, so suggests a supply level of 960 lunches.
EXAM SMART
Note that probabilities affect the expected value calculation, but the result of the expected
value calculation does not tell you the range of possible outcomes or the probability of
undesirable results.
71  2 and 4
Expected values do not take into account the variability which could occur across a range of
outcomes; a standard deviation would need to be calculated to assess that, so Statement 2 is
correct.
Expected values are particularly useful for repeated decisions where the expected value will be
the long-run average, so Statement 4 is correct.
Expected values are associated with risk-neutral decision-makers. A defensive or conservative
decision-maker is risk averse, so Statement 1 is incorrect.
Expected values will take into account the likelihood of different outcomes occurring as this is
part of the calculation, so Statement 3 is incorrect.
EXAM SMART
Remember that the expected value with perfect information assumes that you pick the
supply level that will maximise profits whatever the demand level.
72  $191
This requires the calculation of the value of perfect information (VOPI).
Expected value with perfect information = (0.15 × $1,170) + (0.30 × $1,612) + (0.40 × $2,015) +
(0.15 x $2,496) = $1,839.50
Expected value without perfect information would be the highest of the expected values for the
supply levels = $1,648.25 (at a supply level of 775 lunches).
The value of perfect information is the difference between the expected value with perfect
information and the expected value without perfect information = $1,839.50 – $1,648.25 =
$191.25, therefore $191 to nearest whole $.
73  3 and 4
The investment’s sensitivity to fixed costs is 550% ((385/70) × 100), so Statement 3 is correct.
The margin of safety is 84.6%. Budgeted sales are 650 units and BEP sales are 100 units (70/0.7),
therefore the margin of safety is 550 units which equates to 84.6% of the budgeted sales, so
Statement 4 is therefore correct.
The investment is more sensitive to a change in sales price of 29.6%, so Statement 1 is incorrect.
If variable costs increased by 44%, it would still make a very small profit, so Statement 2 is incorrect.

1
True False
A rolling budget is a budget that starts at nil every  
period and requires managers to justify every item of
expenditure.
A cash flow budget is a good example of feed-forward  
control.
An incremental budget is a budget which, having been  
established at the beginning of a period is then
constantly amended and extended on account of
developing circumstances.
An advantage of activity-based budgets is that they  
enable more efficient improvement programmes to be
implemented.
A zero-based budget is a budget that starts at nil every period and requires managers to justify
every item of expenditure.
A rolling budget is a budget which, having been established at the beginning of a period is then
constantly amended and extended on account of developing circumstances.
An incremental budget is a budget that is based on the existing budget adjusted for changes in
factors such as inflation.
2
Internal External Internal External
historic historic anticipated anticipated
Government inflation    
statistics
Purchases made by    
customers
Cash flow forecast for the    
next five years
Inventory movement    
records
3
Attainable Basic Ideal Current
Kept unchanged over a period    
of time
Makes no allowance for normal    
losses, waste and machine
downtime
Assumes an efficient level of    
operation, but includes
allowances for normal loss,
waste and machine downtime
Based on working conditions    
and prices that apply now
4
True False
The costs of implementation may outweigh the benefits.  
Employees will always welcome any new system which improves  
planning and control within the organisation.
The time and cost involved in the system transition may initially  
lead to control being worse not better.
Employees will adapt easily to the new system and this will  
increase their motivation.
Employees may take time to adapt to change and may need training/persuasion to overcome
any resistance to new methods.
5
True False
It sets out the timetable for budget preparation.  
It is usually prepared before the functional budgets.  
It includes a budgeted statement of profit or loss, statement of  
financial position and cash budget.
It is always prepared on a top-down basis.  
The budget manual sets out the timetable for the preparation of the budget. The master budget
is usually prepared after the functional budgets and may be prepared on a bottom-up basis.
6
True False
It makes it easier for employees to artificially inflate budgets.  
It facilitates improvements in processes.  
Employees will focus on eliminating wasteful expenditure.  
Short-term benefits could be emphasised over long-term  
benefits.
A zero-based budget is more likely to detect an inflated budget.

KENNETH CO
7 $ 29.60
Total overhead cost ($22,000 + $34,000 + $32,000) $88,000

Direct labour hours 8,000
Direct labour cost per hour ($128,000/8,000) $16
Absorption rate $11 per direct labour hour
Budgeted unit cost for product Z for October is:
$
Direct materials 21.50
Direct labour (0.3 × $16) 4.80
Overhead costs (0.3 × $11) 3.30
Total unit cost 29.60
8 $ 55.50
Cost driver rates are needed:

Set-ups ($22,000/88) $250 per set-up
Quality tests ($34,000/40) $850 per test
Other overheads ($32,000/8,000) $4 per direct labour hour
(note this is not a true cost driver)
$
Direct materials 21.50
Direct labour (0.3 × $16) 4.80
Set-up costs (2 × $250/30) 16.67
Quality tests ($850/75) 11.33
Other overhead costs (0.3 × $4) 1.20
Activity-based cost for October 55.50
9
Advantage Not advantage
It encourages managers to spend up to the maximum  
allowed in the budget.
It is a straightforward approach for inexperienced  
managers to apply.
It is suitable for organisations where historic costs are  
a good guide to future costs.
It forces employees to avoid wasteful expenditure.  
Encouraging managers to spend up to the maximum allowed is a disadvantage of incremental

budgeting. Forcing employees to avoid wasteful expenditure is an advantage of zero-based
budgeting. If wasteful expenditure has been built into the budget, incremental budgeting can
ensure it is perpetuated.
10  Analysing the cost of each activity, identifying alternative ways of performing the activity
and assessing the consequences of performing the activity at different levels or not at all.
Zero-based budgeting is more than updating; it requires a reassessment of what should be
incurred every time it is undertaken. This complex process should mean that planning variances
are not a regular feature of analysis.
Using the current year’s results as a starting point and updating the budget for changes in
activity or inflation is a description of incremental budgeting.
Using an adaptive management process to prepare budgets that are focused on cash flows
rather than cost control is a description of Beyond Budgeting.
11  It is difficult to rank activities that have qualitative rather than quantitative benefits.
 It restricts management from changing plans once the budget has been approved.
Zero-based budgeting involves ranking activities by their benefits, and if these benefits are
qualitative they may be difficult to assess. Zero-based budgeting is a complex process, so can
only be undertaken periodically. As such, it is less flexible when there are subsequent changes in
circumstances that affect the benefits produced by different activities.
Zero-based budgeting encourages managers to take account of changes in the economic
environment. Because of their knowledge, operational managers must be involved in the zero-
based budgeting process, so lack of participation is not a demotivating factor. (They may not
like however the pressure that zero-based budgeting puts on them.)

12
a $ 2500
b $ 1
Highest output is 15,000 units in Feb, costing $7,500.

Lowest output is 10,000 units in March, costing $12,500
(NB we take highest and lowest output and their associated cost, not the highest and lowest
cost ─ here the lowest cost is actually $12,000).
Using the high-low method to establish values for a and b:
$(17,500−12,500) $5,000
Variable cost per unit = (15,000−10,000)
=
5,000 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢
= $1 per unit = b
Fixed costs can be calculated by reference to the total costs when output is 15,000 units in
February and total cost is $17,500.
Total cost = $17,500 = Fixed cost + (15,000 units × $1)
Fixed cost = $17,500 - $15,000 = $2,500 = a = 2,500
13 90.0 %
Units Total time Ave time/unit

1 2hrs 2 hrs
2 2×L
4 2 × 𝐿𝐿2
8 11.664 hrs 1.458 hrs
1.458 = 2 × 𝐿𝐿3, so 𝐿𝐿3 = 1.458/2 = 0.729

Learning rate = 0.9
14  All of the above
15
Apply Not apply
Simple to make  
Made largely by labour efforts  
Mass-produced  
New product  
Continuous production  
16  16,080 + 52x
460 – 400 = 60 clients
$40,000 – $36,880 = $3,120
VC per unit = $3,120/60 = $52
Therefore FC = $40,000 – (460 × $52) = $16,080
EXAM SMART
You could get the same answer for fixed costs by using the data for the low level of clients,
as follows:
 FC = 36,880 – (400 × $52) = $16,080
17  1.442 hours
Y = axb
Average time for six jobs: 5 × 6–0.415 = 2.377 hours
Total time required for six jobs = 6 × 2.377 hours = 14.262 hours
Average time for five jobs: 5 × 5–0.415 = 2.564 hours
Total time required for five jobs = 5 × 2.564 hours = 12.820 hours
Time required to perform the 6th job = Total time required for six jobs – total time required for
five jobs.
Therefore, time required to perform the 6th job = 14.262 hours – 12.820 hours = 1.442 hours
COMFYNAP CO
18 $ 201
Learning curve formula y = axb

b = log 0.8/log 2 = - 0.322
Cumulative total time for 32 units = 157.25 hours
Cumulative average time for 31 units = 15 × 31-0.322 = 4.9645 hours
Cumulative total time for 31 units = 31 × 4.9645 hours = 153.90 hours
Incremental time for 32 units = 157.25 hours – 153.90 hours = 3.35 hours
Total labour cost for 32nd unit = 3.35 × $60 = $201.00
19 67.2 %
Cumulative
Cumulative average hours
Cumulative number of beds produced total hours per unit
1 25 25
2
4
8
16
32 110 3.4375
1-32 is five doublings.
25LR5 = 3.4375
LR5 = 0.1375
LR = 0.672 or 67.2%
Note. To get from 0.1375 to 0.672 you need to take the 5th root of 0.1375.
5
√0.1375 = 0.672
20  There was high staff turnover during the initial phase of production.
 There were a number of delays in the production process.
New staff not being used to the process and delays meaning production is non-continuous will
both mean that production takes longer and learning is reduced. The fact the production is
labour-intensive and repetitive should lead to a greater learning effect. Changes in design
during the initial phase would explain slower learning, not changes once the initial phase had
been completed.
21 $ 1779000
Contribution Total Expected

Demand (units) per unit contribution Probability contribution
$ $ $
15,000 60 900,000 0.2 180,000
28,000 65 1,820,000 0.7 1,274,000
50,000 65 3,250,000 0.1 325,000
1,779,000
22
True False
A budget helps to control an organisation by forcing it to create  
a plan.
A budget helps an organisation to co-ordinate the allocation of  
resources.
A budget can help an organisation to motivate staff.  
An organisation is legally required to prepare a master budget  
annually.
Standard costing
23
True False
Basic standards provide the best basis for budgeting because  
they represent an achievable level of productivity.
Ideal standards are short-term targets and useful for day-to-  
day control purposes.
An attainable standard is always based on current efficiency  
levels and costs.
Current standards are particularly useful when inflation is  
high.
Basic standards are unlikely to be the best basis because they remain unchanged over the years.
Ideal standards are long-term targets and are not useful for day-to-day control. An attainable
standard may be higher than the standard currently being achieved.
CORFE CO
24  $2,920,000
An 80% activity level is 210,000 units.
Material and labour costs are both variable. Material is $4 per unit and labour is $5.50 per unit.
Total variable costs = $9.50 × 210,000 units = $1,995,000
Fixed costs = $750,000
Supervision = $175,000 as five supervisors will be required for a production level of 210,000
units. Total annual budgeted cost allowance = $1,995,000 + $750,000 + $175,000 = $2,920,000
25  $593,000
Variable cost per hour ($850,000 – $450,000)/(5,000 hours – 1,800 hours) = $125 per hour
Fixed cost ($850,000 – (5,000 hours × $125)) = $225,000
Number of machine hours required for production = 210 batches × 14 hours = 2,940 hours
Total cost ($225,000 + (2,940 hours × $125)) = $592,500, therefore $593,000 to the nearest $’000.
26  When the budget is flexed, the sales variance will only include the sales price variance.
If the budget is flexed, then the effect on sales revenue of the difference between budgeted and
actual sales volumes is removed and the variance which is left is the sales price variance.
27  1 and 2
Flexible budgeting can be time-consuming to produce as splitting out semi-variable costs could
be problematic, so Statement 1 is correct.
Estimating how costs behave over different levels of activity can be difficult to predict, so
Statement 2 is correct. A flexible budget will not encourage slack compared to a fixed budget, so
Statement 3 is incorrect.
It is a zero-based budget, not a flexible budget, which assesses all activities for their value to the
organisation, so Statement 4 is incorrect.
28  1 and 4
Spreadsheets can be used to change input variables and new versions of the budgets can be
more quickly produced, so Statement 1 is correct.
Sensitivity analysis is also easier to do as variables are more easily changed and manipulated to
assess their impact, so Statement 4 is correct.
A common problem of spreadsheets is that it is difficult to trace errors in a spreadsheet and
data can be easily corrupted if a cell is changed or data is input in the wrong place, so Statement
2 is incorrect.
Spreadsheets do not show qualitative factors; they show predominantly quantitative data, so
Statement 3 is incorrect.

29
True False
Mix and yield variances are most appropriate where a product  
requires a set amount of different types of material.
The materials yield variance assesses whether the finished  
output was greater or less than expected, given the amount of
material that was input.
Mix and yield variances are most appropriate where the input  
proportions of the materials used in a product can be varied
without substantially changing the nature of the output.
The materials mix variance assesses the impact of varying the  
proportions of the different materials used in a product.
Separate price and usage variances are most appropriate where a product requires a set
amount of different types of material.
30
Adverse Favourable
$3900  
Standard cost per unit = $40 + $30 + $8= $78

Number of litres used = 9,700 + 6,300 + 7,400 = 23,400
Units
Actual yield 2,000
Standard yield 23,400 /12 1,950
VARIANCE in units 50 (F)
Valued at the standard cost per unit $78
VARIANCE in $ 3,900 (F)
31  $6,800 favourable
3,000 units should use 10 kg each (3,000 × 10) = 30,000 kg
3,000 units did use = 29,000 kg
Difference = 1,000 kg favourable
Valued at $6.80 per kg ($68/10 kg)
Variance = $6,800 favourable
ROMEO CO
32 $ 7.22
Dough 18.9 kg × ($7.60 – $6.50) = $20.79 favourable

Tomato sauce 6.6 kg × ($2.50 – $2.45) = $0.33 favourable
Cheese 14.5 kg × ($20.00 – $21.00) = $14.50 adverse
Herbs 2 kg × ($8.40 – $8.10) = $0.60 favourable
Total material price variance = $7.22 favourable
33  $38.14
AQSM AQAM Difference Std Cost Variance
kg kg kg $ $
Dough 20 18.9 1.1F 7.60 8.36F
Sauce 8 6.6 1.4F 2.50 3.50F
Cheese 12 14.5 2.5A 20.00 50.00A
Herbs 2 2 – 8.40 –
42 42 38.14A
34  $12.21 favourable
SQSM AQSM Difference Std Cost Variance
kg kg kg $ $
Dough 22 21.43 0.57F 7.60 4.33F
Sauce 8.8 8.57 0.23F 2.50 0.58F
Cheese 13.2 12.86 0.34F 20.00 6.80F
Herbs 2.2 2.14 0.06F 8.40 0.50F
46.2 45 12.21F
35  The proportion of the relatively expensive ingredients used in production was less than
the standard.
A favourable mix variance indicates that a higher proportion of cheaper ingredients were used
in production compared to the standard mix.
36  The actual cost per pizza in Month 6 was lower than the standard cost per pizza.
 The value of the ingredients usage variance and the mix variance are the same.
The actual cost per pizza will be lower than the standard cost per pizza because expensive
cheese has been replaced with cheaper tomato sauce.
The usage variance equals the mix and yield variances combined. The yield variance is zero as
100 pizzas used 42 kg so the mix and usage variances will be the same.
Sales staff should not automatically lose their bonus as the reduced sales could be a result of
the change in mix affecting the quality of the pizza. The new chef will only be responsible for the
mix and yield variances as they have no control over the purchase costs of ingredients.

37
True False
Sales mix and quantity variances are only meaningful when the  
company’s products are independent of each other.
The sales mix variance considers how the profit has been affected  
by selling products in a different ratio than initially expected.
The materials mix variance can be calculated by taking the  
difference between the actual quantity in the standard mix
and the actual quantity in the actual mix, then multiplying it
by the actual cost per kg.
The materials mix variance arises because there is a difference  
between what the input should have been for the output
achieved and the actual output.
Sales mix and quantity variances are only meaningful when the company’s products are
interdependent or linked in some way.
The difference between actual quantity in standard mix and the actual quantity in the actual
mix is valued at the standard cost per kg, not the actual cost.
The difference between what the input should have been for the output achieved and the
actual output is the definition of the yield variance.
CUT CO
The following workings apply to the next three answers.
Sales price
R B D Total
Actual sales 900 2,600 700 4,200
Actual selling price 16 8 4.50
Budgeted selling price 15 8 5
Unit difference 1(F) nil 0.50 (A)
VARIANCE in $ 900 (F) Nil 350 (A) 550(F)
Sales volume
R B D Total
Actual sales 900 2,600 700 4,200
Budget sales 1,000 2,000 500 3,500
VARIANCE in units 100 (A) 600 (F) 200 (F)
Valued at the standard contribution 7 5 3
VARIANCE in $ 700 (A) 3,000 (F) 600 (F) 2,900 (F)
Sales mix
R B D Total
Actual sales @ std mix 1,200 2,400 600 4,200
Actual sales @ actual mix 900 2,600 700 4,200
VARIANCE in units 300(A) 200(F) 100(F) NIL
Valued at the standard contribution 7 5 3
VARIANCE in $ 2,100(A) 1,000(F) 300(F) 800(A)
38  2 only
The price variance is calculated based on the actual quantity sold, not the change in quantity.
(See workings above)
39
Adverse Favourable
$800  
40
Adverse Favourable
$3700  
Weighted average budget contribution per unit = (1,000 × $7) + (2,000 × $5) + (500 × $3)/3,500
= $5.29 per unit
Variance in units = 4,200 – 3,500 = 700 favourable
Variance in $ = 700 × $5.29 = $3,700 favourable
41
Possible cause Not possible cause
The size of the market for non-disposable razors  
increased.
The production costs were as budgeted.  
Price-conscious customers switched to cheaper  
disposable razors.
A close competitor withdrew its non-disposable razor  
after safety concerns.
The size of the market increasing and a competitor withdrawing its razor would affect sales
volume. The production costs being as budgeted would not impact on sales.
42
True False
If product prices are set based on standard costs, then  
a business will be unable to pass the cost of
production inefficiencies on to the customer.
The prices of complementary products cannot be set  
independently.
If a company is using target costing, the price set will  
be determined by the target cost.
Price discrimination can be achieved by setting  
different prices for different versions of the same
product.
Inefficiencies will be reflected in actual costs, not standard costs, so prices based on standard
costs won’t reflect production inefficiencies.
Complementary products are linked products whose demand is not independent, so a price rise
for one will affect demand for both products.
With target costing, the target cost is determined by the price that the market will tolerate, not
the other way round.
Price discrimination by versions of product can be achieved if there is a basic model with a
variety of optional add on features.

43  A favourable market size variance
The market size has increased.
44
True False
The use of planning and operational variances splits responsibility  
for performance between managers in charge of day-to-day
activities and decisions and those in charge of budgeting.
The revision of budgets for operational difficulties that have been  
experienced is likely to lead to more meaningful variance analysis.
Splitting variances into planning and operational variances will  
always make operational managers more receptive to variance
analysis.
Those in charge of budgeting are not always responsible for  
planning variances.
Budgets should only be revised for known planning issues otherwise the operational managers
will not be allocated responsibility for the results of their operational decisions. Operational
managers may resist variance analysis whatever form it takes.
Some planning variances may be outside the control of the organisation, for example changes in
external conditions.
45 Materials planning price variance

Adverse Favourable
$32000  
32,000 × ($4.00 – $5.00) = $32,000 adverse

Materials operational usage variance
Adverse Favourable
$8000  
[30,000 – 32,000] × $4.00 = $8,000 adverse
46
Advantage Not an advantage
The system will highlight non-controllable operational  
variances.
Managers can justify variances as being due to bad  
planning.
Planning variances can highlight out-of-date  
standards.
The system will be based on realistic standards that  
are easy to establish.
Planning and operational variances will highlight non-controllable planning variances. Managers
justifying variances as being due to bad planning can be a weakness, as they could be hiding
operational failures. Realistic standards may not necessarily be easy to establish – they may
involve subjective estimates.
GRAYSHOTT CO
47  $40,400 favourable
The market share variance compares the revised sales volume to the actual sales volume:
Revised sales budget (40,000 units × 90%) 36,000 units
Actual sales 38,000 units
Difference (variance in units) 2,000 favourable
Valued at the standard contribution per unit ($)* 20.20
Variance ($) 40,400 favourable
*Standard contribution = $65 – (5.2 × $4) – (2 × $8) – (2 × $4) = $20.20
48  $45,600
The materials price planning variance is calculated by comparing the original standard
price to the revised standard price:
Original standard price per kg ($) 4.00
Revised standard price per kg ($) 4.24
Difference ($ per kg) 0.24 adverse
Actual quantity of material used (kg)* 190,000
Variance ($) 45,600 adverse
*Actual quantity of materials used = actual material costs/actual price per kg =
$836,000/$4.40 per kg = 190,000 kg
49  $159,600
Labour rate operational variance is calculated by comparing the revised standard rate per
labour hour to the actual rate per labour hour:
Revised standard rate per hour ($) 8.00
There was no revision made to the standard rate, so it is the same rate as in the case
scenario.
Adult rate per hour (1.25 × $8) ($) 10.00
Difference ($) 2.00 adverse
Number of hours worked* 79,800
Variance ($) 159,600 adverse
*Actual hours worked = actual labour cost/actual rate per hour = $798,000/$10 = 79,800
50  1, 2 and 3
Labour efficiency planning variance will occur when the standard hours have to be revised
due to factors which are beyond the control of the operational managers.
All the factors would require the original standard hours to be revised and would
therefore cause a labour efficiency planning variance.
Therefore statements (1), (2) and (3) are all correct.
51 C Both statements are correct and are known issues with the introduction of a system of
planning and operating variances.
52
True False
They focus on assigning responsibility solely to senior  
managers.
They work well in rapidly changing environments.  
The philosophy of continuous improvement behind  
TQM is incompatible with predetermined standards.
Standard costs may allow for a predetermined level of  
scrap, whereas TQM aims for no scrap.
Staff generally have responsibility under both systems. Standard costing works best in a stable
environment.
53  Material cost only

The material price when flexed is higher than budget whilst the external environment shows
that prices are reducing. This indicates that although suppliers lowered their prices, the
manager has still overspent which indicates poor performance.

1
True False
They are designed to provide information for internal  
and external use.
They provide information for planning, control and  
decision making.
They are designed to report on existing operations.  
They are designed to integrate an organisation’s  
processes to provide a single system for the whole
organisation.
MIS are designed to provide information for internal use by management. Not all MIS provide a
single system for the whole organisation, this is a feature specifically of enterprise resource
planning systems.
2  2 only
3  Critical strategic information can be summarised

The tracking and summarising of critical strategic information is done by an Executive
Information System (EIS).
The other three options are all likely to be potential benefits which would result from the
introduction of an ERPS.
Uses of information
4  Cost of telephone calls
 Cost of researcher
Analysis and dissemination costs are management costs.
Management reports
5
Ensure security Don’t ensure
security
Logical access controls  
Database controls  
Hierarchical passwords  
Range checks  
6  Minimise the risk of data loss
7  If working from home, departmental employees must use a memory stick to transfer
data, as laptop computers are not allowed to leave the department
A memory stick is much more likely to get mislaid and compromise security than a password
protected laptop. It is likely that memory sticks could get lost or that information is left on home
computers.
In the context of the scenario all the other options are good practice.

8
True False
In the balanced scorecard the set of indicators which measure  
whether value is being added to the shareholders is known as
the innovation and learning perspective.
The balanced scorecard looks at both internal and external  
matters concerning the organisation.
The Building Blocks model focuses solely on non-financial  
measures.
The Building Blocks model considers competitiveness, resource  
utilisation and flexibility as dimensions of performance.
In the balanced scorecard the set of indicators which measure whether value is being added to
the shareholders is known as the Financial perspective.
The Building Block model of appraising performance takes account of financial and non-financial
performance measures.
9  Level of staff satisfaction

This is much more subjective.
The first statement is wrong because customers are actually paying more quickly.
The second statement is wrong because the quick ratio excludes inventory.
It would have been easy to make a mistake on this question as firstly, if customers were taking
longer to pay, it would contribute to the decline in the current ratio. Remember: question every
aspect of what the statements are telling you. Similarly, as regards statement 2, although the
quick ratio has declined inventory is excluded from the quick ratio, so this makes the statement
false. Again, it would have been easy to slip up by not questioning every aspect of the
statement.
11  0.64
 The quick ratio = (current assets – inventory)/current liabilities. To be able to calculate
this ratio, the value of inventory, current assets and current liabilities need to be
established.
 To determine the value of inventory, the cost of sales value and the inventory turnover
period need to be used. First the cost of sales has to be calculated based on the mark-up
on cost of 50%. The cost of sales will be 100/150 × $960,000 = $640,000. On that basis,
the inventory value can be calculated using the inventory turnover period as 90 days/360
days × $640,000 = $160,000.
 The current ratio = current assets/current liabilities. In Binny Co, the current ratio is 3.2:1
and the only current assets are inventory and cash balances as all sales are on cash basis.
 From the above information, the current liabilities can be calculated.
– Current assets = $160,000 (inventory) + $40,000 (cash balance) = $200,000
– Rearranging the formula for current ratio, the current liabilities = $200,000/3.2 =
$62,500
 Now we have the inventory value, current assets and current liabilities, the quick ratio
can be calculated = ($200,000 – $160,000)/$62,500 = 0.64. Alternatively the quick ratio
could have been calculated by taking the cash balance only of $40,000 and dividing by
the current liabilities.
 Choosing 0.53 would have been arrived at if the inventory value had been calculated
based on the sales value of $960,000. Inventory would be 90 days/360 days × $960,000 =
$240,000. This value would then have been used in the current ratio formula as the
current assets value (forgetting to add the cash balance) to arrive at the current liabilities
figure $240,000/3.2 = $75,000. The cash balance would then be used with the current
liabilities figure to calculate the quick ratio $40,000/$75,000 = 0.53.
 Choosing 0.80 would be arrived at if the cost of sales is worked out based on a margin
rather than a mark-up. Cost of sales = 50/100 × $960,000 = $480,000 and inventory =
90 days/360 days x $480,000 = $120,000. Current liabilities will be ($120,000+
$40,000)/3.2 = $50,000 and the quick ratio will be $40,000/$50,000 = 0.80.
 Choosing 1.56 would be arrived at if all the value of inventory, current assets and current
liabilities were all calculated correctly and the inverse of the correct formula was used i.e.
current liabilities/(current assets – inventory) = $62,500/$40,000 = 1.56.
BUS CO
12
Bus 1
Prime 4
Express 2
Transit 3
Bus: (40% × 68) + (32% × 80) + (0.28 × 82) = 75.76%

Prime: (40% × 58) + (32% × 80) + (0.28 × 83) = 72.04%
Express: (40% × 67) + (32% × 76) + (0.28 × 85) = 74.92%
Transit: (40% × 62) + (32% × 78) + (0.28 × 86) = 73.84%
13
True False
Independent research has shown that Bus Co’s passengers  
are the most satisfied of any national bus operators.
Independent research confirms that Bus Co leads its  
competitors on what matters most to customers.
Independent research confirms that Bus Co is ahead of its  
competitors on value for money.
Independent research confirms that Bus Co is ahead of its  
competitors on punctuality.
Independent research does not provide any overall ranking of customer satisfaction. Only if Bus
Co was ahead of all its competitors in all categories (which it isn’t) could it make this claim.
Similarly there is no independent evidence of which criteria matter most to customers. Bus Co is
ahead of all its competitors on value for money, but has the same rating as Prime for punctualiy,
so is not ahead on that criteria.
14
Occupancy rate of buses   
Utilisation rate for drivers   
Percentage of customers satisfied with cleanliness   
of buses
Percentage of carbon emissions relative to target   
set
15  Introducing a greater range of tickets on some routes

A greater range of tickets is likely to result in more passenger queries when they buy tickets,
delaying the departure of buses. No longer allowing cash and allowing Smartcards will eliminate
passenger time spent buying tickets when they get on buses. Amending the timetable is a
method that has worked for some transport companies, although it is likely to mean a fall in the
journey time measure of satisfaction.
16  Quality
The ticket options available are not linked to the quality of service. Bus Co will aim to score over
its competitors by providing more flexible ticket arrangements. Introducing cheaper fares for
off-peak services should mean that more passengers use buses at times where there are more
spare seats.
JAMAIR CO
17  Using only one type of aircraft
 Focusing on e-commerce with customers both booking tickets and checking in for flights
online
Using only one type of aircraft should reduce maintenance and operational costs. Focusing on
e-commerce should mean a reduction in time spent dealing with bookings and check-ins.
Landing costs are likely to be higher in capital cities than in other cities. Having more than one
class of seat may lead to booking problems, more queries and increased complications because
of providing different services for different passengers during flights.
18
Ensuring flights are on time    
Using fewer planes to transport    
customers
Improving turnaround times    
Improving cleanliness of planes    
by spot checks
19
Absentee rates of employees    
Planes’ lease costs per customer    
Revenue per passenger mile    
Number of flights cancelled    
20  It cannot resolve conflicts between short-term and long-term objectives.

 It can be difficult to gain an overall impression of the results provided.
 There is no direct link between the overall results of the scorecard and the creation of
shareholder value.
 The balanced scorecard will be of limited effectiveness if Jamair’s strategy is unclear.
One of the balanced scorecard’s advantages is that it should steer Jamair the business away
from solely focusing on financial measures. The balanced scorecard emphasises links between
the different perspectives.
21
True False
Jamair Co has a higher P/E ratio than its competitors, which  
may reflect the rumours about a takeover.
Competitor 2 appears to do a greater proportion of long-haul  
flights than Jamair or Competitor 1.
P/E ratios
Jamair (520 × 9)/371 = 12.61
Competitor 1 (1,100 × 6)/546 = 12.09
Competitor 2 (600 × 4.5)/286 = 9.44
Thus Jamair Co has a higher P/E ratio than its competitors, and an explanation could be the
takeover rumours.
Average kilometres (million) per plane
Jamair 56/17 = 3.29
Competitor 1 92/29 = 3.17
Competitor 2 65/25 = 2.60
Competitor 2 has a lower number of kilometres per plane, suggesting that it specialises more in
short-haul flights.

22
True False
Cost-based transfer prices are most appropriate where there is  
an intermediate market for the product.
When the producing division is operating at full capacity, an  
opportunity cost based approach should be used for the transfer
price.
The maximum transfer price is the sum of the supplying division’s  
marginal cost and opportunity cost of the item transferred.
Cost-based transfer prices are most appropriate where there is NO intermediate market for the
product. The sum of the supplying division’s marginal cost and opportunity cost of the item
transferred is the minimum transfer price, not the maximum.
23
True False
Residual income is better for comparing divisions of  
different sizes.
Return on investment may cause a manager to reject a  
project that exceeds the head office target, if the
project will earn less than the division’s existing
Return on investment.
A disadvantage of Residual income is that it requires  
an estimate of cost of capital.
A disadvantage of both Return on investment and  
Residual income is that they may appear to improve as
a division’s assets get older.
Residual income is not good for comparing divisions of different sizes as inevitably a bigger
division will have a bigger RI figure.
24
Poor Not poor
performance performance
Sales volume  
Sales price  
Material cost  
Material usage  
Sales volume
Sales are less than the (optimistic) budgeted figure of 6,000. Expected sales volume based on
last year’s figures = 5,000 × 0.8 = 4,000. 4,200 sold is better than this.
Sales price
Budgeted figure = $600,000/6,000 = $100 per unit
15% reduction on last year = ($450,000/5,000) × 0.85 = $76.50 per unit
Average sale price achieved = $317,000/4,200 = $75.48 per unit, below both figures
Material cost
Both budgeted figure and cost last year = $7 per kg ($113,400/16,200 and $105,000/15,000)
Expected cost this year = 11,500 × $7 × 1.05 = $84,525. Actual cost = $81,600, better than
expected
Material usage
Material usage last year = 15,000/5,000 = 3 kg per unit
Expected figure based on last year and taking account of production changes = 3 kg × 0.9 = 2.7
kg. This is the same as the budgeted figure (16,200 kg/6,000)
Actual usage = 11,500 kg/4,200 = 2.74 kg, higher than expected.
Firstly, a machine with NBV of $40k was sold for $50k. This will reduce non-current assets by
$40k and, as we are told this was a cash transaction, increase cash by $50k – increasing net
assets by $10k. As a profit has been made on disposal, it will also increase profits by $10k.
Secondly, another machine was purchased for $250k. This will increase non-current assets
by $250k, but as this was also a cash transaction, decrease cash by $250k, so no net effect.
As no depreciation is charged on either machine there is no further effect.
The net effect is therefore +10k to both profit and net assets, so the ROI is ($200k/$1,010k) ×
100%=19.8%. Therefore answer B.
18.8% was obtained by omitting the profit on disposal from profits – ($190k/$1,010k) =18.8%.
15.1% was obtained by omitting the profit on disposal and increasing net assets by the
$250k machine purchase but not subtracting the cash – ($190/$1,260k) =15.1%.
15.9% was obtained with the correct profit figure but the incorrect net assets of $1,260k –
($200/$1,260) =15.9%.
25  19.8%
Revised annual profit = $190,000 + $10,000 profit on the sale of the asset = $200,000
Revised net assets = $1,000,000 – $40,000 NBV + $50,000 cash – $250,000 cash + $250,000
asset = $1,010,000
ROI = ($200,000/$1,010,000) × 100 = 19.8%
CARDALE CO
26 11.7 %
Controllable profit = $1,970k
Total assets less trade payables = $14,980k + $3,260k – $1,400k = $16,840k
ROI = 11.7%
27 $ 43200
Bonus to be paid for each percentage point = $120,000 × 2% = $2,400

Maximum bonus = $120,000 × 0.4 = $48,000
Division F: ROI = 28.5% = 18 whole percentage points above minimum ROI of 10%.
18 × $2,400 = $43,200
This is below the maximum and so Division F’s manager will be paid this amount.
28
Possible Not possible
reason reason
Division F’s manager has kept cash balances high.  
The accumulated depreciation on Division F’s non-current  
assets is low.
Division F’s manager invested in the strategic management  
information system just before the year-end.
High cash balances will mean current assets are higher and return on investment is lower. A low
accumulated depreciation figure will mean that non-current assets are high, depressing the ROI.
Using surplus cash at the year-end to buy a new information system will be exchanging one
asset (cash) for another (strategic management information system). The depreciation of the
newly-acquired asset is unlikely to be significant as it is being charged monthly.
29  Division F is smaller than Division N.

 Division F has a lower risk profile than Division N.
If Division F is smaller, its profits and hence its residual income are likely to be lower. If it has a
lower risk profile, it should be allowed to use a lower cost of capital than Division N.
Marginal investments may have a positive RI, but be rejected on the grounds that they run the
risk of lowering ROI. Similarly, the use of RI and an appropriate cost of capital should provide
incentives to undertake any investments with a positive RI, which would be in the interest of
Cardale Co.
30  The system allows easier access to external sources of information.

The system described should have an external focus and allow the manager of Division F to
integrate internal and external sources of information.
The manager will want a summary of the detailed information that relates to his department,
not to have to wade through the information himself.
As the manager appears to be taking the investment decision himself, integration with other
departments is unlikely to be most important – a decision about a system that integrates
information across Cardale Co is likely to be made centrally.
Expert assistance may help the manager make a limited number of decisions but it appears that
he invested in something that would help him generally.
ANDOVER AND WINCHESTER

31 Andover
$ 77.5 000
Winchester
$ 160 000
Division manager assessment should be based on controllable profits:
Andover 115 – (10% × 375) = 77.5
Winchester 180 – (10% × 200) = 160
32  Both 1 and 2
Divisional ROI is based on divisional net profit:
Andover = 55/375 = 14.7% and Whitchurch = 60/200 = 30%
Andover was set up recently, so its assets will be less depreciated than those of Whitchurch,
which will reduce its ROI.
33  controllable by/RI/can
The managers of Andover and Winchester divisions should be assessed on costs, revenue and
investments that are controllable by their division. To promote goal-congruent behaviour by
the two divisions, RI should be used to compare them. Efficiency variances can be used to
assess the managers of the two centres.
34  Rewarding managers if they fulfil a number of financial and non-financial targets

Both sorts of target can be short-term and long-term, and often non-financial targets link well
to longer-term performance. Managers need to have some incentive to improve their
performance - paying a basic salary or linking to company-wide performance which they may
not be able to influence much won’t provide enough incentive. Only rewarding managers for
the performance of their division is at the heart of the problem that’s been identified.
35  The % of on-time deliveries

Customers can clearly see performance here and it will influence their views. What matters to
customers on quality is not what happens before they see the products, but the poor quality
products that they see (internal quality control may pick up a number of faulty products, but
may equally miss others). Customers may be influenced by the level of staff turnover, but only if
it clearly links to poor performance. The number of new products is a good measure of
innovation, but customers may not buy them.

36  Measuring actual performance in relation to financial targets
Non-financial targets are more likely to be appropriate.
37
Direct staff as a Temporary staff usage Achieving the CHQC’s
percentage of contract (hours) as a percentage of designated standard of care
income total staff hours for the elderly
Food cost per meal served
Number of voids Staff turnover
to residents
Economy is an input measure and considers whether the resources used are being acquired at
the required quality for the cheapest price. Efficiency links inputs and outputs and considers
whether the maximum outputs are being achieved given the level of inputs. Effectiveness
measures outputs and considers if the overall objectives are being met.
So, staff costs and food costs should be measured against the budgets set and are economy
measures. The use of temporary staff and having empty beds are efficiency measures as they
measure how well resources are being used. Finally, providing good quality care to meet the
regulator's requirements is a measure of effectiveness. As relationships are key to providing
good care then low staff turnover will facilitate that.
SEATOWN COUNCIL
38  How much time is spent sweeping the sands
 How frequently bins are being emptied
Tractor running costs are likely to be used in measuring economy. The amount of litter collected
will not itself indicate efficiency, as the council will be concerned with the resources used to
collect the litter.
39  Spot checks on litter bins by council officers

 Ratings of beaches by external agencies
 Complaints by visitors
Agency ratings and complaints provide external indications of the effectiveness of operations.
Spot checks on litter bins will show whether rubbish is piling up beside bins.
The number of litter bins, the time spent by employees and the amount of vehicle miles are all
measures of usage of resources, not whether resources used have produced results.
40  Number of hotel rooms in Seatown

The number of hotel rooms is not an indication by itself of the number of visitors – the council
would need to know occupancy rates. Also perhaps a large number of visitors would not stay in
hotels.
41  Certain areas of Seatown’s beaches are more difficult to sweep.

Difficulty Not a difficulty
Some refreshment kiosks will only be open at certain  
times of the year.
The number of visitors will be less in winter.  
Certain areas of Seatown’s beaches are more difficult  
to sweep.
Sweeping should pick up litter that poses a threat to  
beach user safety.
Records of time spent on sweeping different areas should mean that this is taken into account
when considering efficiency, but ultimately all litter has to be picked up from these areas
throughout the year.
Refreshment kiosks only being open at certain times and fewer visitors coming in winter will be
seasonal variations in litter generated, which it might be difficult to estimate for analysis over
the year. Finding hazardous litter on the beach is a qualitative aspect of the effectiveness of
sweeping that may be difficult to measure, but is relevant to the council’s ultimate
responsibilities for the beaches – the council cannot just rely on the public disposing of
hazardous waste in the litter bins.
42  flexibility/competitiveness
The variation in frequency of sweeping beaches during the year is a measure of flexibility,
whereas the number of visitors compared with other resorts is a measure of competitiveness.
Analysis of variations will show whether the council is able to commit more resources at busier
times of the year when more litter is being generated. It will not show whether resources are
being used fully.
Comparison of number of visitors is a measure of how popular the resort is compared with
other resorts, so is a measure of competitiveness that will concern the council. It may be partly
determined by service quality, but there will be other issues influencing visitor numbers as well.

43
Internal External
Growth in the economy  
Director leaves to join a competitor  
Market shortage of labour  
New health and safety regulations  
PART 2 ANSWERS: Section C
1 THE TELEPHONE CO
This was a nice, straightforward relevant costing question, which should have been well-
answered by most people. This was definitely not the case, however, and it proved to be one
of the most poorly answered questions on the paper.
Part (a) asked candidates to prepare a cost statement using relevant costing principles,
showing the minimum cost that a company should charge for a contract. The requirement
also asked for detailed notes to explain the numbers being used. It is very easy in this type of
question to focus purely on the numbers, without giving adequate weight to the words. This
would have been a mistake, because the words were actually worth eight marks compared
to the six marks for the numbers. Some candidates definitely fell into this trap. However, the
biggest problem with this question was that many candidates clearly don’t understand
relevant costing, so they simply couldn’t get either the numbers or the words right anyway.
Out of all the scripts that I personally looked at, and this was a lot, I only saw two candidates
score full marks on part (a).
Common errors included:
 Erroneously including the lost contribution from Contract X when calculating the three
engineers’ costs. The only relevant cost here was the $500 fine for delayed completion
of Contract X. The contribution from this contract was never going to be lost as the
contract was only delayed and not lost altogether.
 Including the 120 telephone handsets that were held in inventory at their historical cost
of $16.80 each, rather than the replacement cost of $18.20. Historical costs are never
relevant because they are sunk. This was a really basic error.
 Erroneously including the site inspector’s costs of $400. The note stated that the site
inspector charged the client directly for the work rather than invoicing the company in
question. This error was down to poor reading.
 Few candidates managed to work out the cost of the computerised control system. It
was simply a question of comparing the total lost sale proceeds and modification cost
of Swipe 1 to the cost of buying the new Swipe 2, and selecting the cheapest option for
the company.
Apart from these common errors, another problem was that the notes given by candidates
didn’t explain the figures being used well enough. Many candidates just wrote down that a
cost was included because it was ‘relevant’ but didn’t say why. This is not an explanation and
didn’t score marks.
EXAM SMART
It is really important to take heed of the Examiner’s warnings here. If more of the marks are
going for why have you included or excluded a cost then the marker will expect to see a
good explanation. The question requirement quite clearly asked for detailed notes and
explanations, so there was no excuse for not giving them.
For example:
Site visits – This is not a cash outflow for T Co but for its customer Push Co. Therefore, it is
not a relevant cash flow for Push Co and is ignored in the costing statement.
Handsets – The required handsets are in regular use by T Co. The 80 handsets in inventory, if
used, will have to be replaced at the prevailing market price to fulfil future contracts with
other customers. The balance of 40 handsets will have to be purchased on the open market.
This will cause a relevant cost of: (40 + 80) × $18.20 = $2,184 because undertaking the Push
Co contract causes T Co to incur an incremental cash outflow.
The words ‘because’ and ‘therefore’ (as well as words like ‘so’, ‘since’, ‘means that’, ‘results
in’, ‘causing’ etc), force you to try to explain yourself and add value.
In the exam, think what was it that made me think that the cost was relevant or not
relevant. Then write it down!
EXAM SMART
If you struggle with deciding how to utilise the numbers, think about the actual cash flows
that will happen if:
 The project is accepted
 The project is rejected
For example:
Control system
 Cash flow if project is accepted:
Swipe 1 modification cost ($4,600)
 Cash Flow if project is rejected:
Swipe 1 sales proceeds $3,000
 Net difference (future incremental cash flow) ($7,600)
(a) Cost statement

$ Note
Lunch 0 1
Engineers’ costs 500 2
Technical advisor 480 3
Site visits 0 4
Training costs 125 5
Handsets 2,184 6
Control system 7,600 7
Cable 1,300 8
12,189
Notes
Note 1: Lunch
This past cost is a ‘sunk cost’ and should therefore be excluded from the cost statement. It has
already arisen and is therefore not incremental.
Note 2: Engineers’ costs
Since one of the engineers has spare capacity, the relevant cost of his hours is Nil. This is
because relevant costs must arise as a future consequence of the decision, and since his wage
will be paid regardless of whether he now works on the contract for Push Co, it is not an
incremental cost.
EXAM SMART
Read the whole question first! If you just look at note 2 and do your calculations before you
read note 9 – you will miss key information. One idea is to annotate the question paper as
you read through with rough workings. You can always change your mind before writing up
your final answer. Otherwise, in this scenario, you may make some complicated
assumptions and calculations about working hours before you stumble across note 9!
The situation for the other two engineers is slightly different. Their time is currently fully utilised
and earning a contribution of $5 per hour each. This is after deducting their hourly cost which,
given a salary of $4,000 per month each, is $25 per hour ($4,000/4 × 40). However, in one
week’s time – when they would otherwise be idle – they can complete Contract X and earn the
contribution anyway. Therefore, the only relevant cost is the penalty of $500 that will be
payable for the delay on Contract X.
Note 3: Technical advisor
Since the advisor would have to work overtime on this contract, the relevant cost is the
overtime rate of $60 ($40 × 1.5) per hour. This would total $480 for the whole job.
Note 4: Site visits
This is a cost paid directly by Push Co to a third party. Since it is not a relevant cost for T Co,
it has been excluded.
Note 5: Training costs
Since the trainer is paid a monthly salary irrespective of what work he does, this element of his
cost is not relevant to the contract, since it is not incremental. However, the commission of
$125 will arise directly as a consequence of the decision and must therefore be included.
Note 6: Handsets
Although T Co has 80 of the 120 handsets required already in inventory, they are clearly in
regular use in the business. Therefore, if the 80 are used on this contract, they will simply need
to be replaced again. Consequently, the relevant cost for both the 40 that need to be bought
and the 80 already in inventory is the current purchase price of $18.20 each. 120 × $18.20 =
$2,184.
Note 7: Control system
The historic cost of Swipe 1, $5,400, is a ‘sunk’ cost and not relevant to this decision. However,
since the company could sell it for $3,000 if it did not use it for this contract, the $3,000 is an
opportunity cost here. The current market price for Swipe 1 of $5,450 is totally irrelevant to the
decision as T Co has no intention of replacing Swipe 1, since it was bought in error. In addition
to the $3,000, there is a modification cost of $4,600, bringing the total cost of converting Swipe
1 to $7,600. This is still a cheaper option than buying Swipe 2 for $10,800, therefore the
company would choose to do the modification to Swipe 1. The cost of $10,800 of a new Swipe 2
system is therefore irrelevant now.
Note 8: Cable
The cable is in regular use by T Co, therefore all 1,000 metres should be valued at the current
market price of $1.30 per metre. The $1.20 per metre is a sunk cost and not relevant.

Part (b) asked for an explanation of the costing principles used in (a) and of the implications
of the minimum price that had been calculated. Answers to both parts of this requirement
were poor. All that candidates had to do for the first part was explain that a relevant cost is a
‘future incremental cash flow’, saying what each one of those three words meant. Then, as
regards the implications of the minimum price, the question just required the candidate to
identify that this price didn’t include a profit element and a mark-up needed potentially to
be added. Also, it could have been stated that the customer might expect this low price in
the future etc. Again, out of all the scripts I saw, few candidates scored full marks here.
(b) Relevant costing principles

Relevant costs are those costs that change as a result of making a particular decision. In simple
terms, a relevant cost is a future cash flow arising as a direct consequence of a decision. In order
for a cost to be relevant to a decision, it must therefore meet all three of these criteria.
Future – any costs which have already been incurred are regarded as ‘sunk’ costs and will
prevent a cost from being considered relevant.
Cash flow – the cost must be a cash flow and not just an accounting adjustment, such as a
provision for a debt or depreciation. Also, cash flows that are the same for all alternatives are
not relevant.
Direct consequence – this criterion means that the cash flow must be incremental. For example,
if a cost has already been committed to, then it will arise irrespective of whether the decision
goes ahead. It will not therefore meet the ‘direct consequence’ criterion.
Opportunity cost – this is the value of the best alternative that is foregone as a result of making
a decision. In the case of the telephone system that Push Co needs for the contract, the
foregone sales proceeds of $3,000 are an example of an opportunity cost since, by using the
system for this contract, Push Co foregoes these sales proceeds.
[Examiner’s note: candidates would not be required to write all of this for the available marks.]
Significance of minimum price calculated
The cost calculated in part (a) is a starting point only, showing the minimum cost that could be
charged to the customer. If T Co charged this price, it would be no better or worse off than if it
did not carry out the work, i.e. it would make no profit or loss. This means that T Co would not
be rewarded for the risk that it takes in completing the work, unless some kind of a mark-up is
also incorporated.
Also, other costs – such as the lunch of $400 – while not incremental to the decision now, have
been incurred. Ideally, therefore, T Co should seek to recover them.
It could also be that, for example, in one week’s time, when the engineers are busy completing
the delayed contract X, another opportunity comes up that the company has to reject because
the engineers are busy on Contract X. Therefore, with hindsight, it would be seen that there was
an opportunity cost associated with using the engineers on this work and delaying Contract X.
Furthermore, none of the business’s overheads have been considered in the cost statement
and, in the long term, these would need to be covered.
It is clear, therefore, that the relevant cost calculated in part (a) is only a starting point for T Co
to use when deciding how to price the contract. The purpose of accepting contracts is to make
profit and increase shareholder wealth. This will only be done if a price higher than the relevant
cost of the contract is charged. In setting this price, however, T Co also needs to give
consideration to the fact that it hopes to attract future work from Push Co. The price needs to
be attractive enough for the customer to return in the future.
EXAM SMART
Pay careful attention to the marking guide for part (b). For six marks in total there are
eleven points in the Examiner’s marking guide. The question is also split between:
 Relevant costing principles and
 Pricing implications.
Therefore, aim to make at least six good points spread across these two sub-requirements.
Even if you can think of four relevant costing principle issues and only two pricing
implications, the marking guide has been adjusted to allow for this!
The Examiner has been very flexible in the marking guide. You could have scored a maximum of four
marks on either part of the sub answer with the overall maximum marks available being six.
Marking guide Marks

(a) Costing statement
Lunch 1
Engineer costs 3
Technical advisor 1
Site visits 1
Training costs 2
Handsets 2
Control system 3
Cable 1
14
(b) Explanation
Relevant costing
Future cost / sunk cost 1
Cash flow not accounting adjustment 1
Incremental 1
Committed cost 1
Opportunity cost 1
Max 4
Price to be charged
Doesn’t incorporate profit 1
Doesn’t cover all costs 1
Ignores fixed costs 1
Contract X – engineer’s time 1
Starting point only 1
Need to make a profit 1
Need to attract future work 1
Maximum for price Max 4
Maximum for (b) overall 6
Cost volume analysis
2 THE ALKA HOTEL

Responses to requirement (a) were usually very good, with a significant proportion of
candidates picking up full marks. It was clear that this topic, and the formulas required, had
been covered by most candidates as part of their studies.
(a) Breakeven point (in occupied room nights) = Fixed cost/contribution per room
$600,000/($180 – $60) = 5,000 occupied room nights
Margin of safety = (Budgeted room occupancy – breakeven room occupancy)/budgeted room
occupancy
Total rooms available per annum: 365 days × 25 rooms = 9,125 rooms
Budgeted occupancy level: 9,125 × 70% = 6,387.5 rooms
Margin of safety: (6,387.5 – 5,000)/6,387.5 = 21.72%
Requirement (b) was also generally well answered, although full marks were far rarer due to
a lack of awareness of what our decision should be based on. Most were able to calculate
the loss of $42,000.
Unfortunately the most common answer given was to close in Q1, to prevent making this
loss. Essentially this is a relevant costing issue – if we close in Q1, do we prevent the whole
loss? A little bit more care would lead us to realise that the fixed costs are just that – fixed. If
we close in Q1 we lose the contribution of
$108,000, but the fixed costs remain. We could discuss if any of the fixed costs COULD be
saved, but by that point we’ve done enough to realise that with the information given,
closing the hotel is a bad idea.
(b) Profit or loss for Q1

$
Contribution (900 rooms × $120) 108,000
Fixed costs (($600,000/12) × 3) (150,000)
Loss (42,000)
The Alka Hotel should not close in Q1. The fixed costs will still be incurred and closure would
result in lost contribution of $108,000. This in turn would result in a decrease in annual profits
of $108,000. In addition, the hotel could lose customers at other times of the year, particularly
their regular business customers, who may perceive the hotel as being unreliable.
Answer to requirement (c) became a bit more muddled. There was more information to deal
with, so this is understandable, although it was pleasing to note that many candidates picked
up marks through application of their knowledge, even if they had misunderstood some of
the information given. The contribution per package, or C/S ratio was often incorrectly
calculated, but breakeven revenue was still obtained, along with sensible discussion.
Recommendations should follow from the results, so it was possible to come to a different
conclusion to the suggested answer and still be given credit. It was again pleasing to see so
many responses here considering the low contribution of this package, and how unlikely it
would be to improve results.
(c) Contribution/sales ratio of Project 1

$
Sales value of two room nights (2 × $67.50) 135
Sales value of a pair of theatre tickets 100
235
Variable cost of two room nights (2 × $60) (120)
Variable cost of a pair of theatre tickets (95)
Contribution 20
C/S ratio (20/235) 8.51%

Breakeven point in revenue ($20,000/0.0851) $235,000
Alternatively:
Contribution per theatre package sold $20
Breakeven point in theatre packages ($20,000/$20) 1,000
Breakeven point in revenue (1,000 × $235) $235,000
The unit contribution per theatre package is low and it requires a large number of sales to break
even. Each theatre package would require two room nights to be sold which would mean 2,000
room nights needed in Q1 to break even. The available rooms for Q1 are only 2,281.25 (9,125/4)
and the Alka Hotel has already sold 900 rooms, so there is insufficient capacity. Based on this,
Project 1 is not viable at the quoted prices.
As already mentioned, answers to requirement (d) often let candidates down. Interpretation
of the breakeven chart was usually performed well – candidates were able to calculate
important figures such as selling price and variable costs (and therefore contribution per
unit). Stronger answers were able to analyse these in terms of the effect the new restaurant
would have, and also whether it seemed to be a good idea or not. For example, many
candidates were able to identify the new margin of safety, and would gain some credit for
this. However, better answers would then discuss whether the hotel’s position was better or
worse – showing an understanding of what margin of safety means to a business. A
conclusion, whilst not essential, could also give weight to an answer – overall, does it seem
like a good idea or not?
(d) Project 2 will cause the fixed costs of the hotel to rise from $600,000 per annum to $800,000
per annum for the hotel and restaurant combined. This is an annual increase of $200,000.
Revenue per occupied room will rise from $180 to $250 ($2,000,000/8,000 rooms) which
reflects the extra guest expenditure in the restaurant.
The total cost predicted at a level of 8,000 occupied rooms is $1,560,000 which means the
variable costs must be $760,000 ($1,560,000 – $800,000 fixed costs). This is a variable cost per
occupied room of $95 which is an increase of $35. This reflects the variable costs of the
restaurant.
As a result of these changes, the breakeven point has increased from 5,000 to 5,161 occupied
rooms so the hotel needs to sell more room nights to cover costs.
However, budgeted occupancy is now 7,300 occupied room nights which gives 80% occupancy
(7,300/9,125). This gives a margin of safety of 2,139 occupied room nights or 29%. This is an
increase on the current position and the hotel’s position appears safer. At 7,300 occupied room
nights the Alka Hotel’s budgeted profit is $331,500 (7,300 × ($250 – $95) – $800,000.
Marking guide Marks
The Alka Hotel:
(a)
Contribution ½
BEP 1
Total rooms available 1
Budgeted occupancy ½
Margin of safety % 1
4
(b)
Profit/loss 1½
Recommendation ½
Explanation 2
4
(c)
C/S ratio 1
BEP $ revenue ½
Recommendation ½
Explanation 2
4
(d)
Calculations 4
Commentary 4
8
3 HEALTH NUTS
(a) (i) Gym
Break-even point
Average sales revenue per customer $
Gym entry 8.40
Car park expected value (0.8 × $1) 0.80
9.20
Variable cost 1.20
Contribution per customer 8.00
Total fixed costs 48,000
BEP (in customers) 6,000
Margin of safety
Total number of customers per day 330 (80 + 40 + 20 + 90)
Number of days in the month 30
Total customers for June 9,900
Margin of safety (in customers) 3,900 (9,900 – 6,000)
Margin of safety (%) 39.39% (3,900/9,900)
(ii) Café
Break-even point
Average contribution per customer: $
Drinks 0.792 ($2.20 × 60% × 60%)
Food 0.352 ($2.20 × 40% × 40%)
1.144
Total fixed costs 3,600
BEP (in customers) 3,147 ($3,600/$1.144)
Margin of safety
Total customers for June 4,950
Margin of safety (in customers) 1,803 (4,950 – 3,147)
Margin of safety (%) 36.43% (1,803/4,950)
(b) The gym needs 6,000 customers per month and the café needs 3,147 customers per month in
order to cover its fixed costs.
Each $1 of contribution after this point generates profit.
Whether or not these figures are particularly high can be gauged by comparing them to the
expected (or, in this case, actual) customers in one month and this is where the margin of safety
is useful. Both the margin of safety for the gym and the café are quite similar, at approximately
39% and 36% respectively. This tells Health Nuts the extent to which it can feel confident about
covering its fixed costs and making a profit. In this instance, its margin of safety is such that,
even if its customer numbers went down by over one third it could still cover its fixed costs.
(c)
Total sales/contribution from gym
Original number of customers 330
New customers 120
Total number of customers per day 450
Total customers for the month 13,500
$
Entry fee 8.40
Car park 0.80
9.20
Total sales from gym entry/car park 124,200
Contribution per customer $

Sales revenue 9.20
Less: variable cost 1.20
8.00
Total sales/contribution from creche

Total customers using the creche per day 120
Total customers for the month 3,600
Number of children per customer 2
Total number of children per month 7,200
$
Price per child 4.00
Total sales from creche 28,800
Contribution per customer $

Sales revenue 4.00
Less: variable cost 0.50
3.50
Total contribution from gym and creche 133,200
Total sales from gym and creche 153,000
Weighted average C/S ratio 87.06%
Budgeted profit per month with creche $

Total contribution from gym and creche 133,200
Less: total fixed costs 56,000
Budgeted profit 77,200
(d)
$
Total contribution from gym 79,200
Total contribution from café 5,663
84,863
Less total fixed costs 51,600
Profit for June 33,263
With the creche, profit will increase from $33,263 to $77,200 per month, an increase of
$43,937. Therefore, from a purely financial point of view, the crèche would seem like a good
idea.
However, there are various other factors that need to be taken into account:
Details of how much the conversion from the café to the creche will cost has not been provided.
The investment would need to be appraised using a technique like NPV to assess its financial
viability.
The research for the revised customer numbers is only initial. Is this data realistic and can it be
relied on? There is no information about how Health Nuts got this research.
The opening of a creche could put off other customers, who want to exercise in a child-free
environment, from using the gym during the day. There is no indication that Health Nuts have
taken this into account.
Similarly, closing the café could upset many other customers at all times of day and lead to the
loss of their business.
The calculations so far performed are not therefore enough to make this decision.
Marking guide Marks
(a) (i) Calculation of breakeven point for the gym 2
Calculation of margin of safety for the gym 1
(ii) Calculation of breakeven point for the gym 1½
Calculation of margin of safety for the cafe ½
5
(b) Explanation relating to the breakeven points calculations 1½
Explanation relating to the margins of safety 1½
3
(c) Calculation of the weighted ave. C/S ratio for the gym and creche 5½
Calculation of the budgeted profit for the gym and creche ½
6
(d) Advice as to the viability of closing the café and opening the creche 6
Limiting factors
4 CSC CO
The first part of the question was a typical single limiting factor question, requiring
candidates to formulate an optimal production plan and calculate maximum profit.
Responses to this question were surprisingly poor given the fairly straightforward nature of
the question. The most common errors were firstly ignoring the fact that the company had
entered into a contract, and therefore these requirements should be produced first.
Secondly there was a requirement to calculate the shortage of material – this was often
omitted. Thirdly, many candidates used the dollar value of the limiting material to calculate
their production plan, rather than the quantities.
These errors didn’t seem to come from a lack of understanding, more a lack of care. It’s possible
that candidates were running short of time by this point, meaning that the requirements and
scenarios weren’t read properly. This highlights the importance of good time management
during the exam – ensuring that some of the more straightforward marks can be obtained.
EXAM SMART
Markers often see students running out of time on the last question of an exam, and the
examiner’s comments here highlight how rushing a question like this can affect performance.
You need for (a) to take a little time to plan out the stages of your calculation. There are
three questions to answer:
 Is there a shortage and how big is it?
 If there is a shortage, in what order should we be producing the products?
 How many of each product should be produced?
(a) (Step 1) Calculate the shortage of Betta for the year

Total requirements in grams:
Cakes: grams used per cake 0.5
Expected demand 11,200
Total required: 5,600
Cookies: grams used per cookie 0.20

Shakes: grams used per shake 1

Overall total required: 15,060

Less available: 12,000
Shortage: 3,060
(Step 2) Contribution per gram of Betta and ranking

Shakes
Cakes Cookies Shakes (contract)
$ $ $ $
Contribution per unit 2.60 1.75 1.20 1.00
Grams of Betta per unit 0.5 0.2 1 1
$ $ $ $
Contribution per gram 5.20 8.75 1.20 1.00
Rank 2 1 3 4
(Step 3) Optimum production plan
Number Total Contri- Total
Product To be Grams Grams Cumulative bution Contri-
produced per unit per unit grams Per unit bution
Shakes (contract) 5,000 1 5,000 5,000 1.00 5,000
Cookies 9,800 0.20 1,960 6,960 1.75 17,150
Cakes 10,080 0.5 5,040 12,000 2.60 26,208
Less fixed costs (3,000)
Profit 45,358

The second part of this question was a discussion about whether the business should breach
the contract they have to supply another business. In general responses were disappointing
– candidates focussed purely on the financial factors. Easy marks could be picked up here for
realising that breaching a contract will have legal, reputational and ethical issues. Many also
wasted their own time by ignoring the note in the requirement – “No further calculations are
required.”
EXAM SMART
This part highlights very clearly that you sometimes need to think beyond the numbers and
financial factors in PM.
(b) Breach of contract with Encompass Health (EH)

It would be bad for business if CSC Co becomes known as a supplier who cannot be relied on to
stick to the terms of its agreements. This could make future potential customers reticent to deal
with them.
Even more seriously, there could be legal consequences involved in breaching the contract with
EH. This would be costly and also very damaging to CSC Co’s reputation.
If CSC Co lets EH down and breaches the contract, EH may refuse to buy from them anymore
and future sales revenue would therefore be lost. Just as importantly, these sales to EH are
currently helping to increase the marketability of CSC Co’s shakes. This will be lost if these sales
are no longer made.
Therefore, taking these factors into account, it would not be advisable to breach the contract.
EXAMINER’S COMMENTS: PART (C)

The final part of the question moved on to linear programming with multiple limiting factors.
This is generally a popular topic and this was overall well answered. Many candidates
attempted this part of the question before any other part of Section C – good examination
technique especially when under time pressure.
What this question demonstrated well was that most candidates are comfortable with the steps
involved in linear programming; however there is a lack of in depth understanding of how it
works. For example, virtually all candidates could identify the iso-contribution line and feasible
region when given on a graph, but few could explain what they meant. Many explained what
they were for (finding the optimum point), but not that the iso-contribution line shows all
points giving the same contribution, or that the feasible region shows all possible production
plans that meet all of the constraints. Similarly, most could define slack in the context of scarce
resources, but found it harder to identify slack variables from a completed graph.
EXAM SMART
The examiner’s comments for (c) highlight the need for revision if you struggled here, also
what you need to revise.
(c)
(i) This line is what is called the ‘iso-contribution line’ and it is plotted by finding two
corresponding x and y values for the ‘objective function’. At any point along this line, the
mix of cakes and cookies will provide the same total contribution, ‘C’.
Since each cake provides a contribution of $2.60 and each cookie provides a contribution
of $1.75, the objective function has been defined as ‘C = 2.6x + 1.75y’. This means that
the total contribution will be however many cakes are made (represented by ‘x’) at $2.60
each plus however many cookies are made (represented by ‘y’) at $1.75 each.
The area 0ABCD is called the ‘feasible region’. Any point within this region could be
selected and would show a feasible mix of production of cakes and cookies. However, in
order to maximise profit, the optimum production mix will be at a point on the edge of
the feasible region, not within it.
(ii) The further the iso-contribution line is moved away from the origin, 0, the greater the
contribution generated will be. Therefore, a ruler will be laid along the line, making sure
it stays at exactly the same angle as the line, and the ruler will then be moved outwards
to the furthest vertex (intersection between two constraints) on the feasible region, as
represented by either point A, B, C or D. In this case, the optimum point is ‘C’, the
intersection of the ‘labour’ constraint and the ‘demand for cakes’ constraint.
(iii) A ‘slack’ value could arise either in relation to a resource or in relation to production of a
product. It means that a resource is not being fully utilised or that there is unfulfilled
demand of a product. Since the optimum point is the intersection of the labour and the
demand for cakes lines, this means that there will be three slack values. First, there will
be a slack value for cookies. This means that there will be unsatisfied demand for cookies
since the optimum point does not reach as far as the ‘demand for cookies’ line on the
graph. Also, there will be slack values for Betta and Singa, which means that both of
these materials are not actually the binding constraints, such that there will be more
material available than is needed.
Marking guide Marks
(a) Calculating shortage of Betta 1-5
Contribution per gram of Betta 1
Ranking 0-5
Optimum production plan 2
Profit 1
6
(b) Each valid point 1 4
(c) (i) Identification and explanation of the iso-contribution line 2
Identification and explanation of the feasible region 2 4
(ii) Explaining how to use line for identification of optimum point 1-5
Identification of optimum point 0-5 2
(iii) Explaining what slack values are 1
Identifying Betta as slack 1
Identifying Singa as slack 1
Identifying slack demand for cookies 1
4
5 BELLAHOUSTON CO
(a) (i) Identify the limiting factor:
Total
Road Spikes Trail required
Direct material/pair (metres) 1.5 0.6 1.2 6,930
Direct labour/pair (hours) 1 1.5 1 6,750
Machine time/pair (hours) 0.4 0.2 0.3 1,875
Based on the above, machine time is the limiting factor.
Calculate contribution per unit of limiting factor and rank the products:
Road Spikes Trail
Contribution per pair of shoes ($) 41.50 29.50 36.00
Machine hours required 0.40 0.20 0.30
Contribution per machine hour ($) 103.75 147.50 120.00
Ranking 3 1 2
Prepare optimum production plan and calculate resultant total contribution earned:
Machine hours Contribution per Total
used pair of shoes contribution
(1,815 available) ($) ($)
Fulfil customer order:
200 Road 80 33.50 6,700
200 Spikes 40 21.50 4,300
200 Trail 60 28.00 5,600
1,635 hours remaining
Apply ranking:
1,400 Spikes – 1st 280 29.50 41,300
1,650 Trail – 2nd 495 36.00 59,400
2,150 Road – 3rd 860 41.50 89,225
206,525
(ii) Calculate the profit maximising mix:

Machine hours Contribution per Total
used pair of shoes contribution
(1,815 available) ($) ($)
Apply ranking for the general
sales in March:
1,400 Spikes 280 29.50 41,300
1,650 Trail 495 36.00 59,400
2,300 Road 920 41.50 95,450
120 hours remaining
Apply ranking for the special order:
200 Spikes 40 21.50 4,300
200 Trail 60 28.00 5,600
50 Road 20 33.50 1,675
207,725
The loss of contribution from fulfilling RunWild’s order is $1,200 ($207,725 – $206,525),
therefore the maximum financial penalty acceptable would be $1,200.
Alternative approach:
If RunWild’s order could only be partially completed, then Bellahouston Co would divert
machine hours from making Road shoes for the specific order to making Road shoes for
general sale to other retailers. The number of Road shoes for general sale in part (a)(i)
fails to meet demand by 150 pairs of shoes and the difference in the contribution earned
from making them available for general sale and not to RunWild is $8 per pair. Therefore,
the difference in the contribution earned is $1,200 (150 pairs of Road shoes × $8), which
would be the maximum financial penalty Bellahouston Co would be willing to accept.
(b) Although the contribution earned is higher if the order is only partially completed, if
Bellahouston Co does not fully complete the order, then RunWild may not enter into a regular
supply contract and future sales revenue would therefore be lost. In addition, the customer
base and reputation of RunWild will help to market Bellahouston Co’s products and increase
awareness of their products. This benefit will also be lost if RunWild choose not to order from
Bellahouston Co again.
It would also not be good for Bellahouston Co’s existing reputation if it becomes known for not
fulfilling its obligations. This could make other sports retailers reluctant to order from them. It
might also impact the end-customer’s perception of their product if they cannot buy
Bellahouston Co’s running shoes due to a lack of availability.
(c) Define the variables:

R = number of pairs of Road shoes
S = number of pairs of Spikes shoes
T = number of pairs of Trail shoes
Constraints:
Direct material 1.5R + 0.6S + 1.2T ≤ 6,120
Direct labour 1R + 1.5S + 1T ≤ 5,865
Machine time 0.4R + 0.2S + 0.3T ≤ 1,815
Demand R ≤ 2,300
S ≤ 1,400
T ≤ 1,650
Non-negativity R, S, T ≥ 0
Objective function:
C = 41.50R+ 29.50S + 36.00T
Marking guide Marks
(a) (i) Production plan 7
(ii) Financial penalty 4
(b) Discussion 4
(c) Linear programming model 5
Pricing decisions
6 HEAT CO
The requirement to calculate the optimum price and quantity in part (a) was new to the
syllabus in June 2011 and about half of candidates seemed not to have revised it and could
not attempt it. Many candidates managed to score one or two marks for establishing the
demand function. It was really pleasing to see some good attempts at part (a) (ii) which
tested the ability to adjust the labour cost for the learning effect. Quite a few answers were
perfect.
Probably the most common mistake was including the fixed cost in the cost of the air
conditioning unit when it was the marginal cost which was being tested.
At this level it is expected that candidates will have a good understanding of what ‘marginal’
means.
EXAM SMART
Clear assumptions are given credit. The stated omission of fixed overheads from marginal
cost is something that the examiner is looking for!
Notice how a methodical approach is not only efficient, but also likely to lead to good marks.
For example in (a) (iii), a clear step-by-step approach is taken – the logic being clearly stated
as the answer is built up.
 Step 1: Establish the MR function. This will have twice the gradient of whatever price
function has been derived in (a)(i). If P = a – bQ then MR = a – 2bQ (given on the
formula sheet).
 Step 2: Establish the marginal cost – this will be whatever answer you have derived in
(a) (ii).
 Step 3: Equate the MR and MC together in order to establish Q
 Step 4: Whatever Q you derive – substitute into whatever demand function you have
arrived at in (a)(i). This will give your answer for P.
Full marks are given even when your previous answers may be erroneous. It is the method
that the markers are looking at.
(a) Profit
In order to ascertain the optimum price, you must use the formula P = a─ bQ
Where P = price; Q = quantity; a = intersection (price at which quantity demanded will be nil);
b = gradient of the demand curve.
The approach is as follows.
(i) Establish the demand function
b = change in price/change in quantity = $15/1,000 = 0.015
We know that if price = $735, quantity = 1,000 units
Establish ‘a’ by substituting these values for P, Q and b into our demand function:
735 = a - 0.015Q
15 + 735 = a
Therefore, a = 750.
Demand function is therefore P = 750 – 0.015Q
(ii) Establish marginal cost
The labour cost of the 100th unit needs to be calculated as follows.
Formula: y = axb.
a = 1.5
Therefore, if x = 100 and b= -0.0740005, then y = 1.5 × 100–0.0740005 = 1.0668178
Therefore, cost per unit = 1.0668178 × $8 = $8.5345
Total cost for 100 units = $853.45.
EXAM SMART
You can also do all your workings in hours and then convert to cost at the end of the
question.
Remember that in the formula y = axb, ‘y’ represents the AVERAGE time per unit, so to get a
total time you then need to multiply by the number of units. The total time for 99 units then
needs to be deducted from the total for 100 in order to get the time for the 100th unit.
 Time for 100th unit = Total for 100 units – Total for 99 units
 Time for 100th unit = (1.0668178 × 100) – (1.0676115 × 99) = 0.9882 hrs
 Labour cost for the 100th unit = 0.9882 × $8 = $7.91 (rounding)
If x = 99, y = 1.5 × 99–0.0740005 = 1.0676115

Therefore, cost per unit = $8.5408
Total cost for 99 = $845.55
Therefore, cost of 100th unit = $853.45 ─ $845.55 = $7.90
Therefore, total marginal cost = $42 + $7.90 = $49.90
Fixed overheads have been ignored as they are not part of the marginal cost.
(iii) Find profit
(1) Establish the marginal revenue function
MR = a ─ 2bQ
MR = 750 ─ 0.03Q
(2) Equate MC and MR
49.90 = 750 – 0.03Q
0.03Q = 700.1
Q = 23,337
(3) Find optimum price
P = 750 – (0.015 × 23,337)
= $399.95

Part (b) was really well-answered, with most candidates being able to describe both pricing
strategies and suggest a suitable one.
A good, logical approach was adopted by most: explain market skimming, explain
penetration pricing and then explain which one would be most appropriate for Heat Co.
(b)
(i) Penetration pricing
With penetration pricing, a low price would initially be charged for the Energy Buster. The
idea behind this is that the price will make the product accessible to a larger number of
buyers and therefore the high sales volumes will compensate for the lower prices being
charged. A large market share would be gained and possibly, the Energy Buster might
become accepted as the only industrial air conditioning unit worth buying.
The circumstances that would favour a penetration pricing policy are:

 Highly elastic demand for the Energy Buster i.e. the lower the price, the higher the
demand. The preliminary research does suggest that demand is elastic.
 If significant economies of scale could be achieved by Heat Co, then higher sales
volumes would result in sizeable reductions in costs. This is not the case here,
since learning ceases at 100 units.
 If Heat Co was actively trying to discourage new entrants into the market. In this
case, new entrants cannot enter the market anyway, because of the patent.
 If Heat Co wished to shorten the initial period of the Energy Buster’s life cycle so as
to enter the growth and maturity stages quickly. We have no evidence that this is
the case for Heat Co, although it could be.
From the above, it can be seen that this could be a suitable strategy in some respects but
it is not necessarily the best one.
(ii) Market skimming
With market skimming, high prices would initially be charged for the Energy Buster rather
than low prices. This would enable Heat Co to take advantage of the unique nature of the
product, thus maximising sales from those customers who like to have the latest
technology as early as possible. The most suitable conditions for this strategy are:
 The product is new and different. This is indeed the case with the Energy Buster.
 The product has a short life cycle and high development costs that need to be
recovered quickly. The life cycle is fairly short and high development costs have
been incurred.
 Since high prices attract competitors, there needs to be barriers to entry in order
to deter competitors. In Heat Co’s case, there is a barrier, since it has obtained a
patent for the Energy Buster.
 The strength and sensitivity of demand are unknown. Again, this is not the case
here.
Once again, the Energy Buster meets only some of the conditions which would suggest
that although this strategy may be suitable the answer is not clear cut. The fact that high
development costs have been incurred and the life cycle is fairly short are fairly good reasons
to adopt this strategy. While we have demand curve data, we do not really know just how
reliable this data really is, in which case a skimming strategy may be a safer option.
Marking guide Marks
(a) Profit using demand-based approach
(i) Establish demand function:
Find b 1
Find a 1
Write out demand function 1
3
(ii) Find MC:
Average cost of 100 1
Total cost of 100 1
Average cost of 99 1
Total cost of 99 1
Difference 1
Correct total MC excluding fixed cost 1
6
Marking guide Marks

(iii) Establish MR function 1
Equate MC and MR to find Q 1
Find optimum price 1
3
(b) Market based strategies
Penetration pricing Each valid point 1
Max 4
Market skimming Each valid point 1
Max 4
Max 8
7 ROBBER CO
EXAMINER’S COMMENTS: PART (A)
This question tested relevant costing within a ‘make or buy’ context. Part (a) asked
candidates to advise whether the company in question should manufacture its own
components for its burglar alarms or whether it should outsource their supply to Burgistan.
It was quite pleasing to see many candidates making a decent attempt at it.
In the suggested solution, the $4k and $6k machine costs are treated as specific fixed costs
and are therefore included in the relevant cost of manufacturing in-house, together with the
depreciation. However, is acceptable to assume these costs to be general fixed costs and
therefore excluded them for their manufacture cost together with the depreciation.
EXAM SMART
Watch out for the following when working out the relevant costs of making the components.
 For keypads the price rise in materials is due to happen half way through the year so
half the units produced would be at the old price and half at the new price.
 Be careful with heat and power to make sure that you strip out the apportionment of
general factory overhead as this can be assumed to going to be incurred regardless of
any decision to purchase externally.
 For the variable element of the machine costs, firstly calculate what the variable cost
per set up is and then scale this for the fact that there will now be more set ups overall
(since batch size is being reduced more batches will be needed). Previously 160 set ups
(80,000/500) were required and now 200 set ups (80,000/400) will be needed. You
therefore need to scale by a factor of 200/160 (or 500/400 as the examiner has shown
as it amounts to exactly the same thing)
 Make sensible assumptions about the general factory depreciation and insurance.
(a)
Display
Keypads screens
Variable costs $ $
Materials ($160k × 6/12) + ($160k × 1.05 × 6/12) 164,000
($116k × 1.02) 118,320
Direct labour 40,000 60,000
Machine set-up costs
($26k – $4k) × 500/400 27,500
($30k – $6k) × 500/400 30,000
231,500 208,320
Attributable fixed costs
Heat and power ($64k – $20k)/($88k – $30k) 44,000 58,000
Fixed machine costs 4,000 6,000
Depreciation and insurance ($84/$96k × 40%) 33,600 38,400
81,600 102,400
Total incremental costs of making in-house 313,100 310,720
Cost of buying (80,000 × $4.10/$4.30) 328,000 344,000
Total saving from making 14,900 33,280
Robber Co should therefore make all of the keypads and display screens in-house
(Note: It has been assumed that the fixed set-up costs only arise if production takes place.)
Alternative method
Display
Keypads screens
Relevant costs $ $
Direct materials
($160,000/2) + $160,000/2 × 1.05 164,000
$116,000 × 1.02 118,320
Direct labour 40,000 60,000
Heat and power
$64,000 – (50% × $40,000) 44,000
$88,000 – (50% × $60,000) 58,000
Machine set up costs:
Avoidable fixed costs 4,000 6,000
Activity related costs (W1) 27,500 30,000
Avoidable depreciation and insurance costs:
40% × $84,000/$96,000 33,600 38,400
Total relevant manufacturing costs 313,100 310,720
Relevant cost per unit: 3.91375 3.884
Cost per unit of buying in 4.1 4.3
Incremental cost of buying in 0.18625 0.416
As each of the components is cheaper to make in-house than to buy in, the company should
continue to manufacture keypads and display screens in-house.
Working 1
Current no. of batches produced: 80,000/500 = 160
New no. of batches produced: 80,000/400 = 200
Current cost per batch for keypads: ($26,000 - $4,000)/160 = $137.5
Therefore new activity related batch cost: 200 × $137.5 = $27,500
Current cost per batch for display screens: ($30,000 - $6,000)/160 = $150
Therefore, new activity related batch cost: 200 × $150 = $30,000

Part (b) was more challenging and required candidates to work out the incremental saving
per unit from making the two components and then, using key factor analysis, calculate how
many of which product should be bought in rather than made in order to increase
production.
It produced weaker answers but many candidates were at least able to work out the
shortage of hours and the number of units that needed to bought in (without going through
the process of ranking the two components), for which they could earn nearly half of the
total marks available.
(b) The attributable fixed costs remain unaltered irrespective of the level of production of keypads
and display screens, because as soon as one unit of either is made, the costs rise. We know that
we will make at least one unit of each component as both are cheaper to make than buy.
Therefore they are an irrelevant common cost.
Display
Keypads screens
$ $
Buy 4.1 4.3
Variable cost of making ($231,500/80,000) 2.89
($208,320/80,000) 2.6
Saving from making per unit 1.21 1.7
Labour hour per unit 0.5 0.75
Saving from making per unit of limiting factor 2.42 2.27
Priority of making 1 2
Total labour hours available = 100,000.
Make maximum keypads i.e. 100,000, using 50,000 labour hours (100,000 × 0.5 hours)
Make 50,000/0.75 display screens, i.e. 66,666 display screens.
Therefore, buy in 33,334 display screens (100,000 – 66,666).
EXAM SMART
In the answer to part (b) above it is not unreasonable to have assumed that the heat &
power costs that were not an apportionment of general factory overhead were also part of
the variable cost. Including these as part of the variable cost of making would have the
following results compared to the Examiner’s answer.
 Keypads, VC of making = 2.89 + 0.55 = $3.44, where the $0.55 heat and power per unit
is calculated as the total cost per unit of $0.8 less $0.25 (being 50% of the labour direct
cost per unit).
 Display screens, VC of making = 2.6 + 0.73 = $3.33, where the $0.73 is calculated as the
total cost per unit of $1.1 less $0.375 (being 50% of the direct labour cost per unit).
Display
Keypads screens
$ $
Buy 4.1 4.3
Variable cost of making (per above) 3.44 3.33
Saving from making per unit 0.66 0.97
Labour hour per unit 0.5 0.75
Saving from making per unit of limiting factor 1.32 1.29
Priority of making 1 2
As you can see the order of priority is unaffected and so the rest of the solution remains as
per the Examiner’s answer.

Part (c) was a straightforward knowledge requirement about the non-financial factors to be
considered when outsourcing. The majority of candidates answered very well scoring full
marks here although a significant number of candidates brought in financial factors into their
answers despite the requirement asking for non- financial factors.
Good points that were raised included consideration of the following:
 Reliability and skills of the suppliers - can they sustain quality standards?
 What if there are any future changes / models, would the suppliers be able to cope?
 Ability of the suppliers to deliver on time; if late, how will this affect customer relations
and goodwill?
 Will the suppliers maintain confidentiality? The designs are IPR - Intellectual Property
Rights, which, if copied, will affect Robber Company's market share.
 What about government pressure / power / policies? The decision to outsource could
result in a number of redundancies which might make the government bring sanctions
against Robber Company.
 Loss of the rationale of Robber's existence - if they outsource is this the start of the
decline of the manufacturing business?
 Exchange rate risks and losses for Robber Co.
EXAM SMART
It is so important to follow the clues given by an Examiner. Non-financial factors requires
you to think of issues that, although they may ultimately have a financial impact, in
themselves are not measured purely in $!
As usual, it is important not just to state the factor but to add value and clarity. You might
want to think of the ‘so what?’ factor. I have stated a fact – so what? Why is it important?
For example:
 Robber needs any new supplier to be flexible and able to meet Robber’s needs (fact). If
the new supplier were not able to cope with sudden increased demand by Robber for
keypads and display screens, then Robber’s production could be delayed causing lost
goodwill with its own customers (so what / value added).
(c) Non-financial factors

 The company offering to supply the keypads and display screens is a new company. This
would make it extremely risky to rely on it for continuity of supplies. Many new
businesses go out of business within the first year of being in business and, without these
two crucial components, Robber Co would be unable to meet demand for sales of control
panels.
 Robber Co would need to consider whether there are any other potential suppliers of the
components. This would be useful as both a price comparison now and also to establish
the level of dependency that would be committed to if this new supplier is used. If the
supplier goes out of business, will any other company be able to step in? If so, at what
cost?
 The supplier has only agreed to these prices for the first two years. After this, it could put
up its prices dramatically. By this stage, Robber Co would probably be unable to begin
easily making its components in house again, as it would probably have sold off its
machinery and committed to larger sales of control panels.
 The quality of the components could not be guaranteed. If they turn out to be poor
quality, this will give rise to problems in the control panels, leading to future loss of sales
and high repair costs under warranties for Robber Co. The fact that the supplier is based
overseas increases the risk of quality and continuity of supply, since it has even less
control of these than it would if it was a UK supplier.
 Robber Co would need to establish how reliable the supplier is with meeting promises for
delivery times. This kind of information may be difficult to establish because of the fact
that the supplier is a new company. Late delivery could have a serious impact on
Robber Co’s production and delivery schedule.
Marking guide Marks
(a) Incremental cost of buying in
Direct materials ½
Direct labour ½
Heat and light ½
Set-up costs 3
Depreciation and insurance 1
Total cost of making ½
Total cost of buying ½
Saving ½
Conclusion 1
8
Or alternative method
Direct materials ½
Direct labour ½
Heat and power ½
Avoidable fixed costs ½
Activity related costs (W1) 3
Avoidable depreciation and insurance ½
Total relevant manufacturing costs ½
Relevant cost per unit ½
Incremental cost of buying in ½
Conclusion 1
8
Marking guide Marks

(b) If 100,000 control panels made
Variable cost of making per unit 1
Saving from making 1
Saving per labour hour 1
Ranking 1
Make 100,000 keypads 1
Make 66,666 display screens 1
Buy 33,334 display screens 1
7
(c) Non-financial factors
Per factor 1 or 2 Max 5
Risk and uncertainty
8 CEMENT CO
Part (a) should have been easy but only about 5% of candidates got this completely correct.
A vast number of candidates applied the probabilities to the profit figures before including
the amounts in the table. Many tables were not clearly labelled and few candidates grasped
the fact that any unsold bag of cement produces a loss of $4.50 in total ($4 buy-in cost and
$0.50 disposal cost).
EXAM SMART
Pay-off tables have to be carefully constructed.
 You must calculate the expected returns at each level of supply and each possible
demand level. This will involve nine separate calculations. Remember that if you supply,
say, 350,000 bags yet demand is only poor (200,000 bags) then some 150,000 will go
unsold, losing $4.50 per bag.
 It is very frustrating for markers where elementary mistakes are made. Therefore,
question practice is key!
(a) Pay-off table

SUPPLY (no. of bags)
Prob.* 350,000 280,000 200,000
Weather $000 $000 $000
DEMAND
Good 350k 0.25 1,750 (1) 1,400 1,000

Average 280k 0.45 1,085 (2) 1,400 1,000
Poor 200k 0.30 325 640 1,000
EXAM SMART
The probability column is only shown so as to help in part (b) (iii)’s calculations.
Profit per bag sold in coming year = $9 – $4 = $5

Loss per bag disposed of = $4 + $0.50 = $4.50
(1) 350,000 × $5 = $1,750,000
(2) [280,000 × $5] - [70,000 × $(4.50)] = $1,085,000 etc
EXAM SMART
For completeness the remaining workings are shown below.
Supply Demand $000
350,000 200,000 (200,000 × $5) – (150,000 × $4.50) 325
280,000 350,000 (280,000 × $5) 1,400
280,000 280,000 (280,000 × $5) 1,400
280,000 200,000 (200,000 × $5) – (80,000 × $4.50) 640
200,000 350,000 (200,000 × $5) 1,000
200,000 280,000 (200,000 × $5) 1,000
200,000 200,000 (200,000 × $5) 1,000
In the exam you don’t need to show workings for all nine outcomes but show enough that
the marker can clearly see that you know what you are doing.
EXAMINER’S COMMENTS: PARTS (b) (i), (ii)

Parts (b) (i) and (ii) were fairly well attempted (identifying the level of production using
maximin and maximax) but even then, most correct answers were not justified as requested
and only therefore scored half marks. It didn’t matter whether justification had been given
by either words or numbers ─ but usually, there was neither.
EXAM SMART
For the maximin and maximax parts of the question, clearly demonstrate why you have
made a choice. If, for example, you made a mistake in part (a), you can still get full credit if
you correctly use and demonstrate your decision here in part (b). Notice how the Examiner
has shown the key numbers and workings for each decision as a clear basis for the answer.
The expected value part of the question is fully explained by clear workings. ‘Think on
paper!’
Avoid fundamental mistakes too. You have to work out each possible outcome in part (a) for
the three possible supply levels. It is only the supply levels that Cement Co can control – the
probabilities relate to the uncertain demand at the various levels
(b)
(i) Maximin – identify the worst outcome for each level of supply and choose the highest of
these worst outcomes.
350,000 280,000 200,000
$000 $000 $000
Worst 325 640 1,000
The highest of these is $1,000,000 therefore choose to supply only 200,000 bags to meet
poor conditions.
(ii) Maximax – identify the best outcome for each level of supply and choose the highest of
these best outcomes.
350,000 280,000 200,000
$000 $000 $000
Best 1,750 1,400 1,000
The highest of these is $1,750,000, therefore choose to supply 350,000 bags to meet
good conditions.
EXAMINER’S COMMENTS: PART (b) (iii)

The requirement to calculate the expected value in part (b) (iii) was worth the most marks
and it was really surprising to see that 90% of candidates could not do this.
They seemed to think that the expected value could be calculated by working out the
expected demand level (by applying the probabilities to the three demand levels) and then
applying this to an expected profit figure. They were confusing the scenario given, where a
decision has to be about how much of a product to supply given three alternative levels of
supply, to a scenario where there is only supply level available (e.g. a one off event) but
there are two sets of uncertainties (e.g. different demand levels and different profit levels.)
In the latter situation, the expected value can be calculated by working out the expected
demand and the expected profit, but where there are three potential supply levels, there
will be three expected values to calculate, with the highest then being selected.
Candidates are clearly confused in this area and need to study it further.
(iii) Expected value – use the probabilities provided in order to calculate the expected value
of each of the supply levels.
Good (0.25 × $1,750,000) + (0.45 × $1,085,000) + (0.30 × $325,000) = $1,023,250
Average (0.7 × $1,400,000) + (0.3 × $640,000) = $1,172,000
Poor 1 × $1,000,000 = $1,000,000
The expected value of producing 280,000 bags when conditions are average is the
highest at $1,172,000, therefore this supply level should be chosen.

The discursive part of this question was answered well in relation to maximin and poorly in
relation to expected value, again because of the fundamental misunderstanding described
above.
(c) Maximin and expected value decision rules

The ‘maximin’ decision rule looks at the worst possible outcome at each supply level and then
selects the highest one of these.
It is used when the outcome cannot be assessed with any level of certainty. The decision maker
therefore chooses the outcome which is guaranteed to minimise his losses. In the process, he
loses out on the opportunity of making big profits. It is often seen as the pessimistic approach to
decision making (assuming that the worst outcome will occur) and is used by decision makers
who are risk averse. It can be used for one-off or repeated decisions.
The ‘expected value’ rule calculates the average return that will be made if a decision is
repeated again and again. It does this by weighting each of the possible outcomes with their
relative probability of occurring. It is the weighted arithmetic mean of the possible outcomes.
Since the expected value shows the long run average outcome of a decision which is repeated
time and time again, it is a useful decision rule for a risk neutral decision maker. This is because
a risk neutral person neither seeks risk nor avoids it; they are happy to accept an average
outcome. The problem often is, however, that this rule is often used for decisions that only
occur once. In this situation, the actual outcome is unlikely to be close to the long run average.
For example, with Cement Co, the closest actual outcome to the expected value of $1,172,000 is
the outcome of $1,085,000. This is not too far away from the expected value but many of the
others are really different.
Marking guide Marks
(a) Pay-off table
Calculation of profit 1
Calculation of loss 1
‘Demand’ label ½
‘Supply’ label ½
Weather column ½
Supply column – 350,000 1½
8
(b) Decision criterion
(i) Maximin
Selecting highest of the low 1
(ii) Maximax
Selecting highest of the high 1
(iii) Expected value
Calculating EV when good 1
Calculating EV average 1
Calculating EV when poor 1
Selecting highest 1
4
(c) Maximin and EV
Describe maximin 1
Used when outcome cannot be assessed with any certainty 1
Risk averse / pessimistic 1
One-off / repeated decisions 1
Describe EV 2
Risk neutral 1
Repeated decisions 1
Max 6
1 YUMI CO
Requirement (a) (i) shows the importance of basic knowledge – flexed budgets are covered
in the MA syllabus at the Applied Knowledge level, and are expected to be something which
a well prepared PM candidate should manage easily.
(a) (ii) was less well answered, primarily due to poor exam technique.
Looking at this requirement in detail, it starts ‘With reference to your answer in part (a) (i)’
–this is important to note, but this doesn’t tell us what is needed done, so it is necessary to
read on. ‘explain the main weaknesses’ – verbs are crucial in requirements and explain is
regularly used, and means something needs to be made clear – in this case weaknesses but
weaknesses of what? ‘in the current monthly budget statements issued to the restaurants
as a basis for managing performance.’ That’s everything – so why are the budget
statements very useful for assessing the performance of the restaurants? The requirement
says to use the answer from (a) (i), but there may also be clues in the written scenario.
EXAM SMART
If coming up with points is difficult, it would be helpful to think about what is important
when assessing performance. Rule number one – it should be controllable. The scenario says
that Head Office costs are apportioned, which should set alarm bells ringing straight away.
Another big clue here is that the budget has had to be flexed – this is done because it’s not
fair to compare (say) material costs at budgeted activity to material costs at actual activity as
if more meals have been sold than expected, then of course material costs would be higher!
Other points can be made but the most important thing here is to address the requirement.
You will get no marks here for assessing the performance of the business.
(a) (i) Flexed budget for Cowly restaurant

Original Flexed
budget budget Actual Variance
Number of customers 1,500 1,800 1,800
$ $ $ $
Revenue 75,000 90,000 87,300 2,700 A
Food and drink costs (22,500) (27,000) (26,100) 900 F
Staff costs (31,500) (37,800) (38,250) 450 A
Heat, light and power (7,500) (9,000) (8,100) 900 F
Rent, rates and other (12,000) (12,000) (12,600) 600 A
overheads
Profit 1,500 4,200 2,250 1,950 A
Notes:
Revenue: $75,000/1,500 = $50 per customer: $50 × 1,800 = $90,000
Food and drink: $22,500/1,500 = $15 per customer: $15 × 1,800 = $27,000
Staff costs: $31,500/1,500 = $21 per customer: $21 × 1,800 = $37,800
Heat, light and power: $7,500/1,500 = $5 per customer: $5 × 1,800 = $9,000
(ii) The most significant weakness in the current performance report is that the original
budget is not flexed to adjust for the actual numbers of customers served.
The existing report shows that the Cowly restaurant has overspent on all its costs which
could be a concern given the importance of cost control in Yumi Co. However, the main
reason for the revenue variance and the costs variances is the fact that the number of
customers the restaurant served was 20% higher than budgeted (1,800 v 1,500).
If the budget is flexed for the actual number of customers, this allows a more meaningful
assessment of the restaurant’s performance to be made.
Once the flexed budget is prepared, it can be seen that revenues were actually lower
than would have been expected, given the number of customers served with average
spend per head being $48.50 instead of $50. Food and drink costs were also less than
budget. Taken together with the reduction in average customer spending, this might
suggest that some of the items on the menu had been changed since the budget was
originally set.
Another weakness in Yumi Co’s budgetary control report is the fact that staff costs and
heat, light and power costs are assumed to be purely variable costs – dependent on the
number of customers. However, although the restaurant may recruit some temporary
staff in busy periods, it is likely that at least some of the staff will be permanent, meaning
that it would be more appropriate to treat staff costs as semi-variable rather than
variable.
Similarly, it seems likely that there will be a significant fixed element within heat, light
and power costs, so treating these as wholly variable costs does not seem appropriate.

This question asks for a discussion on whether incremental budgeting is suitable for Yumi Co.
This is a good example of applying knowledge to the scenario. Discussions should, where
possible, involve both sides of the argument, so the requirement is looking for reasons why
incremental budgeting is/isn’t appropriate. The scenario can be used to expand basic theory
into a discussion.
 Quicker and cheaper than other methods – this is suitable for Yumi Co as they have a
focus on cost control.
 Easily understood by managers – although the budgets are currently prepared centrally,
it would help Yumi Co if the restaurant managers understood the process.
 Suitable for a stable environment – this is applicable to Yumi Co as the scenario says
that results are consistent. A couple of recent changes are mentioned, but incremental
budgeting would allow Yumi Co to allow for them.
 Errors/inefficiencies from prior periods can be carried forwards – this disadvantage
would be a worry for Yumi Co, as margins are tight, so it would want to avoid this.
 Managers may spend unnecessarily – also something which Yumi Co would want to
avoid due to the need to reduce costs. The final two points may be enough to suggest
that moving away from incremental budgeting may be the answer.
(b) Under an incremental budgeting approach, the current year’s budget and results are taken as
the starting point for preparing the next year’s budget. The budget is then adjusted for any
expected changes, such as the impact of inflation on costs and prices, and sales growth or
decline.
The main advantage of the incremental approach is that it is a relatively straightforward way of
preparing a budget, appropriate for organisations which are operating in relatively stable
environments. The locations of Yumi Co’s restaurants, away from significant competition,
suggest that the operating environment is relatively stable, meaning incremental budgeting is
appropriate.
Similarly, the fact that Yumi Co appears to have a relatively well-established brand and
customer base suggests that using an incremental approach to budgeting future revenues
appears reasonable, even if it is difficult to identify some changes which need to be adjusted for
in the next year’s budget. However, one of the major disadvantages of incremental budgeting is
that it does not provide any incentive to make operations more efficient or economical. If the
current year figures include slack or inefficiencies, then using them as the start-point for the
next year’s figures means that inefficiency is automatically perpetuated into the next year.
Such an approach seems somewhat inconsistent with the focus on cost control within Yumi Co.
If the company is worried about its relatively low margins, then an approach to budgeting which
challenges costs more critically (such as zero-based budgeting or activity-based budgeting)
might be more suitable for helping to drive down costs. For example, the highest cost is staff
wages which could be analysed and Yumi Co could investigate making changes to its staffing
model to reduce costs and/or improve efficiency.
As mentioned in part (a), whether labour costs and heat, light and power vary proportionately
with the number of customers appears debatable. If Yumi Co’s incremental budgets ignore the
relationship between activities and costs, then ultimately the budgets will provide Yumi Co’s
management with little relevant information for managing costs. This could become an
increasingly important issue if competition in Yumi Co’s markets intensifies.

Requirement (c) is similar to (b) – again the key skill is to apply knowledge to this scenario.
Writing out the advantages and disadvantages of participative budgeting will not pass this
question – it must be made applicable to Yumi Co. To take one example, an advantage of
participative budgeting is that the lower level managers have better knowledge of the
processes. This can be applied to Yumi Co by saying that ‘local restaurant managers will
understand the local market better, allowing for local events, tastes or changes, such as new
competition.’ This extra detail shows an understanding of how the question applies to the
scenario.
(c) The current budget process is a centralised, top-down process, meaning that the managers from
Yumi Co’s restaurants do not have any opportunity to influence the budgets for their
restaurants.
By contrast, in a participative approach, the managers of each restaurant would be able to
influence the figures for their restaurant, rather than having budget targets simply imposed on
them.
Involving the managers in the budgeting process should help to make the budgets more
effective and realistic. The local managers should have a greater understanding of the
environmental factors and operational constraints which will influence the performance of their
restaurants. For example, the manager of the Cowly restaurant will have a better understanding
of their customers and market conditions and thus provide a greater insight into the potential
impact of the new restaurant than a member of the finance team at Yumi Co’s head office
would have. Similarly, managers are more likely to be committed to achieving a budget if they
have been involved in creating it – not least because their involvement in the preparing the
budget should help to ensure that they feel the budget figures are realistic.
However, involving the restaurant managers in the budgeting process is likely to make it more
time-consuming. For example, instead of running their restaurants, managers will have to spend
time in meetings with head office staff planning and preparing their budgets. In this respect, it
may be more appropriate for Yumi Co to maintain the current, top-down process for
restaurants which are operating in a stable environment (and where the insights from local
managers will add little value), but introduce a more participative approach for restaurants like
Cowly which are facing a period of change.
Another potential disadvantage of participative budgeting is that managers may try to influence
the budgets so that their targets can be achieved easily. By doing this, a restaurant’s
performance, compared to budget, will appear to improve, but this would actually be an
illusion. One of the main issues Yumi Co could face in this respect is that, given the range of
different locations of its restaurants, it will be difficult for head office staff to know whether
individual managers are setting targets which are easy or challenging. If the restaurants were all
similar, or in similar locations, it would be easier to compare the figures suggested by individual
managers to assess how challenging, or not, they are.
Similarly, managers are more likely to highlight issues which will lead to a reduction in their
budget targets, rather than ones which increase their targets. For example, the manager at
Cowly has highlighted that the new competitor will make it more difficult for them to achieve
budget. However, the manager does not appear to have made a corresponding
acknowledgement that the increased numbers of visitors to Cowly could support an increased
revenue target. There is a danger that the managers’ participation in the budgets could lead to
the targets becoming less challenging, which in turn could affect Yumi Co’s competitiveness and
profitability.
Marking guide Marks
(a) (i) Flexed budget:
Revenue ½
Food and drink ½
Staff ½
Heat, light and power ½
Rent and rates ½
Profit ½
Max 3
(ii) Weaknesses Max 4
(b) Discussion Max 6
(c) Definition of participative budgeting 1
Advantages and disadvantages 6
Max 7
Quantitative analysis
2 MIC CO
(a) Monthly costs
Cumulative Actual
Cumulative average Incremental labour cost
number of hours per Cumulative number of Incremental per month
Month batches batch total hours batches total hours $
July 1 200 200 1 200 2,400
August (W1) 2 176 352 1 152 1,824
September 4 154.88 619.52 2 267.52 3,210.24
October 8 136.294 1,090.352 4 470.832 5,649.60
November (W2) 16 124.4 1,990.36 8 900.008 10,800.096
Working 1: Calculations for August
Cumulative average hours per batch: 200 × 0.88 = 176 hours
Cumulative total hours = 2 × 176 = 352 hours
Incremental number of batches = cumulative no. of 2 batches for August less cumulative
number of 1 batch for July = 1 batch
Incremental total hours = cumulative total hours of 352 for August – 200 for July = 152 hours
Actual labour cost = incremental total hours of 152 × $12 per hour = $1,824
Working 2
Time for 7th batch:
Y = axb = 200 × 7 – 0.1844245
= 139.693 hours
Total time for 7 batches = 136.693 × 7 = 977.851 hours
Total time for 8 batches = 1,090.352 hours.
Therefore, 8th batch took 112.501 hours (1,090.352 – 977.851)
Time for batches 8 – 16 = 112.501 × 8 = 900.008 hours
Therefore, cumulative average time for batches 0 – 16 = 1,090.352 + 900.008 = 1,990.36 hours
Cumulative average time for 16 batches = 1,990.36/16 = 124.4 hours per batch.
Note: The labour costs for November could be arrived at quickly simply by taking the 112.501
hours for the 8th batch, multiplying it by 8 batches and applying this number to the $12 per hour
labour cost. This quick calculation is totally sufficient to earn full marks.
EXAM SMART
This requirement takes you back to the basic principles of learning curves and as the
Examiner points out, there are a few ways of arriving at the correct answer. A tabular
approach (as above) works well here as we have to find information for consecutive months
when output is doubling on a cumulative basis each month. If you are quick at applying the
formula for learning curves then it may be faster to use it but either way this should have
proven to be a popular requirement.
(b) Implications of end of learning period

The learning period ended at the end of October. This means that from November onwards the
time taken to produce each batch of microphones is constant. Therefore, in future, when
Mic Co makes decisions about allocating its resources and costing the microphones, it should
base these decisions on the time taken to produce the 8th batch. The resource allocations and
cost data prepared for the last six months will have been inaccurate since they were based on a
standard time per batch of 200 hours.
Mic Co could try to improve its production process so that the learning period could be
extended. It may be able to do this by increasing the level of staff training provided.
Alternatively, it could try and motivate staff to work harder through payment of bonuses,
although the quality of production needs to be maintained.
(c) Involving senior staff at Mic Co in the budget-setting process
EXAM SMART
A good opportunity to show your learnt knowledge of the pro’s and con’s of a top down
(imposed) style of budgeting. There are no excuses for not being able to score well in this
requirement.
Advantages
 Since they are based on information from staff who are most familiar with the
department, they are more likely to improve the accuracy of the budget. In Mic Co’s case,
the selling price could have been set more accurately and sales may have been higher if
the Production Manager had been consulted.
 Staff are more likely to be motivated to achieve any targets as it is ‘their’ budget and they
therefore have a sense of ownership and commitment. The Production Manager at
Mic Co seems resigned to the fact that he is not consulted on budgetary matters.
 Morale amongst staff is likely to improve as they feel that their experience and opinions
are valued.
 Knowledge from a spread of several levels of management is pooled.
 Co-ordination is improved due to the number of departments involved in the budget
setting process.
Disadvantages
 The whole budgeting process is more time consuming and therefore costly.
 The budgeting process may have to be started earlier than a non-participative budget
would need to start because of the length of time it takes to complete the process.
 Managers may try to introduce budgetary slack, i.e. making the budget easy to achieve so
that they receive any budget-based incentives.
 Disagreements may occur between the staff involved, which may cause delays and
dissatisfaction. In Mic Co’s case, however, the fact that the Production Manager was not
consulted has led to disagreement after the event.
 Can support ‘empire building’ by subordinates.
Marking guide Marks

(a) Monthly costs
Per monthly cost: July–October 1½
November 3
Max 9
(b) End of learning period
Each point discussed – maximum 2
Max 4
(c) Advantages and disadvantages
Each advantage – maximum 2
Each disadvantage – maximum 2
Max 7
3 KAPPA CO
Candidates attempting the mix and yield variances either understood the approach correctly or
not at all. On several occasions candidates confused the material usage variance with the yield
variance. Some common mistakes across parts (a) were:
Using incorrect prices:
Material usage, mix and yield variances are all calculated using the standard price, but some
candidates used the actual price of the ingredients. Others used a mixture of the two creating
meaningless variances.
Not converting the quantity variance into a monetary variance:
To complete the variance calculations and see the impact on profit of the material usage, mix
and yield, the variances cannot be left in kilograms but must have a price applied to them so the
impact of the monetary value can be assessed. Some candidates simply calculated the
difference in the standard and actual quantities without any further steps being taken.
Failing to state whether the resulting variance is favourable or adverse:
It is insufficient for a variance to be left as a positive or a negative as the indicator of its sign.
Candidates should clearly indicate whether the variance is favourable or adverse.
Whilst candidates could write favourable or adverse, the use of an F or A after the variance
figure would also be sufficient.
Failing to add up the individual variances:
In all three sub requirements for part (a), a total variance figure was required to score full
marks. Some candidates did accurate workings for their individual variances but neglected to
add up their variances to get the total variances.
EXAM SMART
When completing variance analysis questions within the software of the exam, save yourself
some time by copying and pasting any lines of the variance calculations that are used twice.
For example, the standard quantity in the actual mix line is used in both the materials mix
and the materials yield calculation.
(a)
(i) Usage variance
Should use Did use Difference Std cost/kg Variance
kg kg kg $ $
Alpha 1,840 2,200 360 2.00 720 A
Beta 2,760 2,500 260 5.00 1,300 F
Gamma 920 920 1.00
5,520 5,620 580 F
(ii) Mix variance
AQSM AQAM Difference Std cost/kg Variance
kg kg kg $ $
Alpha 1,873.33 2,200 326.67 2.00 653.34 A
Beta 2,810.00 2,500 310.00 5.00 1,550.00 F
Gamma 936.67 920 16.67 1.00 16.67 F
5,620 5,620 913.33 F
(iii) Yield variance

SQSM AQSM Difference Std cost/kg Variance
kg kg kg $ $
Alpha 1,840 1,873.33 33.33 2.00 66.66 A
Beta 2,760 2,810.00 50.00 5.00 250.00 A
Gamma 920 936.67 16.67 1.00 16.67 A
5,520 5,620 333.33 A
Alternative solution
5,620 kg input should produce 4,683.33 kg of Omega
5,620 kg input did produce 4,600 kg of Omega
Difference = 83.33kg x $4 per kg ($400/100 kg) = $333.32 A
Part (b) was the most poorly answered part of the question. Many candidates either did not
read the requirement carefully enough or not understand what it was asking for. In the
scenario, the production manager receives a report at the end of each month including
variances, some of which he has no control over and he does not receive any feedback or
explanations from the finance team. The requirement asks for a discussion of the problems
arising from using this report to judge the performance of the production manager, but
instead many candidates gave recommendations of how to overcome the issues with the
current system. Whilst this showed an understanding of the scenario, the advice did not
address the requirement and therefore could not score any marks.
A well-structured answer would have stated the problems with the current system,
explained why it was a problem and the impact that it could have on the company and the
production manager. Sadly very few candidates used this approach. Some candidates, who
took this approach focussed only on one or two issues, resulting in them scoring limited
marks due to a lack of breadth in their answer.
Some candidates simply copied out statements in the scenario without explaining the actual
problem that these statements would create. A few candidates ignored the requirement
entirely and gave an explanation and discussion of the material usage, mix and yield
variances which they calculated in part (a). Whilst their answer may have been completely
correct and could have scored highly had the requirement been to discuss the variances, but
sadly it was not.
(b) The raw material price variances included in the report are probably outside the production
manager’s control, and are more the responsibility of the purchasing manager. Furthermore,
the production manager has no participation in setting the standard mix. Holding managers
accountable for variances they cannot control is demotivating.
There appears to be no use of planning variances. Prices and quality of the three materials are
volatile and using ex ante prices and usage standards can give a distorted view of mix and yield
variances. Failing to isolate non-controllable planning variances can be demotivating.
The standard mix for the product has not changed in five years despite changes in the quality
and price of ingredients. It can also lead the production manager to attempt control action
based on variances which are calculated based on standards which are out of date.
As Kappa Co does not currently give feedback or commentary, a true picture is lacking as to the
production manager’s performance. There is also no follow up on the variances calculated. As
Kappa Co does not appear to place much importance on the variances, the production manager
will not be motivated to control costs and could become complacent which could adversely
impact Kappa Co overall.
This can be illustrated by looking at the overall usage variance reported which shows a $580
favourable variance, so the production manager could assume good performance. However, if
the usage variance is considered in more detail, through the mix and yield calculations, it can be
seen that it was driven by a change in the mix. There is a direct relationship between the
materials mix variance and the materials yield variance and by using a mix of materials which
was different from standard, it has resulted in a saving of $913.33; however, it has led to a
significantly lower yield than Kappa Co would have got had the standard mix of materials been
adhered to. Also changing the mix could impact quality and as a result sales and there is no
information about this.
Marking guide Marks
(a) (i) Alpha usage variance 1
Beta usage variance 1
Gamma usage variance 1
Total usage variance 1
Max 4
(ii) AQSM figures 1½
Variance quantities ½
Variance in $ 1½
Total mix variance ½
Max 4
(iii) SQSM or $4,683.33 kg (depending on method used) 1
Variance quantity or 83.33 kg (depending on method used) ½
Variance in $ or calculation of $4 (depending on method used) 1
Total yield variance ½
Max 3
(b) Controllability issues 5
Other relevant points relating to performance 4
Max 9
Standard costing
4 NOBLE
Many candidates answered this well and easily scored nine out of the 12 marks available,
tripping up only on the staff wages and energy costs calculations. There were some candidates
who had no idea what a flexed budget was but these were definitely in the minority.
When you prepare a flexed budget, its format should replicate the original budget that it
relates to. So, for example, if the original budget totals up variable costs, so should the
flexed budget. This makes it easier to compare like with like. Some candidates did not do this
but again, they were in the minority and on the whole, the answers were good.
EXAM SMART
Each exam is bound to give some unusual aspects to a question that you will never have
seen before. When this happens, take your time to carefully work your way through the
requirement. A good example is the staff wages:
 Core wages of $9,216 will be paid to staff provided the number of orders does not exceed 50.
 For every extra five customers over this level – half an hour of overtime has to be
worked by each staff member. In this scenario the average number of orders is 65,
some 15 more orders than the 50. His means that 15 ÷ 5 = 3 extra ½ hour shifts have to
be worked by all the staff.
 The extra cost of this will be 8 staff × 1½ hours × 6 days × 4 weeks × $12/hour = $3,456.
 The total cost for wages becomes $9,216 + $3,456 -= $12,672
(a) Flexed budget

Number of meals 1,560
$ $
Food sales (1) 62,400
Drink sales (1) 15,600
Total revenue 78,000
Variable costs:
Staff wages (2) (12,672)
Food costs (3) (7, 800)
Drink costs (4) (3,120)
Energy costs (5) (4,234)
(27,826)
Contribution 50,174
Fixed costs:
Manager’s and chef’s pay (8,600)
Rent, rates and depreciation (4,500)
(13,100)
Operating profit 37,074
(1) Food revenue

Food revenue = 1,560 × $40 = $62,400
Drinks revenue = 1,560 × ($2.50 × 4) = $15,600.
(2) Staff wages
Average number of orders per day = 1,560/(6 days × 4 weeks) = 65 per day
Therefore, extra orders = 15 per day
8 staff × 1.5 hours × 6 days × 4 weeks = 288 extra hours
At $12 per hour = $3,456 extra wages.
Total flexed wages = $9,216 + $3,456 = $12,672
(3) Food costs
Food costs = 12.5% × $62,400 = $7,800
(4) Drink costs
Drinks costs = $15,600 × 20% = $3,120
(5) Energy costs
Standard total hours worked = (8 × 6) × 6 days × 4 weeks = 1,152 hours
Extra hours worked = 288 (working 2)
Total hours = 1,152 + 288 = 1,440
At $2.94 per hour = $4,234

In part (b) candidates were provided with the sales mix contribution variance and the sales
quantity contribution variance and asked to describe each of them and identify why they
had arisen. Many candidates confused the sales mix with the materials mix and talked about
the latter. Also many candidates could not describe the quantity variance or identify why it
had arisen.
There is clearly a lack of understanding about variances, with candidates perhaps learning
formulae in order to churn out calculations but not really understanding what variances
mean to a business. This area needs more work by the majority of students.
(b) The sales mix contribution variance measures the effect on profit of changing the mix of actual
sales from the standard mix.
The sales quantity contribution variance measures the effect on profit of selling a different total
quantity from the budgeted total quantity.
The mix variance is adverse here. Since meal B generates a higher contribution than meal A, the
adverse variance shows that more of meal A must have been sold, relative to B, than budgeted.
Since the quantity variance is favourable, this means that the total quantity of meals sold (in the
standard mix) was higher than expected, as evidenced by the number of meals sold being 1,560
rather than the budgeted 1,200.

Part (c) was the higher skills marks on the paper. Only a few candidates were able to show
that planning and operational variances needed to be calculated, so that the manager would
only be assessed on results that were within his control.
EXAM SMART
The examiners often set differentiating requirements in the last part of any question. The
key here is to have a go! In part (b) you are told about sales mix and sales quantity
variances. Think about what other two sales variances you may know (sales volume, sales
price and then potentially analysing these into planning and operational variances).
 Sales margin price variances could be subdivided into planning and operational
elements. We are told that Noble’s owner told the restaurant manager to run the half-
price promotion. It is likely that most of the adverse sales margin price variance can be
attributed to a planning variance in that it was outside the control of the restaurant
manager.
 Similarly the sales margin volume variance for drinks could be calculated and split also
into planning and operational elements. Possibly a sales margin mix variance might
identify whether the restaurant manager had been able to sell more of the higher
margin drinks – even at the half-price discount.
(c) Two other variances

Drink sales
As well as the price variance for drinks sales, the sales margin volume variance could be
calculated. This will examine the difference between the standard volume of sales that would
ordinarily be expected for this number of customers (1,560 × 4 drinks) compared to the actual
volume of drinks sold because of the drinks promotion (1,560 × 6 drinks). Since the variance is
calculated by applying the increase in volume to the standard margin, this variance will be
favourable.
In addition, the total sales margin price variance for drinks sales could be split into an
operational and a planning variance.
The manager is only responsible for any operational variance and any part of the sales margin
variance that relates to a planning error (i.e. the last minute decision by the owner to run the
drinks promotion) should be separated out. This way, the manager will not be held accountable
for matters outside of his control.
Food sales
By running the half price drinks offer promotion, more customers have been attracted to the
restaurant. Drinks have been treated as a ‘loss leader’ i.e. sold at a low price in order to entice
customers. It would therefore be relevant to calculate some variances in relation to food sales
in order to show how the drinks promotion has increased food sales. The most obvious one to
calculate would be the sales margin volume variance for food sales.
EXAM SMART
Candidates only needed to mention two variances.
Marking guide Marks

(a) Flexed budget
Food sales 1
Drink sales 1
Total revenue 1
Staff wages 1½
Food costs 1
Drinks costs 1
Energy costs 1½
Variable costs total 1
Contribution 1
Manager’s and chef’s pay ½
Rent & Rates ½
Operating profit 1
12
(b) Explanation of variances 2
Suggestions of reason for variances 2
4
(c) Variance discussions
Each variance 2 Max 4
5 CLEAR CO
(a)
Variance calculations
RLE ICL Total
AQAM 4,130 960 5,090
AQBM 3,764.79 1,325.21 5,090
BQBM 3,750 1 ,320 5,070
$ $ $
Standard contribution (W1) 2,400 2,500
Mix variance 876,504F 913,025A 36,521A
Quantity variance 35,496F 13,025F 48,521F
Alternative quantity variance calculation:
For quantity variance, could work out weighted average standard contribution and use that
instead:
Total contribution ($) 12,300,000
Budgeted total sales quantity 5,070
Weighted average contribution ($) 2,426.04
Quantity variance ($) 48,521F
(W1) Standard contribution
RLE ICL
$ $
Selling price 3,000 3,650
Variable costs 600 1,150
2,400 2,500
(b) The sales mix contribution variance measures the effect on contribution of changing the mix of
actual sales from the budgeted sales mix.
The sales quantity contribution variance measures the effect on contribution of selling a
different total quantity from the budgeted total quantity.
(c) Possible additional calculations
Actual compared to budgeted revenue RLE ICL Total
$ $ $
Actual sales revenue 11,977,000 3,264,000 15,241,000
Budgeted sales revenue 11,250,000 4,818,000 16,068,000
Difference in revenue 727,000 -1,554,000 -827,000
Percentage terms 6.46% -32.25% -5.15%
Sales volume variance $ $ $
(AQ-BQ) × standard contribution 912,000F 900,000A 12,000F
Selling price variance
(AP-SP) × AQ 413,000A 240,000A 653,000A
Total sales variance
(AP – standard variable costs) × AQ 9,499,000 2,160,000 11,659,000 Actually
received
Budgeted units × standard contribution 9,000,000 3,300,000 12,300,000 Expect to
receive
499,000F 1,140,000A 641,000A
Sales performance
When comparing budgeted revenues to actual revenues, it can be seen that ICL has under-
performed this year, with revenues being 32.25% lower than budgeted. This is a result of both
lower sales volumes and a lower selling price for ICL, which has resulted in an adverse sales
volume variance of $900,000 and an adverse sales price variance of $240,000. The main reason
for this is probably the merger that took place during the year, which resulted in Clear Co’s now
biggest competitor subsequently reducing prices for ICL and presumably capturing a bigger slice
of the market as a result. Even though Clear Co’s actual price for ICL was $250 less than
budgeted, its sales volumes still fell by 27% so it was apparently unable to match the
competition.
Looking at the mix of sales between RLE and ICL at Clear Co, there is an adverse mix variance of
$36,521. This is because, whilst the sales of ICL were lower than budgeted, the sales of RLE were
higher than budgeted. Since RLE has a lower standard contribution than ICL, this produced an
adverse mix variance. This shift in sales mix could be partly attributable to the fact that the RLE
procedure is for people aged over 40 and there is an increasingly ageing population in Zeeland.
Clear Co has had to lower its price to make these sales of RLE but again, this is probably due to
increased pressure to reduce prices resulting from the merger.
Another factor which it is not possible to quantify from the information provided, but which will
invariably have had an impact on sales of lens treatments overall, is the increased availability of
laser treatments to customers. Given that 90% of customers are now eligible for the less
complex laser treatment, this side of the business may well have grown at Clear Co.
Overall, the sales volume variance is favourable for Clear Co because of the increased sales of
RLE. However, to achieve this, prices have been reduced, resulting in a significant adverse sales
price variance of $653,000. These results are disappointing and Clear Co may have to rethink its
strategy moving forwards.
Marking guide Marks

(a) (i) Calculation of sales mix contribution variance 4
(ii) Calculation of sales quantity contribution variance 4
8
(b) Explanation of what sales mix contribution variance measures 1
Explanation of what sales quantity contribution variance measures 1
2
(c) Calculations 4
Discussion of sales performance 6
10
6 TRUFFLE CO
This was a straight forward variance question. It should have been well-answered but it
wasn’t, apart from part (a). In part (a), the requirement asked for calculations of the total
labour rate and total efficiency variances. These were very simple calculations on which
about half of candidates scored full marks. The most common error that occurred was that
candidates used a standard cost of $6 an hour rather than the correct standard cost of $12
per hour. The $6 given in the question was the standard cost of labour for each batch, but
given that a batch only takes half an hour, it was necessary to identify that this figure needed
to be doubled to arrive at the standard cost per hour rather than per batch. It is really
important to read the question carefully when picking up key information.
(a) Basic variances

Standard cost of labour per hour = $6/0.5 = $12 per hour.
Labour rate variance = (actual hours paid × actual rate) – (actual hours paid × std rate)
Actual hours paid × std rate = $136,800/0.95 = $144,000
Therefore, rate variance = $144,000 – $136,800 = $7,200 F
Labour efficiency variance = (actual production in std hours – actual hours worked) × std rate
[(20,500 × 0.5) – 12,000] × $12 = $21,000 A
EXAM SMART
These variances could alternatively be presented as follows.
Labour rate variance $
12,000hrs paid
Should cost ($12/hr) 144,000
Did cost 136,800
Variance 7,200 (F)
Labour efficiency variance hrs

20,500 batches produced
Should take (0.5hrs) 10,250
Did take 12,000
Variance 1,750
@ std cost/hr $12
$21,000 (A)

Part (b) was more difficult, with a requirement to analyse each of the variances from part (a)
into component parts for planning and operational variances. There were some poor
attempts here, with a substantial number of candidates writing about planning and
operational variances rather than performing the calculations. This was surprising, given that
the requirement was very clear as to what was expected. Only a very small minority of
candidates attempted to produce a total planning variance and a total operational variance,
without splitting it between rate and efficiency as the question required.
(b) Planning and operational variances

Labour rate planning variance
(Revised rate – std rate) × actual hours paid = [$12 – ($12 × 0.95)] × 12,000 = $7,200 F
Labour rate operational variance
There is no labour rate operational variance.
(Revised rate – actual rate) × actual hours paid = $11.40 ─ $11.40 × 12,000 = 0
Labour efficiency planning variance
(Standard hours for actual production ─ revised hours for actual production) × std rate
(10,250 ─ (20,500 × 0.5 × 1.2)) × $12 = $24,600 A
Labour efficiency operational variance
(Revised hours for actual production – actual hours for actual production) × std rate
(12,300 ─ 12,000) × $12 = $3,600 F
EXAM SMART: PART (c)

A range of points that are well discussed should score well. If a point made is factual but
brief, it will not generally score as well as a point that is developed and expanded. It is not
just a matter of quantity of your answer, but quality too.
Compare the following two possible answers:
 The Production Manager should only be assessed on operational variances which are
controllable.
with
 The Production Manager should only be assessed on operational variances which are
controllable. Therefore, he cannot claim credit for the favourable labour rate variance
($7,200) since the pay cut was decided centrally and was outside the Manager’s
control.
The second point is longer but adds value and elaborates/develops the first point made.
(c) Discussion
When looking at the total variances alone, it looks like the Production Manager has been
extremely poor at controlling his staff’s efficiency, since the labour efficiency variance is
$21,000 adverse. It also looks, at a glance, like he has managed to secure labour at a lower rate.
In order to assess the Production Manager’s performance fairly, however, only the operational
variances should be taken into account. This is because planning variances reflect differences
that arise because of factors that are outside the control of the production manager. The
operational variance for the labour rate was $0, which means that the labour force were paid
exactly what was agreed at the end of October: their reduced rate of $11.40 per hour. The
manager clearly did not have to pay anyone for overtime, for example, which would have been
expected to push this rate up. The rate reduction was secured by the company and was not
within the control of the Production Manager, so he cannot take credit for the favourable rate
planning variance of $7,200. The company is the source of this improvement.
As regards labour efficiency, the planning and operational variances give us more information
about the total efficiency variance of $21,000 (A). When this is broken down into its two parts,
it becomes clear that the operational variance, for which the Manager does have control, is
actually $3,600 favourable. This is because, when the recipe is changed as it has been in
November, the chocolates usually take 20% longer to make in the first month while the workers
are getting used to handling the new ingredient mix. When this is taken into account, it can
therefore be seen that workers took less than the 20% extra time that they were expected to
take, hence the positive operational variance. The planning variance, on the other hand, is
$24,600 adverse. This is because the standard labour time per batch was not updated in
November to reflect the fact that it would take longer to produce the truffles. The Manager
cannot be held responsible for this.
Overall, then, the Manager has performed well, given the change in the recipe.
Marking guide Marks
(a) Rate and efficiency variances
Rate variance 2
Efficiency variance 2
4
(b) Planning and operational variances
Labour rate planning variance 2
Labour rate operational variance 2
Labour efficiency planning variance 2
Labour efficiency operational variance 2
8
(c) Discussion
Only operational variances controllable 1
No labour rate operating variance 1
Planning variance down to company, not Manager 2
Labour efficiency total variance looks bad 2
Manager has performed well as regards efficiency 2
Standard for labour time was to blame 2
Conclusion 2
Max 8
7 MEDICAL TEMP CO
(a) Market size and market share variances
The market size and market share variances are a breakdown of the sales volume variance. The
sales volume variance shows the effect on profit of the actual sales level being different from
the budgeted sales level. However, without considering how the market itself has changed, it is
difficult to draw conclusions about performance from the sales volume variance. Therefore, the
sales volume variance is broken down into its two components. By doing this, it is possible to
assess the extent to which changes in profit are as a result of:
(i) A change in the size of the market as a whole, which is beyond the control of the sales
manager; and
(ii) A change in the share of the market which the company holds, which is deemed to be
within the control of the sales manager.
Consequently, the variances become far more meaningful for performance management
as businesses can identify external and internal factors which can influence the results
and what was controllable and uncontrollable.
(b) Variances
Quarter 2 original budgeted sales volumes and contribution
Nurses Doctors
National Q1 sales volume (no. of weekly contracts) 14,000 4,000
Percentage of market 30% 40%
Budgeted sales volume 4,200 1,600
$’000 $’000
Budgeted revenue for MTC 4,200 3,200
Standard contribution 80% 80%
Budgeted standard contribution 3,360 2,560
Quarter 2 revised budgeted sales volumes and contribution

National Q2 sales volume (no. of weekly contracts) 18,900 4,100
Percentage of market 30% 40%
Revised sales volume 5,670 1,640
$’000 $’000
Budgeted revenue for MTC 5,670 3,280
Revised standard contribution 4,536 2,624
Quarter 2 actual results

$’000 $’000
Actual revenue in quarter 2 5,300 3,600
Actual sales volume at standard contribution 4,240 2,880
Market size variance (planning)
(Budget v revised contribution)
$’000 $’000
Budget contribution for MTC 3,360 2,560
Revised budget contribution for MTC 4,536 2,624
Variance 1,176 F 64 F
Total market size variance = $1,176,000 + $64,000 = $1,240,000 F

Nurses Doctors
Market share variance (operational)
(Revised contribution v actual)
$’000 $’000
Revised budget contribution for MTC 4,536 2,624
Actual sales volume at standard contribution 4,240 2,880
Variance (296) A 256 F
Total market share variance = $(296,000) + $256,000 = $(40,000) A

(c) Cheat Co
The sales director at Cheat Co has deliberately manipulated the market size figures to make the
market for doctors and nurses look smaller. Now, instead of being the actual market size of
18,900 weekly contracts ($18.9m/$1,000) and 4,100 weekly contracts ($8.2m/$2,000), they will
be much lower at 13,230 and 2,870 respectively. This means that the revised budgeted sales
volume figures used to calculate Cheat Co’s variances were far lower. This behaviour is
unethical and may well lead to the sales director getting a bonus which he does not deserve.
As a consequence of this, the market size variances are highly adverse, so it looks like Cheat Co’s
original budgets are very wrong. The sales director will not care about this since he will not be
held accountable for that variance; instead he will be responsible for the favourable market
share variance of over $2m. This makes the sales director’s performance look really good, but
the reality is that it only looks this high because the budgeted sales figures include revenue for
maternity units and the revised budgeted figures do not. This does not reflect the sales
director’s real performance for the quarter.
Marking guide Marks
(a) Market size and share variances are breakdown of sales volume
variance/need to consider change in size of market 1
Description of market size/market share variances/reference to
controllability 3
4
(b) Original budget (1 mark each doctors and nurses) 2
Revised budget (1 mark each doctors and nurses) 2
Actual sales volume at standard contribution (0.5 each doctors and
nurses) 1
Market size variance – doctors 1
Market size variance – nurses 1
Total market size variance ½
Market share variance – doctors 1
Market share variance – nurses 1
Total market share variance ½
10
(c) Discussion – up to 2 for each well discussed point. Must address both
parts of the requirement 6
8 STICKY WICKET
It was good to see an improvement in the variance analysis discussion that was performed in
part (a) of the question this time round, compared to December 2009’s variance analysis
question. Fewer candidates made meaningless comments such as “the material price
variance is favourable, which is good.”
Good comments tended to be along the lines of “whilst there has been a favourable material
price variance, this is because cheaper, lower quality materials were used, which, in turn, has
led to an adverse material usage variance” (although admittedly, few answers were quite as
succinctly constructed as this, but the understanding was there!)
EXAM SMART
Questions where you have to assess performance of an individual require you to focus on
the individual and what they have control or influence over. Here the Production Director
has decided to use lower-quality material and labour. There are bound to be knock-on
effects on a multitude of variances.
For example, the use of inferior material will lead obviously to a favourable material price
variance. However, the material usage variance is likely to have been affected by the
increased wastage that is likely. Possibly the labour efficiency variance will be influenced by
the increased difficulty in working the lower-quality wood.
You will not know for certain if your answer is right but you need to hypothesise. Try to push
the point.
Using words in your written answer such as:
 because
 means that
 could cause
 so that
 therefore
 resulting in …
…usually force you to think about why something has happened and what the consequences
can be.
If you just write a narrative about the variances and fail to focus on the individual manager
then you will not score well even if your points are factually sound.
(a) The performance of the Production Director could be looked at considering each decision in turn.
The new wood supplier:
The wood was certainly cheaper than the standard saving $5,100 on the standard the concern
though might be poor quality. The usage variance shows that the waste levels of wood are
worse than standard. It is possible that the lower grade labour could have contributed to the
waste level but since both decisions rest with the same person the performance consequences
are the same. The overall effect of this is an adverse variance of $2,400, so taking the two
variances together it looks like a poor decision. As the new labour is trained it could be that the
wood usage improves and so we will have to wait to be sure.
The impact that the new wood might have had on sales cannot be ignored. No one department
within a business can be viewed in isolation to another. Sales are down and returns are up. This
could easily be due to poor quality wood inputs. If SW operates at the high quality end of the
market then sourcing cheaper wood is risky if the quality reduces as a result.
The lower grade of labour used:
SW uses traditional manual techniques and this would normally require skilled labour. The
labour was certainly paid less, saving the company $43,600 in wages. However, with adverse
efficiency and idle time of a total of $54,200 they actually cost the business money overall in the
first month. The efficiency variance tells us that it took longer to produce the bats than
expected. The new labour was being trained in April 2010 and so it is possible that the situation
will improve next month. The learning curve principle would probably apply here and so we
could expect the average time per bat to be less in May 2010 than it was in April 2010.

Part of the skill in part (b) was in identifying the variances that needed to be calculated. It
was good to see that most candidates were able to do this, although a few missed the labour
idle time variance.
The calculations were performed with a reasonable degree of accuracy as well, showing that
candidates were far better prepared than in previous sitting.
(b) Variance for May 2010:

Material price variance ($196,000/40,000 ─5) × 40,000 = $4,000 Fav
Material usage variance (40,000 ─ (19,200 × 2)) × $5/kg = $8,000 Adv
Labour rate variance ($694,000/62,000 - 12) × 62,000 = 50,000 Fav
Labour efficiency variance (61,500 ─ 57,600) × 12 = 46,800 Adv
Labour idle time variance 500 × 12 = 6,000 Adv
Sales price variance (68 ─ 65) × 18,000 = 54,000 Adv
Sales volume contribution variance (18,000 ─ 19,000) × 22 = 22,000 Adv
EXAM SMART
Variances could be presented as:
Material price variance $
40,000kg purchased
Should cost ($5/kg) 200,000
Did cost 196,000
Variance 4,000 (F)
Material usage variance kg

19,200 bats produced
Should use (2kg) 38,400
Did use 40,000
Variance 1,600
@ std cost/kg $5
$8,000 (A)
Labour rate variance $

62,000hrs paid
Should cost ($12/hr) 744,000
Did cost 694,000
Variance 50,000 (F)
Labour efficiency variance hrs

19,200 bats produced
Should take (3hrs) 57,600
Did take 61,500
Variance 3,900
@ std cost/hr $12
$46,800 (A)
Labour idle time variance hrs
Hours paid 62,000

Hours worked 61,500
Variance 500
@ std cost/hr $12
$6,000 (A)
Sales price variance $

18,000 bats sold
Should sell for ($68) 1,224,000
Did sell for ($65) 1,170,000
Variance 54,000 (A)
Sales volume variance

Budget sales 19,000
Actual sales 18,000
Variance (units) 1,000
Std contribution $22
Variance ($) $22,000 (A)
Marking guide Marks

(a) Assessment of wood decision 2½
Assessment of labour decision 2½
Sales consequences 2
7
(b) MPV 2
MUV 2
LRV 2
LEV 2
LIT 1
SPV 2
SVCV 2
13
1 HAMMOCKS CO
(a) To make a profit long-term
In order to make a profit the long term revenues need to be higher than the long term costs.
The weekly revenue per guest is $2,000 in the 20X7 budget, the 20X7 actual results and the
20X6 actual results which is not in line with inflation. This means that revenues per guest are
falling in real terms.
However all staff costs have increased by 2% which is caused by inflation.
Overall this means that the profit per guest, based on the limited figures available is falling.
The repair costs, allowing for inflation have been set at the same level as 20X6. The actual for
20X7 appears to be better than budget, but as repairs are likely to be incurred on an ad hoc
basis, this does not necessarily indicate an improvement. The 20X6 repair costs are higher than
the competitor’s but it is difficult to compare because Hammocks Co have more rooms so we
are not comparing like with like. On a repair per room basis Hammocks has slightly lower cost at
$163 per room compared to the competition’s $164 per room.
Due to the secure long-term contracts which Hammocks Co offers its staff, staff costs are fixed
costs in the management accounts. This means that in order to be profitable, these costs need
to be covered by the contribution per guest. Although there is not the data to calculate the
contribution per guest per week, the higher level of guest occupancy level in 20X7 (both
budgeted and actual) is a positive indication. Hammocks’ occupancy level per room was 81%
compared to the competitor’s 77% (all based on double occupancy) indicating that performance
is good.
To create customer loyalty
There are a number of indicators to show that Hammocks Co have created a loyal customer
base.
Firstly compared to their main competitor Hammocks Co receive more revenue, charge a higher
price per guest per week and have better occupancy rates. This indicates good customer
satisfaction.
Secondly the ratio of staff to guest is higher than the competition; 1.5 compared to 1.3 in 20X6
(actual in 20X7 is slightly higher due to a lower occupancy rate than budgeted and the fact that
staff numbers are fixed). As this is a seasonal business this is may simply be a blip.
Finally, the comments on TripEvent are very positive about the level of service and standard of
cleanliness and maintenance. However it should be noted that the entire customer experience
is not positive. Complaints like the administrative errors and unchanging menus could be a
warning sign of possible erosion of customer loyalty.
(b) (i) A balanced scorecard approach to performance management is important to Hammocks
Co because it will provide management with a set of information which covers all
relevant areas of business performance. At present Hammocks Co considers performance
from a financial and customer perspective. These perspectives are important but they do
not allow a wide enough consideration of all of the factors that should be considered in
this business.
Introducing the balanced scorecard will:

 Ensure that all internal systems and processes support the customer and financial
objectives. For example, in decision-making there is little point in buying a new IT
system that does not either improve customer experience or reduce processing
costs.
 Encourage full integration between all departments. Errors in invoicing or sending
specific requirements are system or internal process errors. While a customer
might not choose a holiday resort for its excellent administration, they may refuse
to use a company again if they receive poor service. Thus neglecting one aspect of
the scorecard can impact on customer satisfaction and longer term financial
performance.
 Make sure important elements are assessed and expected performance levels
quantified and/or qualified. This this means that performance can be measured,
explained, compared and where necessary, control action can be taken. The errors
that occur at Hammocks Co are spoiling the company’s reputation, but there is no
evidence that any action is being taken.
Note: Only TWO were required.
(ii) Internal business process
Goal: To have an effective and efficient administration.
The feedback on TripEvent indicates that the only guest complaints relate to
administrative issues prior to the guest arrival and not operational issues at the resort. In
fact the actions of the resort staff with the speedy resolution of bedding issues and the
organising of a complimentary transfer seems to have diverted trouble. Therefore
measures need to be focused on the weaker area which is the administration.
Measures:
(1) Number of times that a guest request is not received at resort prior to their
arrival/number of requests made.
This will measure the number of times the guest experience is not seamless from
booking to arrival.
(2) Average number of corrections to booking due to an administrative error.
This measures inefficient use of staff time and potentially increased customer
frustration.
Innovation and Learning
Goal: To match leading competitor’s facilities
The comment on TripEvent shows that even loyal customers are noticing that rivals are
including more innovative facilities at their resorts. Although the true strength of
Hammocks Co lies in the quality of the service it is important that the facilities’ appliances
and service offerings are updated to compare favourably with that of its rivals.
Measures:
(1) Number of in-room appliances offered by rivals but not by Hammocks Co.
The measure will ensure that Hammocks Co consider what is included within the
guest rooms by comparing to external factors.
(2) Number of new items offered on the menu each month.
This should ensure that the chefs consider the latest trends in fine dining and do
not ever appear stagnant from the point of view of the customer.
Marking guide Marks

(a) Discuss the performance of Hammocks 8
(b) (i) Two advantages of using the Balanced Scorecard 3
One goal, two performance measures for:
(ii) Internal business processes 4½
(ii) Innovation and growth 4½
12
2 FLAG CO AND BUDGET CO

(a) Profitability
Flag Co Budget Co
ROCE 12.8% 13.7%
Operating margin 10.93% 6.07%
Asset turnover 1.17 2.26
Budget Co has a better return on capital employed and is therefore making better returns for its
investors. The main cause of this is Budget Co’s ability to generate sales. For every $ of capital
employed, it generates $2.26 of sales revenue as compared to only $1.17 in the case of Flag Co.
Budget Co has much shorter flight times than Flag Co and therefore could be making more
journeys and spending less time parked at airports.
Budget Co earns a lower operating margin than Flag Co, as Budget Co’s operating costs as a
percentage of revenue are 94% compared to Flag Co at 89%. This is probably due to Budget Co’s
pricing strategy. The lower operating margin is more than offset by Budget Co’s higher asset
turnover, resulting in a higher capital employed (asset turnover x operating margin = ROCE,
therefore 6.07% × 2.26 = 13.7%).
Analysis of the other information provided shows that Budget Co has a much higher seat
occupancy rate.
Flag Co Budget Co
Seat occupancy rate 66.29% 95.00%
This is probably a consequence of its low fares policy resulting in higher sales of seats relative to
Flag Co and therefore a higher asset turnover.
Budget Co also appears more fuel efficient than Flag Co.
Flag Co Budget Co
Available seat kilometre per litre of fuel 8,802 12,001
The better fuel economy is probably related to Budget Co’s newer fleet of aircraft. Better fuel
economy would tend to improve Budget Co’s operating margin, however, it is still lower than
Flag Co’s.
Liquidity
Flag Co Budget Co
Current ratio 0.60 0.79
The current ratios of the two businesses are below the text book norm of 2:1, however, they are
both service companies which carry little inventory, so this is not surprising or worrying. There is
no apparent reason for the difference between the two companies.
Risk
Flag Co Budget Co
Capital gearing (debt:equity) 110.44% 51.47%
Interest cover 4.96 times 8.08 times
Operating gearing 950% 820%
Flag Co has a relatively high level of long-term borrowings. This adds to the risks of the business
as interest on these borrowings has to be paid no matter the company’s operating profit. At
present, its operating profit is nearly five times larger than its interest bill and it appears to be
able to comfortably pay its commitments. Its operating gearing is 950%, indicating that if sales
volume fell by 10%, then its profit before interest and tax would fall by 95% (that is 950% or 9.5
times more). This would cause Flag Co difficulty in covering its interest payments. As demand
for business travel is very sensitive to economic conditions, there is a strong probability that at
some point Flag Co will experience a fall in sales volume.
As a result of its owner’s equity investment, Budget Co carries less financial gearing than Flag Co
and has better interest cover. Its operating gearing is slightly lower and given its relative
insensitivity to economic conditions, it can be considered a safer company than Flag Co.
(b) Fitzgerald and Moon’s building block model provides a framework for service companies to
design performance measurement systems which are linked to management rewards. It
provides a system of targets (standards) which will motivate managers to improve business
performance.
There are three building blocks in the model. The first block gives six dimensions, meaning the
aspects of performance which must be measured in a service business. These are:
 Financial performance, for example, profitability and growth.
 Competitiveness which measures an organisation’s standing against its competition.
 Quality of the service offered.
 Flexibility of the organisation in providing the service.
 Innovation which addresses the ability to introduce new processes and services.
 Resource utilisation which measures productivity and efficiency.
These six dimensions should be split into results (financial performance and competitiveness)
which are the outcomes of past decisions and determinants (quality, flexibility, innovation and
resource utilisation) which drive future performance and results.
The second block relates to setting standards. To motivate managers, it is important that they
take ownership of standards (that is accept or internalise them) and the standards appear
achievable and equitable (fair).
The third block relates to the rewards managers are offered for achieving the standards. These
must have clarity (the performance measurement scheme must be understood by managers),
they must be motivating (rewards must be attractive) and controllable (not subject to
influences outside the manager’s control).
Marking guide Marks
(a) Calculations 6
Discussion 8
14
(b) Explanation 6
3 TONFORD SCHOOL
(a) The primary objective of commercial organisations is to maximise the wealth they generate for
their owners (shareholders). In contrast, the objectives of NFPO’s are often non-financial and
reflect the interests which the various stakeholders have in an organisation. These stakeholders
often have varying interests in the organisation, meaning that the organisation will also have a
number of different objectives.
These conflicts may make it difficult to set clear objectives on which all stakeholders agree.
Consequently, the organisation’s management will face a dilemma when trying to decide which
objectives are most important and therefore prioritised in the course of strategic planning and
decision-making. This can be a particular problem when different objectives make different
demands on resources or require different courses of action.
Another problem is that these organisations often do not generate revenue but simply have a
fixed budget for spending which they have to keep to and are often subject to strong external
influences which will influence the setting of objectives e.g. political factors.
(b) Note: This solution is longer than one which candidates would need to produce to score the
marks available. However, it is intended to illustrate the range of relevant points candidates
could have identified from the scenario, and therefore the number of marks potentially
available in this question.
Objective 1 – Strive for continuous improvement in performance standards.
The percentage of pupils achieving the target grades is not only below the national target, it is
also lower than Tonford School achieved five years ago. As such, the school’s does not appear to
be achieving continuous improvement.
However, exam results alone are not necessarily an accurate indicator of a school’s
performance. For example, exam results will reflect the underlying ability of the pupils, as well
as the quality of the teaching they receive.
There is a danger that if Tonford School focuses only on exam results it will become ‘selective’
and will only accept the most academically gifted pupils. However, such an approach would
contradict the objective to provide ‘all children’ with access to high quality education,
regardless of their background.
Pupil progress may be a more valuable measure than exam results, because the extent to which
pupils’ performance improves provides an indication of the value added by the school, rather
than pupils’ inherent ability.
Given the typical range of scores, Tonford School’s performance in this respect (+0.4) is
significantly above the national target (+0.25) and is at the upper end of the range.
The fact that pupil numbers have increased seems likely to suggest that the school is becoming
more popular with parents. Given that parents can choose which school to select for their
children, the increase in pupil numbers is likely to reflect a perception among parents that the
school is performing well.
The results of the recent inspection visit would seem likely to reinforce this perception.
Note: An alternative interpretation could be that all the other schools in the area are already
full, and Tonford has spare capacity, which is why its pupil numbers increased. However, such
an explanation seems less likely given the context of the other performance indicators.
Objective 2 – Provide a supportive learning environment, which encourages a high standard
of pupil achievement.
The ‘pupil progress’ score suggests the school is providing children with a high quality education
and a learning environment which encourages a high standard of pupil achievement. The fact
that Tonford School’s 20X7 score is higher than its 20X2 score also suggests an improvement in
the learning environment (although here again, to some extent the scores may reflect pupils’
aptitude for learning as well as the efforts of the school).
The school’s inspection grade is higher than five years ago, and is above the national target,
which suggests the school is improving, and is performing relatively well. Although there is no
indication that the DoE gives any more weighting to any single aspect of the performance data
compared to other areas, the inspection grades could potentially be the most important
indicator of how well as school is performing.
However, although Tonford School’s grading is ‘Very good’ this suggests there is still room for
further improvement, because the school did not achieve the top grade: ‘Excellent’.
Tonford School’s teacher/pupil ratio has remained essentially the same over the last five years –
at 19 pupils per teacher, which is favourable compared to the national target of 22 pupils per
teacher.
20X7: 662 pupils/35 members of teaching staff =18.9 pupils per member of staff
20X2: 627 pupils/33 members of teaching staff = 19 pupils per member of staff
Having a low teacher pupil ratio is likely to be beneficial because it will allow teachers to give
more time to each pupil, thereby providing a supportive learning environment.
Given that the school is funded by the DoE, it seems likely that the DoE would have had to
authorise the budget needed to recruit the additional teachers. On this basis, the fact that
Tonford School has been able to increase the number of teachers it employs suggests that the
DoE is pleased with the way it is performing, and therefore authorised the additional budget.
Objective 3 – Ensure pupils are prepared for adult life and have the skills and character
necessary to contribute to society and the economy.
The inspector has highlighted Tonford School’s ‘strong sense of community values and
citizenship’. This suggests the school is performing well in relation to the objective of preparing
students for adult life, and developing their social skills.
Exam results and the ‘pupil progress’ scores in compulsory subjects indicate that the school is
making a significant contribution in providing pupils with core knowledge and skills necessary
for adulthood.
Objective 4 – Provide all children with access to high quality education, regardless of their
location or background
The inspector’s report has highlighted that pupils at Tonford School come from diverse
backgrounds’ and awarded the school an improved grading over the last five years. Coupled
with ‘pupil progress’ scores, this indicates that the school is fulfilling the objective to provide
children which access to high quality education, regardless of their background.
(c) In order to assess any organisation’s performance against its objectives, performance
information needs to be available, and, in many cases, this information is obtained by
measuring aspects of performance relevant to the objectives.
Difficulties of measurement
However, one of the inherent difficulties with qualitative objectives compared to quantifiable
objectives is how to measure them.
For example, exam success rate (% of pupils achieving 5 grades A-C) is quantifiable, and
relatively easy to measure, using exam results data. However, trying to measure the overall
quality of education in a school or whether a school provides a ‘supportive learning
environment’ is potentially much more difficult, because there aren’t any specific outputs (e.g.
results) which can be measured.
So, while exam results and pupil progress metrics are indicators of pupil achievement in schools
– which can be measured – assessing them only provides a partial assessment of whether
schools are providing children with ‘access to high quality education’ or whether they are
providing ‘supportive learning environment which encourages a high standard of pupil
achievement.’
A related problem is that the aspects of performance which are monitored end up being the
ones where performance can most easily be measured, rather than those which are most
important in ensuring that the objectives are achieved.
The DoE has recognised these issues though and acknowledged the need for inspectors to visit
schools on a regular basis, to gain an insight into the aspects of performance which cannot be
reflected in statistical measures.
Subjectivity
Another major problem with assessing qualitative aspects of performance is that they tend to
be subjective. For example, people are likely to have different expectations of what constitutes
a high quality of education, a supportive learning environment, or the extent to which students
are prepared for adult life.
In this respect, one of the key things the DoE has to ensure is that its inspectors are consistent
in their grading of schools. For example, if one inspector rates a school as ‘Good’, but another
inspector would have rated the same school as ‘Excellent’, this inconsistency would significantly
reduce the validity of the performance data which is produced.
Marking guide Marks
(a) Discuss the performance of Hammocks 4
(b) Performance assessment of Tonford School 12
(c) Explanation of difficulties in qualitative objectives 4
4 MEDCOMP
(a) The balanced scorecard uses four perspectives: financial, customer, learning and growth and
internal business process.
Financial CSF:
The critical success factor identified for this perspective is most likely to be positive
cash flow.
KPI:
The most appropriate performance indicator is total donations less operating costs.
Total donations in 20X8, 20X7 and 20X6 are $1,710,000, $1,605,000 and $1,475,000
respectively and when the operating costs are deducted, the net cash flows are
$(20,000), $55,000 and $45,000 respectively. This shows that for the current year
Medcomp is not achieving a positive cash flow.
However, this is a relatively small cash deficit for the year and does not suggest that
the charity has any real problems. The size of the donations has risen considerably
over the years and the number of businesses donating has fallen. This could indicate
that the fundraisers have focused their efforts on a smaller number of more affluent
businesses.
Customer CSF:
The critical success factor identified for this perspective is most likely to be medical
effectiveness.
KPI:
The best performance indicator for this perspective is the percentage of successful
treatments.
For the years 20X8, 20X7 and 20X6 these are 77%, 86% and 87% respectively. As
treatment for cataracts is a relatively simple procedure, a high success rate would be
expected but the results in 20X8 show a significant deterioration. The reasons for
the recent fall in effectiveness could be the result of factors outside the control of
Medcomp, such as variations in the disease or the advanced condition
of the disease when presented. However, it could be also linked to the lack of
efficiency of the new treatments.
Internal CSF:
business The critical success factor identified for this perspective is most likely to be
process functional efficiency.
KPI:
The performance indicator for this perspective could be: ‘average number of days to
deliver drugs and equipment to treatment centres’.
This has remained at seven days since 20X6 and in some ways this can be expected
as the 12 treatment centres have been at the same location for many years and the
logistics of the delivery well established. It should be noted that this measure is an
average lead time and will also vary on location. However, as Medcomp rarely
experiences shortages at the treatment centres, it can be surmised that transport
costs are managed as efficiently as possible and this means an average seven-day
lead time.
Learning CSF:
and growth The critical success factor identified for this perspective is most likely to be
innovation.
KPI:
The performance indicator for this perspective is the new procedures as a
percentage of total procedures from the table.
It is clear that Medcomp has made several changes to the existing protocol in 20X8.
One in five procedures administered are new and have been introduced within the
past 12 months. This is a clear improvement on 20X7 and 20X6 as the CSF is for new
treatments. However, the new treatments have not improved the efficiency of the
treatment, as evidenced by the percentage of successful treatments, and this will
need to be monitored.
(b) The benefits to an organisation of using the balanced scorecard to assess performance instead
of relying solely on financial measures are as follows:
Not all organisations have profit or financial return as the main objective. In an altruistic not-for-
profit charity such as Medcomp, the objectives are based on delivering a service which can be
measured in benefit to people who are unable to pay for the service. Therefore, it is necessary
to have measures which are not purely financial to reflect the different emphasis of the mission
and supporting objectives.
Financial performance indicators are ‘lagging’ indicators. This means that the events and
decisions which caused these indicators occurred long ago. The balanced scorecard includes
‘leading’ indicators. For example, the learning and growth perspective may encourage spending
on training or techniques which will depress profits or increase costs in the short term, but will
have much greater benefits in the future.
The balanced scorecard helps to align key performance measures with strategy at all levels. This
means that all employees will be able to link their individual goals to those of the organisation as
a whole. The benefit of this is that it ensures that what gets measured is important to the
organisation.
Financial measures used in isolation are relatively easy to manipulate in the short term. For
example, a high return on investment figure may be considered an indicator of good
performance whereas it may have been caused by a manager delaying the purchase of a
necessary asset. The balanced scorecard provided a range of indicators which makes this type of
manipulation more difficult to conceal.
Marking guide Marks
(a) Identification of CSF for each perspective (0.5 each) 2
Identification of KPI for each perspective (1 each) 4
Analysis of performance using the KPIs (max 4 for any perspective) 10
16
(b) Benefits of balanced scorecard – up to 2 for each well discussed point 4
5 PROTECT AGAINST FIRE CO

Ratio analysis
Division S Division C
Year on year Year on year
Increase in revenue 44% 9%

Increase in material costs 36% 25%
Increase in payroll costs 70% 15%
Increase in property costs 78% 6%
GPM in 2013 56% 65%
GPM in 2012 61% 67%
Increase in D & M costs 38% 18%
Increase in admin costs 6% 0%
NPM in 2013 11% 21%
NPM in 2012 9% 22%
Revenue per employee in 2013 $102,224 $104,917
Revenue per employee in 2012 $111,772 $104,828
Payroll cost per employee in 2013 $27,000 $21,000
Payroll cost per employee in 2012 $25,020 $20,000
Total market size ($ revenue) in 2013 (w.1) $129.48m $80.12m
Total market size ($ revenue) in 2012 (w.1) $107.75m $77.61m
Working 1 for market size
Division S 2013: $38,845m/30% = $129.48m Division C 2013: $44,065m/55% = $80.12m
Division S 2012: $26,937/25% = $107.75m Division C 2012: $40,359m/52% = $77.61m
Note: Percentages have been calculated to the nearest 1%.
EXAM SMART
You would not be expected to perform all the calculations above for seven marks. It would
be sensible to try and do calculations that allow you to discuss a range of different areas
rather than be too narrow.
Remember that when discussing the figures you should try to add some value by considering
why the results might have arisen as well as what the implications might be.
Give your answer some structure by making sure you use sensible sub headings and keep
your paragraphs nice and short (3-4 lines).
Commentary
General overview
Overall, Division S has performed well in 2013, although it has not managed to meet its objective of
becoming market leader despite its $2m advertising campaign. Since it has 30% of the market in 2013
and there are only two competitors holding 70% of the market between them, at least one of those
competitors must hold 35% or more of the market.
Revenue and market share
This has increased by a huge 44% in the last year. This compares to an increase of only 9% in
Division C. However, part of the reason that this has been achieved is because the changes in fire
safety laws introduced by the government at the end of 2012 have caused the market for fire products
and services to increase from $107.75m to $129.48m. Part of Division S’s success is therefore down to
increased opportunity. However, Division S has also increased its market share by a further five
percentage points compared to 2012. Division C has only managed a three percentage point increase
in its market share, so this is a good result by Division S. One can assume that this is at least partly as a
result of the advertising campaign carried out by Division S. However, this did cost a large amount,
$2m, and it did not quite enable the Division to achieve its aim of becoming market leader.
Materials costs
The increase in materials costs is 36%, compared to an increase in revenue of 44%. It is difficult to say
whether this is good or bad since the increase in revenue includes revenue from services, for which no
materials costs would be expected to arise. Further information is needed on the split of revenue
between products and services.
Payroll costs, revenue per employee and cost per employee
Payroll costs have increased by a massive 70% and far more than Division C’s 15% increase. This is
largely due to the fact that Division S’s employee numbers increased from 241 in 2012 to 380 in 2013.
This is a really big increase in employee numbers and has been accompanied by a fall in revenue per
employee from $111,772 in 2012 to $102,224 in 2013. It is possible that Division S over-recruited as it
hoped to secure a greater level of business than it did through its advertising campaign. Division S’s
payroll cost per employee also increased from $25,020 in 2012 to $27,000 in 2013. Presumably, this is
because of the fact that there is high demand for staff skilled in this area and Division S has probably
had to increase pay in order to attract the calibre of staff which it needs.
Increase in property costs
In percentage terms, the biggest increase in costs which Division S has suffered is in relation to its
property costs. They have increased by 78%, compared to Division C’s 6% increase. It would appear
that this increase is due to the increased rent charged by Division S’s landlords on its business
premises. However, it is not possible to quantify this precisely without further information on rent
increases.
Gross profit margin

This has actually fallen from 61% to 56%. Division C has also seen a fall in its GPM, but only a two
percentage point fall as opposed to Division S’s 5 percentage point fall. The reasons for Division S’s
lower GPM are the higher material, payroll and property costs. Also, Division S did not try to pass on
any of its increased costs to its customers in the form of higher prices.
Distribution and marketing costs
These have increased by 38% compared to Division C’s 18%. However, when you take out the
advertising costs in both years’ figures and work out the cost increase without them
($8.522m – $7.102m/$7.102m), it leaves an increase of only 20%. This increase would be expected
given the 20% increase in world fuel prices which occurred. Division S has to deliver to a wider
geographical spread of customers than Division C, so it would be expected to feel the full brunt of fuel
price increases.
Administrative costs
These have increased by 6% compared to Division C’s less than 1% increase (0% when rounded down
to the nearest percent). Further information is needed about the items included in these cost figures
to explain why this increase has arisen.
Net profit margin
Despite challenging cost increases in all categories, Division S has still managed to increase its NPM
from 9% to 11%. However, this is substantially lower than the NPM in Division C, which has fallen
slightly but is still 21%, almost twice that in Division S. As we have seen, Division S’s GPM is lower than
Division C’s anyway and, on top of that, Division C has not suffered a big increase in advertising costs
like Division S; nor have administrative costs risen inexplicably.
Head Office
There is no information given about Head Office. If the Calana Division is also the Head Office, there
could be Head Office costs included in Calana’s figures, which would affect the comparisons being
made. Further information is required here.
Marking guide Marks
½ mark per calculation 7
Per comment – maximum 2
6 BISCUITS AND CAKES

This was a straightforward performance measurement question in a divisional context. This
type of question is just as core as, for example, the traditional performance measurement
question (A T Co) in December 2010’s paper, or the transfer pricing question (Bath Co) in
December 2011’s paper. ROI and RI came up in June 2011’s paper too and so this should not
have posed problems.
The question required candidates to calculate ‘annualised’ return on investment and
residual income for two divisions. The annualisation caused a problem for many candidates.
All candidates had to do in order to annualise the ROI and RI was multiply the monthly net
profit figure by 12, to reflect the fact that there are twelve months in a year. Many
candidates didn’t do this, but they still managed to score the majority of marks available,
since a candidate is only ever penalised once for an error.
(a) ROI and RI

Return on investment = net profit/net assets
Division B
$311,000 × 12/$23,200,000 = 16.09%
Division C
$292,000 × 12/$22,600,000 = 15.5%
(b) Residual income
B C
$000 $000
Less: imputed interest charge
$22.6 × 10% (2,260)
$23.2m × 10% (2,320)
Residual income 1,412 1,244

In part (c), stronger candidates realised that, in order to discuss the performance of the divisions
well, they needed to recalculate the ROI and/or RI using controllable profit. Where candidates did
this, they generally accompanied it with some good discussion and scored full marks.
Weaker answers performed other calculations on the two divisions and gave some general
commentary, even though the question asked for a discussion ‘using both ROI and RI’.
(c) Performance of the two divisions

ROI
Divisions B and C have ROIs of 16.09% and 15.5% respectively, compared to the target of 20%.
This suggests that the divisions have not performed well, but the reason for this is that now,
uncontrollable head office costs are being taken into effect before calculating the ROI. The
target ROI has not been reduced to reflect the change in the method being used to calculate it.
Using the old method, ROI would have been as follows.
B: ($311,000 + $155,000) × 12/$23.2m = 24.1%
C: ($292,000 + $180,000) × 12/$22.6m = 25.06%
From this it can be seen that both divisions have actually improved their performance, rather
than it having become worse.
RI
From the residual income figures, it can clearly be seen that both Division B and C have
performed well, with healthy RI figures of $1.4m and $1.2m respectively, even when using net
profit rather than controllable profit as bases for the calculations. The cost of capital of the
company is significantly lower than the target return on investment that the company seeks,
making the residual income figure show a more positive position.
EXAM SMART
Much of this paper is about signalling and behaviour. Think with this sort of requirement as
to how an individual is likely to react to the performance indicators that they are assessed
on. If managers are incentivised to attain certain targets (here the ROI levels) then if those
incentives are generous enough, the managers will act in a way to protect that position.
This may not be goal congruent but is human nature. If a manager suspects that their bonus is
under threat from taking on the new investment, then they will not take on that investment!
Here for example, you could, in theory, just calculate the ROI of the project and see that if it is
lower than the existing ROI, the new project will always be rejected. The manager’s and staff
bonus could be reduced in the future. However you were required to calculate the total
annual(ised) ROI including the new investment – therefore follow the examiner’s instructions.
This requirement again highlights the potential problems of using ROI as a divisional performance tool.
(d) Division B’s ROI with investment

Depreciation = 2,120,000 ─ 200,000/48 months = $40,000 per month.
Net profit for July = 311k + ($600k × 10%) - $40k = $331k
Annualised net profit: $331k × 12 = $3,972k
Opening net assets after investment = $23,200k + $2,120k = $25,320k.
ROI = $3,972k/25,320k = 15.69%
Therefore, Division B will not proceed with the investment, since it will cause a decrease in its ROI.
If RI is calculated with the investment, the result is as follows.
B
$000
Annualised Net Profit 3,972
Less: imputed interest charge
$25.32m at 10% (2,532)
Residual income 1,440
This calculation shows that, if the investment is undertaken, RI is actually higher than without
the investment. The suggestion is, therefore, that the investment should have been proceeded
with. So, use of ROI has resulted in behaviour by Division B’s manager that is not good for the
company as a whole.
EXAMINER’S COMMENTS: PART (e)

In part (e) candidates were supposed to identify the fact that changing the basis for
calculating ROI and using this for performance measurement without changing the target
ROI would cause managers to be demotivated.
Many candidates answered this well, although some simply discussed the general problems
encountered when using ROI, which were relevant to a degree ─ but shouldn’t have been
the sole answer.
(e) Behavioural issues

The staff in both divisions have been used to meeting targets and getting rewarded
appropriately. Suddenly, they will find that even though in reality divisional performance has
improved, neither division is meeting its ROI target. This will purely be as a result of the
inclusion of the head office costs. The whole basis of being assessed on uncontrollable
apportioned costs is questionable in the first place. However, if it is going to be done this way,
at the least the target ROI must be revised.
Staff are likely to become frustrated with a new system which is inherently unfair. This could
give rise to staff organising themselves together in order to oppose the system. At the least,
they are likely to become quickly demotivated, working slower than possible and perhaps
withdrawing things like voluntary overtime. The cost to the company as a whole is likely to be
high and the situation needs to be resolved as quickly as possible.
Marking guide Marks
(a) ROI/RI calculations
ROI for B 1
ROI for C 1
2
(b) ROI/RI discussion
RI for B 1½
RI for C 1½
3
(c) Discussion
ROI discussion 2
RI discussion 2
Extra ROI calculation under old method 1
Valid conclusion drawn 1
6
(d) ROI/RI after investment
ROI calculation 2
RI calculation 1
Comments and conclusion 2
5
(e) Behavioural issues
ROI of investment Per valid point 1 Max 4
7 MAN CO
In part (a) candidates had to calculate the incremental loss per component for the group if the
buying division bought from the external supplier in future. It was a really simple calculation:
external buying cost less internal production cost, but most candidates got this wrong.
Perhaps it was because they expected it to be more difficult than it was. They also had to work
out how many components the supplying division should sell to the buying division if group
profits were to be maximised. Again, the answer was simple: all of them. Many candidates got
this part correct. It’s worth noting that if a requirement is only worth 3 marks, like this one,
the calculations required will be quite short. Some candidates wrote several pages of complex
calculations here but should have realised that they were doing something wrong given that
the question was only worth 3 marks.
EXAM SMART
The tip from the examiner that the number of marks indicates how complex the calculation
will be is worth remembering. It’s possible to waste quite a lot of time on a calculation that’s
much complex than the examiner requires.
(a) Maximising group profit

Division L has enough capacity to supply both Division M and its external customers with
component L.
Therefore, incremental cost of Division M buying externally is as follows:
Cost per unit of component L when bought from external supplier: $37
Cost per unit for Division L of making component L: $20.
Therefore incremental cost to group of each unit of component L being bought in by Division M
rather than transferred internally: $17 ($37 – 20).
From the group’s point of view, the most profitable course of action is therefore that all
120,000 units of component L should be transferred internally.

Part (b) involved some profit calculations for the divisions and the group, most candidates
made a decent attempt at this.
(b) Calculating total group profit

Total group profits will be as follows:
Division L:
Contribution earned per transferred component = $40 – $20 = $20
Profit earned per component sold externally = $40 – $24 = $16
$
120,000 × $20 2,400,000
160,000 × $16 2,560,000
4,960,000
Profit 4,460,000
Division M:
Profit earned per component sold externally = $27 – $1 = $26
$
120,000 × $26 3,120,000
Profit 2,920,000
Total profit 7,380,000

Part (c) involved some discussion of the problems arising if the transfer price wasn’t
changed. Candidates were supposed to identify the fact that, if the transfer price wasn’t
changed, the buying division would buy from the external supplier as the divisions had
autonomy. However, some candidates failed to notice this point and discussed how
demotivating it would be for the buying division instead.
EXAM SMART
The situation where the buying division can buy the component from an external supplier for
less than the transfer price is quite common in transfer pricing questions, with the
dysfunctional consequences discussed in the answer. Here taking account of internal costs of
transfer being lower solves the problem. If you do P5, you may come across situations where
the solution to this situation is less easy.
(c) Problems with current transfer price and suggested alternative

The problem is that the current transfer price of $40 per unit is now too high. Whilst this has
not been a problem before since external suppliers were charging $42 per unit, it is a problem
now that Division M has been offered component L for $37 per unit. If Division M now acts in its
own interests rather than the interests of the group as a whole, it will buy component L from
the external supplier rather than from Division L. This will mean that the profits of the group will
fall substantially and Division L will have significant unused capacity.
Consequently, Division L needs to reduce its price. The current price does not reflect the fact
that there are no selling and distribution costs associated with transferring internally, i.e. the
cost of selling internally is $4 less for Division L than selling externally. So, it could reduce the
price to $36 and still make the same profit on these sales as on its external sales. This would
therefore be the suggested transfer price so that Division M is still saving $1 per unit compared
to the external price. A transfer price of $37 would also presumably be acceptable to Division M
since this is the same as the external supplier is offering.
EXAMINER’S COMMENTS: PART (d)

Part (d) was a purely written requirement asking candidates to describe the balanced
scorecard approach to performance management. Although it was asked in the context of a
company, the question was really generic in nature.
There were some really good answers to this, although the structure of answers could have
been better. It is really hard to mark a question like this where candidates’ answers are just a
‘sea of words’ i.e. one or two sides of tightly written text with no headings and often not
even any paragraphs.
It was appropriate to give a short introduction and then say a little bit about each perspective
under its heading. By this stage, candidates need to start writing more professionally,
otherwise they are going to be ill-prepared for the Professional level papers, where marks will
be specifically allocated for professional writing and well-formatted answers.
Whilst professional marks are not available at this level, candidates should realise that it’s far
easier to earn more marks where the candidate clearly separates out the points he or she is
making.
EXAM SMART
Think of the markers!
Moving on from the Examiner’s commentary, think of the marker facing two answers from two
candidates. One candidate has gone for the seas of words or the wall-of-writing approach. The
marker sees a piece of paper filled up from top to bottom and side to side with writing. The only
choice the marker has is to wade through the mass of text looking for the relevant points to
mark. This takes time and can potentially annoy the marker….not a good move!
The other script has taken time to set out each element of the balanced scorecard under a
heading. It will have spaced each section with a blank line between each paragraph. The
marker will find this script a lot easier to mark!
You can’t get away here with just listing out the three non-financial perspectives of the
scorecard. You need to explain why the four perspectives are relevant as well as the
principles behind the scorecard design.
(d) Customer perspective

The customer perspective considers how Man Co appears to customers. Man Co should ask
itself: ‘to achieve our vision, how should we appear to our customers?’.
The customer perspective should identify the customer and market segments in which the
divisions will compete. There is a strong link between the customer perspective and the
revenue objectives in the financial perspective. If customer objectives are achieved, revenue
objectives should be too.
Internal perspective
The internal perspective requires Man Co to ask itself the question – ‘what must we excel at to
achieve our financial and customer objectives? It must identify the internal business processes
that are critical to the implementation of its strategy.
Learning and growth perspective
The learning and growth perspective requires Man Co to ask itself whether it can continue to
improve and create value.
If it is to continue having loyal, satisfied customers and make good use of its resources, it must
keep learning and developing. It is critical that it invests in its infrastructure – i.e. people,
systems and organisational procedures – in order to provide the capabilities that will help the
other three perspectives to be accomplished.
Marking guide Marks
(a) Maximising group profits
Calculating incremental cost per unit 2
Recommendations 1
3
(b) Profit
Profit of L 3
Profit of M 2
Total profit 1
6
Marking guide Marks

(c) Discussion
Transfer price is too high 2
Division M will not buy 1
Profits for group will fall 1
S/D costs should mean lower TP anyway 2
Suggested transfer price 1
6
(d) Customer perspective 2
Internal perspective 2
Learning and growth perspective 2
Max 5
ACCA PM Question Bank Formulae Sheet 375
Formulae Sheet
Regression analysis
y = a + bx
𝑛𝑛 ∑ 𝑥𝑥𝑥𝑥−∑ 𝑥𝑥 ∑ 𝑦𝑦
𝑏𝑏 =
𝑛𝑛 ∑ 𝑥𝑥 2 −(∑ 𝑥𝑥)2
∑ 𝑦𝑦 ∑ 𝑥𝑥
𝑎𝑎 = 𝑛𝑛
− 𝑏𝑏
𝑛𝑛
𝑛𝑛 ∑ 𝑥𝑥𝑥𝑥−(∑ 𝑥𝑥)(∑ 𝑦𝑦)

𝑟𝑟 =
�(𝑛𝑛 ∑ 𝑥𝑥 2 −(∑ 𝑥𝑥)2 )(𝑛𝑛 ∑ 𝑦𝑦 2 −(∑ 𝑦𝑦)2 )
Learning curve
Y = axb
Where: Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
LR = the learning rate as a decimal
Demand curve
P = a – bQ
Change in price
b =
Change in quantity
a = price when Q = 0
MR = a – 2bQ
376 F o r m u l a e S h e e t ACCA PM Question Bank

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© First Intuition Ltd, 2023

JUNE 2023 RELEASE

Revision Questions 147

Revision Answers 247

Formulae sheet 375

First Intuition Question Bank – Performance Management

Question practice is key to success

Icons in this Question Bank

Section A: Objective test questions and Section B: Scenario based

Question Page ref

1: Specialist cost and management accounting techniques

3: Budgeting and control

Question Page ref

4: Performance measurement and control

3: Budgeting and control

4: Performance measurement and control

Objective test and Scenario

Question Page ref Revision (R)

1: Specialist cost and management accounting techniques

Question Page ref Revision (R)

3: Budgeting and control

4: Performance measurement and control

Based on Page ref Revision (R)

ACCA Specimen paper

PART 1 QUESTIONS: Objective test and Scenario

1: Specialist cost and management accounting techniques

Activity based costing

4 KY makes several products including Product W. KY is considering adopting an activity-based

9 Which TWO of the following statements about ABC are correct?

Set the required

Set the selling

14 Which of the following statements describes target costing?

16 Which TWO of the following techniques are relevant to target costing?

Life cycle costing

24 Which of the following is NOT a benefit of life cycle costing?

Available resources for the month are expected to be:

Environmental management accounting

Relevant cost analysis

Cost volume profit analysis

8 A company makes two products with the following characteristics:

9 A profit-volume chart can illustrate the relationship between

10 A company makes a single product which it sells for $2 per unit.

Maximum demand (units) 800 1,500

19 The following statements have been made about linear programming:

Planned output 300 125 240 400

23 What is/are the limiting factor(s) in month 1?

26 What is the maximum profit which can be earned in month 3?

33 A company has entered two different new markets.

Make or buy and other short-term decisions

37 What would be the order of priority of making the products in house?

Dealing with risk and uncertainty in decision-making

Use the following information to answer the next three questions.

46 What is the expected cash return on the project?

3: Budgeting and control

Budgetary systems and type of budget